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Investment thesis

We think HMPRO’s current valuation is expensive—PERs of 33.7x for FY14 and 29.4x for FY15 versus expected earnings growth of only 9% in FY14 and 15% in FY15. But we expect the share price to stay firm in the short-term on speculation of a stock dividend. Our short-term strategy is to HOLD the position and possibly exit after the dividend payment, as we expect profit growth of only 11% YoY in 2H14 against a sector mean of 18% YoY, dampened by a loss at Mega Home and costs tied to market entry to Malaysia. We prefer CPN, BEAUTY and ROBINS for their stronger 2H14 earnings growth profiles.

Expansion still aggressive but store size will tend to be smaller

At the analyst meeting yesterday, management reaffirmed plans to debut five HomePro stores in Thailand and the first branch in Malaysia in 2H14. All domestic stores to open in 2H14 will be located only in first-tier cities, as demand in second- and third-tier cities remains weak. For FY15, the firm plans to open 6-8 HomePro stores and four Mega Home outlets in Thailand, while the schedule for the second branch in Malaysia has slipped to FY16. The mean size of the stores to open next year will be smaller.

SSSG to decelerate in 2H14

SSSG was impressive at 6.5% in 2Q14 and 5.3% for 2H14, driven by a recovery in demand for home products and robust TV sales ahead of the FIFA World Cup. However, we expect SSSG to decelerate to 4-5% in 2H14, due to cannibalization and the absence of World Cup impact. Taking out the World Cup effect, 2Q14 SSSG would have been about 5%, while the the openings of second and third stores in first-tier provincial cities will bring cannibalization.

Profit squeezed by losses at Mega Home and Malaysia operation

Mega Home losses and pre-operating expenses for expansion in Malaysia present major headwinds to 2H14 earnings. Management expects Mega Home to achieve black ink in late FY15, while the Malaysian operation is likely to take 4-5 years to break even. It may take three years to break even at store level in Malaysia, but at corporate level it depends on how fast the firm can roll out new branches and whether those new outlets will turn profits, given that profit contributions from at least four stores would be required to square overhead costs.

Share price may be supported by stock dividend and asset spin-off

Management hinted at the analyst meeting that HMPRO is considering paying an interim dividend for 1H14 operations. We expect it to be a stock dividend rather than cash, as the firm is likely to need to reserve funds for annual CAPEX of Bt8-9bn. Moreover, HMPRO plans to monetize assets by spinning off Hua Hin Market Village to an REIT next year. The property value is expected at Bt4-5bn, which should yield a net gain of Bt1.6-2.0bn.