20170829-德意志银行-国美电器-00493.HK-Higher SG&A costs triggered by business transformation; Hold.pdf

Deutsche Bank Markets Research Rating Hold Asia China Consumer Retail/Wholesale Trade Company Gome Date 29 August 2017 Forecast Change Higher SG&A costs triggered by business transformation;Hold Reuters Bloomberg Exchange Ticker 0493.HK 493 HK HSI 0493 ADR Ticker ISIN GMELY US3817351097 Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Sales(CNYm)64,595.1 76,695.0 84,654.5 89,799.3 95,138.1 EBITDA(CNYm)2,097.4 805.6 1,466.4 1,843.3 2,099.0 Reported NPAT(CNYm)1,208.0 325.1 411.5 724.7 915.4 Reported EPS FD(CNY)0.07 0.02 0.02 0.03 0.04 DB EPS FD(CNY)0.08 0.02 0.02 0.03 0.04 OLD DB EPS FD(CNY)0.08 0.02 0.03 0.05 0.06%Change 0.0%0.0%-39.6%-29.9%-29.7%DB EPS growth(%)19.7-80.8 17.2 75.9 26.2 PER(x)13.9 53.7 39.8 22.7 17.9 EV/EBITDA(x)6.3 18.7 8.3 6.6 5.6 DPS(net)(CNY)0.03 0.01 0.01 0.01 0.02 Yield(net)(%)2.5 0.7 1.0 1.8 2.2 Source:Deutsche Bank estimates,company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years,except P/B which uses the year end close Lowering TP by 24%to reflect lower NP forecasts in 2017/18/19.Hold._ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports.Thus,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.MCI(P)083/04/2017.Price at 29 Aug 2017(HKD)0.88 Price target-12mth(HKD)0.85 52-week range(HKD)1.13-0.88 HANG SENG INDEX 27,863 Anne Ling Research Analyst(+852)2203 6177 Key changes TP 1.12 to 0.85 -24.1%Sales(FYE)84,728 to 84,654 -0.1%Op prof margin(FYE)1.0 to 0.8 -22.2%Net profit(FYE)681.8 to 411.5 -39.7%Source:Deutsche Bank Price/price relative 0.750.91.051.21.351.51.658/152/168/162/17GomeHANG SENG INDEX(Rebased)Performance(%)1m 3m 12m Absolute-5.4-12.9-4.3 HANG SENG INDEX 3.3 8.4 22.1 Source:Deutsche Bank We lower our 2017/18/19 net profit forecasts by 40/30/30%and cut our target price by 24%,to HKD0.85.We note that positive SSSg momentum will likely continue during the rest of year.The GPM should also benefit from product differentiation and product selection initiatives.However,the online/offline integration exercise resulted in a higher-than-expected opex ratio and higher finance costs with investment in supply chain and technology facilities.Success in business transformation is yet to be proven.We maintain a Hold,as we consider the current price to be fairly valued.NP cut by 40%/30%/30%for FY17/18/19E on higher opex and finance costs Post 1H17 results,we have factored in the latest sss and cost trend incorporating part of guidance from management,including a higher SG&A ratio and a higher net finance cost.We also forecast that net loss from online will be RMB937m,remaining at a similar level to last year,as we see the online platform as still needing more time to ramp up.Our NP reduction reflects mainly a higher opex ratio and higher finance costs.1H17 EBIT missed due to foreign exchange loss and wider loss from online Gome recorded NP down 2%,to RMB121m,on sales up 8%,to RMB38bn.Sales were largely in line,but EBIT was 47%lower than our forecast due to a higher-than-expected opex ratio,attributed mainly to an RMB186m foreign exchange loss,a higher-than-expected loss from the online business and a higher SG&A ratio.Target price cut to HKD0.85(from HKD1.12);risks We maintain our Hold rating as we believe shares are fairly valued.Our primary valuation methodology is a DCF(9.5%COE,1.1 beta,1.5%terminal growth rate).Upside/downside risks relate to SSSg and competition.See pg 3.Distributed on:29/08/2017 15:48:31 GMT0bed7b6cf11c29 August 2017 Retail/Wholesale Trade Gome Page 2 Deutsche Bank AG/Hong Kong Model updated:29 August 2017 Running the numbers Asia China