1Q22 results slightly missed our expectations

Hefei Department Store announced its 1Q22 results: Revenue edged up 0.2% YoY to Rmb1.91bn; attributable net profit fell 15.6% YoY to Rmb91mn, implying EPS of Rmb0.12, slightly missing our expectations mainly due to COVID-19 resurgence; and recurring net profit dropped 26.0% YoY to Rmb60mn. In addition, the firm recorded non-recurring revenue of Rmb22mn mainly from its investment income.

Trends to watch

1Q22 revenue remained flat YoY. The firm’s operations remained largely stable despite the COVID-19 resurgence, with its revenue in 1Q22 up 0.2% YoY. Specifically, we think the COVID-19 resurgence weighed on the offline footfall of its department store and household appliance business. As for its supermarket business, we believe COVID-19 - coupled with intensified competition - affected offline footfall, but likely stimulated demand driven by consumers’ stockpiling recently. Moreover, the firm continued its investment in its agricultural product projects. We expect its agricultural product wholesaling business to maintain robust growth in 2022.

Declining gross margin (GM) dragged profitability; recurring net profit margin fell 1.1ppt YoY. In 1Q22, GM edged down 1ppt YoY to 30.2%. Selling, G&A and financial expense ratios reached 6.3% (down 0.1ppt YoY), 14.2% (up 0.3ppt YoY) and 1.1% (down 0.1ppt YoY). As a result, attributable net profit margin dropped 0.9ppt YoY to 4.8%, and recurring net profit margin slid 1.1ppt YoY to 3.2%. GM also declined, putting a drag on the firm’s profitability in 1Q22.

Watch business innovation and digital transformation. 1) Business innovation: In 2022, the firm plans to step up its efforts to explore innovative and diversified business models for its main businesses. Specifically, it plans to accelerate the transformation of the cooperation model, improve scenario-based services and explore new profit models for its department store business. Moreover, Joymart (the firm’s chain supermarket brand) will enhance the profitability of its core products by strengthening proprietary brand power, and expanding fresh food and dine-in services to more outlets. 2) Digital transformation: We expect the firm to accelerate the development of its “Baida Shopping” (a Wechat mini program), which enables consumers to access various goods and services such as department stores, supermarkets and wholesale agricultural products. Moreover, the firm will build a platform that integrates shopping, live streaming and membership services. We believe the firm will continue its efforts to strengthen its digital operating capabilities and facilitate cross-business synergies and data sharing.

Financials and valuation

Considering the COVID-19 resurgence, we lower our 2022 and 2023 earnings forecasts 10% and 9% to Rmb163mn and Rmb170mn. The stock is trading at 23x 2022e and 22x 2023e P/E. Given our earnings forecast revisions, we cut our TP 6% to Rmb5.1, implying 24x 2022e and 23x 2023e P/E and offering 5% upside. Maintain OUTPERFORM.

Risks

Weak consumer demand; intensifying competition; COVID-19 resurgence; tightening policies in the real estate industry.