Seeking Alpha: GOME Still Looking To Adapt To China's Evolving Retail Market

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

Seeking Alpha: GOME Getting Its Due

It took a little longer than I'd expected, but China's GOME Electrical Appliances (OTCPK:GMELY) (0493.HK) has finally seen the market come around and recognize the progress that the company has made in repositioning itself as a competitive electronics retailer for the changing Chinese marketplace. These shares have jumped more than 50% from my last update (and are up about 40% from when I named them a Top Idea) and now stand more or less at my fair value. While I think there are still good days ahead for this retailer, I don't see the unreasonable discount to fair value that gets my attention as an investor.

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GOME Getting Its Due

Seeking Alpha: GOME Continues To Gain Share And Evolve Toward A Logistics-Driven Model

The best thing I can say about early December Top Idea GOME Electrical Appliances (OTCPK:GMELY) (0493.HK) is that the shares did quite a lot better than rival Suning and only very slightly worse than the Hang Seng Index. Even so, the 5% decline over that stretch is quite disappointing.

I continue to believe that GOME is on the right track with its focus on becoming an "omni-channel" retailer and driving a competitive advantage through low-cost/high-service logistics and supply chain management. Online appliance and electronics retailers seem to be pulling back from aggressive price competition and the company is taking share in Tier 1 and 2 cities. The online strategy is still a work in progress, but with a focused strategy to improve its product mix and logistics costs, I believe these shares are still meaningfully undervalued.

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GOME Continues To Gain Share And Evolve Toward A Logistics-Driven Model

Seeking Alpha: GOME's Realism On Electronics Retailing Still Not Fully Appreciated

GOME Electrical Appliances (OTCPK:GMELY) has been called China's Best Buy (BBY) in the past, even though the comparison can get a bit stretched at times. Where Best Buy is estimated to hold about 30% share of the U.S. electronics and appliance retailing market, GOME is #1 in China in consumer electronics with about 10% share. Even so, both companies had a period of serious turmoil as "growth for the sake of growth" created an inefficient store base and online competition made serious inroads into their businesses.

Whether you believe Best Buy's turnaround plan is working and will continue to work is a story for another day. What I want to focus on today is the strategic shift at GOME that has led to improved same-store sales and the way in which management views the evolution of competition and retailing in China. I believe that GOME is correct in its view that success will ultimately come down to a battle of logistics, and I think the company is ahead of its rivals in building for that reality. I do not believe that GOME will ever generate sizable FCF margins, but I do believe that modest improvement, coupled with supply chain investments that will help the company maintain its competitiveness, support a fair value almost 50% above today's level.

As a quick aside, I would encourage investors who are considering GOME shares to buy the Hong Kong-listed shares if possible (0493.HK). I realize that it can be more expensive to do so, but the liquidity on the ADRs is not very good at all.

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GOME's Realism On Electronics Retailing Still Not Fully Appreciated

Investopedia: Home Depot Chooses Profits Over Empire Building

Although not everything that home improvement superstore operator Home Depot (NYSE:HD) has tried worked, management deserves credit for being ready with a quick hook when it seems clear that an idea just isn't going to live up to expectations. That seems to be the case with the company's plans for China, as management has announced that it will be closing its remaining big box stores in China and shifting to a strategy of specialty stores and e-commerce.

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http://www.investopedia.com/stock-analysis/2012/Home-Depot-Chooses-Profits-Over-Empire-Building-HD-BBY-WMT-YUM0918.aspx