2016 performance is in line with expectations
Lianhua supermarket announced FY16 annual results: revenue was 27 billion yuan, down 2% from the same period last year; net profit was-450 million yuan (- 497 million yuan in 2015), and earnings per share was-0.4 yuan. The results are in line with previous forecasts.
Same-store sales growth fell 1.2 per cent in 2016 (6.5 per cent in 2016 and 0.7 per cent in the first half of 2016). The main driver of the improvement in same-store sales is the convenience store sector (up 6.3% year-on-year). However, convenience stores are the sector with the largest losses, with operating interest rates falling by 5.8%, mainly due to high labor costs.
EBIT margin fell 0.3 percentage points to-0.8%, mainly due to operational deleveraging, reduced interest income, and cumulative increases in goodwill and store closures.
Trend of development
Same-store sales growth is expected to remain negative in the first quarter of 2017, mainly due to the early Spring Festival in 2017. However, the growth rate of same-store sales throughout the year may benefit from the general environment of CPI growth. CICC Macro Group expects CPI to grow 2.6 per cent year-on-year in 2017.
It is expected to have a synergy with Yi Guo in terms of operation and O2O business. Shanghai Yi Guo holds 21.17% of Lianhua supermarket, making it the second largest shareholder of the company. We will pay close attention to whether Yiguo will help Lianhua supermarket implement business reform and promote O2O business development through its management and e-commerce capabilities.
Valuations are attractive. The current share price corresponds to a price-to-sales ratio of 0.1 times 2017. The company's net cash reached 8.4 billion yuan, 122% higher than the market capitalization.
Profit forecast
Keeping the 2017 earnings forecast unchanged, we raised our 2018 earnings per share forecast by 11% from 0.05 yuan to 0.06 yuan.
Valuation and suggestion
At present, the company's share price corresponds to a price-to-sales ratio of 0.1 times 2017. We maintain the recommended rating, but raise the target price by 7.96% to HK $4.61 (0.15 times the 2017 price-to-sales ratio), which is 22.61% upside from the current share price.
Risk.
The reform fell short of expectations.