Is This Company Set For A Turnaround?

 

 

 

 

 

 

 

 

The retail sector for Hong Kong and China has not been ideal for the past few years. Yet, as China transform into a consumer led economy, will we see the retail sector coming back strong than ever in the future? In this article, we will look at one company in particular that has hit some road block in its business in Hong Kong and China. Its share price has fallen from

 

its peak in 2012 of more than HK$24.60 per share to below HK$10.00 per share at its bottom. Currently, the company is trading at a share price of HK$10.30 per share. Can the company successfully turn itself around?

 

AEON Stores (Hong Kong) Co. Limited (HKG:0984) is one of the major retailer in Hong Kong and South China. The company operates supermarket, hypermarket, and convenience stores under a few brands. The slower growth in China together with the Sino-Japanese tension on the rise, AEON Stores suffers a damaging blow to its business back in 2013. Currently, even though the revenue contributed by Hong Kong and South China is quite similar, most of the profits are coming from its Hong Kong operations. The south China operation is facing huge challenges of rising operation costs, slower growth and changing consumption patterns by its customers.

Yet, above all that, the company continues to see revenue growth year on year. Since 2009, the company has been growing revenue by 9% a year. Furthermore, as with most staple consumer retailers, the balance sheet of the company is strong, as it finances itself mainly from good working capital allocation.

 

A Turnaround?

From its latest interim result, it seem that the company has been able to turn its losses in 2013 to a positive for the first half of the year. If the trend continues, the company might be able to maintain its profitability for the rest of the year. However, it should be noted that its south China business continues to be loss making and it is unsure if the company is able to compete in such a competitive environment.

 

Value In Action

From an annualized Price to Earnings ratio, the company is trading at 16.3 times forward P/E. If the company can turn the business around and continues its growth path, this company might be an interesting one to watch. However, if it continues to struggle with its China business for too long, we might see more value destruction than creation.

 

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All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and does not in any way represent those of his employer and other related entities. Stanley Lim does not own any shares in the companies mentioned above.

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