A-Share Retail Weekly

BabyTree a leading maternity & baby social networking platform: BabyTree is now a leading maternity & baby social networking platform in China. According to officially disclosed data, BabyTree has a subscriber base of 80m and daily active user number of more than 10m, covering 80% of the families in China that have a pregnant mother or a child aged 0-6 years old.

    Maternity & baby goods market demonstrating great potential: According to iResearch, the size of the domestic maternity & baby goods market is likely to grow to above Rmb3trn by 2018 (vs. Rmb1.65trn in 2014). B2C e-commerce only had a 5.6% market share in 2014. Also, no competitive vertical e-commerce players have emerged so far.

    Business integration a win-win: We see the deal as an ideal integration between maternity & baby goods e-commerce and relevant online communities. Jumei is strong in cross-border procurement and supply chain management, while BabyTree is strong in developing and maintaining its users.

    · Earnings turning around, strategy leading peers: We believe Jumei is in possession of the most crucial competitiveness for cross-border e-commerce development and is set to become one of the leaders in this business relying on its strong merchandiser team, new product development capabilities and stable supply chain.

    Recap of last week The SW Retail Index jumped 6.5% last week, outperforming the CSI 300 which edged up 0.6%. Retail stocks rebounded last week mainly as they had been oversold. Central Emporium (600280 CH), Better Life (002251 CH), Baida Group (600865 CH) and Gansu Gangtai (600697 CH) surged 46.5%, 37.4%, 31.7% and 23.1% respectively. As of Jul 24, the retail sector was trading at 55.3x P/E (TTM), representing a 124.7% premium over the 24.6x P/E for the overall A-share market. This premium was larger than its historical average of 78%.

    Stock picks We are positive on the following companies this week:

    Better Life (002251 CH): Share price has dropped significantly from the peak and is below the price of the company’s placement and that used in its stock pledge financing. Business transformation is progressing well with all indicators of business transformation in line with expectation. Lao Feng Xiang (600612 CH): At 22.5x FY15E P/E and >20% ROE, we believe the company is a typical growth stock with cheap valuation and high ROE given its 3-year net profit CAGR of 20%+.。

    Yonghui Superstores (601933 CH): We believe the company is a quality name and expect it to maintain net profit growth above 15% going forward given its strong fresh food business management capabilities and its partnership scheme which serves to incentivize its frontline staff.

    Beijing Wangfujing (600859 CH): While the company is yet to launch an SOE reform, we believe various reform measures such as the potential injection of PCD department stores, an employee incentive scheme and the introduction of strategic shareholders will likely materialize, judging from the cases of Wuhan Dept Store (000501 CH), Bailian (600827 CH) and Silver Plaza (600858 CH). The company is the most open-minded towards “Internet+” business transformation among its state-owned peers. Furthermore, smooth progress has been seen in its cooperation with Tencent (700 HK, NR) in payment, membership management and marketing, and we expect to see further cooperation going forward.

    Haining China Leather (002344 CH): The company is making steady progress in the development of P2P finance and cross-border e-commerce businesses. Valuation appears undemanding as current share price is below the company’s placement price of Rmb19.24.

    Rainbow Dept Store (002419 CH): Management has spent more than Rmb1m to increase their stakes in the company and is expected to invest another Rmb4m in the future. Rmb5m worth of stock purchases would be equivalent to implementing a share incentive scheme. The company is actively developing its “Red Scarf”, social commerce and cross-border e-commerce businesses, and is leading other state-owned retail companies in various business fields.

    Downside risks: Systematic risk of the stock market, and slow progress in business transformation