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QKLS: QKL Stores Inc Is Undervalued And Will Bounce Back

|Includes:QKL Stores Inc. (QKLS)

Introduction of QKLS

(NASDAQ:QKLS) is the biggest Chinese private supermarket chain of Northeast of China.

It has 49 supermarkets, 5 department stores and over 6000 employees. In addition, QKLS owns two logistics distribution centers in Harbin and Shenyang. QKLS joined the Independent Grocers Alliance in 2005.

Assets and Liabilities

According to the third-quarter report, by the end of September of 2012, the total assets of QKLS were $168,847,167, of which $99,112,161 were current assets..

Sources:U.S. Securities and Exchange Commission

Assets and Fluctuation of Exchange Rates

The Assets in QKLS (cash, deposit, etc.) are all in CNY, tantamount to QKLS occupies the long position in CNY exchange rate. The continuous appreciation of CNY may increase the assets of QKLS.

Exchange Rate of USD to CNY

Date

Exchange Rate

03-13-08

7.097

04-10-08

6.992

06-17-08

6.8919

06-22-10

6.798

09-21-10

6.6997

01-13-11

6.5997

04-29-11

6.499

08-11-11

6.3991

02-10-12

6.2937

Sources: China Foreign Exchange Trade System

Higher Inventory Turnover

According to the information from the company, inventory turnover ratio of QKLS was 6.2 in 2012, which is better than other companies in China.

Inventory Turnover Rate

Stock code

Nine Months Ended September 30,2012

002336

Ren Ren Le

4.89

000759

Zhongbai Holdings Group Co.,Ltd

5.26

601116

Sanjiang Shopping Club Co., Ltd.

5.22

600361

Beijing Hualian Hypermarket Co.,Ltd.

5

601933

Yonghui Superstores Co., Ltd.

5.98

002024

Suning Electrical Group Co., Ltd.

3.95

Ave

 

5.055

Sources:The Shenzhen Stock Exchange , The Shanghai Stock Exchange

Prospective Analysis of QKLS

From 2009 to 2011, QKLS has kept positive income growth for three years with 14.4% cumulative growth in net sales, which is above the average.

The development of QKLS benefits from both the development of retailing industry in China and the advantage in financing, which helps QKLS to gain more market shares in northeastern China. From 2009 to 2011, QKLS has totally set up 28 supermarkets, 3 department stores, and doubled the amount of employees.

QKL Supermarket In Shuangcheng City Heilongjiang Province

QKL Supermarket In Daqing Heilongjiang

QKL Supermarket In HuLunbeier Inner Mongolia Autonomous Region

QKL stores Inc. In Daqing Heilongjiang

Sources: http://www.qkl.cn/

Moreover, compared with other companies in China, QKLS focuses on developing in the medium-sized cities in northeast China to avoid the fierce competition in big cities and help QKLS realize its big leap.

The huge potential of retailing market in northeast China makes us optimistic for the future of QKLS.

Population and GDP

 

Population

Growth Rate of GDP

 

2011

Heilongjiang Province

38,312,224

12.2%

Jilin Province

27,462,297

13.7%

Liaoning Province

43,746,323

12.1%

The Inner Mongolia Autonomous Region,

24,706,321

14.3%

Total

134,227,165

 

Sources:China National Bureau of Statistics

By the end of 2011, GDP of the Northeast China was $ 942.5 billion and the GDP growth rate is greater than 12%. Total sale nets of chain supermarkets in these provinces are approximately $ 47 billion.

There are 134 million residents in Northeast China, which is larger than the total population of Great Britain and Italy. Chinese government launched the policy called "revitalize northeast". It is expected that in ten years the GDP growth rate of Northeast China will keep above 8%. In the year of 2020, the GDP will be approximately $2,000 billion in China. The sustainable expansion of retailing market provides QKLS with a stable base for further development.

We predict that QKLS would slow down its speed on setting up stores in the next one to three years. The annual amount of stores increased would be kept at 3 to 5, and the growth rate of operation revenue will be around 7%.

Due to the increasingly fierce market competition, we are expecting the net margin of QKLS would be around two million dollars in fourth season 2012. The annual operation revenue in 2012 could be about three hundred and ninety million dollars, a year-on-year growth of 5.4% and the rising trend remains。

Less than $10 Million, QKLS was undervalued

The stock value of QKLS is near $ 8 million. According to the third-quarter report,QKLS possessed $ 95 million net asset, of which $ 26 million were cash.

For further research, we contrasted QKLS with listed retailing companies in china.

P/B Ratio of A-shares

Stock Code

 

Book Value

Stock Value

P/B ratio

002336

RenRenLe

32.8814

36.04

1.096

000759

Zhongbai Holdings Group Co.,Ltd

28.2276

44.81

1.587

601116

Sanjiang Shopping Club Co., Ltd.

14.6031

38.61

2.644

600361

Beijing Hualian Hypermarket Co.,Ltd.

30.2816

33.82

1.117

601933

Yonghui Superstores Co., Ltd.

42.5055

193.59

4.554

002024

Suning Electrical Group Co., Ltd.

282.6252

490.97

1.737

600694

Dashang Co.,Ltd.

42.8607

103.6

2.417

Unit:one hundred million CNY

P/B Ratio of H-shares

Stock Code

 

Book Value

Stock Value

P/B ratio

06808

Sun Art Retail Group Ltd.

161.91

1135.26

7.01

00814

Beijing Jingkelong Company Limited

19.73

22.24

1.13

Unit:one hundred million CNY

P/B Ratio of QKLS

Stock Code

 

Book Value

Stock Value

P/B ratio

QKLS

QKL stores Inc.

5.93

0.43

0.073

Unit:one hundred million CNY

Sources:The Shenzhen Stock Exchange,The Shanghai Stock Exchange ,U.S. Securities and Exchange Commission

,Hong Kong Exchanges and Clearing Limited

Note

A-shares are ordinary shares issued by Chinese companies,which can be traded in securities market of China.

H-shares are ordinary shares issued by companies,which can be traded in HK.

Note-2

The data comes from the semi-annual report of companies in 2012.The stock value of the company was calculated against closing price in December 31, 2012.

The Value of "QKLS" in Retail Industry

Besides the above, we think that the low price of QKLS will not last too long. QKLS has huge market shares on many medium-sized cities in northeast China and will be acquired by other companies in China.

We think that the famous retailers have the will to purchase local companies in some medium-sized cities in order to gain more market shares. Located in Daqing and owning huge market shares in Northeast China, QKLS will be seen as a strong player by others in capital market in the future.

Who will invest in QKLS in the future? Take regions into consideration. It can be the Dashang Co., Ltd. who runs a long-term business in the northeast retailing market or the Beijing Jingkelong Company who want to enter the market of northeast China. Besides,China Resources Co., Ltd. who has purchased Jiangxi Hongkelong Department & Investment Co., Ltd. or HNA Retailing Holdings Co., Ltd. who acquired Shanxi Sankeshu Superstores Trade Co., Ltd., also pay close attention to QKLS.

Conclusion

We believe that QKLS is "substantially undervalued", and its real value will be gradually recognized by the investors. We consider its price will bounce back In the next six months.That is why we recommend to buy in. We are fully confident that this act will bring in profits to the investors.

Disclosure: I am long QKLS.

Additional disclosure: This is a translation of Chinese report about QKLS .Some grammar errors can't be completely avoided now,but the article will provide efficient informations that investors focusing on QKLS need or want. By the way,it is also a big chance for the investors investing in the american depositary shares of Chinese companies.If not,it will be a great loss.

Stocks: QKLS