1、1 Stock DataShare Outstanding 260mMarket Cap (m) 3380mSector Retail(Department Stores)Major Shareholder Aeon Co. (70.96%)051015202528/5/05 10/10/06 22/2/08 6/7/09 18/11/105 Year TrendPrice Target $22.88Current Price 13.0(24/03/10)12M Range(high) 14.6(03/08/09)12M Range(low) 9.6(08/04/09)Hang Seng In
2、dex 21008.62Valuation Day 24/03/2010BuyAEON Stores (Hong Kong) Co., Limited 永旺百货 Reuters: 0984.HK Bloomberg: 984 HK Exchange: HKG 永旺 ,Forever Prosperous?! Forever Choice! BUY! The 2009 profit is lower than expected mainly because the new stores in the mainland are still in investment stage. This is
3、nonrecurring that we can expect great resurgence of net income in the coming years. In the first two months of 2010, AEON saw a double-digit growth increase in turnover, indicating that it has recovered significantly from the financial tsunami. Most of the capital expenditure in the previous years w
4、ent to expand the store network in the mainland. The Director of AEON stated that the Group would carry out the plan to set up two more GMS in South China next year. We believe that the steady expansion would help AEON benefit from economies of scale and enjoy more satisfactory growth rate. Strong B
5、alance Sheet (see Financial Analysis). The ratios analysis is comfortable; AEON performed outstandingly among the peers. Although the expansion is strong, the management is so sane that maintaining a relatively low leverage and sufficient liquidity. The management of AEON is efficient and flexible.
6、In the slack economy of 2009, it still sustained overall segmental result for the year of the Hong Kong operations grew by 7% to reach HK$265.9 million (2008: HK$249.2 million). This growth amid the weak economy demonstrated the Groups resilience in the adverse operating environment and the effectiv
7、eness of its effort in cost control and enhancing operational efficiency. Company Background AEON Stores (0984.HK) is a Hong Kong-based company engaged in the operation of general merchandise stores. The Company is a member of the AEON Co., Ltd. (AEON Co.), a Japanese retailing and services company.
8、 The merchandise is broadly categorized into food, fashion, household items and electrical appliances. It currently operates five JUSCO, sixteen independent JUSCO $10 Plaza, three JUSCO Living Plaza, five independent Supermarket and three Bento Express (Japanese take-away restaurant) in densely popu
9、lated districts in Hong Kong, as well as thirteen GMS and two Shopping Centers in the mainland China. Analyst: ZENG Ruqi, Jerry Mail: PE 20.62PE(3/24/10) 20.22ROE 0.2565P/Book 3.17P/Sales 0.63EPS 0.64HKDKey Indicators (2009)Strong Balance SheetCompetitive among the peersSolid expansion; long term s
10、trategies Experience at managementSign for the recovery;its cash can almost cover the current liability.2 55%45%2009 TurnoverHK OperationMainland OperationRatios (Annual Results) Dec-09 Dec-08 Dec-07 Dec-06 Dec-05Revenue (Thousand) 5897909 5376567 4759947 4286972 3919741Revenue Growth rate 9.70% 12.
