Home Product Center

Home Product Center Plc (HMPRO)
Although we like Homepro’s increasing exposure to Thailand’s fast-growing upcountry, store numbers in Thailand are approaching saturation levels. Competition for Homepro continues to intensity as competitors step up their expansion. We upgrade FY12-14 EPS by 1-8% to incorporate more new stores and higher SSSG assumptions. We raise our DCF target price (7.1% WACC, 5% LTG) after adjusting earnings and rolling over to end-CY13. We take over coverage with a downgrade of the stock to Neutral from Outperform, as we believe Homepro’s growth prospects are widely known and have been priced in. Competition is also increasing with overseas expansion still uncertain. 

Some near-term success
We expect Homepro’s sales to grow strongly yoy in 4Q, powered by a second wave of post-flood
reconstruction, which should result in 10% SSSG in 2012. However, this could mark the peak for Homepro, with 1Q13 likely to be weaker given a high base in 2012. We expect SSSG to
decline to 6-7% per year by 2014 and remain sensitive to any changes in Thailand’s GDP growth.

We expect gross margins to climb
further, albeit slowly, as Homepro continues to take market share from traditional retailers while
high-margin private-label goods make further inroads. However, competition should also increase for Homepro’s construction goods, as modern-trade competitors such as Siam Global and Thai Watsadu accelerate their expansion. Competition in the improvement and furnishing segments is also likely to intensify from existing players, as well as new entrants. Thailand’s GDP growth.
Competition building up

We expect gross margins to climb
further, albeit slowly, as Homepro continues to take market share from traditional retailers while
high-margin private-label goods make further inroads. However, competition should also increase for Homepro’s construction goods, as modern-trade competitors such as Siam Global and Thai Watsadu accelerate their expansion. Competition in the improvement and furnishing segments is also likely to intensify from existing players, as well as new entrants. Lack of long-term catalysts
Homepro does not merit an Outperform unless any share-price weakness from 1Q13 results provides attractive entry points, in our view. Its long-term growth is less certain given rising competition and stilluncertain overseas expansion, even as Thailand stores reach saturation
point by 2018.