China China distribution Retail / Wholesale Trade channelspg.jrj.com.cn/acc/Res/CN_RES/INDUS/2016/8/3/7c3b05... · 8/3/2016 · decline in SSS. By product, we expect sportswear and

Deutsche Bank Markets Research

Asia

China

Consumer

Retail / Wholesale Trade

Industry

China distribution channels

Date

3 August 2016

Forecast Change

1H16 preview – expect offline traffic to still be under pressure

Expect food retailers to outperform amid the challenged environment

________________________________________________________________________________________________________________

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) 057/04/2016.

Richard Rui-Huang, CFA

Research Analyst

(+852 ) 2203 6202

[email protected]

Anne Ling

Research Analyst

(+852 ) 2203 6177

[email protected]

Key Changes

Company Target Price Rating

1169.HK 13.02 to 12.40(HKD)

-

Source: Deutsche Bank

Top picks

Yonghui Superstores (601933.SS),CNY4.57

Buy

Intime Retail (1833.HK),HKD6.06 Buy

Source: Deutsche Bank

We believe the overall consumption environment is still challenging, with SSS expected in negative zones for home appliance retailers and department stores. SSS was weaker in 2Q than in 1Q, while key food retailers are likely to retain flattish to positive growth mainly helped by the ticket size and ASP. Gift card sales were good during CNY to the private sectors. We expect the real demand to come back after three and half years of frugality programs. We also expect leading retailers to embrace e-commerce by developing online channels or by the O2O initiatives gaining back store traffic. Among distribution/retail stocks, we prefer Yonghui and Intime on their resilient SSS and bold store expansions.

This report includes changes to

estimates and price targets for

Haier Electronics; others remain

unchanged.

Food retailers – strong 1Q16 SSSg on gift cards, expect more O2O initiatives Food retailers had strong performances in 1Q16, mainly driven by gift card loading and the calendar shift. Sun Art recovered positive growth in gift cards, while Wal-Mart China saw double-digit growth in gift cards during CNY. We believe the real demand is gradually recovering given the gift cards sold to the private sector. We expect gift cards to help SSS next season (mid-Autumn, September). We expect food retailers to gain traffic through the development of online channels or alliances with O2O players. Yonghui and Wal-Mart allied with JD, while Sun Art is working with O2O players for the last mile delivery. We prefer Yonghui on its accelerating store expansions and solid SSS.

Home appliance retail – weak SSS; expect Gome to continue to renovate stores Gome and Suning reported a SSS fall of 9-10%/4% for 1H16. We believe TV sets underperformed partly due to being replaced by mobile phones/tablets, while kitchenware and small appliances outperformed as consumers are more conscious about health and lifestyle. We expect the hot weather in Southern China in July to drive the sales of air conditioners and refrigerators. Gome should work on store renovations, which resulted in losing 2-3 months revenue and deteriorated GPM. For HE, we lower our FY16-18E NP by 2-4% mainly on the continued downsizing of the third party brands’ distribution.

Department store – challenged business environment; Intime is the best one The environment for department stores is expected to remain challenging in 1H16, with most of the operators seeing a high single digit or mid teens decline in SSS. By product, we expect sportswear and cosmetics to outperform driven by the health and lifestyle conscious, while gold & jewelry, household and lady’s footwear should underperform due to the weak demand and online shift. We believe May was tough partly due to the holiday calendar shift. We believe Intime is the best in the class, with 2Q SSS improved to -3% yoy, driven by its innovative O2O initiatives and store management capability. We expect Intime to report mid single digit growth in core NP for 1H16.

Food retailers have outperformed in 2016 TD We believe this is due to: 1) resilient SSS, 2) short covering. While valuation is not cheap for food retailers, we believe they are more defensive in the sector.

Valuation and risks Our primary valuation methodology is DCF, which we believe is able to capture the cash flow of China’s retailers and distributors. We also use P/E multiples for back testing. Upside/downside risks: business expansion, SSS and competition from both online and offline.

