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QKL Stores Inc. Investor Presentation November 2010

QKL Stores Inc. Investor Presentation November 2010. Safe Harbor Statement.

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QKL Stores Inc. Investor Presentation November 2010

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  1. QKL Stores Inc.Investor PresentationNovember 2010

  2. Safe Harbor Statement Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Any statements set forth above that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such factors include, but are not limited to, the company’s ability to market existing and new products, ability to access to capital for expansion, and changes from anticipated levels of sales, future national or regional economic and competitive conditions, changes in relationships with customers, dependence on our flagship product profits and other factors detailed from time to time in the Company's filings with the United States Securities and Exchange Commission and other regulatory authorities. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation was developed by the Company, is intended solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy the Company’s stock. This presentation is based upon information available to the public, as well as other information from sources which management believes to be reliable, but is not guaranteed by QKLS as being accurate nor does it purport to be complete. Opinions expressed herein are those of management as of the date of publication and are subject to change without notice. 2

  3. Investment Highlights Leading chain of supermarkets/hypermarkets in Northeastern China Untapped, high growth opportunity in underdeveloped market Large addressable market in 2nd and 3rd tier cities Robust same store sales growth with remarkable fresh food section Strong Financials and healthy cash flows Experienced management team with global experience

  4. Corporate Overview Leading Supermarket Chain inNortheastern China Robust Growth in Profitable Market • Founded in 1998, based in Daqing, Heilongjiang Province, the “Oil Capital” of China • 32 supermarkets, 13 hypermarkets and 3 department stores in the three northeastern provinces and Inner Mongolia • Focus on rapidly growing 2nd and 3rd tier cities (populations of 100K or more) ($MM) *excludes $2.0 million of one-time reverse merger-related costs **excludes one-time non-cash charge of $35.5 million resulted from the change in fair value of warrants issued to investors in conjunction with the Company’s issuance of convertible preferred stock issued in March 2008 ***excludes changes in fair value of warrants

  5. Market Opportunity

  6. The Retail Sales of Consumer Goods in the PRC, 2004 - 2013 (estimate) $3,000 $2,807 $2,478 $2,179 $1,917 $2,000 $1,713 $1,562 $1,173 $958 $1,000 $820 $719 $0 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E Retail Atmosphere in China 9 Year CAGR of 16.3% China is expected to become the second largest retail market Source: Historical data: National Bureau of Statistics of China; projected data: Frost & Sullivan

  7. Attractive Retail Market Growth Outpaces Rest of China Untapped Modern Retail Market • Population of 130+ million • 2003 “Plan for Revitalizing Northeast China” GDP growth higher than national average since 2004 • China retail sales up 18.4% through the year 2010 • Per capita disposable income of urban residents up 11.8%; net income per capita of rural residents up 10.5% in 2010 • 230 small and medium-sized city locations with limited exposure to large domestic and foreign supermarkets • Natural resource rich area with significant spending power • Transition from farmer’s market to modern markets Source: QKL Stores Inc Source: Available at http://chinaneast.xinhuanet.com/2007-05/23/content_10091405.htm

  8. Attractive Retail Market From Farmer’s Market… …to Modern Retail

  9. Total Area of QKL Stores 63K m2 115K m2 189K m2 Company profile: Timeline 2004 2008 3Q10 2007 1998 1st store opened in Daqing, Heilongjiang Province, China 38 stores; NASDAQ Listing in 4Q09; Raised $39.7 MM in public offering in 4Q09 30 stores; Public on OTC; Finished $15.5 MM PIPE financing 19 stores; Launched private label products 10 stores; Joined IGA As of 3Q10 2008 2007

  10. Company Profile • As of Dec. 30, 2010, we operated 32 supermarkets, 13 hypermarkets and 3 department stores in northeastern China and Inner Mongolia • Our stores sell a broad selection of merchandise, including fresh food, grocery and non-food • Total gross area of stores is approximately 257,000 sq. meters “Value Alley” Strategy: Emphasize higher margin fresh food and non-food sales

