Retail

Benefiting from lower oil prices Neutral

Retail

- Declining oil price benefits commerce sector

The weak economy depresses the commerce sector's earnings. However, oil price

plunge grants the following benefits: 1) It lowers logistic expense. Many vehicles

are used for goods transportation and distribution. DC cost charge from suppliers

are projected not to be lowered. However, as most logistic transportation comes

from outsourcing, transportation cost is negotiated on forward contracts, so fuel

cost would be lowered step by step and there would be a lag time for the cost

decrease (diesel price as reference price). 2) It lowers electricity expense in

department stores. Ft rate in January-April 2015 tends to decrease by B0.10/unit,

resulting in the electricity rate per unit dropping 3% from B3.96 to B3.86, while a

further decrease is still foreseen. Initially, electricity and logistic expenses make

up 2-4% of sales. Under the assumption that both expenses drops by 12% (20%

for fuel cost, 5% for electricity expense), the sector's earnings are estimated to

increase by 2-3% from the initial forecast.

- Sector's earnings to rebound

Nevertheless, we maintain the sector's earnings forecast under the assumption

that value-added tax (VAT) is raised by only 1% in 2H15 (October); larger VAT

hike would have more effect on the sector's earnings. Under the current forecast,

FY2015 net profit is estimated to grow by 23%yoy. CPALL's (40% of the sector's

earnings) profit is projected to increase by 30% from low profit base in 2014 due

to high interest expense. Excluding extraordinary items, the sector's normalized

profit is expected to grow by 16%. The sector already passed its bottom, likely to

rebound gradually this year, especially in 2H15. Same store sales growth is

projected to improve from 0.4%yoy in 4Q13-3Q14 to 4%yoy this year, and

aggressive branch expansion is foreseen.

- High returns in first quarter. Upgrade recommendation to BUY for HMPRO

We reiterate NEUTRAL. Top picks are CPALL(FV@B53) and ROBINS(FV@B64). We

upgrade our recommendation for HMPRO([email protected]) from HOLD to BUY as the

share price shows 20% upside. Also, it has not been affected much by the slowing

economy because it focuses on upper-middle incomers. According to the nineyear

statistics, the commerce sector usually granted high returns in the first

quarters. CPALL, HMPRO, and ROBINS have 67%, 89%, and 89% probability of

granting the average returns of 5%, 18%, and 16%, respectively, outperforming

the SET.