Zhongmin Baihui Retail Group - Phillip Securities 2016-05-06: Weak start points to tough year ahead

Zhongmin Baihui Retail Group - Phillip Securities 2016-05-06: Weak start points to tough year ahead  ZHONGMIN BAIHUI RETAIL GRP LTD 5SR.SI 

Zhongmin Baihui Retail Group - Weak start points to tough year ahead

  • Revenue and net profit hurt by extended winter in 1Q16.
  • Expects subdued sales in FY16 due to marginal growth in store space coupled with a meek macro environment.
  • Net cash position supportive of consistent dividend payout. Potential dividend yield of 3.2%.
  • Lower TP from S$1.73 to S$1.44; downgrade to Neutral rating.

Persistent headwinds from FY15; cautious on expansion. 

  • The two new stores in Putian Xianyou (Dec-15) and Quanzhou Wanxiang (Jan-16), as well as Chinese New Year failed to lift sales. 
  • Revenue and net profit declined 1.5% yoy and 9.8% yoy, respectively, on the back of lower contribution from all segments in 1Q16. 
  • Management attributed the sluggish turnover to the changes in sales structure, as the Group continued its effort to increase profitability. 
  • The unusual weather continued to haunt the Group. The late winter season, which started in Dec-15 (usually starts in Nov) and did not end until Apr-16 (usually ends in Mar), had disrupted its clothing sales in 4Q15 and 1Q16. 
  • Gross profit margin decreased from 14.6% in 1Q15 to 13.2% in 1Q16, hit by the higher sales promotion activities for the extended winter season. 
  • No change on its expansion plan as per our last update report.

Ongoing effort to increase profitability

  • Ongoing effort to increase profitability by rationalising costs through 
    1. reducing operating staff; and 
    2. phasing out low-end merchandise that required intensive sales labour from the Group’s department stores. 
  • The lower selling and distribution expenses (- 7% yoy in 1Q16) despite higher store counts reflects the improved productivity and efficiency. 
  • The move to change sales structure is expected to help gross profit and bottom line in the expense of sales volume.

Investment Actions

  • The prospects for retail sales in China appear gloomy, tarnished by the lacklustre Chinese New Year sales. Although retails sales of consumer goods in China has been resilient against Chinese economic slowdown (double digit annual growth for the past decade), we do not think a near term turnaround is possible. Thus, we adjusted downwards our growth expectation between 2016 and 2020. 
  • We also adjusted our exchange rate expectation on CNY against SGD from RMB4.57 per SGD to RMB4.80 per SGD to reflect the latest FX forecast from Bloomberg consensus.
  • FY16F earnings was cut by 4% to RMB48mn, in view of the weak quarter turnover, which sets a softer tone for the rest of the year. As a result, TP is lowered to S$1.44 from S$1.73, based on discounted cash flow (DCF) methodology. Downgrade from Buy to Neutral rating.

Peter Ng Phillip Securities | http://www.poems.com.sg/ 2016-05-06
Phillip Securities SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.44 Down 1.73