Distributed on: 08/02/2016 19:24:58GMT

3 August 2016



Page 2 Deutsche Bank AG/Hong Kong

Industry overview

Share price performance – Food retailers outperformed in 2016TD

Figure 1: Share price performance in

1Q16


2Q16TD


2016TD

-30% -20% -10% 0%

Lianhua

Intime

Suning

SSEC Index

Haier Electronics

Yonghui

HSCEI Index

Sun Art

HSI Index

Golden Eagle

1Q16

-20% 0% 20% 40%

Suning

Golden Eagle

Intime

Haier Electronics

SSEC Index

Sun Art

HSCEI Index

Yonghui

HSI Index

Lianhua

2Q16 TD

-30% -20% -10% 0% 10%

Suning

Intime

SSEC Index

Haier Electronics

Yonghui

Lianhua

Sun Art

Golden Eagle

HSCEI Index

HSI Index

2016 TD

Source: Deutsche Bank, Bloomberg Finance LP

Source: Deutsche Bank Bloomberg Finance LP

Source: Deutsche Bank Bloomberg Finance LP

Top China retailers’ performance – cosmetics, home appliance and food outperformed

Figure 4: Top 100/50 retailers’ sales

yoy growth - overall

Figure 5: Top 100 retailers’ sales yoy

growth – home appliance


yoy growth – food

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

100 key large retail enterprises 50 key large retail enterprises

-20%

-10%

0%

10%

20%

30%

May

-13

Jul-

13

Sep

-13

No

v-1

3

Jan

-Feb

20

14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-Feb

20

16

Ap

r-1

6

Jun

-16

Top 50 retail sales % - home appliance

Top 100 retailer sales % - home appliance

Gome offline quarterly sales yoy%

Suning offline quarterly yoy%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

100 key large retail enterprises-Food 50 key large retail enterprises-Food

Source: Deutsche Bank CNNIC

Source: Deutsche Bank CNNIC, company data



yoy growth – apparel


growth – cosmetics


growth – gold & jewelry

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

100 key large retail enterprises-Apparel 50 key large retail enterprises-Apparel

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

No

v-1

3

Jan

-Feb

20

14

Ap

r-1

4

Jun

-14

Au

g-1

4

Oct

-14

Dec

-14

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-Feb

20

16

Ap

r-1

6

Jun

-16

Top 100 retailer sales yoy% - cosmetics

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

100 key large retail enterprises-Gold & Jewelry

50 key large retail enterprises-Gold & Jewelry


Source: Deutsche Bank CNNIC, company data


3 August 2016



Deutsche Bank AG/Hong Kong Page 3

Figure 10: Foreign food retailers’ SSSg Figure 11: Local food retailers’ SSSg – Yonghui and Sun

Art outperformed

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

Wal-Mart Tesco Carrefour

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Wumart CRE Sun Art Yonghui CPI

Source: Deutsche Bank, company data

Source: Deutsche Bank, company data

Summary of our forecast changes and 1H16 preview

We have changed our forecasts and target price for Haier Electronics only.

Figure 12: Summary of DB estimates

Current forecast Previous forecast

Ticker Company Rec Current price

Target price

Reporting Ccy

Sales (2016E)

NP (2016E)

Sales (1H16E)

NP (1H16E)

Sales (2016E)

NP (2016E)

601933.SS Yonghui Superstores Buy 4.57 5.80 RMBm 50,747 1,161 24,520 668 na na

6808.HK Sun Art Buy 5.28 5.63 RMBm 101,607 2,387 53,268 1,408 na na

1169.HK Haier Electronics Hold 13.2 12.4 RMBm 63,004 2,606 30,509 1,135 66,465 2,671

0493.HK Gome Hold 0.89 0.82 RMBm 75,148 -24 34,760 10 na na

1833.HK Intime Buy 6.06 7.53 RMBm 5,957 892 3,039 730 na na

Source: Deutsche Bank estimates, company data

3 August 2016




Food retailers

Yonghui Superstores − accelerating store expansion

(601933.SS, RMB4.57, target price RMB5.80, Buy)

1H16 net profit rose 27% yoy to RMB668m on an 18% increase in revenue, as reported in its preliminary 1H16 results

on 16 July. The audited results are set to be reported on 26 August. Revenue is 48% of our full-year forecast, in line with

its interim revenue mix of 47-48% in 2013-14. Net profit is 58% of our full-year FY16 forecast, vs. 53-54% in 2013-14.

We expect its EBIT margin to improve by 0.5ppts yoy in 2Q16, vs. a 0.3ppts yoy improvement in 1Q16. The company

attributed the NP growth to 1) GP margin improvement and an opex ratio decline in 2Q16, 2) some regions (Jiangsu,

Shaanxi, and Shanxi) turning profitable from previous net losses, and 3) Sichuan’s NP increasing significantly.

