Company Report

PHILIPPINE EQUITY RESEARCH

Puregold Price Club, Inc.: In Prime Position for Growth

Initiating Coverage
10 FEBRUARY 2012

SHARE DATA

Rating

HOLD

Ticker

PGOLD

Fair Value (Php)

21.00

Current Price

20.90

Upside (%)

0.48

We are initiating coverage on Puregold Price Club, Inc. with a HOLD recommendation and an FV estimate
of Php21.00/sh based on the DCF method. Puregold is well positioned to capitalize on the existing growth
opportunities in the countrys retail sector given its well-recognized brand, differentiated focus on middle
to lower income customers and resellers, and aggressive expansion plans. However, current valuations are
unattractive, with the stock trading at par with our fair value estimate and relative to peers. Pullbacks below
Php18.00/sh should be viewed as opportunities to BUY the stock.
A growing retail industry. Over the past decade, the countrys retail industry has grown significantly,
benefiting from the steady economic and population growth, higher disposable incomes, and
increasing urbanization. This trend is expected to continue going forward, with Planet Retail
forecasting a 2-year CAGR of 11.0% for total retail sales until 2012.

ABSOLUTE PERFORMANCE (%)

PGOLD
PSEi

1M
18.99
5.02

3M

43.92
9.74

YTD
19.13
9.10

Penetrating the larger traditional retail market by tapping resellers. Over 70% of the countrys
retail sales still come from traditional formats. Puregold actively tries to penetrate the said market by
tapping resellers. Puregolds Tindahan ni Aling Puring (TNAP) loyalty program attracts resellers by
giving reward points and discounts. The program has been quite successful, with sales from TNAP
members currently accounting for 30% of the companys sales.

MARKET DATA (Php)

Market Cap

Favorable competitive landscape supportive of growth. While competition in urban areas

particularly in Metro Manila is relatively intense, much opportunity still lies in provincial areas which
are still dominated by independent local stores. Larger players such as Puregold offer value to
consumers by providing greater convenience, more product variety, and lower pricing. This should
provide large players much room to grow without having to fight for market share.

42,600.00 Mil

Outstanding Shares

2,000.00 Mil

52 Wk Range (Php)

10.68-21.70

3 Mo Ave Daily T/O

87.27

Store expansion to drive earnings growth. Over the next five years, Puregold plans to spend
Php10.2Bil to expand its branch network from 100 stores as of end 2011 to 200 stores by 2016.
Puregolds aggressive expansion should continue to fuel earnings growth through higher sales and
margins. We forecast net income to increase at a CAGR of 22.5% for the next five years, reaching
Php4.17Bil by 2016.
Valuation is unattractive; wait for pullbacks to buy. At the current market price of Php20.90/sh,
Puregold is trading in line with our FV estimate of Php21.00/sh. Puregold is also fairly valued relative
to its peers, trading at 17.8X 2012E P/E, which is slightly higher than the 17.0X average of comparable
companies. Nevertheless, pullbacks to prices below Php18.00/sh should be viewed as opportunities
to buy.

RESEARCH CONTACT

Charles William Ang

charles.ang@citiseconline.com

FORECAST SUMMARY
Year to Decemer 31 (Php Mil)
Net Sales
% change y/y
Gross Profit
% change y/y
Gross Margin (%)
Operating Income
% change y/y
Operating Margin (%)
Net Income
% change y/y
Net Profit Margin (%)

2009
24,112
28.0
2,219
59.5
9.2
458
54.3
1.9
131
1.6
0.5

2010
29,108
20.7
3,531
59.1
12.1
985
115.1
3.4
510
288.3
1.8

2011E
36,990
27.1
5,437
54.0
14.7
2,246
127.9
6.1
1,515
196.8
4.1

2012E
49,915
34.9
7,487
37.7
15.0
3,401
51.4
6.8
2,349
55.1
4.7

2013E
58,505
17.2
8,776
17.2
15.0
4,097
20.5
7.0
2,829
20.4
4.8

RELATIVE VALUE
P/E (X)
P/BV (X)
ROE (%)
Dividend Yield (%)

