Gome reported revenue of 19 billion yuan in the first half of fiscal year 20, down 44.4% from the same period last year, and a net loss of 2.6 billion yuan, which was larger than 380 million yuan in fiscal year 19 and lower than our expectations, mainly due to lower income and profit margins.
From July to August, the company held a number of live events with local governments and CCTV to promote year-on-year same-store sales growth back to a high number of units. We expect revenue growth to return to 13 per cent year-on-year in the second half of the year.
Gome expects 60 to 8 billion yuan in income from JD.com and Pinduoduo in the second half of the year. But the profit margin of Pinduoduo's related business is still low.
To reiterate the "underweight" rating, the discounted cash flow target price was lowered to HK $0.5 because we believe that Gome will take time to establish its new business model and that huge financial costs will continue to drag on earnings for fiscal year 20-21.
Net loss widened in the first half of FY20
Gome reported revenue of 19 billion yuan in the first half of the fiscal year, down 44.4 percent from the same period last year, due to the COVID-19 epidemic. Sales of home appliances fell 60% in the first quarter of fiscal year compared with the same period last year, as more than 90% of Gome's offline stores were temporarily closed during the outbreak. Due to explosive sales growth in online channels and purchases by community groups, as well as the lifting of restrictions on the installation of household appliances, the decline narrowed to 16% in the second quarter of fiscal 20. Gross profit margin in the first half of fiscal year 20 was 8.98%, a year-on-year decline of 5.6 percentage points, due to an increase in revenue contribution from sales of low-margin 3C products during the epidemic. The ratio of sales and distribution expenses to total revenue increased by 4.2 percentage points, and the ratio of administrative expenses increased by 1.3 percentage points, resulting in an operating loss of 2 billion yuan. The net loss during the period was 2.6 billion yuan, up from 380 million yuan in the first half of fiscal year 19.
Recovery begins from July to August
From July to August, Gome's same-store sales returned to high-unit positive growth due to live events with local governments and CCTV, with single-digit year-on-year growth in July and double-digit year-on-year growth in August. The turnover of goods generated by the live broadcast event exceeded 2.5 billion yuan, with an average realization rate of about 60 per cent. Merchandise turnover increased by double digits from July to August compared with the same period last year.
From July to August, Gome earned 15 to 2 billion yuan from JD.com and Pinduoduo. As Gome increased the number of customized products, the overall merchandise turnover from July to August returned to the normal level of 16-17%.
The advantages of cooperation with JD.com and Pinduoduo have not yet been shown.
Gome expects income from JD.com and Pinduo to reach 60 to 8 billion yuan in the second half of the fiscal year, including 50 to 6 billion yuan for Pinduoduo and 20 to 3 billion yuan for JD.com. We believe that the advantages of this partnership will still take time to prove. The profit margin from JD.com is similar to that of Gome, but Pinduoduo's profit margin is still low. Gome plans to open 8 to 1000 franchise stores in county-level cities in the second half of the fiscal year and relocate 100 proprietary stores from shopping malls to residential areas. Gome will have 3000 to 3500 stores by the end of 2020, compared with 1500 by the end of 2019. Management expects Gome to break even in the second half of fiscal year 20, but huge financial costs will continue to be a drag on earnings. We expect Gome to lose money in fiscal years 21 and 22.
To reiterate the "underweight" rating, the new discounted cash flow is priced at HK $0.50. We have lowered the company's net profit forecast for fiscal year 20 by 131% and revised its net profit forecast for fiscal year 21 and 22 to a net loss to reflect the adverse impact of COVID-19 's epidemic. We believe that Gome still needs time to find solutions to create synergies for its online and offline combinations as well as its cooperation with JD.com and Pinduo. Gome needs to improve the profits of its cooperation with Pinduoduo. The positive drivers are better-than-expected cost control and faster-than-expected sales growth. Risks include the COVID-19 epidemic and the more serious impact caused by the failure of the reform.