SSSg is expected to grow at 2% yoy in 2Q16, vs. mid-single-digit SSSg in 1Q16, mainly attributable to an ASP increase.

The company streamlined its apparel business supply chain in 2H15. We believe the sales performance of its stores in

new regions (Jiangsu, Shaanxi and Shanxi) has improved.

To develop store network in two business clusters. We expect Yonghui to add 60-80 stores each year during 2016-18E,

in line with management’s guidance at the beginning of this year. We believe it will focus on developing the Eastern and

Western China regions. It has formed two business clusters. The first should mainly open red label stores, covering

Fujian, Western China, and Northeastern China, where they will penetrate lower-tier cities. The second business cluster

will mainly develop the green label (Bravo) stores in Beijing, Tianjin, Hebei, Eastern China and Guangdong, where they

will focus on the high-tier cities. We believe the cluster restructuring helps the company to 1) invest more resources to

develop the Bravo stores, 2) decentralize management to the divisional level, and 3) effectively motivate mid-level

management and store managers.

Apparel supply chain streamlined. The group fine-tuned the supply chain of its apparel business in 2H15 by adding new

suppliers and clearing inventory. We expect apparel revenue to increase by 15% yoy in 1H16 to RMB1.3bn, after a 6%

decline in 2H15.

JD placement to be completed in 1-2 months. We expect the JD placement to be completed in 1-2 months, as the CSRC

approved the proposal in July. It is currently working on JD Daojia and expects to have more O2O initiatives after the

placement.

Reiterating Buy on accelerating store expansion. We have a Buy rating on the stock, as 1) we believe Yonghui should be

a long-term beneficiary of China’s secular trends in modern trade retailing, and 2) it has industry-leading expertise in

fresh food operations, driven by its strong sourcing capability, well-established supply chain management and optimized

business procedures. We estimate 41% net profit growth for FY16-18E, on 20% revenue growth, driven mainly by 60-80

new store additions each year, 2-3% SSSg and operating leverage. Key downside risks: keen competition, low CPI and

challenges in nationwide expansion.

3 August 2016




Figure 13: Yonghui interim P&L

YE 31Dec, RMBm 1H13 2H13 2013 1H14 2H14 2014 1H15 2H15 2015 1H16E 2H16E 2016E

Turnover 14,413 16,130 30,543 17,703 19,023 36,727 20,835 21,310 42,145 *24,520 26,227 50,747

YOY % Growth 23.1% 24.3% 23.7% 22.8% 17.9% 20.2% 17.7% 12.0% 14.8% 17.7% 23.1% 20.4%

Sales Split % 47% 53% 100% 48% 52% 100% 49% 51% 100% 48% 52% 100%

Gross Profit 2,790 3,071 5,861 3,440 3,780 7,220 4,141 4,218 8,359 4,969 5,190 10,159

GPM 19.4% 19.0% 19.2% 19.4% 19.9% 19.7% 19.9% 19.8% 19.8% 20.3% 19.8% 20.0%

EBIT 484 384 869 519 433 952 568 238 806 771 579 1,350

EBITM 3.4% 2.4% 2.8% 2.9% 2.3% 2.6% 2.7% 1.1% 1.9% 3.1% 2.2% 2.7%

EBIT Split % 56% 44% 100% 55% 45% 100% 70% 30% 100% 57% 43% 100%

Finance income (47) (35) (82) (51) (53) (104) (23) 47 25 44 44 88

Exception Item 68 90 159 112 129 241 108 (53) 56 20 41 61

Associates 0 0 0 0 (5) (5) (7) (82) (89) 1 1 2

Profit Before Tax 506 440 945 580 505 1,084 647 151 797 836 664 1,500

Tax (116) (107) (224) (126) (105) (232) (121) (77) (197) (170) (175) (345)

ETR % 23.0% 24.5% 23.7% 21.8% 20.9% 21.4% 18.6% 50.9% 24.7% 20.4% 26.3% 23.0%

Minority Interest (1) (1) (1) (1) (0) (1) 0 5 5 3 3 6

Net Profit 389 332 721 453 399 852 527 79 605 *668 492 1,161

YOY % Growth 102.4% 7.0% 43.5% 16.4% 20.3% 18.2% 16.3% -80.2% -28.9% 26.9% 524.9% 91.7%

Profit Split % 54% 46% 100% 53% 47% 100% 87% 13% 100% 58% 42% 100% Source: Deutsche Bank company data, Note: * is as reported in preliminary report by the company. Other figures in 1H16 are DBe.