187.3
19.5
11.0
0.0

51.8
14.8
30.8
0.0

21.6
4.5
26.6
0.0

17.8
3.6
22.4
0.0

14.8
2.9
21.6
0.0

Source: PGOLD, COL estimates

10 FEBRUARY 2012

Initiating Coverage with a HOLD rating

We are initiating coverage on Puregold Price Club, Inc. with a HOLD
recommendation and an FV estimate of Php21.00/sh based on
the DCF method. Growth prospect for the modern retail industry
is very attractive, with the modern retail industry accounting for
only 21.2% of the total retail industry. At the same time, the modern retail industry should benefit from increasing urbanization in
the country. Puregold is well positioned to capitalize on the existing
growth opportunities in the countrys retail sector given its wellrecognized brand, differentiated focus on middle to lower income
customers and resellers, and aggressive expansion plans.
Despite Puregolds growth prospects, we believe valuations are unattractive. At Php21.90/sh, the stock is already fairly valued, trading
at par with our FV estimate. Puregold is also unattractive in terms of
relative valuation. At its current price, the stock is trading at 17.8X
2012E P/E, which is slightly higher than the 17.0X average P/E multiple of peers. Nevertheless, pullbacks to prices below Php18.00/sh
should be viewed as opportunities to buy.

Company Background
Puregold is currently the countrys second largest retailer among
hypermarkets, supermarkets, and cash and carries based on gross
sales. The company conducts its operations through three retail
formats and store brands. These include hypermarkets under the
brand Puregold Price Club, supermarkets under Puregold Junior,
and discounters under Puregold Extra. As of end September 2011,
the three formats comprise 86.7%, 11.7% and 1.7% of net sales respectively.
Exhibit 1: Revenue Breakdown by Retail Format
Puregold Junior,
11.7%

Puregold Extra,
1.7%

No. of Stores1

Puregold Price Club

Puregold Junior
Puregold Extra
Total

61
28
11
100

Avg. Net Selling Stock-Keeping

Units (SKUs)
Space2

3,368
947
432

up to 50,000
up to 8,000
up to 2,000

Source: PGOLD
as of end 2011

1
2

as of August 2011

Puregold targets middle to lower income retail customers or the Cclass and D-class households with monthly income of Php8,000 to
Php50,000/mo. It also targets local resellers such as sari-sari stores,
canteens, bakeries, etc. As of end 2Q11, retail customers accounted from approximately 70% of total revenues, while resellers accounted for the remaining 30%. In line with its focus on the lower
end market, the Puregold brand is associated with low prices, high
value-for-money, and a wide assortment of products.
Puregold has successfully grown its business at an above average
pace, with net sales increasing from Php18.9Bil in 2008 to Php29.2Bil
in 2010, representing a 2-year CAGR of 24.3%. During the first three
quarters of 2011, sales reached Php27.0Bil, up 36.3% from the same
period in 2010. Net income increased at a faster pace, rising by a
2-year CAGR of 98.6% from Php129.4Mil in 2008 to Php510.4Mil in
2010. Earnings for 9M11 were also strong, increasing by 185.0% to
Php1.08Bil.
Following its initial public offering last year, the Co Family beneficially owns 65.5% of Puregold. Four of the seven directors are also
members of the family, with Lucio Co serving as the Chairman of
the company.

A growing industry
Over the past decade, the countrys retail industry has grown significantly, benefiting from the steady increase in the population,
improvement in the economy, higher disposable incomes, and
increasing urbanization. This trend is expected to continue going
forward, with Planet Retail forecasting a 2-year CAGR of 11.0% for
total retail sales until 2012.

