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FEDS reports solid May sales on domestic recovery. The Ministry of Economic Affairs announced that Taiwan’s retail sales for May totaled NT$285.8bn, up 1.6% MoM and 6.9% YoY, reaching a 5-year high and indicating economic recovery on the island. As one of the top department store operators here, FEDS reported 5.1% YoY sales growth in May, after the 16.5% YoY sales growth seen in April. For the year through May, FEDS reported unconsolidated sales of NT$9.3bn, up 9.8% YoY.
FEDS to benefit from RMB appreciation. On June 21, the People’s Bank of China announced that it would "further reform the exchange rate regime and enhance the exchange rate flexibility." This reform should enhance the purchasing power of China’s citizens and in turn benefit the retail sector there. As a result, Taiwanese firms with RMB earnings should benefit from the appreciation of China’s currency, and FEDS, with revenue from China accounting for 24% of consolidated sales, should stand to benefit in the retail sector.
Major subsidiaries outperform year-to-date. In addition to FEDS’ Taiwan operations that have seen earnings improvement, other major subsidiaries including SOGO Department Store, A-Mart, FEDS China and Pacific China, respectively witnessed bottom line growth of 29.5%, 152.2%, 293.4% and 6.1% YoY, for the year through April, according to the most recent data from the company. A-Mart, which has suffered losses for several years, finally reported pre-tax profit of NT$48mn, compared to a loss of NT$248mn in 2009.
Raising 2010 bottom line by 48.5%; TP remains at NT$30.9. We believe that the chance of FEDS losing controlling rights in Pacific Liu Tung and SOGO is remote, as mentioned in our last note. The legal dispute remains a concern for investors, however, and it may put a cap on the company’s share price performance. Meanwhile, we have revised up FEDS’ 2010 top line by 12.6% and bottom line by 48.5% to reflect its strong earnings results reported for the year through April and we retain our Hold rating on the stock with target price unchanged at NT$30.9/share.
2009 bottom line reached historic high. PCSC reported 2009 sales of NT$101.8bn, down 0.42% YoY. The company reported net income of NT$4.1bn, however, for EPS of NT$3.9, which set a new high. Gross margin and operating margin respectively reached new highs at 32.4% and 4.8%. PCSC attributes the margin expansion to a better product mix and heavier sales weighting on high-margin private label products, which currently account for 23% of the company’s sales. PCSC guides a sales weighting of 25%-30% for private label products this year, which indicates further margin expansion.
Robust sales seen in 1Q10. PCSC reported 1Q10 sales of NT$26.9bn, up 4% QoQ and 11% YoY, on the strength of its “City Café” promotions. We expect the sales growth to continue rolling into 2Q10, as PCSC just began working with Taiwan High Speed Rail (unlisted) and Far EasTone (4904 TT/NR/NT$38.05), offering consumers the ability to purchase high speed rail tickets and to subscribe to monthly telecom services at 7-Eleven stores. According to statistics, 70% of consumers in Taiwan pay less than NT$500 per month for telecom services; therefore PCSC’s two monthly rate plans at NT$177 and NT$377 should be competitive, especially since they give credits to consumers for food purchases at 7-Eleven stores after they buy into a plan.
Aggressive store expansion in Shanghai. PCSC expects the number of its 7-Eleven stores in Shanghai to reach 50 by the end of 2010 and 300 within three years. Although records show that it took PCSC’s Taiwan operations seven years to reach the break-even point, management expects its China operations to produce positive results much faster due to the company’s experience in the industry. Since PCSC differentiates itself from peers by offering more fresh food services, its per-store daily sales are two to three times that of other convenience stores. With innovative operations, we see its CVS move into China as a long-term catalyst despite short-term losses.
Maintain Buy; TP raised to NT$97. As the global economic recovery has lifted regional CVS players’ PE multiples, we now apply a higher average regional CVS peer PE multiple of 20.9x to PCSC’s core business. Along with valuations in PCSC’s associated subsidiaries, we derived a new target price of NT$97, which offers a 15% upside to the latest share price. We favour PCSC’s ongoing business innovation, as well as its focus on margin expansion. With an average 5-year ROE of 22% and cash dividend payout ratio of 80%, we see PCSC a long-term Buy.