Figure 14: Yonghui - DB forecast vs. market consensus

RMBm Current forecast Market forecast Diff from market forecast

RMBm FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

Sales 50,747 61,081 72,856 49,495 57,077 65,953 3% 7% 10%

EBIT 1,350 1,669 2,023 1,064 1,246 1,472 27% 34% 37%

Net profit 1,161 1,415 1,695 912 1,084 1,290 27% 31% 31% Source: Deutsche Bank, Bloomberg Finance LP

Sun Art – more O2O and online alliances

(6808.HK, HK$5.28, target price HK$5.63, Buy)

Sun Art is scheduled to release its interim results on 10 August. We expect net profit to decline by 5% yoy to RMB1.4bn

on a 5% increase in revenue. This is an improvement from a mid-teen decline in 2015. For 2Q, we forecast a net profit

decline of 7% yoy on a 4% increase in sales revenue with flattish SSSg (SSSg was +1.1% in 1Q16).

O2O development. Sun Art reached a strategic alliance with Shihui (实惠) in July, aiming to complete the last mile

delivery services by leveraging the third-party O2O player. Shihui has a mobile app, covers 40 major cities with 200+

service stations (GFA of 100 sqm for each station), and offers merchandise home delivery, home care service,

healthcare service and housing services to community residents. We expect the alliance with O2O players to relieve Sun

Art from investment in online traffic and logistics.

Allied with Gome to share the traffic. Sun Art has allied with Gome to add a flagship store to Gome’s online platform;

meanwhile, Feiniu will add a supermarket channel to Gome Online. The two parties will share a user database,

promotional events, supply chain management and supplier resources. We believe this could create synergies for both

companies, as it could 1) increase traffic as they have different user bases, 2) enrich SKUs, backed by their expertise in

their different product categories, and 3) share supply chain resources, especially logistics resources.

3 August 2016




Valuation and risks. Our primary valuation methodology is a DCF, employing a WACC of 9.5% and a terminal growth

rate of 2.0%, which is in line with our 1-2.5% TGR sector assumption for the other Chinese consumer companies we

cover. We use the Deutsche Bank China COE of 9.5%, as Sun Art’s business is in China. We use a beta of 1.0, which is

also in line with the range we use for consumer stocks listed in Hong Kong. Downside risks: 1) slower-than-expected

expansion plans; 2) improvement in GPM failing to offset an opex increase; and 3) competition from e-commerce and

offline peers.

Figure 15: Sun Art interim P&L

RMBm, YE 31Dec 1H14 2H14 2014 1H15 2H15F 2015 1H16E 2H16E 2016E

Turnover 48,038 43,817 91,855 50,708 45,706 96,414 53,268 48,339 101,607

YOY % Growth 7.9% 5.1% 6.6% 5.6% 4.3% 5.0% 5.0% 5.8% 5.4%

Sales split % 52% 48% 100% 53% 47% 100% 52% 48% 100%

Total Gross profit 10,720 10,673 21,393 11,665 11,274 22,939 12,290 12,610 24,900

Total GPM 23.0% 25.1% 24.0% 23.7% 25.6% 24.6% 23.9% 27.1% 25.4%

Opex (8,416) (9,069) (17,485) (9,629) (10,006) (19,635) (10,269) (11,447) (21,717)

Opex ratio -17.5% -20.7% -19.0% -19.0% -21.9% -20.4% -19.3% -23.7% -21.4%

EBIT 2,304 1,604 3,908 2,036 1,268 3,304 2,020 1,163 3,183

YOY % Growth 8.9% -4.5% 3.0% -11.6% -20.9% -15.5% -0.8% -8.3% -3.7%

EBIT split % 59% 41% 100% 62% 38% 100% 63% 37% 100%

EBITM 4.8% 3.7% 4.3% 4.0% 2.8% 3.4% 3.8% 2.4% 3.1%

Profit Before Tax 2,488 1,711 4,199 2,181 1,371 3,552 2,135 1,277 3,412

Tax (699) (477) (1,176) (659) (429) (1,088) (651) (394) (1,045)