Retail/Wholesale Trade GomeGome Reuters:0493.HK Bloomberg:493 HK HoldHold Price(29 Aug 17)HKD 0.88 Target Price HKD 0.85 52 Week range HKD 0.88-1.13 Market Cap(m)HKDm 14,924 USDm 1,908 Company Profile Gome Electrical Appliances Holdings Limited,through its subsidiaries,retails household appliances and consumer electronic products in China.Price Performance 0.750.91.051.21.351.51.65Aug 15 Nov 15 Feb 16 May 16 Aug 16 Nov 16 Feb 17 May 17GomeHANG SENG INDEX(Rebased)Margin Trends 0.01.02.03.04.014151617E18E19EEBITDA MarginEBIT Margin Growth&Profitability 02468100510152014151617E18E19ESales growth(LHS)ROE(RHS)Solvency 05101520-50-40-30-20-10014151617E18E19ENet debt/equity(LHS)Net interest cover(RHS)Anne Ling +852 2203 6177 Fiscal year end 31-Dec 20142014 20152015 20162016 2017E2017E 2018E2018E 2019E2019E Financial Summary DB EPS(CNY)0.07 0.08 0.02 0.02 0.03 0.04 Reported EPS(CNY)0.08 0.07 0.02 0.02 0.03 0.04 DPS(CNY)0.03 0.03 0.01 0.01 0.01 0.02 BVPS(CNY)1.0 1.0 1.0 1.0 1.0 1.1 Weighted average shares(m)16,924 16,961 20,311 21,967 21,967 21,967 Average market cap(CNYm)17,358 19,648 17,475 12,669 12,669 12,669 Enterprise value(CNYm)11,990 13,182 15,078 12,202 12,239 11,772 Valuation Metrics P/E(DB)(x)14.7 13.9 53.7 39.8 22.7 17.9 P/E(Reported)(x)13.6 16.3 53.7 39.8 22.7 17.9 P/BV(x)0.92 1.01 0.79 0.73 0.71 0.70 FCF Yield(%)nm 9.2 9.7 nm 1.1 4.8 Dividend Yield(%)2.9 2.5 0.7 1.0 1.8 2.2 EV/Sales(x)0.2 0.2 0.2 0.1 0.1 0.1 EV/EBITDA(x)6.6 6.3 18.7 8.3 6.6 5.6 EV/EBIT(x)9.8 8.4 359.9 17.9 11.3 8.8 Income Statement(CNYm)Sales revenue 60,360 64,595 76,695 84,654 89,799 95,138 Gross profit 8,994 9,513 10,377 12,998 13,922 14,812 EBITDA 1,803 2,097 806 1,466 1,843 2,099 Depreciation 579 524 764 783 756 769 Amortisation 0 0 0 0 0 0 EBIT 1,224 1,573 42 683 1,087 1,330 Net interest income(expense)256 211-3-306-295-276 Associates/affiliates 0 0 0 0 0 0 Exceptionals/extraordinaries 100-207 119 0 0 0 Other pre-tax income/(expense)0 0 0 0 0 0 Profit before tax 1,580 1,577 158 377 792 1,054 Income tax expense 562 640 213 340 406 435 Minorities-262-271-379-375-339-296 Other post-tax income/(expense)0 0 0 0 0 0 Net profit 1,280 1,208 325 411 725 915 DB adjustments(including dilution)-100 207 0 2 3 3 DB Net profit 1,180 1,415 325 414 728 919 Cash Flow(CNYm)Cash flow from operations-393 2,364 4,477 814 1,980 2,218 Net Capex-626-554-2,781-2,540-1,796-1,427 Free cash flow-1,018 1,810 1,695-1,725 184 791 Equity raised/(bought back)2 0 104 0 0 0 Dividends paid-718-510-208-204-221-324 Net inc/(dec)in borrowings 743-2,454 9,868 2,752 0 0 Other investing/financing cash flows 771-203-5,660 0 0 0 Net cash flow-222-1,356 5,799 822-37 466 Change in working capital-1,954 465 3,692 706 772 801 Balance Sheet(CNYm)Cash and other liquid assets 8,794 7,438 13,237 14,059 14,022 14,488 Tangible fixed assets 5,018 4,993 7,250 9,006 10,046 10,705 Goodwill/intangible assets 0 0 0 0 0 0 Associates/investments 7,628 7,982 15,781 15,781 15,781 15,781 Other assets 22,636 21,174 25,534 26,811 27,892 29,013 Total assets 44,077 41,588 61,802 65,658 67,741 69,987 Interest bearing debt 3,426 972 10,840 13,592 13,592 13,592 Other liabilities 24,851 24,136 30,117 31,349 33,336 35,329 Total liabilities 28,277 25,108 40,957 44,941 46,928 48,921 Shareholders equity 16,671 17,618 22,356 22,603 23,038 23,587 Minorities-871-1,138-1,511-1,886-2,225-2,520 Total shareholders equity 15,800 16,480 20,845 20,717 20,813 21,067 Net debt-5,368-6,466-2,397-468-430-897 Key Company Metrics Sales growth(%)7.0 7.0 18.7 10.4 6.1 5.9 DB EPS growth(%)31.4 19.7-80.8 17.2 75.9 26.2 EBITDA Margin(%)3.0 3.2 1.1 1.7 2.1 2.2 EBIT Margin(%)2.0 2.4 0.1 0.8 1.2 1.4 Payout ratio(%)39.9 40.0 37.0 