Springland (1700.HK) up MP OP Lower Earnings and TP; Asset Value Provides Share Price Support

23 July 2012

Last Closing : HK$ 4. 08 Upside: +30% Target Price : HK$ 5.3 Consumer Sector

Springland (1700.HK) UP MP OP Lower earnings and TP; asset value provides share price support

Financial Highlights YE Dec (RMB m) FY09 FY10 FY11 FY12E FY13E FY14E LT Neutral BUY Total operating revenue 2,501 3,281 3,983 4,574 5,343 6,181 Net profit 248 372 581 652 776 929 Core profit 248 392 581 652 776 929 SELL BUY Core EPS (RMB) 0.15 0.19 0.23 0.26 0.31 0.37 Growth 13% 25% 24% 12% 19% 20% Core profit vs consensus (+/-%) na na na -3% -5% -6% PER (X) 22.4 17.9 14.4 12.8 10.8 9.0 Stock Yield (%) na 1.7% 3.4% 3.1% 3.7% 4.4% P/B (X) 5.4 2.2 2.1 1.9 1.7 1.5 Source: Company, BOCOM Int’l estimates

Our FY12/13E EPS are revised down by 6%/7%, mainly to reflect lower SSS growth and margin assumptions of the supermarket segment. Though we adjust our SOTP-based TP from HK$6.1 to HK$5.3, representing 16.7X FY12E P/E, due to lower earnings and valuation We expect 1H12E net profit to grow by benchmark, our Buy recommendation is maintained on Springland’s regional leadership, 9%, led by 13% total sales proceeds leading self-owned store property ratio and unique dual-format model. Asset value, backed by prime store properties (estimated at HK$4.8/sh, equivalent to 117% of share price) (“TSP”) growth of both department store should provide share price support. Potential announcement of new department store and supermarket segments. projects in the upcoming interim result release, which would ease concern on the visibility of store expansion, may serve as a positive catalyst. Lower earnings and TP. We lower FY12/13E EPS by 6%/7% mainly to reflect lower SSS NAV is estimated at HK$4.8/sh, which growth and margin assumptions of the supermarket segment (Figure 1). Regarding the should provide share price support. department store segment, we trim FY12/13E EBIT by 4%/3% mainly due to a revision of FY12E SSS growth from 15% to 13%. For the supermarket segment, FY12/13E EBIT is cut by 14%/22%, primarily attributable to downward adjustments of (1) FY12E SSS growth from 5% to 1.5% on slowing food CPI inflation and increasing competition and (2) FY12/13E EBIT margin by 0.6/0.9 ppt as we become more conservative on EBIT margin given lower sales leverage and dilution from new stores. After this earnings downgrade, we expect Springland to deliver 16% EPS CAGR in FY12-13E. We adjust our SOTP-based TP from HK$6.1 to HK$5.3, equivalent to 16.7X FY12E P/E, due to lower valuation benchmark and earnings (Figure 2). Buy maintained. Department store segment – better-than-peers SSS growth in 1H12E. We expect Stock data Springland to achieve 11% SSS growth in 1H12E (vs. estimated high single-digits for the 52w High 8.03 sector), mainly driven by young stores (Zhenjiang and Ma’anshan). The 11% SSS growth is 52w Low 3.8 a decent figure given the average age of Springland’s store portfolio is 5 years in FY12E Market cap (HK$m) 10,200 (vs. 3-4 yrs of Intime and Golden Eagle). As SSS growth of categories like gold & jewelry Issued shares (100m) 25 and watch (whose commission rates are below average) outperformed in 1H12E, we Avg daily vol (m) 0.9 believe commission rate would decline mildly in 1H12E. Going forward, the department （） store segment remains the growth driver (21% FY12-13E EBIT CAGR), led by 13%/14% SSS 1-mth change % -5.6 growth and 0.4/0.4 ppt EBIT margin expansion on positive operating leverage from old YTD change （%） -19.8 stores in FY12/13E, respectively. 50d MA 4.6 200d MA 5.0 Supermarket segment – 13% total sales proceeds (“TSP”) growth in 1H12E, driven by 14-day RSI 38.7 new stores. We believe SSS growth had stayed flat during the period due to slowing food Source: Company data, Bloomberg CPI inflation and increasing competition. After the earnings cut, we expect 4% FY12-13E EBIT CAGR on 1.5%/4.5% SSS growth and 1.1/0.7 ppt decline of EBIT margin. Having said that, profit contribution from the supermarket segment is forecast to drop from 21% in 1 Year Performance chart FY11 to 18% in FY12E. HSI 1700.HK 20% 1H12E results preview. We expect 1H12E net profit to grow by 9% to RMB381m, led by 10% 13% total sales proceeds (“TSP”) growth of both department store and supermarket 0% segments. OP margin is estimated to remain stable at 10.8% as the positive operating -10% leverage of the department store segment is largely offset by the margin decrease of the -20% supermarket segment. Net finance income is forecast to drop from RMB25.5m (high -30% interest income from a short-term entrusted loan during FY11) to RMB0.4m. -40% Current price below asset value of store properties. Springland’s self-owned store Jul-11 Nov-11 Mar-12 Jul-12 property ratio (87% in FY12E) has been one of the highest in the department store sector. Based on our estimates (Figure 3), NAV is at HK$4.8/sh, which should provide good share Source: Company data, Bloomberg