ETR % -28.1% -27.9% -28.0% -30.2% -31.3% -30.6% -30.5% -30.9% -30.6%

Profit before MI 1,789 1,234 3,023 1,522 942 2,464 1,484 883 2,367

Minority Interest (79) (45) (124) (46) 25 (21) (76) 96 20

Net Profit 1,710 1,189 2,899 1,476 967 2,443 1,408 979 2,387

YOY % Growth 9% -1% 4% -14% -19% -16% -5% 1% -2%

Profit split % 59% 41% 100% 60% 40% 100% 59% 41% 100%

Net Profit margin 3.6% 2.7% 3.2% 2.9% 2.1% 2.5% 2.6% 2.0% 2.3% Source: Deutsche Bank, company data

Figure 16: Sun Art - DB forecasts vs. market consensus

Current forecasts Market forecasts Diff. from market forecasts

RMBm 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E

Sales 101,607 108,166 114,192 102,591 108,858 116,600 -1% -1% -2%

EBIT 3,183 3,381 3,601 3,244 3,240 3,415 -2% 4% 5%

Net profit 2,387 2,572 2,764 2,402 2,466 2,607 -1% 4% 6%


3 August 2016




Home appliance retailers/distributors

Haier Electronics – NP cut by 2-4% on continued downsizing of third party brand distribution business

(1169.HK, HK$13.20, target price HK$12.40, Hold)

We expect Haier Electronics to report its interim results at the end of August. We lower our FY16-18E NP forecasts by

2-4% on slower-than-expected growth in the washing machine business (1Q16: +2% yoy) and the continued downsizing

of the third party brand distribution business.

We expect Haier to report a 4% increase in NP to RMB1.1m in 1H16, mainly attributable to an improvement in GP

margin on more sales mix from logistics and low raw material prices. We expect top line to decline by 3%, mainly due

to the downsizing of the third party brand distribution business (DBe new: -30% yoy vs. DBe old:-20%) and the AC

output constraint in 1H16. We expect Haier to gradually exit the third party distribution business as some third party

brands have shifted to an online platform.

Washing machine is likely to grow in low single digits (DBe: +2% yoy) in 1H16, while water heater is likely to grow at

high single digits given a less competitive environment. According to China Market Monitor (Figure 17), Haier’s washing

machine market share expanded 0.7 ppts yoy in 1H16 in terms of sales volume, mainly due to the expansion of SKUs in

mid-end products (RMB2-4.5k). Its market share gained 0.6 ppts yoy in 1H16 in terms of sales value, mainly due to a

market share gain in the high-end segment (RMB4.5k+; Figure 18). This is attributable to its high-end products (Casarte

brand) being well received by the market. We expect Haier to continue to increase the mid-end SKUs and the high-end

products.

Figure 17: Haier washing machine market share in volume (sell out)

Prince range 1H15 1H16 yoy change

~RMB2k 24.27% 24.69% 0.42%

RMB2k-4.5k 29.66% 30.83% 1.17%

RMB4.5k+ 24.69% 25.29% 0.60%

Overall 25.80% 26.47% 0.67% Source: Deutsche Bank, China Market Monitor

Figure 18: Haier washing machine market share in value (sell out)

Prince range 1H15 1H16 yoy change

~RMB2k 25.18% 24.41% -0.77%

RMB2k-4.5k 29.80% 30.31% 0.51%

RMB4.5k+ 24.57% 25.96% 1.40%

Overall 26.32% 26.92% 0.60% Source: Deutsche Bank

Valuation and risks

We maintain our Hold recommendation as the company will continue to downsize the third party brand distribution

business, while the logistics M&A has now become more difficult to ink as the valuation is currently expensive. The

dividend payout ratio is likely to remain at an unattractive 10% for FY16-18E.

We lower our DCF-based target price (9.5% WACC, 1.0% beta, and 1.5% TGR) by 5% to HK$12.4, which implies 12/11x

FY16/17E PE. Our primary valuation methodology is DCF. As most of Haier Electronics’ business comes from China, we

use a China COE of 9.5% and beta of 1. The long-term growth rate is 1.5% (old: 2%), in line with our 1-2.5% TGR sector

assumption for the other Chinese consumer companies we cover. Up/downside risks: better-/slower-than-expected

logistics expansion.