40.0 40.0 40.0 ROE(%)8.0 7.0 1.6 1.8 3.2 3.9 Capex/sales(%)1.0 0.9 3.6 3.0 2.0 1.5 Capex/depreciation(x)1.1 1.1 3.6 3.2 2.4 1.9 Net debt/equity(%)-34.0-39.2-11.5-2.3-2.1-4.3 Net interest cover(x)nm nm 14.9 2.2 3.7 4.8 Source:Company data,Deutsche Bank estimates 29 August 2017 Retail/Wholesale Trade Gome Deutsche Bank AG/Hong Kong Page 3 Valuation Target price cut to HK$0.85(previously HK$1.12)Post the 1H17 results announcement,we reduce our FY17/FY18/19 forecasts by 40%/30%/30%to reflect higher-than-expected SG&A expenses and higher finance costs based on the latest trend and the companys guidance during the earnings call.In Figure 1,we show the difference between our estimates and managements key guidance(for more information on guidance,refer to“2017 onwards outlook”section).Our forecasts are 31/17%lower than the markets 2017/18 forecasts,as we believe most of the market has not reviewed Gomes full-year forecasts based on the new guidance and results announcement.We use a DCF approach to capture Gomes cash flow.Our DCF yields HKD0.85/share(old:HKD1.12).We maintain our Hold recommendation,as we believe the shares are fairly valued.We use Deutsche Banks China COE of 9.5%and a beta of 1.1.The terminal growth rate(TGR)is 1.5%,in line with our 1.0-2.5%sector assumption for other consumer stocks that we cover.Our target price implies 38/23x 2017/18E PE,or 0.8x FY16 PB.Risks Downside risks:1)a failure to improve store profitability and narrow losses in its online business;2)weaker-than-expected SSSg;3)a failure to control opex;4)corporate governance issues from the recent acquisition of Meixin and its connected party transaction.Upside risks:1)better-than-expected SSSg;2)less competition for the online business.Figure 1:Deutsche Bank forecasts pany guidance Source:Deutsche Bank estimates,Company data.Note:major changes are highlighted in red.Figure 2:Deutsche Bank forecast changes Diff from market forecastRMBmFY17EFY18EFY19EFY17EFY18EFY19EFY17EFY18EFY19EFY17EFY18EFY19EFY17EFY18EFY19ESales 84,654 89,799 95,138 84,728 89,954 95,384 83,449 88,445 93,555 0%0%14%1%2%2%EBIT683 1,087 1,330 878 1,464 1,798 849 1,188 1,369 -22%-26%-26%-20%-9%-3%Net profit411 728 911 682 1,034 1,303 595 876 1,059 -40%-30%-30%-31%-17%-14%Current forecast%change vs.previous forecastMarket forecastPrevious forecastforecast Source:Deutsche Bank estimates,Company data,Bloomberg Finance LP Old guidance Old guidance new guidance new guidance DB old DB old DB new DB new SSSgsimilar with previous guidance2017:4%;2017:4.7%;GPM2017 GPM is expected to be+1%yoy higher than 2016;GPM for offline sector to improve 1.5%yoy;For the online business,mgmt guided for 2-3%gpmGPM in 2017 expects to be at least 17.5%;for Online:GPM expects be around 3%2017:17.0%;offline/online:20%/2.5%2017:17.4%;offline/online:20%/2.8%Administrative expenses basically flat compared to 2016 and 2015SG&A ratio target to be 16.0%-16.5%in 2017,despite 17.2%in 1H2017:15.4%2017:16.5%EBITDA margin na1.7%-1.8%,hopefully 2%EBITDA margin:2.4%EBITDA margin:1.75%NPMimprovement to be 1pptNPM expects to be 0.45%-0.5%in 2017 and will see improvement subsequently2017:0.8%2017:0.49%Online loss naexpects a net loss of RMB900mRMB959 RMB937capexRMB1bn for 2017;+150m in logistics,+120m in ordiary capex,+90m in Meixin,+91.3m lease paymentCapex expects to be aroud RMB1.4-1.5bn in 2017 and going forward around RMB1.5-2bn2017:as 7%of Revenuesremain unchangedStore openingnew opening of 52-100 stores and closure of 50-80 storesPlan to open 2,000 physical stores in tier 4&5 markets during 2017-2019 and remodel 500 stores in total2017:net store opening at 152017:net store opening at 1029 August 