11、95% 11.03% 9.37%Liquidity AnalysisCurrent Ratio (X) 1.21 1.18 1.31 1.24 1.22Quick Ratio (X) 0.95 0.9 1.07 1.02 0.91Solvency AnalysisLong Term Debt/Equity (%) 3.96 0 0 0 0Total Debt/Equity (%) 14.84 14.31 10.94 8.01 2.23Total Debt/Capital Employed(%)12.47 12.53 9.9 7.31 2.04ROI AnalysisReturn on Equi
12、ty (%) 14.62 25.57 30.52 19.9 19.35Return on Capital Employ (%) 12.28 22.39 27.63 18.17 17.66Return on Total Assets (%) 4.69 8.57 10.25 6.04 6.41Profitability AnalysisOperating Profit Margin (%) 4.53 7.05 7.92 4.87 2.98Pre-tax Profit Margin (%) 4.53 7.05 7.92 4.87 2.98Net Profit Margin (%) 2.83 5.05
13、 5.88 3.46 2.26Trading AnalysisInventory Turnover (X) 10.56 9.79 11.55 11.67 14.37Investment Income AnalysisDividend Payout (%) 50.09 45.19 50.13 40.31 40.7 Source: Cash Ratio 0.86Quick Ratio 0.95Current Ratio 1.21Financial Statement Analysis Revenue Analysis From 2005 to 2009, AEON has achieved CAG
14、R of 10.8% for revenue. Although affected by the financial tsunami in 2009, it still maintained 9.7% growth rate, indicating that its sales growth is stable and relatively anti-risk. In 2008, about 42% turnover was from the PRC operation. This increased to 45% in 2009, showing that the operation of
15、the Mainland could be a key driver for its growth in the coming years, as the mainland retail market has substantial growth potential. Liquidity Analysis AEON has strong cash flow . The liquidity ratios are quite stable. Though the financial crisis dragged the ratios down in 2008, with the recovery
16、of economy, it began increasing again in 2009. For a company with steady and strong sales, it is not easy to maintain such satisfactory liquidity ratios with relatively low leverage. Solvency Analysis AEON began raising the long-term debt for financing in 2009, but the LT Debt/Equity ratio is still
17、quite low with just 3.94%. It seems to have an intention to increase its D/E ratio, but the growth rate slowed down after 2007. It is likely to stay at 15% in the future. 15% is still so conservative that we dont need to worry about its solvency. 05101520Jan-05 Jan-06 Jan-07 Jan-08 Jan-09Solvency An
18、alysisD/A D/E3 0246810J a n - 05 J a n - 06 J a n - 07 J a n - 08 J a n - 09M a r g in T r e n dP r e t a x m a r g in N e t P r o f it M a r g inN a m e R I C PE EPS C c y D P S C c y P a y o u t R O E % P / B o o k P / S a l e s M a rk e t C a p U S DA e o n S t o re s 0 9 8 4 . H K 2 0 . 6 9 0 .
19、6 4 H K D 0 . 3 2 H K D 0 . 5 0 2 5 . 6 5 3 . 2 5 0 . 6 4 445211211S e c t o r a v e ra g e (M e a n ) 2 9 . 0 4 n / a n / a n / a n / a 0 . 1 9 2 . 4 5 3 . 9 3 4 . 1 3 930946010S e c t o r m e d i a n 2 1 . 5 5 n / a n / a n / a n / a 0 . 0 0 9 . 1 6 3 . 0 4 1 . 8 6 319268696G o l d e n E a g l e 3
20、 3 0 8 . H K 8 3 . 8 4 0 . 3 4 H K D 0 . 3 1 CNY 0 . 9 0 3 6 . 4 7 1 5 . 9 1 1 8 . 8 2 3948868700J i a h u a S t o re s 0 6 0 2 . H K 2 3 . 8 3 0 . 0 2 CNY 0 . 0 1 CNY 0 . 5 0 5 . 9 6 0 . 9 5 0 . 4 1 56769901KPI 0 6 0 5 . H K 2 . 7 7 0 . 1 4 H K D 0 . 0 0 H K D 0 . 0 0 3 5 . 6 8 1 . 0 4 0 . 4 1 9332
21、6851L i f e s t y l e I n t l 1 2 1 2 . H K 2 0 . 7 4 0 . 6 8 H K D 0 . 2 8 H K D 0 . 4 1 1 7 . 9 1 4 . 6 0 6 . 7 6 3063445559N e w W o rl d D e p a rt 0 8 2 5 . H K 2 2 . 3 7 0 . 3 2 H K D 0 . 1 5 H K D 0 . 4 6 1 2 . 3 6 2 . 8 3 8 . 7 3 1615135482S o u r c e : R e u t e r s 3 0 0 0 X t r a H o s t
22、e d Te r m i n a l A c c e s sReturn of Investment Analysis The 2009 ROE and ROA ratios are not that satisfactory compared with previous years. In fact, the operation in Hong Kong is quite well, but the PRC operations suffered loss, with the performance of existing stores below expectation for the s
23、lack economy, the new stores still in investment stage, and the impairment loss arising from the refundable prepaid rental of HK$13 million not being accepted in arbitration. In the following years, I believe these nonrecurring situations can be improved for sure. Profitability Analysis Similar to t
