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Home Product Ctr (HMPRO) 

 

- Same store sales to rebound in 2H15 

We still have conservative outlook on HMPRO's earnings in 2H15. Same store sales are projected to stay flat (0%yoy) or grow slightly this year, especially from provincial branches that will be affected by the economic slowdown more than Bangkok branches; 2Q15 same store sales fell 5.4%yoy in other provinces but grew 6.4%yoy in Bangkok. Same store sales is projected to improve in 2H15 after declining 1.5%yoy in 1H15; a rebound is foreseen as 2Q15 same store sales dropped at a slower pace by 0.4%yoy. Effect of cannibalization in four provinces lasting over six months would recede. Total income would grow thanks to the opening of five new HMPRO branches and three new Mega Home branches (as expected). Therefore, we maintain our forecast, projecting total income to grow by 10.7%yoy this year. 

- House-brand products improvement: added value 

HMPRO's new strategy focuses on improving its house-brand products. House-brand products are one of the main factors that boost HMPRO's gross margin since their profit margin is 10% higher than other products and the proportion of sales of house-brand products increase every year (making up 20.5% of total sales in 2014). The company is improving its house-brand products (designs, product groups, customer bases, prices, etc.) to access wider range of customers, likely to take a couple years to complete. This strategy is a good way to give HMPRO's products added value, meet customers' demand, and boost profit margin in the long run. However, in the short term, this strategy would decrease the proportion of income from house-brand products from 19.6% in 1H15 to around 19-20% and weaken HMPRO's profit margin. We maintain our conservative forecast, expecting HMPRO's net profit to grow by 4%yoy in 2H15 as same store sales would rebound and Mega Home branches would make a breakeven and generate profit in 2H15. 

- Share price at average minus 1SD. Among the least expensive in the sector 

Although HMPRO's earnings are expected to stay flat from 2014, the share price has considerably reflected negative factors already. FY2015 expected P/E ratio of 24x is the same level as the five-year average minus 1SD, which is among the least expensive in the sector. We reiterate BUY.