  11. Company Profile - Store Prototype Supermarkets Hypermarkets Store Prototype

  12. Company Profile - Robust Same Store Sales Revenue Growth Drivers Gross Profit Drivers • Increased Non Food variety at higher margins • Resource buying direct from farmers for fruits, vegetables and fish. • Direct purchasing from the manufactures for grocery and non food • QKL Private Label yields higher margins • Marketing initiatives • Loss leader promotional offers • Weekly Advertised Mailers • Established position within the community • Operating strategy change to reflect value to the customer • QKL brand and self prepared product sales growth • QKL membership card

  13. Company Profile - Operating Philosophy Store Organization • Product divided into fresh food, grocery and non-food • Food localization caters to local demand and drives fresh food sales • Consumer education signage Service and Training • QKLS management training school • 5 and 10 year service recognition program • Quarterly evaluation and bonuses • Clear salary and job profiling • Stock options for management

  14. Company Profile - Distribution Centers Current Distribution Centers • Fresh DC with daily delivery in Daqing • Grocery & non-food DC in Daqing New Distribution Center • 19,600 sq. mtr. (210,973 sq. ft.) facility in Harbin - centrally located near our stores • Commenced operations in 2Q10 • Ability to bypass distributors and increase margin • Bulk buying increases purchasing power • Will support 200 stores network

  15. Company Profile -Information Technology Distinctive Logistics Capabilities • Logistics center in Daqing • Manhattan WMS • Used by 60 of the world’s 250 largest retail companies • Wal-Mart, Home Depot, Target, Costco, Kroger, Sears • V.O.I.P telephone • Real time video conferencing • Warehouse Management System • CRM • Merchandising Supply Chain MGT • Human Resource Advanced management system maximizes operating synergies

  16. Company Profile: Independent Grocery Alliance Leverage IGA System • We are the first member of the IGA in northeastern China • Access to IGA global purchasing network • Access to shared education system with other IGA retailers in China • Reduced supply costs for popularproducts such as: • Coca Cola • Proctor & Gamble, Co. • Colgate – Palmolive Company • H.J. Heinz Company • General Mills • Kellogg • Kraft • Nestle

  17. Company Profile: Advertising and Marketing Advertising • In store promotions • Lost leader promotions attract customer traffic • Bi-monthly QKL mailer, weekly mailer and three day special mailer • Theme promotions Membership Cards • Members receive product discounts • Complete customer information collection C.R.M. • Ability to tailor product offering to local demand • Rebates • Debit Card Ability • Ability to deposit changes

  18. Company Profile:Promotion Activities Prepaid Buying Cards • 16% of current sales • Corporate promotional items • Gifts during Chinese holiday seasons • 2% discount for RMB 3,000 purchases Promotional Signs • Inform customer and create image of customer value • Advertised special • Member discount • Special product • In store promotion • Private label • Clearance product • E.D.L.P • New item • Organic

  19. Company Profile:Private Label • Merchandise made to our specifications by manufacturers, using a QKL name • Includes 600 SKUs grocery and non-food items • Same quality but 10% cheaper than brand merchandise • Profit margins higher than profit margins for other grocery items • Represented 5.5% and 5.0% of total sales revenue for 2009 and 2008, respectively • Target is to increase sales to 5.8% of total revenue by 2010

  20. Company Profile:Growth Strategy Increase Private Label Sales Increase Market Share in Existing Markets Develop Distribution Network Expand Geographical Coverage within Northeastern China Continue to Diversify into Department Stores Pursue Strategic Acquisitions

