Bloomberg News

Gome Profit Increases as Chinese Growth Lifts Electronics Demand

November 30, 2011

Nov. 30 (Bloomberg) -- Gome Electrical Appliances Holdings Ltd. profit jumped 13 percent in the third quarter as consumers in the world’s fastest-growing major economy spurred demand at China’s second-largest electronics retailer.

Net income climbed to 538.8 million yuan ($85 million) in the three months ended Sept. 30, from 477.6 million yuan a year earlier. Sales rose 14 percent to 14.2 billion yuan. Third- quarter figures were derived from earnings the Beijing-based retailer reported to Hong Kong’s stock exchange yesterday.

Gome, which added 241 stores after closing 26 underperforming ones in the last nine months, is expanding in smaller towns to narrow the gap with larger rival Suning Appliance Co. and tap demand for electrical appliances in China’s rural areas. The market for electronics and appliances in the world’s most populated nation is estimated to surge 70 percent to 2.14 trillion yuan by 2015 from 2010, according to London-based researcher Euromonitor International.

“We are confident that the rising spending power of Chinese consumer will fuel our growth,” Chief Financial Officer Fang Wei said in a conference call yesterday. “We’re accelerating store expansion, adding more stores in the second and third-tier cities in a move to capture the rising demand and growing affluence” in those cities, he said.

Margin Improvement Aim

The continued store expansion has increased selling and distribution costs by 31 percent in the nine-month period. Gome aims to increase its consolidated gross profit margin to 23 percent by 2014 from 19 percent at the end of September by selling more higher-margin products, Fang said.

Gome’s sales rose 15 percent from a year earlier during China’s week-long National Day holidays in October, Fang said.

The company, whose shareholders include U.S. private equity fund Bain Capital LLC, said year-on-year same-store sales rose 6.2 percent in the first nine months, compared with a 7.4 percent increase in the first half. Same-store sales strip out the effect of outlets open less than a year.

China’s economy, the world’s second biggest, will expand 8.5 percent next year, the Organization for Economic Cooperation and Development estimated in a report Nov 28.

Gome rose 0.5 percent to HK$2.01 in Hong Kong trading yesterday. The stock has climbed 29 percent since Oct. 3, when the company said it would put a property venture with its jailed founder on hold.

Terminating Venture

Gome said yesterday it terminated the plan to form a property venture with Beijing Eagle Real Estate Holdings Ltd. and Beijing Gome Electrical Appliances Co., because of “recent volatility and uncertainty in the macroeconomic environment.”

The retailer said Sept. 27 it planned a real-estate venture with billionaire founder and controlling shareholder Huang Guangyu, also known as Wong Kwong Yu. Huang is serving a 14-year prison sentence for bribery and insider trading and owns about a third of the company with his wife Lisa Du Juan, according to data compiled by Bloomberg.

--Editors: Subramaniam Sharma, Stephanie Wong

To contact the reporter on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editor responsible for this story: Frank Longid in Hong Kong at flongid@bloomberg.net


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