price support. Key investment risks. The pipeline of new projects below expectation, increasing Albert Yip, CFA market competition, SSS growth below expectation. [email protected] Tel: (852) 2977 9205

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Springland (1700.HK)  Consumer Sector 23 July 2012

Figure 1: Major assumptions changes FY12 FY13 FY14 change change change Old New (ppt) Old New (ppt) Old New (ppt) SSSg - dept store 15% 13% -2 14% 14% 0 na 13% na SSSg - supermarket 5% 1.5% -3.5 5% 4.5% -0.5 na 5.5% na commission rate - dept store 17.5% 17.4% -0.1 17.4% 17.3% -0.1 na 17.3% na GM - supermarket 13.7% 13.5% -0.2 13.7% 13.2% -0.5 na 13.1% na EBIT margin - dept store 10.6% 10.6% 0.0 10.8% 11.0% 0.2 na 11.5% na EBIT margin - supermarket 7.8% 7.2% -0.6 7.4% 6.5% -0.9 na 6.2% na Source: BOCOM Int’l

Figure 2: SOTP methodology

EPS (RMB) by Target FY12E segment FY11 FY12E FY13E P/E HK$/sh Remarks Department store 0.18 0.21 0.26 18.3 4.7 continuing at 10% premium to major consumer peers' 16.6X FY12E P/E Supermarket 0.05 0.05 0.05 10.1 0.6 change from 30% to 40% discount to supermarket sector's 16.9X FY12E P/E on lower earnings outlook Total 0.23 0.26 0.31 5.3 Equivalent to 16.6X FY12E P/E Source: BOCOM Int’l

Figure 3: NAV estimates Appraisal Shared value Interest value Operating store properties by FY12E GFA (sq m) (RMBm) RMB/sq m (%) (RMBm) Remarks Yixing Springland Store 28,727 471 16,411 100% 471 5% increase from appraisal value in prospectus Yixing Springland Store (Hexin branch) 45,172 554 12,273 100% 554 5% increase from appraisal value in prospectus Liyang Springland Store and Datonghua Supermarket 40,021 306 7,635 100% 306 5% increase from appraisal value in prospectus Danyang Springland Store and Datonghua Supermarket 43,728 819 18,729 100% 819 5% increase from appraisal value in prospectus Jiangyin Springland Store and Datonghua Supermarket 53,700 1,275 23,737 100% 1,275 5% increase from appraisal value in prospectus Wuxi Yaohan Store and Datonghua Supermarket 105,655 2,479 23,467 100% 2,479 15% increase from appraisal value in prospectus, Hang Lung Center 66 estimated at between RMB30,000-40,000/sq m Yixing Datonghua Supermarket 12,233 229 18,711 100% 229 5% increase from appraisal value in prospectus Nantong Yaohan Store 62,623 626 10,000 57% 360 Maanshan Yaohan Store 36,181 362 10,000 100% 362 Jiangyin Datonghua Supermarket (Xiake branch) 7,732 93 12,000 100% 93 Zhenjiang Yaohan Store, Datonghua Supermarket and hotel 140,666 1,061 7,546 100% 1,061 15% increase from appraisal value in prospectus Jintan Springland Store and Datonghua Supermarket 47,031 376 8,000 100% 376 Changxing Yaohan Store and Datonghua Supermarket 45,189 362 8,000 100% 362 Xuancheng Yaohan Store and Datonghua Supermarket 53,000 371 7,000 100% 371 Jiangyin Datonghua (Huashi) 10,600 106 10,000 100% 106 Sub-total 9,224

Estimated net cash at end of FY12E 542

Total estimated NAV 9,766

Estiamted NAV per share (RMB) 3.9 Estimated NAV per share (HK$) 4.8

Discount to estimated NAV -14% Source: Company, BOCOM Int’l

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Springland (1700.HK)  Consumer Sector 23 July 2012