3 August 2016




Figure 19: Deutsche Bank’s current forecasts vs. previous forecasts and market consensus

Current forecast Previous forecast Market forecast % change vs. previous forecast

Diff from market forecast

RMBm FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

Sales 63,004 68,059 74,173 66,465 72,465 79,036 66,494 72,149 77,444 -5% -6% -6% -5% -6% -4%

EBIT 2,988 3,211 3,471 3,068 3,339 3,608 3,204 3,513 3,616 -3% -4% -4% -7% -9% -4%

Net profit 2,606 2,813 3,065 2,671 2,918 3,178 2,807 3,108 3,186 -2% -4% -4% -7% -9% -4%


Figure 20: Haier Electronics interim P&L

YE 31Dec, RMBm 1H14 2H14 2014 1H15 2H15 2015 1H16E 2H16E 2016E

Turnover 32,937 34,197 67,134 31,332 31,494 62,826 30,509 32,495 63,004

YOY % Growth 14% 3% 8% -5% -8% -6% -3% 3% 0%

Sales Split % 49% 51% 100% 50% 50% 100% 48% 52% 100%

Gross Profit 4,532 5,310 9,842 4,664 5,329 9,993 4,737 5,581 10,318

GPM 13.8% 15.5% 14.7% 14.9% 16.9% 15.9% 15.5% 17.2% 16.4%

Other income 53.9 77.2 131 43.4 218.3 262 61.0 201.4 262

Operating Cost -3,313 -3,658 -6,971 -3,444 -3,949 -7,393 -3,493 -4,100 -7,592

opex ratio -10.1% -10.7% -10.4% -11.0% -12.5% -11.8% -11.4% -12.6% -12.1%

EBIT 1,273 1,730 3,002 1,264 1,598 2,862 1,306 1,683 2,988

YOY % Growth 16% 13% 14% -1% -8% -5% 3% 5% 4%

EBIT Split % 42% 58% 100% 44% 56% 100% 44% 56% 100%

EBITM 3.9% 5.1% 4.5% 4.0% 5.1% 4.6% 4.3% 5.2% 4.7%

Interest income 39 119 158 100 93 193 87 87 174

Profit Before Tax 1,316 1,850 3,166 1,399 1,945 3,344 1,402 1,779 3,181

Tax -311 -340 -651 -269 -341 -609 -269 -311 -580

ETR % -24% -18% -21% -20% -20% -20% -19% -17% -18%

Minority Interest -28 -40 -68 -34 2 -32 2 2 5

Net Profit 978 1,469 2,447 1,097 1,606 2,703 1,135 1,470 2,606

YOY % Growth 19% 21% 20% 12% 9% 10% 4% -8% -4%

Profit Split % 40% 60% 100% 41% 59% 100% 44% 56% 100%

Net Profit margin 3.0% 4.3% 3.6% 3.5% 5.1% 4.3% 3.7% 4.5% 4.1%

Core net profit 973 1,468 2,441 1,063 1,362 2,425 1,135 1,470 2,606

YOY % Growth 18% 21% 20% 9% -7% -1% 7% 8% 7% Source: Deutsche Bank, company data

Gome - store renovations hurt earnings

(0493.HK, HK$0.89, target price HK$0.82, Hold)

Recurring net profit declined by 75-85% yoy in 1H16, as reported in Gome’s profit warning on 31 July. According to the

company’s announcement, SSSg likely fell 9-10% yoy due to the renovation of some of the major stores (losing two to

three months of revenue), or down 5-6% excluding the renovations. 1H16 revenue rose 9-10% yoy; offline revenue

increased 4-5%, helped by the consolidation of Artway in 2Q16, while B2C online revenue increased by 60% yoy. Online

B2C growth (60% yoy) is below our full-year forecast of 85%, while SSS (a decline of 9-10%) is well below our full year

expectation of -3%.

We expect Gome to renovate 140/150/150 stores in 2016/17/18. These stores need to be closed for 2-3 months before

reopening, which impacts SSS and GP margins. Management believes the renovation effect will be properly reflected

within six months of the renovation. It saw the five stores renovated in 1Q record 18-20% yoy revenue growth in 2Q.

3 August 2016




Revenue from small appliances and mobile phones doubled after the renovation, indicating successful attraction of

young customers. It believes the renovated stores have better profitability now than they did before the renovation.

Maintaining Hold as Gome is still in the investment period for store renovations. Our primary valuation methodology is

DCF, employing a COE of 9.5%, beta of 1.1 and a terminal growth rate of 1.5%. This produces a fair value estimate of

HK$0.82/share, implying 67/20x FY17/18E PE or 0.9x FY16E PB. Upside/downside risks relate to SSSg and competition.