Puregold Price
Club, 86.7%
Source: PGOLD

Exhibit 2: Store Formats

Growth prospect of the modern retail industry, which is comprised

of hypermarkets, supermarkets, convenience stores, cash and carries, etc., is even more attractive. As of end 2010, the countrys
modern retail industry was highly under-penetrated, having only
17 sqm of total modern retail sales area for every 1,000 inhabitants. This is much lower than the average for the region. Also, ap-

PGOLD/Field Notes/ page 2

10 FEBRUARY 2012

proximately 79% of total retail sales still come from the traditional
formats such as wet markets and sari-sari stores. In contrast, only
51% of retail sales in Asian countries excluding Japan come from
traditional formats.
Exhibit 3: Modern Retail Formats Total Sales Area per 1000 Inhabitants (sqm)

Exhibit 5: Sales of Top Market Participants (in US$ Mil)

1,825

743

195

270

SM Investment
149

133

Taiwan

South
Korea

Puregold

570
326

Rustan's

145

Robinsons

239

Benison Group

120 120
Uniwide

2010

Source: Planet Retail

108

Malaysia

473
222

2006

32

Japan

712

China

17

14

Philippines

Indonesia

Vietnam

Source: Planet Retail

Exhibit 4: 2010 Modern vs. Traditional Retail Sales

Modern Retail
Sales
21%

Traditional Retail
Sales
79%
Source: Planet Retail

Favorable competitive landscape supportive of

growth
Puregold is currently one of the largest and fastest growing hypermarket and supermarket retail chains in the country. As of 2010,
Puregold trails only the SM group comprised of Supervalue, Inc.
(SM Supermarkets), Sanford Marketing (Savemore), and Supershopping, Inc. (SM Hypermarkets) in terms of sales and selling
space. Other notable competitors include Rustans, Robinsons, Benison Group of Companies, and Uniwide.

Philippine retailers have benefited from the absence of foreign

competitors. Up until 2000, regulations have prohibited global
leaders such as Wal-Mart and Carrefour from entering the country.
This has allowed local players to grow significantly and to gain superior insight into the market before any foreign competitors.
The huge size of dominant players is also expected to discourage
new entrants from coming in. For example, as of end 2010, SM had
an asset base of Php65.3Bil and sales of Php74.6Bil, while Puregold
had an asset base of Php10.1Bil and sales of Php29.1Bil. Size is important as this leads to economies of scale in terms of overhead
costs and greater bargaining power with suppliers.
The top players also benefit from having substantial control of the
market. As of end 2010, the top six players already accounted for
91% of total sales of hypermarkets, supermarkets, cash & carries,
and convenience stores, with the top the top four already accounting for 83% of total sales.
While the competitive environment in urban areas, particularly
in Metro Manila is relatively intense, much opportunity still lies in
provincial areas. Such areas are still currently largely dominated by
independent local stores, which would be prime markets as the
larger players could offer more value in terms of convenience, products, and pricing. This should provide the top players much room to
grow without having to fight for market share.

Penetrating the larger traditional retail market by

tapping resellers
As discussed earlier, over 70% of the countrys retail sales still come
from traditional formats. Puregold actively tries to penetrate the
said market by tapping resellers. To attract resellers, Puregold
launched the Tindahan ni Aling Puring (TNAP) loyalty program. The
TNAP program is a free, lifetime membership club for retail micro-

PGOLD/Field Notes/ page 3

10 FEBRUARY 2012

entrepreneurs. It is primarily a rewards based program which allows members to accumulate points based on the quantity of their
purchases. On the top of these rewards, the program also offers
additional services such as sales delivery, training sessions, and insurance benefits. Such promotions have successfully allowed the
company to attract resellers.
Since launching the TNAP program in 2001, the number of its
members has grown from 30,000 in 2005 to 170,000 as of end August 2011. Of the current TNAP members, approximately 93% are
sari-sari store owners. Sales from TNAP members currently account
for over 30% of total net sales. While Puregold doesnt have a specific growth target for this segment, we expect this to comprise a
bigger percentage of revenues going forward as it expands into
less urbanized areas.
Exhibit 6: Breakdown of Net Sales as of 1H11

