PUBLISHED : Sunday, 19 March, 2006, 12:00am
UPDATED : Sunday, 19 March, 2006, 12:00am

About a year ago Merrill Lynch initiated coverage of Gome Electrical Appliance, China's largest consumer electronics retailer, with a 'buy' recommendation and a 12-month price objective of $8.73.

The broker believed Gome had strong growth prospects and was one of the most profitable retailers in China with a return on invested capital of 59 per cent.

It forecast earnings growth of 170 per cent for 2004, 34 per cent for 2005 and 26 per cent for 2006 based on its expanding retail network - 144 outlets in 2004, 282 outlets planned by the end of 2007 - and sustainable margins.

The broker believed Gome's high returns were sustainable due to economies of scale, the company's bargaining power, strong cash generation and high brand recognition.

In March last year Gome announced a 44.5 per cent rise in net profit to $352.91 million for the nine months to December 2004 after it changed its financial year end from March 31 to December 31.

In November it said it earned net profit of $363 million for the first nine months, up 3.5 per cent compared with a year ago.

The counter closed on Friday at $7.20.