Figure 21: Gome interim P&L

YE 31Dec, RMBm 1H14 2H14 FY14 1H15 2H15E FY15E 1H16E 2H16E FY16E

Sales 29,124 31,236 60,360 31,692 32,903 64,595 34,760 40,388 75,148

yoy growth 7% 7% 7% 9% 5% 7% 10% 23% 16%

Full year contribution 48% 52% 100% 49% 51% 100% 46% 54% 100%

Gross profit 4,430 4,564 8,994 4,712 4,801 9,513 4,559 5,317 9,876

Other income 953 1,109 2,062 899 1,095 1,994 1,069 1,336 2,405

SG&A (4,746) (5,087) (9,833) (4,917) (5,017) (9,934) (5,697) (6,888) (12,585)

EBIT 638 586 1,224 694 879 1,573 (69) (235) (304)

EBIT margin 2.2% 1.9% 2.0% 2.2% 2.7% 2.4% -0.2% -0.6% -0.4%

yoy growth 83% -12% 21% 9% 50% 28% -110% -127% -119%

Full year contribution 52% 48% 100% 44% 56% 100% 23% 77% 100%

Finance cost 108 148 256 106 104 211 57 26 83

Extraordinary 100 - 100 - (207) (207) (97) 37 (60)

PBT 846 734 1,580 801 776 1,577 (109) (172) (281)

Income tax (248) (314) (562) (276) (365) (640) (123) (129) (251)

Minority interest 94 168 262 162 110 271 241 267 508

net profit 693 587 1,280 687 521 1,208 10 (34) (24)

Net margin 2.4% 1.9% 2.1% 2.2% 1.6% 1.9% 0.0% -0.1% 0.0%

yoy growth 115% 3% 43% -1% -11% -6% -99% -107% -102%

Core net profit 593 587 1,180 687 728 1,415 106 (71) 36

yoy growth 84% 3% 32% 16% 24% 20% -85% -110% -97%

Full year contribution 50% 50% 100% 49% 51% 100% 298% -198% 100% Source: Deutsche Bank, company data

3 August 2016




Department stores

Intime – core net profit to grow at 5% yoy in 1H16

(1833.HK, HK$6.06, target price HK$7.53, Buy)

We expect Intime to release its interim results in mid-August. We expect core net profit to increase by mid-single digits

at 5% yoy to RMB546m on flattish yoy growth in revenue. To recap, SSS saw a decline of 4.8% in 1Q16 but this

narrowed to a decline of 3.4% in 2Q16.

Alibaba has become its largest shareholder. Alibaba (BABA.N, Buy, US$82.48) converted all of its CBs at a price of

HK$7.13 into 535m conversion shares in Intime on 30 June 2016. After the conversion, Alibaba has become the largest

shareholder of Intime with a 28% stake, up from 10% before the conversion. We believe this to be a strategic

investment by Alibaba, which plans to develop the O2O business in the retail market. We expect Intime to accelerate

offline retail industry consolidation, and it is likely to be able to obtain more resources from Alibaba to develop the O2O

programs.

Asset securitization to fuel M&A plans. Intime has successfully launched its first store property securitization project

(Dahongmen). We believe this is a good start and it should have 10-12 projects in the pipeline to free up RMB5bn cash

inflow. We believe the asset securitization should help 1) optimize its capital structure, 2) free up cash flow to expand

swiftly in the market, and 3) leave the main business intact as it will lease back the store and continue with the retail

business.

Valuations and risks. Our primary valuation methodology is DCF. As most of Intime’s business comes from China, we

use a 9.5% China WACC (3.9% RFR, 5.6% ERP, 1.0 beta, debt-free structure). We use a long-term growth rate of 1.5%,

in line with our assumptions for China consumer stocks. Downside company risks include weak SSSg, slower store

expansion, rising staff costs, and M&A.

Figure 22: Intime- DB forecast vs. market consensus

DB estimates Market consensus Difference from market consensus

RMBm FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E

Sales 5,957 6,406 6,968 5,942 6,377 6,889 0% 0% 1%

Net profit 1,259 1,294 1,409 1,186 1,259 1,504 6% 3% -6%

Core net profit 892 1,018 1,138 960 1,068 1,122 -7% -5% 1% Source: Deutsche Bank, Bloomberg Finance LP

