Chow Sang Sang (116 HK)

Transcription

1 Equity Research Consumer Discretionary Chow Sang Sang (116 HK) Hold (maintained) Target price: HK$ H16 China sales outperformed peers; still cautious on HK market Maintain Hold We revise down our FY16/17 net profit estimates by 5/14% primarily to factor in lower HK & Macau/China SSS assumptions, now forecasting 16%/2% core net profit declines in FY16/17. We lower our TP from HK$14.80 to HK$14.00, still based on 13x FY16E P/E, its historical average. We continue to prefer CSS to Chow Tai Fook (1929 HK, Underperform) and Luk Fook (590 HK, Underperform) given its better-managed China business. Albert Yip, CFA SFC CE No. ADT GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong China sales outperformed peers CSS continued to deliver stronger-than-peers sales in China in 1H16 its 5% SSS decline was better than the 20-22% declines at CTF/LF. More importantly, high single-digit growth for gem-set SSS also beat CTF (-18%) and LF (-2%). We attribute this to CSS s product segmentation and differentiation, its purely directlyoperated retail network, and smaller network in terms of store number. China contributed 55%/90%+ of its jewelry retail business s revenue and operating profit in 1H16. Outlook 1) SSS was solidly in negative territory in July and Aug due to the rush to buy gold last year. On the positive side, China gem-set SSS achieved double-digit growth in July and Aug (vs high single-digit growth in 1H16). 2) Lease renewals for most of its large shops will be in 4Q16 and FY17. We expect the rental expenses ratio to fall in FY17. Store network The company closed two stores in HK in 1H16. Looking into 2H16, the company expects to reduce floor area as management is still cautious on the HK market. In China, the company added eight new stores in 1H16, and has plans for 22 new stores in 2H16, with several re-fittings and closures. Results highlights 1H16 net profit fell 50% YoY to HK$364m, towards the high-end of its guidance for a 50-60% decline. Excluding the one-off gain from the disposal of HKEX shares in 1H15, we estimate core net profit fell 25% YoY. Revenue dropped 16% YoY, below our expectation, driven by 26%/5% SSS declines in HK & Macau and China. GM rose by a strong 3.9pp to 27%, driven by a surge in the gold price, a higher sales mix contribution from fixed gold price products and gem-set products (+2ppt to 35%). OP dropped 19% YoY on a 2.8pp increase in SG&A expenses ratio and Rmb81m fair value loss for derivatives. Stock performance 10% 0% -10% - -30% -40% Aug-15 Nov-15 Feb-16 May-16 HSI CSS Source: Bloomberg Key data Aug 30 close (HK$) Shares in issue (m) Major shareholder Chow Kwen Lim (20.13%) Market cap (HK$ bn) M avg. vol. (m) W high/low (HK$) 16.20/10.80 Source: Bloomberg Stock valuation Year-end Dec Turnover (HK$ m) Net profit (HK$ m) Sources: Company data, GF Securities (HK) Core profit (HK$ m) Core EPS (HK$) EPS YoY (%) P/E Yield (%) BPS (HK$) ,142 1,218 1, ,246 1,082 1, ,069 1, E 16, E 16, P/B ROE (%)

