It's been a tough year for GOME Electrical Appliances (OTCPK:GMELY) (0493.HK). Although I thought the shares were fully valued when I last reviewed this large Chinese electronics retailer, I didn't think a nearly 50% plunge in the Hong Kong shares was in store. Even allowing for the generally dismal performance of the Hang Sang and the H-Shares Index (down about 27% and 40%, respectively), GOME has been an underperformer, and that's even more apparent given that rival Suning (002024.SZ) has fallen only about 10% over the same period.
Weakness in China has definitely shown up in GOME's results, as
same-store sales grew just 2.3% in fiscal 2015 - not only missing the
company's earlier target of 3%, but continuing the slowdown from 5%
growth in 2014 and high single-digit growth in years prior. While some
of this is due to the economic challenges in China today, some of it is
also due to the saturation of the major Chinese cities where GOME
operates and the ongoing penetration of online commerce.
GOME continues to build out its own online efforts, but an alliance between Alibaba (NYSE:BABA)
and Suning is a threat that shouldn't be ignored, and there are no
guarantees that the company's efforts to bulk up its logistics offerings
will help as much as advertised. Acquiring the unlisted parent company
stores should help, though, as it significantly increases the company's
presence in faster-growing Tier 2 cities and creates more logistical and
operating synergy opportunities.
Although GOME shares look as though they could be meaningfully
undervalued, that is true of a lot of Chinese equities today and there
are clearly no guarantees that the macroeconomic environment in China
cooperates. I'd also note that GOME's U.S. ADRs trade only very
infrequently and investors are far better off trying to buy the Hong
Kong-listed shares (something most larger brokers can and will
facilitate at a reasonable price).
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GOME Still Looking To Adapt To China's Evolving Retail Market