Company profile
Christine International Holdings Limited (Christine) is a leading bakery product chain operator in China. According to Euromonitor's data, on December 31, 2010, Christine owned and operated one of the largest retail chain stores selling bakery products in China in terms of revenue and number of retail stores. Christine began producing and selling bakery products in 1993, and was one of the first Taiwanese bakery companies to enter the Chinese market. On June 30, 201, Christine offered a range of bakery products through its channel retail network (972 retail stores in total).
2012 2012 Interim Earnings Summary Mid-Year Earnings Summary
On 2012/7/27, Christine issued a profit warning. Christine expects that the 2012 mid-term results will clearly decline from the results of the same period up to the same period in 2011 without review, and may be a loss. The company's management pointed out three major reasons that led to a sharp decline in profits, including i) rapid showrooms, which led to an increase in sales costs related to employee salaries, new store rents, and spare packaging materials in stores ii) the impact of minimum wage policies for workers and social security systems (iii) the impact of workers' minimum wage policies and social security systems (iii) stock incentive schemes and listing expenses. The following is a summary of the interim results:
Revenue increased by about 6.0% year-on-year, reaching approximately RMB 595 million
Gross profit increased by about 0.6% year on year, reaching about RMB 283.77 million
Gross margin fell 2.6 percentage points year over year to 47.7%
Basic (loss) earnings per share fell by about 187%, reaching a loss of about RMB 2.0 cents
No interim dividends
Summaries
We are not optimistic about the company's profit prospects under the structural problems of insufficient growth momentum, falling gross margin, and rising sales costs. The pace at which the company opened new stores was higher than we anticipated, but the concurrent cost increase exceeded our expectations. Also, the one-time commencement of the stock incentive plan and listing was reflected in the first half of 2012.
Christine's stock price plummeted after the earnings warning was announced. Investors must be aware that profit margins and the market's valuation of Christine will decline. However, due to the current poor operating environment of the company, we anticipate that the company will record minor losses in 2012 and 2013. We forecast Christine International's forecast market book rate for 2013 to be 0.6 times. The current price of Christine International is HK$1.07, the estimated market book ratio is 0.85 times, and there is a strong downside risk of 29.4%. We adjusted Christine's 12-month target price to HK$0.76 and gave it a “sell for sale” rating.
