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Home Product Center

Flat growth foreseen in the rest of 2014. Downgrade to SELL

Home Product Center Plc (HMPRO)

- Loss from new outlets and political unrest suppress 1Q14 profit

1Q14 profit was sluggish at only B726m, falling 21%qoq on seasonal effect and

increasing only 5%yoy, marking a record low in several years. The reasons were

the company began to book an expense from the first HMPRO outlet in Malaysia

that is opening at the end of this year and loss from newly opened Mega Home

outlets (two in 1Q14, totaling four at present) has made SG&A/sales increase

110 bps from 1Q13 to 23.7%, resulting in a net margin dropping to 6.6percent from

7.4% in 1Q13. Total sales still grew 18%yoy as opening of new stores helped to

compensate for same-store-sales that could grow only 2%yoy as a result of the

political turmoil. Gross margin has risen from 25.7% in 1Q13 to 26.1% in this

quarter from an increase in the proportion of high margin house-brand products

by 20 bps to 20.7% of total sales.

- Flat growth foreseen in the rest of 2014. Forecast cut is likely

The profit outlook for the rest of the year would remain dull like 1Q14, with

insignificant growth year on year. Accordingly, a further forecast cut is likely,

from the present FY2014 net profit growth estimate of 14.4%yoy (near the

consensus). Under the current assumption, FY2014 net margin is projected to

lower 20 bps from last year to 7.4%, which is substantially above 1Q14 net

margin because SG&A/sales would be higher than 22.8% previously projected

due to the expense on Malaysia outlet and loss from Mega Home outlets of

totaling B100-150m this year, or 0.2-0.3% of sales. Strong sales growth would

not be able to negate the above-mentioned negative factors since 2Q14 samestore-

sales would improve only slightly from 1Q14 as a result of the economic


- Fully valued. Downgrade to SELL

HMPRO has risen until fully valued, with 2014 expected P/E ratio of 28x, higher

than the past average of 26x. The flat profit growth would hinder the share price

from continuously outperforming. As the share price is still high, we downgrade

our recommendation from HOLD to SELL.

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