Suofeiya Home Collection:Q4earnings growth slowed slightly;waiting for kitchen cabinet losses to reverse
Q4 earnings growth slowed slightly
Suofeiya announced 2016 preliminary results, with revenue of Rmb4.52bn (+42% YoY)and net profit attributable to the parent of Rmb660m (+44% YoY), in line with ourestimates but slightly missing consensus. Q4 revenue grew 39% YoY while Q4 netprofit attributable to the parent grew 40% YoY, decelerating from Q3, mainly onbigger-than-expected losses from the Schmidt kitchen cabinet business.
Schmidt: Sales ramping up, N-T losses do not impair growth prospects
Schmidt generated revenue of Rmb420m, beating the company's earlier target.
However, losses from this business also exceeded the company's estimate (~Rmb55mloss booked in consolidated financials), mainly as: 1) aiming to seize market share, thecompany cut ex-factory prices in 2016 to offer better value, effectively driving endmarketsales; while 2) year-end employee incentives and its 2017 talent pipeline causedpersonnel expenses to grow quickly. Channel development accelerated as dealers'confidence strengthened; nearly 600 stores now sell Schmidt kitchen cabinets, and thecompany plans to reach a higher-than-expected 1,000 stores by year-end. Schmidt islikely to break even in 2017, in our view.
Wardrobes: Solid operational quality
With rising cost pressure on all fronts, maintaining fast earnings growth off a high basewas no easy task for its wardrobe business. The company offset increases in certain rawmaterial prices through cost control efforts and efficiency improvements, resulting inonly a minor hit to gross margin. It also continued to raise the density of sales outlets intier 1/2 cities while developing stores in tier 4/5 cities. In addition, the company drovecontinuous growth in average transaction value (ATV) through enriching its productline. Revenue growth slowed slightly in Q4, which we mainly attribute to end-marketservice bottlenecks in the peak sales season.
Valuation: Maintain Buy, Rmb66.8 price target
We derive our Rmb66.8 price target using DCF (WACC 7.0%).