Equity Analysis /

Mobile World: 8M 19 results: Profits surpass initial target; reiterate Buy

    Son Tran
    Son Tran

    Market Strat, Retail, Consumer 

    Rong Viet
    30 September 2019
    Published by

    In eight months, MWG fulfilled 63% of the whole year’s revenue target, which is not surprising as Q4 is usually peak season for mobile phones and consumer electronics. In the past, revenues in 8M 2017 and 2018 accounted for 64% and 68% of the years’ actual numbers, respectively. The highlight is that NPAT growth significantly surpasses the initial target, while the number of stores has already reached the full year’s target. Beside the remarkable growth of BHX, the results also came from the improvement of TGDD and DMX.

    Key takeaways:

    1. Ongoing conversion of TGDD’s stores to DMX mini stores. Since the company started this strategy from January 2018, there have been over 70 stores converted. Also, DMX store openings have accelerated. Excluding DMX stores that were converted from TGDD, newly established DMX stores are 134 in 8M 19, compared with 68 in FY 18. MWG revealed its intention of continuing to open DMX stores rather than relying only on BHX to maintain the company’s growth.
    2. The company is doing well in product diversification. YTD, household goods and kitchenware have brought in sales of VND5,100bn (7.4% of total revenue). Meanwhile, newly added watches and sunglasses generated VND250bn in sales. These products have high margins (especially watches, sunglasses and private-label household goods), are relatively easy to sell, and do not face obsolete risk like consumer electronics and mobile phones. Taking advantage of cross-selling at current stores is an appropriate tactic in the scenario of smartphone saturation.
    3. Average monthly sales per BHX store has been steady at VND1.5bn for the past three consecutive months, which seems to be the optimal level for current store size and product mix. MWG is now concentrating on improving margins by economy of scale and optimising purchases. According to our estimates, BHX will deliver profits for MWG from 2020, while this year it would still generate a loss of over VND600bn, slightly higher than the VND570bn loss in 2018.
    4. Accumulated 8-month net profit margin reached 3.9%, an improvement of 17% compared with 3.35% in 8M 18. The 0.6% increase in profit margin is especially significant, equivalent to cVND600bn (MWG’s estimated sales in 2019 is nearly VND100tn), c20% of 2018’s NPAT. We believe that MWG’s profit margin will continue to improve by: (i) increasing the proportion of high-profit items such as watches, sunglasses, household goods, (ii) increasing SSSG due to store layout optimisation, while fixed costs do not change much, (iii) increasing profit margin of BHX thanks to economy of scale and cost optimisation and (iv) the actual tax rate of MWG decreasing in 2020 and 2021, due to BHX’s accumulated losses in previous years, which will be deducted from taxable income in the following years.

    In the past, MWG’s stock price has gone up sharply whenever there was a massive DMX expansion, from 2016 to early 2018 (Figure 3). In 2018, the stock price went sideways as the number of DMX store was almost flat coupled with investors’ concerns about the potential success of the new grocery chain (BHX). From the beginning of 2019 until now, both DMX and (especially) BHX have started to see strong growth in numbers, while MWG’s stock price has also continued to soar. We believe that the new growth cycle of the stock is just beginning.

    MWG’s plan to open up to 8,000 BHX stores is supported by the large FMCG retail market and a healthy financial condition. Debt/equity is c1x – a safe level for retail businesses. NPAT in 2019 is estimated at nearly VND4,000bn and projected growth in the following years will be over 30%. With thousands of billions of VND in cash flow each year from operating activities and payout ratio below 20%, MWG will not face many difficulties in expanding BHX stores. We maintain our Buy recommendation for MWG, with an unchanged target price of VND150,000 per share over the next 12 months.