  21. Company Profile:Competitive Advantages Vs. Domestic Competitors Vs. International Competitors • High quality products at lower cost, the breadth of products we carry, and deep knowledge of our customers • Strong relationships with our suppliers, especially meat and other fresh food • Effective marketing and advertising programs • Superior information management system, inventory management, and employee training • First retailer in northeastern China to become a licensee of IGA • Quality customer service • Private label • Experienced international management team • Unique market positioning • Familiarity with local Chinese culture and understanding of consumer behavior and purchasing power • Identify and adopt consumer needs more effectively (e.g., importance of fresh meats) • Strong relationships with suppliers & local governments, both of which are crucial for store location selection and infrastructure availability • More favorable terms of lease agreement

  22. Financial Performance

  23. Robust Top Line Growth ($MM)

  24. Gross Profit / Margin Performance ($MM) % *Reflects reclassification of certain items which impacted revenue, COGS as well as operating expenses 17.0-19.0% expected future gross margin, reflecting change in operating philosophy and new store build outs

  25. Healthy Operating Trend – Adjusted EBITDA ($MM) Adjusted EBITDA represents net income before depreciation, amortization, change in fair value of warrants, interest income, interest expense and provision for income tax. The Company uses adjusted EBITDA as a measure of the Company's operating trends. Investors are cautioned that adjusted EBITDA is not a measure of liquidity or of financial performance under Generally Accepted Accounting Principles (GAAP). The adjusted EBITDA numbers presented may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA, while providing useful information, should not be considered in isolation or as an alternative to net income or cash flows as determined under GAAP. Consistent with Regulation G under the U.S. federal securities laws, the non-GAAP measures in this press release have been reconciled to the nearest GAAP measure.

  26. Income Statement *Excludes changes in fair value of warrants

  27. Balance Sheet and Cash Flow Highlights Key Balance Sheet Items Key Cash Flow Items

  28. Experienced and Proven Management Name Experience • Founder, Chairman, and CEO since inception in 1998 • 20 years wholesale and retail experience in northeast China • Bachelors from Heilongjiang Radio & TV University; EMBA form Tsinghua University Zhuangyi Wang Founder, Chairman, CEO • 33 years of U.S. retail experience including: Jewel Companies, Inc. and American Stores Co. • 12 years international retail experience including: AlAzizia-Panda United, INC., Fairprice Co-Operative Ltd and PT Matahari Putra Prima Tbk • Advanced Management Program at Harvard Business School; Restaurant Executive Program at Cornell University Alan D. Stewart COO • Over ten years of experience in the field of accounting and finance, including partner at Hong Kong CPA firm • A member of the American Institute of Certified Public Accountants (AICPA), and holds an active license in the Colorado State Board of Accountancy • B.A. in Accountancy from the Hong Kong Polytechnic University, MBA from the Chinese University of Hong Kong Jerry Chan CFO

  29. Investment Highlights Leading chain of supermarkets/hypermarkets in Northeastern China Untapped, high growth opportunity in underdeveloped market Large addressable market in 2nd and 3rd tier cities Robust same store sales growth with remarkable fresh food section Strong Financials and healthy cash flows Experienced management team with global experience

  30. NASDAQ: QKLS Revenue (3Q10) $64.9 MM Diluted EPS (3Q10) $0.03 Net Income (3Q10) $1.0 MM Debt (as of 09/30/10) $0.0 MM Cash (as of 09/30/10) $48.4 MM Enterprise Value $65.7. MM Market Cap. $114.1 MM Diluted Shares Outstanding (9-Month as of 09/30/10) 38.5 MM Price (11/19/10) $3.84 Equity Snapshot

  31. Contact Information QKL Stores Inc. Investor Relations – ICR, Inc. Mr. Mike Li IR manager 44 Jingqi, Dongfeng Xincun Daqing City, 163311 China Tel: (86)459 4607629 Email: mike_lyhidsq@hotmail.com Mr. Bill Zima ICR, Inc. Tel: 86 10 6583 7511 Email: Bill.zima@icrinc.com Auditor – BDO China Li Xin Da Hua CPA, Co. Ltd. Legal Counsel – Loeb & Loeb LLP

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