3 August 2016




Figure 23: Intime’s interim P&L

YE 31Dec, RMBm 1H14 2H14 2014 1H15 2H15 2015F 1H16F 2H16F 2016F

Turnover 2,352 2,899 5,251 3,056 2,699 5,755 3,039 2,919 5,957

YOY % Growth 3% 30% 16% 30% -7% 10% -1% 8% 4%

Sales Split % 45% 55% 100% 53% 47% 100% 51% 49% 100%

Gross profit 1,811 2,201 4,012 2,289 1,975 4,264 2,341 2,159 4,501

GPM 77.0% 75.9% 76.4% 74.9% 73.2% 74.1% 77.1% 74.0% 75.6%

EBIT 484 545 1,029 736 227 963 706 293 999

YOY % Growth -11% 1% -5% 52% -58% -6% -4% 29% 4%

EBIT Split % 47% 53% 100% 76% 24% 100% 71% 29% 100%

EBITM 21% 19% 19.6% 24% 8% 16.7% 23% 10% 16.8%

Interest expense 41 6 48 (1) 15 14 30 39 69

Profit Before Tax 906 899 1,805 1,115 702 1,842 1,094 682 1,775

Tax (256) (385) (641) (355) (138) (493) (348) (138) (486)

ETR % -38% -54% -46% -40% -42% -40% -40% -30% -36%

Minority Interest -54 12 (42) -47 15 (32) -15 -15 (30)

Net Profit 596 526 1,121 713 580 1,317 730 528 1,259

YOY % Growth -19% -39% -30% 20% 10% 17% 2% -9% -4%

Profit Split % 53% 47% 100% 54% 44% 98% 58% 42% 100%

Net Profit margin 25.3% 18.1% 21.4% 23.3% 21.5% 22.9% 24.0% 18.1% 21.1%

Core net profit 475 281 756 520 300 804 546 345 892

YOY % Growth -8% -20% -13% 10% 7% 6% 5% 15% 11% Source: Deutsche Bank, company data

3 August 2016




Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Haier Electronics 1169.HK 13.20 (HKD) 1 Aug 16 NA

SUN ART RETAIL GROUP 6808.HK 5.28 (HKD) 1 Aug 16 14,15

Yonghui Superstores 601933.SS 4.57 (CNY) 2 Aug 16 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Richard Rui-Huang

3 August 2016




Historical recommendations and target price: Haier Electronics (1169.HK) (as of 8/1/2016)

1

23

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16

Se

cu

rity

Pri

ce

Date

Previous Recommendations

Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating

Current Recommendations

Buy Hold Sell Not Rated Suspended Rating

*New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche Bank

1. 07/10/2015: Upgrade to Hold, Target Price Change HKD14.12 Richard Rui-Huang

3. 22/03/2016: Hold, Target Price Change HKD13.02 Richard Rui-Huang

2. 01/03/2016: Hold, Target Price Change HKD13.12 Richard Rui-Huang

Historical recommendations and target price: SUN ART RETAIL GROUP (6808.HK) (as of 8/1/2016)

1

23

4 5

6 7

0.00

2.00

4.00

6.00

8.00

10.00

12.00


Se

cu

rity

Pri

ce

Date







1. 14/11/2014: Buy, Target Price Change HKD10.00 Lydia Ling** 5. 26/08/2015: Buy, Target Price Change HKD6.82 Anne Ling

2. 03/03/2015: Buy, Target Price Change HKD8.80 Lydia Ling** 6. 20/01/2016: Buy, Target Price Change HKD6.33 Richard Rui-Huang

3. 14/05/2015: Buy, Target Price Change HKD8.40 Anne Ling 7. 01/03/2016: Buy, Target Price Change HKD5.63 Richard Rui-Huang

4. 13/08/2015: Buy, Target Price Change HKD7.10 Anne Ling

3 August 2016




Historical recommendations and target price: Yonghui Superstores (601933.SS) (as of 8/2/2016)

1

2

3

0.00

2.00

4.00

6.00

8.00

10.00

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Se

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ce

Date







1. 29/06/2015: Upgrade to Buy, Target Price Change CNY12.90 Anne Ling

3. 03/06/2016: Buy, Target Price Change CNY5.80 Richard Rui-Huang

2. 28/04/2016: Buy, Target Price Change CNY11.60 Richard Rui-Huang

Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock

Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

53 %

36 %

11 %15 % 15 % 19 %

050

100150200250300350400450500

Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

3 August 2016




Regulatory Disclosures

1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

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consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

3 August 2016




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Documents

China China distribution Retail / Wholesale Trade channelspg.jrj.com.cn/acc/Res/CN_RES/INDUS/2016/8/3/7c3b05... · 8/3/2016 · decline in SSS. By product, we expect sportswear and