20131030-美银美林-Loss-making_3Q__lower_estimates_11页_571kb

Lianhua Supermarket Hldgs (H) 3Q Analysis Summary

Core Content

Lianhua Supermarket Hldgs (H), a leading supermarket and food retailer in China, has faced challenges in its financial performance during the first nine months of 2013 (9M13). The company's Net Profit After Tax (NPAT) dropped by 48% YoY, which suggests that the third quarter of 2013 (3Q13) is likely to be a loss-making period. This decline in performance has led to a revision of the company's estimated earnings for 2013 and 2014, with a 15% and 12% reduction respectively, due to slower top-line growth and lower margin assumptions.

Main Points

• Financial Performance:

  • 9M13 NPAT fell by 48% YoY, indicating potential losses in 3Q13.
  • Operating revenue grew by 4.8% YoY in 9M13, down from 1H13 growth.
  • The third quarter's SSSG (Same-Store Sales Growth) is expected to decline further from 3.7% in 1H13 due to lower traffic and ticket size.

• Earnings Estimates:

  • The current estimate for 2013E EPS is 0.22, down from the previous estimate of 0.25.
  • The 2014E EPS is now estimated at 0.24, compared to the previous estimate of 0.27.
  • The company's earnings are currently about 30% below the consensus estimate.

• Valuation:

  • The current price objective is HK$4.00, which is below the current share price of HK$5.20.
  • The 2014E P/E ratio is 17.15x, which is considered a demanding valuation.
  • The current valuation is viewed as undemanding, but the company's low earnings visibility and high valuation lead to an Underperform rating.

• Competitive Landscape:

  • Lianhua is heavily concentrated in eastern China, especially Shanghai, where 85% of its hypermarkets are located.
  • The market is expected to become more competitive with new entrants such as CRE and Wumart, and with the rise of e-commerce.
  • Structural issues such as an aging network, gift card overhang, and sticky costs are expected to continue to affect earnings visibility.

• Investment Thesis:

  • Despite having hidden assets and advantages, the company's value is unlikely to be unlocked in the short term.
  • Initiatives in centralized procurement, merchandise enhancement, and supply chain management are expected to support long-term growth.
  • Weak near-term growth and lack of catalysts may cap share price upside, despite the undemanding valuation.

Key Information

• Stock Data:

  • Current price: HK$5.20
  • Price objective: HK$4.00
  • Market value: HK$5,822 million
  • Average daily volume: 2,704,426
  • Free float: 33.3%

• Financial Highlights:

  • 9M13 Operating Revenue: 25,088 million CNY, up 4.8% YoY.
  • 9M13 Net Profit: 186 million CNY, down 48.3% YoY.
  • 9M13 Net Margin: 0.7%, down from 2.2% in 9M11 and 1.5% in 9M12.
  • Free Cash Flow for 2013E: 158 million CNY, up from -751 million CNY in 2012A.
  • Free Cash Flow Yield for 2013E: 3.45%, up from -16.41% in 2012A.

• Earnings Revisions:

  • 2013E EPS: Down from 0.25 to 0.22 (-15.0%).
  • 2014E EPS: Down from 0.27 to 0.24 (-12.0%).

• Valuation Metrics:

  • 2013E P/E: 18.97x
  • 2014E P/E: 17.15x
  • 2013E EV/EBITDA: 4.72x
  • 2014E EV/EBITDA: 4.56x
  • 2013E Free Cash Flow Yield: 3.45%
  • 2014E Free Cash Flow Yield: 12.91%

Key Financial Ratios

• Operating Margin: -0.3% for 2013E and 2014E.
• EBITDA Margin: 1.7% for both 2013E and 2014E.
• Net Debt-to-Equity Ratio: 96.2% for 2013E and 79.0% for 2014E.
• Return on Equity (ROE): 6.9% for 2013E and 7.3% for 2014E.

Summary Table

Investment Opinion

• Rating: Underperform
• Reasoning: Low earnings visibility and a demanding valuation (17x 2014E P/E) are the primary reasons for the Underperform rating.
• Price Objective: HK$4.00, rolling over to 2014E P/E.
• Share Price Movement: The share price has risen 42% since July, which has factored in too much optimism about the turnaround story.

Analyst Information

• Chen Luo, CFA: +852 2161 7734, chen.luo@baml.com
• Lucy Yu: +852 2161 7840, lucy.yu@bamll.com

Conclusion

Lianhua Supermarket Hldgs (H) is facing significant challenges in its 3Q13 performance, with lower-than-expected earnings and a decline in sales growth. The company's earnings estimates have been revised downward due to slower top-line growth and lower margin assumptions. Despite having some hidden assets and long-term growth initiatives, the current valuation and lack of near-term catalysts suggest that the company may not perform well in the short term. The investment opinion remains Underperform, and the price objective is set at HK$4.00, which is below the current share price.