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Home Product Center Plc (HMPRO)

Q2 2013 profit to grow as usual, up 6%qoq and 24%yoy

According to the analyst meeting, HMPRO has revised up its expansion target of
We estimated 2Q13 profit of HMPRO at B735m or the growth of 6%qoq and
24%yoy. Sales are projected to leap 21%yoy as a result of the same-store-sales
growth of 7%yoy from the low base in 2Q12 and the growth of 14%yoy from 7
new store openings. Profitability has remained quite steady. Although gross
margin would increase from 26.5% in 2Q12 to 27% because of a 1% increase in
high margin house brand products from 19.5% to 20.5% of the total sales, it
would be offset by rising selling and administrative expense from recognition of
cost of the new stores and expense on Mega Home stores before their openings
this year. Accordingly, net margin in 2Q13 would stabilize from the same period
last year at around 7.6%.

- Profit growth foreseen in rest of 2013. Additional upside from property fund
For the rest of the year, HMPRO’s profit would grow continuously from openings
of 7 new stores in 2H13 and peak in 4Q13. Despite decelerating purchasing
power, we still have a positive outlook and believe that it would not have a
significant effect on HMPRO on the following grounds. 1) Customers of HMPRO
are mainly mid- to high-incomers. 2) More than 55% of its income comes from
provincial customers who still have high purchasing power, evidenced by the
new stores opened in Chantaburi (February) and Chumporn (March) that have
already reached breakeven point and generated profits. However, there is still a
risk from 2 Mega Home stores to be opened in late 4Q13 (reduced from 3
stores) that might not be able to break even in the first 1-2 years and even face
larger losses than we have projected. This issue might make HMPRO’s earnings
in 2013 decrease 11% from our projection. However, we still maintain our
forecast because there is a positive factor from possible recognition of an
extraordinary profit of around B1-2bn from an establishment of a property fund
of a project in Hua Hin (or additional EPS of B0.12-0.24). It would become clear
in late 4Q13 whether the fund would be established by this year or 2014, which
we would report later.

- Correction likely passes, likely outperform again. Buy
Declining more than 31% during the recent correction, HMPRO has likely already
found the bottom, while the profit in the rest of the year would increase
continuously. The price would also be driven by speculation from the property
fund establishment, likely returning to outperform again. Reiterate BUY
([email protected]); top pick of the sector.