24、he ROI Analysis above, the profitability ratios appear to underperform. In reality, this is acceptable as the whole retail industry cut down the price to promote sales in 2009, thus leading to a lower profit margin. Trading Analysis The management of inventory in 2009 is more effective than 2008. Ho
25、wever, the operation in the Mainland still need to be improved, as the ratio in 2009 is still inferior to that of 2005-2007, the years when the majority of business were in Hong Kong. This can change better with more GMS are open in PRC in the future, for the reason that retail industry scaled econo
26、mic developments. Investment Income Analysis In 2009, the market situation is so bad that that AEON increased dividend and reduced investment. In previous years, though its sales growth was strong, the dividend payout of AEON was consistent and stable, ranging from 40% to 50%. Also, AEON never incre
27、ased its outstanding share, showing that the management of AEON paid close attention to the interests of existing shareholders and focused on the business instead of financing issues. Relative Valuation The Sector Average P/E ratio is 29.04. As the retail industry is anti-risk, the PE of the whole s
28、ector is relatively high in the financial distress year. In fact, excluded some extreme cases, like KPI, AEON enjoyed relatively low PE ratio compared with other sector peers in 2009. 010203040J a n - 05 J a n - 06 J a n - 07 J a n - 08 J a n - 09R O I A n a lysi sR O E R O A4 The ROE of AEON is qui
29、te comfortable with 25.65%, better than most of its competitors. Also, the payout ratio is higher than last year, reaching 50%, which is reasonable and prudential in this difficult year. From its previous financial reports, we know that AEON invested most of its retention earning into the mainland,
30、and continuously opened new GMS. After 2009, I believe its payout ratio will decrease to lower stage, and AEON will keep expanding its business in the mainland before the mainland market is saturated. In this way, the growth rate of AEON should be promising in the coming years. To a firm with high g
31、rowth potential and low P/E, AEON is undervalued intuitively. The P/B ratio of AEON is slightly lower than the average with 3.25X. It is not that outstanding as Jiahua, but after taking its ROE (25.65%) into consideration, the result is satisfactory. With relatively low P/B ratio and high ROE, AEON
32、is worth investing. The market Cap of AEON is not that significant, but the EPS (0.64) and ROE are excellent, indicating that the operation of AEON is more efficient though it is not that big. With the development of the chain operation, we can expect better economics of scale and higher price of AE
33、ON. DCF Valuation Key Assumptions (refer to Appendix for the projections) Revenue Thanks to the continuous investment in the mainland, AEON still have outstanding growth in revenue in 2009, the toughest year. Because of the Word expo and the recovery from financial crisis, I believe the growth rate
34、of revenue in 2010 will bound to the 12%, the 2 yrs CAGR in 2008. After that, with the emergence of the mainland middle class, the target customers of AEON, and the chain operation in the mainland, the growth rate could sustain at 10.75%, the 4 yrs CAGR level, before the end of 2014. Minority Intere
35、st Minority interest was estimated using recent 4 years average after tax income to minority interest ratio (9.4%). Effective Tax Rate In 2009, about 45% of the revenue is from the mainland, so the effective tax rate in 2009 should be 20.88, 45%*17.5%(HK Tax rate)+55%*25%(PRC tax rate). Given the st
36、eady expansion in the mainland and the relatively saturated market in HK, I assume the tax rate will increase in the following years and stay around 23.5% afterwards. 0 .0 2 6 70 .6 8 60 .1 5 6 20 .1 3 3 8 5 3 2C o s t o f E q u i t y E s t i m a t i o n R e t r ie v e d f r o m B lo o m b e r g , o