TNAP Members
31%

Store expansion to drive earnings growth

Over the past two years, Puregold rapidly expanded its portfolio of
stores from 34 branches in 2009 to 100 branches as of end 2011.
This led to a 23.9% CAGR of sales. Meanwhile, we forecast earnings
to grow by a much faster pace from Php131 Mil in 2009 to Php1.52
Bil in 2011, representing a two-year CAGR of 240%. The improved
scale and stronger bargaining power with supplier resulting from
Puregolds larger size allowed gross margin to increase from 9.2%
to 14.7%, and operating margin to expand from 1.9% to 6.1% respectively.
Going forward, we expect Puregold to continue with its rapid
branch expansion. Over the next five years, Puregold is expected to
increase its branch network from 100 stores as of end 2011 to 150
stores by 2013 and 200 stores by 2016. The company is projected to
spend Php10.2Bil in capital expenditures, funded by the proceeds
of its initial public offering and internally generated funds. Our
growth forecast is generally in line with the companys guidance.
Exhibit 7: Store growth forecast
200

100

Retail
Consumers
69%

2009

2010

2011
Hypermarkets

2012E

2013E

Supermarkets

2014E

2015E

2016E

Discounters

Source: Puregold, COL Forecasts

Source: Puregold

Focus on lower income segments improves resilience

Compared to its competitors, Puregold believes that it will be less
affected by negative economic developments such as a potential
drop in remittances, or weaker-than-expected GDP growth. This is
largely due to its focus on lower income segments. Most of Puregolds customers are from the broad C and D markets and the local
resellers. PGOLD believes that during times of economic hardships,
its business stands to benefit from a shift down from higher classes,
increasing its overall market and offsetting the decline in purchasing power.

Puregolds aggressive expansion should continue to fuel earnings

growth. By 2016, we expect net sales to rise to Php79.53Bil, corresponding to a five-year CAGR of 16.5%. Meanwhile, we expect gross
margins to peak at around 15.0%, just slightly above its current level
and comparable to the margin of other major players. Nevertheless,
we forecast operating margins to steadily increase to 7.6% in 2016
since Pureglds larger network will allow the company to benefit
from increasing economies of scale. Given these assumtions, Puregolds net income is expected to grow at a CAGR of 22.5% for the
next five years, reaching Php4.17Bil by 2016.

PGOLD/Field Notes/ page 4

10 FEBRUARY 2012

Exhibit 8: Margins Forecast

Puregold faces operational and logistical risks of doing business in

new territories. Possible difficulties include obtaining regulatory or
local government approvals and distributing/transporting inventories. Also, Puregold may experience difficulty in building its brand in
these new areas.

16%
12%
8%
4%
0%
2008

2009

2010

2011E

Gross Margin

2012E

2013E

Operating Margin

2014E

2015E

2016E

Net Margin

Source: Puregold, COL Forecasts

Exhibit 9: Net Income Forecast

Stores
Net Sales
(PhpMil)
Net Income
(PhpMil)

2009
34

2010
62

2011E 2012E 2013E 2014E 2015E 2016E

100
128
150
169
185
200

24,112 29,108 36,990 49,915 58,505 66,049 72,858 79,525

131

510

1,515

2,349

2,829

3,290

3,728

4,173

Source: PGOLD, COL Forecasts

Efficient business model key to rapid expansion

Puregolds strong track record of growth is mainly attributable to
its efficient business model which features multi-format offering of
hypermarket, supermarket, and discounters; strategic store locations; and efficient and scalable operations. Using its three available
store formats, Puregold aims to maximize coverage and penetration by offering the most suitable format/s for a particular area. Primary factors in choosing a location include the targeted catchment
area and the accessibility of the store by its target customers.
The companys efficiency is further supported by outsourcing its
logistics and distribution functions to third-party cross-docking
providers. All restocking of the companys inventory are conducted
either through direct store deliveries using the distribution channel
of its suppliers, or by a third-party cross-docking, which involves the
transfer of a cargo from one transport vehicle to directly to another
with minimal warehousing. Such a setup allows Puregold to rapidly
expand its operations without sacrificing its operating efficiency.

Expansion into Visayas and Mindanao presents

notable risk
A significant part of the Companys medium term expansion plan
is to open stores in Visayas and Mindanao. Specifically, Puregold
is planning to have 12 stores each in Visayas and in Mindanao by
2013, which would mark the first time that the company is opening stores outside of Luzon. With no prior experience in these areas,

While the risks may be substantial, Puregold believes that the risks
are worth taking given its growth potential. The company understands that Visayas and Mindanao are largely underserved in terms
of the large-scale hypermarkets and supermarkets. Currently, Visayas and Mindanao account for 39% and 32% of the countrys total
population and GDP.

