FRIENDSHIP&APOLLO COMMERCIAL(002277)：2021 AND 1Q22 RESULTS MISS;WATCH UPGRADING OF MAIN BUSINESS

　　2021 and 1Q22 results missed our expectations
Friendship & Apollo Commercial announced its 2021 results: Revenue grew 11.0% YoY to Rm2.59bn, attributable net profit fell 6.0% YoY to Rmb131mn (implying EPS of Rmb0.09), and recurring net profit declined 25.3% YoY to Rmb113mn, missing our expectations due to the impact of COVID-19 resurgence in some regions of China, intensifying competition, and new lease accounting standards. In 1Q22, revenue fell 3.0% YoY to Rmb653mn, attributable net profit dropped 46.6% YoY to Rmn60mn, and recurring net profit declined 47.8% YoY to Rmb59mn.
　　Trends to watch
　　Revenue from main business showed signs of recovery in 2021. The firm’s revenue from the retail segment edged up 6.8% YoY. Specifically, revenue from same-store sales at department stores and specialized stores declined 1.13% YoY, while that from outlets and shopping malls increased 17.5% YoY. As the firm’s subsidiary Changsha Friendship & Apollo Wuyi Plaza withdrew its transfer of ownership contract, revenue from the real estate segment reached around Rmb7.07mn in 2021 (vs. 68.92mn in 2020). The firm’s self-developed online shopping platforms (e.g., Tepin.hk and YouaMall) contributed a total of Rmb38.35mn in revenue, largely flat YoY. Friendship & Apollo Commercial’s holding subsidiary Opec Yishehui had revenue of Rmb906mn (up around 16% YoY) on third-party platforms (e.g., Tmall and JD.com). In terms of store expansion, the firm opened four convenience stores on a net basis in 2021, and promoted its business of franchised 7-Eleven convenience stores. As of end-2021, the firm had 9 department stores and specialized stores, 8 outlets and shopping malls, and 42 convenience stores.
　　Profitability under pressure. The firm’s gross margin rose 1.8ppt YoY in 2021 to 47.4% but dropped 6.4ppt YoY in 1Q22 to 46.2%. Selling expense ratio fell 1.8ppt YoY in 2021 to 18.2% and 2.4ppt YoY in 1Q22 to 13.2%. G&A and R&D expense ratio rose 0.1ppt YoY in 2021 to 21.7% and 2ppt YoY in 1Q22 to 20.8%. Financial expense ratio grew 3ppt YoY in 2021 to 12.5% and 2.8ppt YoY in 1Q22 to 14.3%, mainly due to the impact of new lease accounting standards. Attributable net margin declined 0.9ppt YoY in 2021 to 5.1% and 7.5ppt YoY in 1Q22 to 9.2%. Recurring net margin fell 2.1ppt YoY in 2021 to 4.4% and 7.7ppt YoY in 1Q22 to 9.0%.
　　Watch strategic transformation and upgrading of main business. The firm aims to promote sales at department stores through innovative marketing campaigns, and strengthen its effective membership management to further improve the quality of its brand. The firm is stepping up efforts to introduce well-known international brands to boost sales at its outlets. In addition, it plans to accelerate expansion of convenience stores through the franchise model, and boost the market share of its 7-Eleven brand through strict product selection and quality control.
　　Financials and valuation
　　Given the impact of COVID-19 resurgence, intensifying competition, and new lease accounting standards, we lower our 2022 earnings forecast 30% to Rmb202mn and introduce 2023 earnings forecast of Rmb234mn. The stock is trading at 23x 2022e and 20x 2023e P/E. We maintain OUTPERFORM due to be optimistic about the company's convenience store and outlet business prospects, and lower our TP 5% to Rmb3.53 (24x 2022e and 21x 2023e P/E), offering 4% upside.
　　Risks
　　Intensifying competition; weak consumption; COVID-19 resurgence.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。