37、 n M a r . 2 4 2 0 1 0 T h e le v e r a g e t e n d t o w a r d s s t a b le f r o m 2 0 0 7 ,s o t h e B e t a is c a c u la t e d w it h 2 0 0 7 - 2 0 1 0w e e k ly d a t a .R is k fre e ra teBe taM a rk e t R is k Pre m iu mC APM C o s t o f Eq u ityPE 2 0 . 6 2P E ( 3 / 2 4 / 1 0 ) 2 0 . 2 2R O
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39、%20.00%2004 2005 2006 2007 2008 2009 2010Debt to Equity 4 years 3 years0.202 0.2874 Yrs Average 3 yrs Average0.226 0.1973 Yrs Average Assume 0.019 0.050Other AssumptionsPPE CAGR4 Yrs average revennue GR2 Yrs Average2175695000.112Deppreciation% of PPECapex in 2010Capex growthrate after2010Change in W
40、C% of t/oGrowthPrice Target $22.88Current Price 13.0(24/03/10)12M Range(high) 14.6(03/08/09)12M Range(low) 9.6(08/04/09)Hang Seng Index 21008.62Valuation Day 24/03/2010Buy-2% -1% Original +1% +2%Changes in growth rate 4% 5% 6% 7% 8%Target price 20.53 21.58 22.88 24.53 26.70-1.5% -0.75% Original +0.7
41、5% +1.5%Changes in risk free rate 1.17% 1.92% 2.67% 3.42% 4.17%Target price 26.4 24.47 22.88 21.55 20.43Price Range 20.43$ - 26.70$ Pretax Margin For the same reasons mentioned above, margin will recover to 07-09 Average (6.51%) in 2010, and stay at 06-10 average (6.1%) level afterward. Debt to Capi
42、tal Ratio (D/C) According to the graph on the right hand side, AEON had an intention to increase its D/E ratio, but the growth rate slowed down after 2007. In this way, I assume that the D/E ratio of AEON will remain at 15% level after 2009, so the D/C ratio should be 13%. Growth Rate (g) After 4-ye
43、ars expansion in the mainland, I assume the retention ratio will be higher at 70%, as the market will be more saturated and relatively stable. Thus, the growth rate after 2014 is 5% with the assumed 17% ROE. 5% is quite conservative with 8% GDP growth rate in the mainland. Sensitivity Analysis In th
44、e slack economy of 2009, the risk free rate is relatively low at 2.67%. As the yield of the previous 10-year Exchange Fund Bills the sensitively analysis on growth rate is necessary. The sensitivity analysis is comfortable with the price range between $20.43 and $26.70. Compared with the current pri
45、ce 13$, it is really worth investing. Conclusion The Group has demonstrated resilience and experienced management during the challenging year in 2009 on its solid foothold. In 2010, the Group is set to capture the opportunities arising in the recovering retail market. Riding on the strong and long-t
46、erm relations with local communities in Hong Kong and mainland, it continues establishing distribution network and developing chain operation, which could bring the economies of scale to the Group in the future. Together with the strong balance sheet and steady development in previous years, I optim
47、istically give a strong BUY recommendation to AEON. APPENDIX 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005Revenue 9,939,322,583 8,974,217,935 8,102,824,602 7,316,043,248 6,605,658,080 5,897,909,000 5,376,567,000 4,759,947,000 4,286,972,000 3,919,741,000Operating Costs 9,332,736,332 8,426,530,992
48、 7,608,317,863 6,869,552,936 6,175,450,139 5,606,305,000 4,972,641,000 4,378,038,000 4,085,053,000 3,753,626,000Pretax Profit/Loss 606,586,251 547,686,944 494,506,739 446,490,312 430,207,941 267,424,000 381,051,000 376,830,000 208,922,000 163,729,000pretax margin 0.061 0.061 0.061 0.061 0.065 0.045
49、0.071 0.079 0.049 0.042Net Profit/Loss 464,038,482 422,574,708 384,788,056 350,355,367 340,402,034 195,171,000 306,523,000 301,461,000 156,705,000 123,936,000Minority Interests 43,538,840 39,648,463 36,103,096 32,872,417 31,938,536 28,023,000 32,915,000 21,405,000 8,358,000 -596,000Net Income 420,499,641 382,926,244 348,684,960 317,482,950 308,463,498 167,148,000 273,608,000 280,056,000 148,347,000 124,532,000Share Outstanding 260,000,000 260,000,000 260,000,000 260,000,
