Gome sinks to all-time low after warning of losses

PUBLISHED : Thursday, 26 July, 2012, 12:00am
UPDATED : Thursday, 26 July, 2012, 12:00am
 

Shares in Gome Electrical Appliances Holdings, the mainland's second-largest home appliance retailer, plunged to an all-time low after it forecast a first-half loss due to lower sales and e-commerce losses.

Gome slumped as much as 18 per cent yesterday before closing at a record low of 65 HK cents yesterday, down 14.5 per cent.

It came after the company, which is backed by private equity firm Bain Capital, said on Tuesday that it may record a net loss for the six months to June because of a drop in sales revenue and e-commerce sector losses.

'The profit warning was expected, but the profit loss exceeded market consensus,' said Elyse Wang, an analyst at Haitong International Research. 'The sales plunge was severe as Gome's network is mainly located in first- and second-tier cities, which have suffered a greater impact from the economic slowdown and an intense price war in e-commerce.'

Gome plans to close stores and cut 10 to 15 per cent of its store areas to reduce operating costs. It's also set to boost sales by enhancing its sourcing and logistics operations and offering pay increases and equity incentives to employees.

Bain Capital, the second-largest shareholder in Gome with an 11.06 per cent stake in the company, invested around US$420 million in the then cash-strapped retailer in 2009.

However, the private equity firm is facing a big loss on that investment as its stake - now worth around US$165 million - has lost 84 per cent of its value since Gome's shares hit a 52-week high of HK$3.84 last August, according to Reuters.

Jailed billionaire Wong Kwong-yu, the founder of Gome, and his family now hold a 35.6 per cent stake.

Electrical appliance retailers have emerged as one of the worst sector performers amid weaker consumer demand, the suspension of a number of government incentive programmes and the online price war, which has been heating up.

Suning Appliance, the mainland's top home appliance retailer and Gome's main rival, said earlier this month that first-half net profit would fall from 20 to 30 per cent compared to a year earlier.

'We see that the gap between Suning and Gome is widening,' said Forrest Chan, a consumer analyst with CCB International Securities. 'A question that has puzzled investors is why Gome's performance is much worse than Suning's since they are in the same market.'

Despite declining sales, both Gome and Suning have pledged heavy investment in the e-commerce business in the second half.

They said they would offer 'deeper than ever' discounts and up the ante in the price war against B2C retailers such as 360buy, Dang Dang and Amazon.

But analysts worry that the price war will only worsen the retailers' profit margins.

'Amid the irrational industry-wide price war, Gome faces a tough dilemma,' said Luo Chen, an analyst with Merrill Lynch (Hong Kong). 'If it is not aggressive with promotions, it might lose online share. Aggressive promotions might boost sales revenue but lead to huge losses.'

35.6%

Jailed billionaire Wong Kwong-yu, who founded Gome, and his family hold a stake of this size in the retailer

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