Chinese electronic retailer GOME (GMELY, quote) struggled in Hong Kong trading after reporting sub-par earnings Monday.
Chinese retailer GOME could return to profitability next year.
Although both the Hong Kong (EWH, quote) and Mainland Chinese (FXI, quote) markets started brightly, with the Hang Seng at one point more than 1% higher, Chinese exchanges suffered a reversal in the mid-afternoon on profit-taking. Downward pressure saw both the Hang Seng and the Shanghai Composite finish in the red.
Observers have attributed the sell-off to a number of poor earnings from Mainland Chinese consumer stocks recently. In addition to the abovementioned GOME, Tingyi (TCYMY, quote) — an instant noodle company — and Parkson (PKSGF, quote) — a high-end market chain — issued disappointing quarterly reports.
The fact that the Chinese retail sector underperformed is not entirely surprising. Given that the Chinese economy recorded its slowest growth since the global financial crisis began this quarter, it logically follows that consumer sentiment would be adversely affected. With green shoots starting to show in the Chinese economy, and the U.S. government edging closer to an accord over the fiscal cliff, a rebound in Chinese consumer sentiment could be around the corner.
Such an improvement could be a boon to electronics retailer GOME. The firm reported losses of 687 million yuan ($110 million) for the first nine months of the year, compared with a net profit of 1.79 billion yuan ($287 million) over the same period of time last year.
While superficially those numbers look somewhat disconcerting, not all of these losses can be attributed to reduced consumer confidence; rather, GOME is in the process of improving the efficiency of its network and enhancing its marketing exposure. These initiatives were always going to pressure earnings over this period.
As a result, GOME should not be dismissed by investors on the back of this earnings report; the company has huge exposure to booming Chinese smartphone demand. Assuming that the Chinese economy returns to its habitual 8+% growth rate and Chinese consumer demand concomitantly increases, GOME is poised to return to profitability at some point next year.