Home Product Center

Home Product Center Plc (HMPRO) 

 

Investment thesis

We have cut our YE16 target price to Bt9 from Bt9.7 following an earnings downgrade from putting more conservative assumptions on expansion. Despite that, its valuation (12M forward PER of 0.2SD below LT mean) and upside potential to our new target price have remained attractive. We believe HMPRO’s earnings growth profile will gradually improve on the back of new merchandising and house brand strategies as well as more economy of scale at Mega Home. Our BUY rating stands.

SSS continues slow

SSS contracted 3% in 3Q15, making for -1.9% for 9M15. Stores in Bangkok posted an impressive SSSG of 4%, but sales at upcountry stores (accounting for 60% of total sales) remained soft, with an SSS contraction of 6-7% due to weak spending power and cannibalization. Taking out the cannibalization effect, upcountry and total SSSs would drop 4-5% and 1-2%, respectively. The 4Q15 should be better. The company’s chief executive said he had seen some spending recovery in the southern region upon entering tourist season. Coupled with easing cannibalization in Chiang Mai and Nakhon Ratchasima, 4Q15 SSS should be relatively flat.

Management expects SSS will return to growth next year, but we expect only small growth as the cannibalization effect is likely to continue playing out given that HMPRO aims to open new stores only in large cities in which spending power remains solid.

Expansion still in cautious mode; earnings downgrades

HMPRO plans to maintain its rollout rate of 4-5 HomePro and 3-4 Mega Home stores in Thailand. Its aggressive expansion mode of 8-10 HomePro locations, such as those during FY12-14 is unlikely to be seen in short to medium term as weak consumption persists. As such, we decided to put more conservative assumptions by cutting our rollout numbers for HomePro during FY16-20 to four stores a year from six. Our earnings estimates thus have been cut by 6% in FY16 and 8-10% in FY17-20.

More stores overseas

HMPRO reaffirms it will open its second HomePro store in Malaysia next year. The performance of the second store should be better than the first as its standalone format should draw more big-ticket spending. Losses from Malaysian operations should gradually reduce. Besides Malaysia, the firm is looking to roll out the Mega Home format into CLMV countries and Cambodia is likely to be its first target location. 

Gross margin should be enhanced in 2H16

The proportion of private labels was 19.5% in 9M15, down from 20.5% in 2014 due to the company’s ongoing restructuring program. HMPRO expects the proportion to start rising again in mid-2016, so gross margin should resume an encouraging trend and be a major driver of the bottom line from 2H16 onwards.