Competition could intensify as Puregold gains

recognition
With the success of Purergold, competitors might decide to replicate the companys business model. Particular strategies that competitors might replicate include the companys focus on resellers;
targeting the lower income segments; and utilizing the same multiformat offering. Such actions could potentially reduce the companys competitive advantage going forward. Also, competitors
might follow Puregolds plan to expand in areas outside of Luzon.
This could possibly give competitors first mover advantage in some
areas.
Nevertheless, given Puregolds current scale, extensive experience,
and established brand name, we believe that the company would
continue to have an advantage over other players. Puregolds aggressive expansion plan and adequate capital base also allow it to
remain a step ahead of the competition.

Valuation unattractive; Pullbacks are opportunities

to buy
Despite Puregolds attractive growth prospects, we believe valuations are unattractive. At Php20.90/sh, the stock is already fairly
valued, trading at par with our FV estimate. Puregold is also unattractive in terms of relative valuation. At Php20.90/sh, the stock is
trading at 17.8X 2012E P/E, which is slightly above the 17.0X average P/E multiple of peers. Nevertheless, pullbacks to prices below
Php18.00/sh should be viewed as opportunities to buy.

PGOLD/Field Notes/ page 5

10 FEBRUARY 2012

Exhibit 10: P/E Ratio of Comparables

Lianhua Supermarket Holdings

Wumart Stores
Beijing Jingkelong Company
Yonghui Superstores Company
Zhongbai Holdings Group
Chongqing Department Store
AEON Co.
Wal-Mart Stores
Costco Wholesale Corp
Target Corp
Carrefour SA
Average

P/E Ratio EPS Growth

13.9
14.4%
25.7
22.5%
11.1
17.3%
33.1
39.2%
16.2
22.7%
13.9
20.9%
12.3
9.7%
13.8
11.0%
22.3
15.4%
12.3
9.1%
12.5
6.5%
17.0
17.2%

Source: Bloomberg

PGOLD/Field Notes/ page 6

10 FEBRUARY 2012

Appendix 1: Income Statement (in Php Mil)

Net Sales
Gross Profit
Other Income
Operating Expense

EBIT
Taxes
Net Income
EPS

08
18,841.8
1,391.2
891.5
1,985.7
297.0
48.2
129.4
0.11

09
24,112.4
2,219.4
785.3
2,546.5
458.2
57.5
131.4
0.11

10
29,108.0
3,531.0
780.7
3,326.3
985.3
232.6
510.4
0.40

11F
36,989.7
5,437.5
992.1
4,183.7
2,245.9
690.4
1,514.9
0.97

12F
49,915.1
7,487.3
1,338.7
5,425.4
3,400.6
1,070.5
2,349.0
1.17

13F
58,505.0
8,775.8
1,569.1
6,247.4
4,097.5
1,289.2
2,828.9
1.41

Source: PGOLD, COL estimates

Appendix 2: Balance Sheet (in Php Mil)