Figure 4: P/E band chart

HK$ 10

25X 8 21X

18X 6 15X

4 11X

2 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

Source: BOCOM Int’l, Bloomberg

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Springland (1700.HK)  Consumer Sector 23 July 2012

Figure 5: Financial statements Profit & loss Balance sheet Y/E Dec (RMB m) FY09 FY10 FY11 FY12E FY13E FY14E Y/E Dec (RMB m) FY09 FY10 FY11 FY12E FY13E FY14E

Revenue Non-current assets Concessionaire commission 536 844 1,079 1,277 1,502 1,731 PPE 3,719 3,873 4,456 5,713 6,937 8,135 Direct sales 1,697 2,073 2,427 2,710 3,139 3,622 Prepaid land premiums 256 395 384 377 369 361 Rental income 40 59 78 101 119 143 Investment in JCE 0 0 268 276 286 297 Provision of food and beverage 13 15 17 21 26 31 Goodwill 127 127 127 127 127 127 2,286 2,990 3,602 4,108 4,786 5,527 Others 47 112 672 682 700 715 4,150 4,508 5,908 7,175 8,419 9,635 Other income 216 291 381 466 557 654 Total operating revenue 2,501 3,281 3,983 4,574 5,343 6,181 Current assets Inventories 301 413 458 497 577 666 Cost of goods sold (1,477) (1,807) (2,104) (2,355) (2,734) (3,157) Trade receivables 9 11 10 14 16 19 Employee benefit expense (200) (294) (430) (523) (633) (741) Others 207 242 238 252 279 303 Depreciation & amortization (146) (205) (221) (255) (288) (315) Pledged deposit 743 0 0 0 0 0 Operating lease rental exp (44) (44) (55) (69) (86) (101) Cash balance 613 1,538 2,139 1,379 1,181 1,204 Other operating expenses (242) (338) (396) (455) (502) (554) 1,873 2,203 2,845 2,142 2,053 2,191

Operating profit 391 594 778 917 1,101 1,313 Current liabilities Bank borrowings 1,746 10 87 182 656 0 Net financial income (45) (75) 53 (4) (13) (11) Trade payables 598 795 1,032 1,198 1,410 1,626 JCE & Associates 1 0 0 8 10 12 Advance from customers 585 837 1,217 1,238 1,457 1,679 Pre-tax profit 347 520 831 921 1,098 1,313 Tax payable 32 41 54 72 85 102 Tax expense (98) (144) (239) (256) (305) (365) Others 433 496 727 795 936 1,079 Minority interests (1) (3) (11) (14) (17) (20) 3,395 2,178 3,117 3,485 4,544 4,486 Net profit 248 372 581 652 776 929 Recurring profit 248 392 581 652 776 929 Non-current liabilities Bank borrowings 983 113 838 656 200 950 EPS (RMB) 0.15 0.18 0.23 0.26 0.31 0.37 Others 257 271 280 280 280 280 Recurring EPS (RMB) 0.15 0.19 0.23 0.26 0.31 0.37 Deferred tax liabilities 333 333 358 358 358 358 DPS (HK$) na 0.07 0.14 0.13 0.15 0.18 1,573 716 1,476 1,294 838 1,588

Growth Rates (YoY) Minority interests 32 30 31 45 62 82 Total operating revenue 2.6% 31.2% 21.4% 14.8% 16.8% 15.7% Equity 1,056 3,816 4,129 4,494 5,028 5,671 Net profit 12.8% 50.2% 56.0% 12.3% 19.0% 19.7% Financial ratios Recurring net profit 12.8% 25.1% 24.3% 12.3% 19.0% 19.7% Y/E Dec (RMB m) FY09 FY10 FY11 FY12E FY13E FY14E Recurring EPS 12.8% 25.1% 24.3% 12.3% 19.0% 19.7% ROE (%) 22.3 15.5 14.7 15.1 16.3 17.4 Margins & Ratios ROA (%) 4.9 6.2 7.5 7.2 7.8 8.3 Operating margin 15.6% 18.1% 19.5% 20.0% 20.6% 21.2% ROCE (%) 7.9 9.6 12.9 12.5 13.7 14.7 Net margin 9.9% 12.0% 14.6% 14.3% 14.5% 15.0% Effective tax rate 28.3% 27.8% 28.8% 28.0% 28.0% 28.0% Gearing (%) 267% 3% 22% 19% 17% 17% Payout ratio na 33.9% 49.1% 40.0% 40.0% 40.0% Net Gearing (%) 134.2% net cash net cash net cash net cash net cash Interest coverage (X) 5.9 6.7 316.8 34.4 39.1 51.4 Cash flow statement Dividend coverage (X) na 4.0 2.7 3.5 3.5 3.5 Y/E Dec (RMB m) FY09 FY10 FY11 FY12E FY13E FY14E Current ratio 0.6 1.0 0.9 0.6 0.5 0.5 Pre-tax profit 347 520 801 921 1,098 1,313 A/C receivable turnover days 1 1 0 1 1 1 Depreciation & amort 146 205 222 251 284 310 A/C payable turnover days 49 44 45 45 45 45 Interest income (21) (14) (29) (23) (15) (14) Inventory turnover days 74 83 79 77 77 77 Interest expense 66 89 17 27 28 26 Others 6 (27) 0 0 0 0 Change of working capital 199 293 425 199 462 465 Tax paid (103) (139) (184) (247) (280) (335) Operating cash flow 641 926 1,252 1,128 1,576 1,766