2017 Retail/Wholesale Trade Gome Page 4 Deutsche Bank AG/Hong Kong 2H17 onwards outlook EBIT miss due to foreign exchange loss and wider loss from online Gome recorded NP down 2%to RMB121m,on sales up 8%to RMB38bn.Sales were largely in line,but EBIT was 47%lower than our forecast due to a higher-than-expected opex ratio,attributed mainly to an RMB186m foreign exchange loss and a higher-than-expected loss from the online business.The wider loss from the online business also resulted in a higher ETR(245%vs.163%in 1H16)and a higher minority interest(up 39%yoy).Better SSSg outlook,while higher cost pressure in 2H Gome reported SSS up by 2.3%in 1H17 and up 8.5%in 2Q.By city tiers,its Tier1 cities saw 2%SSSg,and Tier 2 cities saw 4%.For the stores located in lower-tier cities,they are still in the process of online/offline integration,and management expects them to make a positive contribution in the near term.The positive momentum has continueThe positive momentum has continued d in 3Qtd.in 3Qtd.On a fullOn a full-year basis,it guided year basis,it guided for for SSSgSSSg ofof 3%3%-5%.5%.Online GMV saw 54%+GMV growth in 1H,among which directly operated directly operated businessbusinesseses (25%(25%-30%mix)saw a yoy decline 30%mix)saw a yoy decline and the and the platform business saw platform business saw doubledouble-digit growth.digit growth.This was due mainly to some self-operated business direct traffic to offline,as these are more high-end products.ManagementManagement expects the selfexpects the self-operated business operated business toto resume resume doubledouble-digit growth in 2Hdigit growth in 2H.The commission rate also saw a decline,as the company intended to introduce some high-quality merchants by lowering the commission rate.This also led to a lower GPM(below 3%)and a wider net loss from the online business.On a On a fullfull-year basis,online GMV year basis,online GMV is is expectexpecteded to reach RMB45to reach RMB45-46bn46bn(RMB20.5bn in 1H17).Management expects to book an RMB900 loss,remainingremaining largelylargely flat or flat or slightly narrowinslightly narrowing from last year.g from last year.The nThe net loss ratio et loss ratio is expected to remainis expected to remain below 10%(vsbelow 10%(vs.12%for 1H17).12%for 1H17).The GPM for 1H17 reached 17.8%,benefiting mainly from a higher mix of different products(40%)and high-quality product selection,e.g.Gree exclusive model.Going forwardGoing forward,the,the company will company will maintain its maintain its product product s selectionelection strategy and its GPM at above 17.5%.strategy and its GPM at above 17.5%.SG&A expenses as a percentage of sales increased from 16.3%to 17.2%,due mainly to 1)newly consolidated stores from non-listcos started from April 2016,2)the newly acquired Meixin increasing more expenses.ManagementManagement believes believes the the SG&A expense ratio will drop due to better SG&A expense ratio will drop due to better synergsynergy y effecteffects s and and that that the the fullfull-year expenyear expense ratio will se ratio will normalinormalis se e to 16%to 16%-16.5%.16.5%.During 1H16,the company recognised a foreign exchange loss of RMB186m,due mainly to an exchange loss from a Euro loan.MManagementanagement will review this will review this loan in 2H to target maintainloan in 2H to target maintaininging the foreign loss to no more than the foreign loss to no more than thethe current current level.level.It also issued a USD500m USD bond in 1H17 to replace the domestic deposit for overseas borrowing.This led to a 206%financial cost increase,to RMB323bn.The capital proceeds from the above finan