Cash
Receivables
Inventory
Other CA
Ttl. CA

08
1,224.7
809.2
1,901.1
4,033.9
7,968.9

09
1,136.1
645.3
1,904.3
6,229.9
9,915.7

10
1,837.9
241.6
2,934.3
402.1
5,415.9

11F
6,002.8
307.0
3,619.7
344.3
10,273.8

12F
6,876.3
414.3
4,867.4
456.2
12,614.2

13F
8,999.7
485.6
5,705.1
530.7
15,721.0

PPE
Oth. Assets
Ttl. Assets

1,592.1
301.9
9,862.9

2,166.0
386.2
12,467.9

4,145.5
562.3
10,123.7

5,904.3
714.5
16,892.7

8,297.2
964.2
21,875.7

9,605.0
1,130.2
26,456.2

Accounts Payables
Short Term Debt
Other CL
Ttl. Cl

3,230.3
4,241.3
1,036.6
8,508.2

3,767.5
6,114.2
985.3
10,867.0

4,985.3
2,092.3
451.4
7,529.1

6,163.8
0.0
696.5
6,860.2

8,253.8
0.0
983.0
9,236.7

9,654.9
0.0
1,145.8
10,800.8

LT Debt
Oth. Liabs
Ttl liabs

0.0
220.4
8,728.6

0.0
335.3
11,202.3

0.0
546.8
8,075.9

0.0
711.0
7,571.3

0.0
968.5
10,205.2

0.0
1,156.0
11,956.8

Minority Int
S/H Equity

0.0
9,862.7

0.0
12,467.9

0.0
10,123.7

0.0
16,892.8

0.0
21,875.7

0.0
26,456.3

Source: PGOLD, COL estimates

PGOLD/Field Notes/ page 7

10 FEBRUARY 2012

Appendix 3: Cash Flow Statement (in Php Mil)

09
(1,067.4)
131.4
376.9
(1,549.4)

10
6,725.7
510.4
426.4
5,769.3

11F
2,819.9
1,514.9
574.6
730.4

12F
4,020.6
2,349.0
762.0
909.6

13F
4,260.6
2,828.9
851.0
580.7

(1,358.7)
0.0
Other non-current assets
0.0

(894.1)
(870.5)
(23.6)

(2,390.2)
(2,268.2)
(122.0)

(2,321.5)
(2,214.0)
(107.5)

(3,147.1)
(2,970.8)
(176.3)

(2,137.3)
(2,020.1)
(117.2)

Financing CF
Cash dividend
Debt
Others

2,247.9
0.0
0.0
0.0

1,872.9
0.0
1,872.9
(0.0)

(3,633.7)
0.0
(4,021.9)
388.2

3,666.5
0.0
(2,092.3)
5,758.8

0.0
0.0
0.0
0.0

0.0
0.0
0.0
0.0

Change in cash
Cash (Begin)
Cash (End)

661.8
562.9
1,224.7

(88.5)
1,224.7
1,136.1

701.8
1,136.1
1,837.9

4,164.9
1,837.9
6,002.8

873.5
6,002.8
6,876.3

2,123.4
6,876.3
8,999.7

Operating CF
Net income
Othr non-cash items
Chng in wrk cap

08
(227.5)
129.4
192.6
0.0

Investing CF
Acquisition of PPE

Source: PGOLD, COL estimates

Appendix 4: Ratios
ROE
Sales Growth
EPS Growth
GPM
OPM
NPM
CA/CL (X)
D/E Ratio

08
11.4%

7.4%
1.6%
0.7%
0.9
3.7

09
11.0%
28.0%
1.6%
9.2%
1.9%
0.5%
0.9
4.8

10
30.8%
20.7%
261.4%
12.1%
3.4%
1.8%
0.7
1.0

11F
26.6%
27.1%
140.4%
14.7%
6.1%
4.1%
1.5
0.0

12F
22.4%
34.9%
21.1%
15.0%
6.8%
4.7%
1.4
0.0

13F
21.6%
17.2%
20.4%
15.0%
7.0%
4.8%
1.5
0.0

Source: PGOLD, COL estimates

PGOLD/Field Notes/ page 8

10 FEBRUARY 2012

INVESTMENT RATING DEFINITIONS

BUY

HOLD

SELL

Over the next six to twelve

months, we expect the share
price to increase by 15% or
more.

Over the next six to twelve

months, we expect the share
price move within a range of
+/- 15%.

Over the next six to twelve

months, we expect the share
price to decline by more
than 15%.

TOP PICK DEFINITION

A stock that is included in our Top Pick list has to meet the following criteria: 1.) It must belong to a sector with neutral to positive outlook; 2.) It must
have double digit earnings growth for the current and the succeeding fiscal year; 3.) Its share price appreciation potential must be above 15% as of the
date it was included in the list; and 4.) It must have an upward intermediate term trend.

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incomplete or condensed. All opinions and estimates constitute the judgment of CitisecOnlines Equity Research Department as of the date of the report
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