Interest received 21 14 29 23 15 14 Others (671) 656 18 (12) (19) (16) Capex (608) (392) (1,000) (1,500) (1,500) (1,500) Acquisition (364) (4) 0 0 0 0 Investing cash flow (1,622) 274 (952) (1,489) (1,503) (1,501)

Changes in bank loan 1,405 (2,607) 830 (87) 18 94 Interest expense (101) (95) (17) (27) (28) (26) Share issuance 0 2,452 0 0 0 0 Dividend paid (26) (48) (149) (285) (261) (310) Others (267) 0 0 0 0 0 Financing cash flow 1,012 (298) 664 (399) (271) (242)

Net change in cash 31 902 963 (760) (198) 22 Source: BOCOM Int’l

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Springland (1700.HK)  Consumer Secto r 23 July 2012

BOCOM International 11/F, Man Yee Building, 68 Des Voeux Road, Central, Hong Kong Main: + 852 3710 3328 Fax: + 852 3798 0133 www.bocomgroup.com

Rating System Company Rating Sector Rating Buy: Expect more than 20% upside in 12 months Outperform (“OP”): Expect more than 10% upside in 12 months LT Buy: Expect more than 20% upside but longer than 12 months Market perform (“MP”): Expect low volatility Neutral: Expect low volatility Underperform (“UP”): Expect more than 10% downside in 12 months Sell: Expect more than 20% downside in 12 months

Research Team

Deputy Head of Research Raymond Cheng, (852) 2977 9393 raymond.cheng CFA, CPA, CA @bocomgroup.com

Strategy @bocomgroup.com Economics Hao Hong, CFA (852) 2977 9384 hao.hong Li Miaoxian (86) 10 8800 9788 - 8043 limiaoxian Benny Wong, CFA (852) 2977 9215 benny.wong

Banks @bocomgroup.com Internet Yang Qingli (86) 10 8800 9788 - 8008 yangqingli Connie Gu (86) 10 8800 9788 - 8045 conniegu Li Shanshan (86) 10 8800 9788 - 8058 lishanshan Wan Li (86) 10 8800 9788 - 8051 wanli

Coal Metals & Mining He Wei (86) 10 8800 9788 - 8040 hewei Luo Rongjin (86) 10 8800 9788 - 8050 luorongjin Wang Rongjuan (86) 10 8800 9788 - 8046 wangrongjuan Jovi Li (852) 2977 9243 jovi.li Benjamin Pei (86) 10 8800 9788 - 8041 benjaminpei

Consumer Oil & Gas Phoebe Wong (852) 2977 9391 phoebe.wong Wu Fei (852) 2977 9392 fei.wu Albert Yip, CFA (Discretionary) (852) 2977 9205 albertyip Summer Wang (Staples) (852) 2977 9221 summer.wang Kevin Wang (852) 2977 9386 kevin.wang

Electronics Property Miles Xie (852) 2977 9216 miles.xie Alfred Lau, CFA (852) 2977 9235 alfred.lau Toni Ho, CFA, FRM (852) 2977 9220 toni.ho

Healthcare Telecom, Media & Small/Mid - Caps Wu Bin (86) 10 8800 9788 - 8052 wu.bin Li Zhiwu (852) 2977 9209 lizhiwu

Insurance Transportation & Industrial Li Wenbing (86) 10 8800 9788 - 8053 liwenbing Geoffrey Cheng, CFA (852) 2977 9380 geoffrey.cheng George Yin (Automobile) (86) 10 8800 9788 - 8039 george.yin Ian Feng (852) 2977 9381 Yinan.feng

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Springland (1700.HK)  Consumer Sector 23 July 2012

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