Home Product Center

Home Product Center Plc (HMPRO) 

 

Investment thesis

Last week, we accompanied HMPRO CFO Wannee Juntamongkol to meet investors in Paris, London and Edinburgh. Most of the fund managers we met expressed concern about Thailand’s consumption slowdown and asked how soon a recovery would take place. Only a few still hold positions in HMPRO. However, the information we gathered on the roadshow made us more positive on the firm’s outlook. We foresee recovery of SSS and earnings growth in 2H15, driven by the improving performance of Bangkok stores and the turnaround of Mega Home (expected to start posting a profit in 3Q15). HMPRO’s current valuation is also attractive, trading at a PER of 23.2x FY15 and 18.9x FY16, versus its five-year average of 25.4x. We maintain our BUY rating with a YE15 target price of Bt8.20.

SSSG is improving

HMPRO’s 2Q15 SSSG should not be as weak as we had estimated. Management guided that it would be in a range of 0% to -0.5% (improving from -2.7% in 1Q15) thanks to a late-quarter recovery in sales at Bangkok stores. Bangkok SSSG in 2Q15 should be in the high single-digit territory, while provincial SSS would continue contracting around 5-6%, mainly due to weaker sales at its southern stores following poorer rubber prices.

New merchandising strategy boosted traffic

To cope with weak consumption, HMPRO focuses on the customer groups among which spending power remains solid and uses different campaigns and product mixes to cater for varied customer preferences at stores in Bangkok and upcountry. This strategy has worked well. The number of tickets rose 2.8% in 2Q15 from the contraction of 3% in 1Q15. 

Private labels remain key to widened gross margin in long term

HMPRO still aims to push up its house-brand mix to 25% in the next five years, even though the proportion has been flat at around 20.5% since 2013. The slow increase in past years was mainly due to weak sales upcountry in which the proportion of private labels is higher than that in Bangkok. However, in the long run, upcountry sales should grow faster than Bangkok sales thanks to the low base, so the proportion should rise to the same level as the firm’s target.

Long-term expansion remains intact

Although HMPRO cut expansion of HomePro outlets to five from eight and of Mega Home stores to three from four this year, it reaffirms its target to have 100 HomePro stores in Thailand and 10 in Malaysia, as well as 20 Mega Home outlets, all by 2020. The room to open stores in Thailand is still large as HomePro outlets geographically cover just 60% of the country. Even in Bangkok, the firm is still looking for new sites as some stores cannot fully handle the fast-growing demand. As such, although the firm has slowed store openings in the near term, it is still aggressive with land acquisition as it sees opportunity in buying land at bargain prices.