Gome Electrical Appliances

GOME Electrical Appliances Holding Ltd is an electrical appliance retailer in China and Hong Kong founded by Wong Kwong Yu in 1987, adopting the “Gome” brand name in 1993. It listed in Hong Kong in 2004, and in 2008 police revealed that Wong was being investigated for stock manipulation. He resigned in early 2009 and was sentenced to 14 years in prison.

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Struggling Gome hopes the worst is now behind it

With its founder still in jail, and beset by rivals and the challenge of the internet, retailer Gome is hoping that the worst is now in the past

PUBLISHED : Saturday, 09 February, 2013, 12:00am
UPDATED : Saturday, 09 February, 2013, 4:51am

Is the worst over for Gome Electrical Appliances? That is the question many are asking after the Beijing-based appliance retailer weathered a series of setbacks over the past month.

Two weeks ago Gome said in a filing to the Hong Kong Stock Exchange that it may record a loss for 2012, because of declining sales, increasing rental expenses, and losses in its e-commerce business.

Around the same time it was reported to be planning to close all the shops it is managing in Hong Kong as a prelude to withdrawing from the retailing business in the city. And earlier this month it reportedly cut hundreds of employees in its online department, though management described the move as a "human resource adjustment" rather than large-scale layoffs.

To make things worse, the "home appliances to rural areas" scheme, a nationwide government policy to subsidise the purchases of televisions, washing machines, and fridges in rural communities, came to an end in January, casting a shadow over the already weak appliance market in the country.

A year ago the market cooled down quickly after the government halted another policy offering subsidies to encourage consumers to dump old electrical appliances and buy new ones.

But despite all this negative news, Gome's management told investors after issuing a profit warning on January 29 that "the worst is now behind us." A key indicator that things were on the mend, it said, was a sales recovery through the new year period.

It now expects the business improvement will continue this year, supported by its measures to tighten cost control, strengthen its supply chain and product mix, and the restructuring of its online business.

Many brokerages and analysts expect reasonable growth in same-store sales for the first quarter of this year, considering the low base effect from a year earlier, but their views are mixed on whether Gome has really bottomed out or not.

Citi Research analyst Eddie Lau, in a note to shareholders, said: "There's sequential improvement on track. We'd like to rate Gome shares as a buy, despite current-year losses and structural challenges from online retailers, due to our expectation for a cyclical recovery in demand for home appliances and electronic products in 2013."

In addition, Lau said, the cost pressure on running online shopping portals might also ease, as the government may take measures to curb the cut-throat price wars among the competitors.

But Luo Chen of Merrill Lynch took a less sanguine view: "While bulls and bears might debate the magnitude of its cyclical recovery, we believe this is irrelevant," he said. "What matters, in our view, is that Gome's long-term earnings power could be depressed given the structural share loss in first-tier markets, a lack of critical mass in second-tier markets, and continued losses for e-commerce."

In an assessment on Gome's long-term earning power, Luo estimated the company's normalised earnings at 1.2 billion yuan (HK$1.48 billion) on a three-year horizon, which would imply a 10.5 times normalised price-earnings ratio based on current prices.

"It is broadly in line with the historical average of global peers like Best Buy and Yamada Denki. We believe the long-term recovery potential is already in the [share] price," Luo said.

Gome's share price has plunged by more than 50 per cent over the past 12 months, against a roughly 12 per cent gain in the benchmark Hang Seng Index over the same period. Gome ended the week at HK$0.94.

The decline in the share price represented the worst performance by the stock since the company was listed in Hong Kong in June 2004.

From January to September last year, Gome's sales fell 18 per cent to 36 billion yuan, and it posted a net loss for the period of 687 million yuan. Gross profit margin slid by three percentage points to 15.88 per cent.

While the company attributed the loss to the slowing mainland economy, poor consumer sentiment, and heavy investment in its e-commerce platforms, some industry observers believe there were other forces at work.

"The fall from grace of Gome's founder, Wong Kwong-yu, is the root cause of the decline of the retailing giant," said Liu Buchen, an independent appliance market expert. "From then on, Gome has been swinging like a pendulum and has made critical mistakes in its development strategy."

Gome Electrical Appliances was founded by Wong and his brother in January 1987. Smart businessmen with bold ideas, they were the pioneers of the "chain store" model in the mainland's appliance retailing market.

In the 1990s the property market started to take off, and demand for electrical appliances from wealthier consumers increased fast, which helped Gome expand aggressively and grow into a nationwide popular retailing brand. It quickly grew into the dominant player in the market, leaving rivals like Nanjing-based Suning Appliance and Beijing's Dazhong Appliance in its wake.

In June 2004 it was listed in Hong Kong, and Wong was ranked by Forbes as the richest man in China after the float. Four years later, Wong was arrested and later sentenced to 14 years in jail for bribery, illegal business operations and insider trading.

Under the leadership of its new chairman, Chen Xiao, who focused more on improving store efficiency, the hectic pace of expansion slowed and Suning Appliance surpassed Gome as the retailer with the most shops across the nation.

In March 2011, Wong, whose family held a stake of around 35 per cent in Gome, exerted his influence from jail and ousted Chen from the boardroom. Wong's ally Zhang Dazhong then took the helm as chairman. Gome returned to its old path and opened more than 400 new stores in 2011 alone, in a bid to take back the number one position in the market. However, it did not take long for Gome to realise that the era of shop numbers was over and e-commerce had become the new battlefield.

Last December, Gome announced it would integrate its own online platform with the platform it acquired in 2010, coo8.com saying it would make the consolidated platform a leader in online sales of not only appliances but also mother-and-baby products, cosmetics, and healthcare products.

"Gome is now heading in the right direction. It just started a bit late," Liu Buchen said.

Meanwhile Gome's biggest rival, Suning, has also been suffering the pains of transition. For the first three quarters of last year, Suning's net profit stood at 2.35 billion yuan, down 31 per cent year-on-year.

But Suning's ambitious plan to become the "Wal-Mart plus Amazon" of China has seen the company grow its share of the internet market faster than Gome, with online revenue more than doubling last year.

Gome unveiled a three-year in December in which it pledged to achieve greater penetration of second and third-tier markets and to continue to enhance its e-commerce business.

But the challenges facing mainland retailers are severe.

"The tier-2 market poses more challenges on logistics, store format and merchandising, and Gome is still in the early stages of investment with high input cost and low margins," said Luo Chen. "In addition, competition from e-commerce and Suning still present big threats."

Analyst Liu Buchen, however, was more concerned about management issues in Gome. "It's hard to get optimistic if a company's real mastermind makes his decisions from jail," he said.

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