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Investment thesis

The current moment is not a good time to take positions in HMPRO, we believe, particularly given its weakening growth outlook. SSSG is tending to decelerate, while there are uncertainties surrounding the Malaysian operation. Furthermore, its current valuation is unattractive—PERs of 36.2x for FY14 and 31.5x for FY15—so the scope for share price upside is limited, in our view. We have a HOLD call with a YE15 target price of Bt9.40.

What happened in 3Q14

HMPRO’s 3Q14 SSSG was 4.8%, a deceleration from 6.5% in 2Q14, due to cannibalization (starting in September) and because in 2Q14 there was a surge in sales of TV sets ahead of the World Cup. Management said SSSG was driven by stores in Bangkok, while SSS at upcountry stores was flat or down slightly. Spending was weakest in the Northeastern region, followed by the Northern region. Sales in the two regions is unlikely to recover soon, as household debt remains high. Moreover, spending in the South (which had supported growth) started declining in August in tandem with the dive in rubber prices and weak tourism numbers.

Slowing SSSG in the short-term

The cannibalization effect will intensify in 4Q14, as all five stores opening, September through December, will be located in large cities that already host HomePro outlets. The cannibalization effect will be even greater in FY15, as most of the eight HomePro stores to open in that year are also likely to be in large cities, given that demand in second- and third-tier provincial cities remains weak. As such, we expect SSSG to decelerate further to 4-4.5% in 4Q14 and to range 4-5% during FY15; our assumption is a little below the management guidance of 5-6%.

Mega Home to break even in 2H15

Mega Home’s performance is improving and it is now profitable at store level. Management expects it to turn a profit at corporate level in 2H15, when it will have six operating outlets. Four Mega Home stores are currently in business and the firm plans to launch another four in FY15, two of which will open in 1H15.

Malaysia operation to squeeze profitability in the medium-term

After opening its first store in Malaysia in late November, HMPRO will spend heavily on marketing to build brand awareness among Malaysian shoppers. As such, losses at that operation will be bigger than they are at the moment (mostly administration expenses). The Malaysia unit is likely to take 4-5 years to break even, as it will need at least four profitable stores to square overhead costs. Management could not confirm whether it can open a second store in next year, due to the drawn out nature of negotiations with landlords.