Zhongmin Baihui Retail Group - Phillip Securities 2016-03-14: Best-laid plans of mice and men oft go astray

Zhongmin Baihui Retail Group - Phillip Securities 2016-03-14: Best-laid plans of mice and men oft go astray ZHONGMIN BAIHUI RETAIL GRP LTD 5SR.SI 

Zhongmin Baihui Retail Group (ZBR) - Best-laid plans of mice and men oft go astray 

  • Plans laid out but… 
    1. Unusually unfavorable weather affected winter sales in 4Q15 and weighed on whole year earnings. 
    2. Expansion plan hits speed bumps along the road – execution as well as regulatory challenges. 
  • Expects subdued sales in FY16 due to marginal growth in store space (additional 2.4% store space) coupled with a meek macro environment, but partially offset by gradual turnaround in Nanjing Nanzhan Store and higher footfall in Xiamen Wucun Store. 
  • Lower TP from S$2.10 to S$1.73 but maintain Buy rating. 


Key takeaways 


Blame it on weather. 

  • Revenue declined 11% yoy and 6% yoy in 4Q15 and FY15, respectively. Management attributed the sluggish sales in part to an unseasonably mild winter. 
  • The mild winter worldwide caught retailers off guard, especially it is the common practise of the Group to stock up winter clothing, which usually helps to boost its year-end sales number. 

Continuous effort to increase profitability and/or efficiency. 

  1. Cost rationalization to increase profitability by 
    1. reducing operating staff (e.g. cutting operating staff by 50% in some smaller supermarkets); and 
    2. the elimination of some low-end merchandise that required intensive sales labour from the Group’s department stores. 
    3. The move to change sales structure dampened top line but lifted gross margin on the other hand. 
  2. Improvement in brand and merchandise mix increased gross margin for direct sales activities, from 11.7% in FY14 to 13.3% in FY15. 
  3. Cutting losses by terminating Xiamen Zhongshan Store’s operation and shifting business structure in Nanjing Nanzhan Store to rental income-focused. The Group shared that, currently about 50% of gross floor area (GFA) in Nanjing Nanzhan Store is leased out, providing some income visibility. Given the significant progress at the Nanjing Nanzhan Store, the Group will continue to explore various options for the store. 

Modest expansion programme, expects an additional 2.4% store space this year, bringing total store network to 14 by end-FY16. 

  1. In FY15, only one new store is added to the self-owned store list, i.e. the Putian Xianyou Store in Dec-15. Total GFA grew to 2,128k sq. ft. by end-FY15, or 3.6% yoy. 
  2. The Group expects the small store in Quanzhou (opened in Jan-16) to start contributing to 1Q16’s bottom line. Another small format store in Quanzhou will be ready to launch in the 2Q16. The second small store in Quanzhou will consists of two floors – first floor will be fully leased out, while the second floor will be occupied by its supermarket operations. 
  3. Where there is risk, there is opportunity. Despite the challenging business environment, the Management shared that it has become easier to find cost-effective and good locations for new stores. In view of the encouraging response from its first small store format in Quanzhou, the Group intends to continue to explore to opportunities to grow its business in small stores format. 
  4. Reviewing its opening schedule for Quanzhou Quangang Zhongxing Store and Quanzhou Anxi Xincheng Store due to delay in construction work and red tape. 
  5. On the other hand, footfall in Xiamen Wucun Store is expected to pick up pace following the full restoration of train services at Xiamen Train Station in Jan-16. 


How do we view this? 


4Q15 results was disappointing. 

  • Revenue was 2% short from our expectation despite our conservative assumption on 4Q15 sales given that fourth quarter is usually one of the stronger quarters. Gross profit margin was slightly lower than our expectation, 37.7% vs 38.0%. 
  • EBITDA was lower due to 
    1. lower than expected other income and 
    2. higher than expected administrative expenses. 
  • Other income declined 33% yoy in 4Q15 due to lower advertisement and promotion income recognised; while additional stores and the loss on disposal of Xiamen Zhongshan Store’s PPE in FY15 offset the impact from cost control measures. 

Sustainable dividend, or potentially higher dividend payout, supported by its strong net cash position. 

  • The Group declared a final dividend of 1.5 Singapore cents for FY15, bringing the total dividend for the year to 4.5 cents. 
  • Considering that there is no significant project in the pipeline, we expect CAPEX to remain low this year. 
  • The Group generated a strong net operating cash flows of RMB102.6 mn in FY15. Its cash and cash equivalents stood at RMB268 mn as at end-FY15. 



Investment Actions 

  • Taking into considerations of its recently beaten down share price, macro headwinds in China and the delay in stores opening, we revised downward our FY16 earnings by 22% to RMB50 mn, which could translate to a 25.5x FY16E PER.
  • We lowered our TP to S$1.73 from S$2.10 but maintain our Buy rating based on discounted cash flow (DCF) methodology with a higher beta of 0.69 (vs 0.59) to reflect its increased volatility.



Valuation 

  • ZBR currently trades at a 25x FY15 PER, which is at a 35% or 41% discount to its Chinese and regional peers, respectively. The lower PER accounts for ZBR’s 
    1. smaller market capitalization and 
    2. single province concentration risk. 
  • Nonetheless, we expects the FY16E and FY17E PER to hover around 25x. We are Positive on the stock for its 
    1. strong brand equity backed by experienced management team, 
    2. growing customer base and industry resiliency, and 
    3. strong cash position. 
  • Taking into considerations of its recently beaten down share price, macro headwinds in China and the delay in stores opening, we revised downward our FY16 earnings by 22% to RMB50 mn, which could translate to a 25.5x FY16E PER. 
  • We also adjusted our exchange rate expectation on CNY against SGD from RMB4.50 per SGD to RMB4.57 per SGD to reflect the recent currency market volatility. 
  • Nonetheless, we remains optimistic on RMB’s strength in the long term. 
  • We lowered our TP to S$1.73 from S$2.10 but maintain our Buy rating based on discounted cash flow (DCF) methodology with a higher beta of 0.69 (vs 0.59) to reflect its increased volatility.



Peter Ng Phillip Securities | http://www.poems.com.sg/ 2016-03-14
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.73 down 2.10


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