China Department Stores 1h12 Wrap: Few Surprises, Low Expectations, Macro Overhang

1H12 Results – China department stores reported mixed results for 1H12. Against

our revised down expectations (China Department Stores - Fears On Sales

Growth Slowdown Overdone; Buy on Weakness), the 1H12 earnings of Intime

and Lifestyle were better-than-expected. Golden Eagle reported in-line results, but

Parkson disappointed. We think the new management guidance for full year 2012

had little impact as market expectations had already been lowered heading into the

1H results. YTD, the sector has dropped 12% and is trading at 14.1x 2012E and

12.2x 2013E PER. While sector EPS growth is expected to slow to mid-single digit

for this year, we look for stronger growth in 2013E with sales growth picking up from

4Q12E. Our top picks are Intime (1833.HK) and Lifestyle (1212.HK).

 Sales Performance and Concessionaire Rate – Lifestyle reported the strongest

SSSG in 1H12, followed by Intime, Golden Eagle and then Parkson. July/August

2012 SSSG remains muted as the base is still high, but we think our FY12E SSSG

is achievable with an easier 4Q comp. Sales growth of gold/jewelries is still stronger

than the store average for many operators, despite the sharp decline in their growth

rate YoY. While the 1H12 concessionaire rate fell YoY on merchandise mix, new

stores dilutions, and promotional activities, the decline was less severe than we had

expected.

 New Store Losses and Operating Margin – Operating margin declined for

Parkson, Golden Eagle and Intime, on lower concessionaire rate and new store

losses, in-line with our expectation. We were surprised that most operators, with the

exception of Intime, are more or less sticking with their store opening schedule.

Operators have revised up full year new store losses on weaker sales. Meanwhile,

Lifestyle reported a 4ppt improvement in its core EBIT margin in 1H12. It has no

new store until the 2H13 opening in Shenyang.

 Key Issues Discussed by Mgmt – There is now more discussion on e-commence,

but...