2 Figure 2: SSS trend for jewelry companies Source: Company data, GF Securities (HK) estimates Figure 1: 1H16 results review Y/E Dec (HK$ m) 1H16 1H15 % change Revenue 7,801 9,245-16% - jewelry retail 6,871 8,165-16% - other businesses 930 1,080-14% Cost of sales (5,692) (7,111) - Gross profit 2,109 2,134-1% Other income % Selling and distribution expenses (1,300) (1,356) -4% Administrative expenses (256) (229) 12% Other gains/(losses) (94) % Operating profit % Finance income % Finance costs (10) (16) -35% Others na Share of profit/(loss) of associates % Profit before tax % Tax expense (134) (132) 1% Profit after tax % Net profit % Core profit % EPS (HK$) % DPS (HK$) % Margin & Ratio (%) Gross margin Operating margin (0.3) SG&A expense/revenue Net margin (3.2) Effective tax rate Payout ratio (3.1) 1H16 1H15 change Inventory days A/C receivables days A/C payable days 3 4 (1) Net gearing (%) (12) Source: Company data Calendar Year 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 SSS trend Chow Tai Fook -2% 47% 18% 10% 4% -40% - -18% -16% -15% -3% -15% -26% na China -5% 31% 11% 13% 15% -28% -12% -15% -9% -7% 6% -6% -25% -17% HK and Macau 4% 67% 26% 7% -9% -50% -29% -21% -26% -24% -13% -23% -27% - Luk Fook na na na 9% -10% -54% -21% -7% - -18% -6% -25% -27% -24% China 14% 117% 70% 36% 1% -52% -30% -11% -5% 0% 2% -10% -19% -24% HK and Macau 29% 83% 30% 6% -12% -54% - -6% -22% -19% -7% -26% -28% -24% Chow Sang Sang China % --- na FY13: --- -ve --- -ve mid sd flat % ve low-teen +ve low sd ve 5% HK and Macau % ---- na FY13: 33% --- -ve 32% --- -ve dd -ve sd ve 12% ve low sd -ve high-teen ve 26% SSS volume growth Chow Tai Fook China na na na na 36% -24% -13% -16% -12% -10% 13% -7% -25% - HK and Macau na na na na 15% -44% -22% -13% -28% -30% -18% -21% -29% -24% Luk Fook gold SSS volume growth China na na na na 26% -54% -34% -10% -5% 2% 10% -10% -29% -37% HK and Macau na na na na -1% -63% -24% 1% -18% -13% 21% -19% -24% -29% RSV trend Chow Tai Fook China na na na na na -24% -2% -6% -3% 0% 9% -6% -25% -13% HK and Macau na na na na na -43% - -16% -21% -16% -5% - -26% -22% SSS trend by category Chow Tai Fook Gold products 8% 77% 32% 14% -2% -56% -33% -21% -19% -12% 13% -14% -27% na China na na na na na -61% -29% -28% -10% -2% 22% -3% -29% -22% HK and Macau na na na na na -51% -37% -14% -32% -25% 4% -24% -25% -12% Gem-set jewellery -16% 7% 3% 8% 14% 2% 0% -12% -6% -10% -13% -12% -23% na China na na na na na mid sd ve low sd 3% -4% -4% -7% -24% -12% HK and Macau na na na na na -ve low sd -ve mid sd -22% -17% -16% -24% -16% -22% -27% Luk Fook Gold and platinum products na 130% 56% 19% -15% -65% -28% -6% -21% -18% 5% -25% -28% -26% China na na na 40% -3% -59% -38% -16% -10% -7% -1% -14% -27% -29% HK and Macau na na na 15% -18% -65% -27% -5% -22% - 6% -26% -28% -25% Gem-set jewellery na 21% 10% -4% -2% -19% -6% -8% - -18% -26% -26% -25% -19% China na na na -6% 23% 5% 14% 13% 11% 23% 13% 2% 4% -8% HK and Macau na na na 28% -3% - -7% -9% -22% -19% -28% -27% -27% - 2

3 Figure 3: SSS trend Figure 4: Store number trend 40% 30% 10% 0% -10% - -30% 33% 9% 6% 3% 5% -6% -12% -5% -11% -23% -23% FY12 FY13 FY14 FY15 FY16E FY17E % % % 31014% % 8% 7% 4% 5% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 25% 15% 10% 5% 0% China HK & Macau Total stores Growth (%) Sources: Company data, GF Securities (HK) Figure 5: Key assumptions (HK$ m) FY13 FY14 FY15 FY16E FY17E Total revenue 25,142 19,246 19,069 16,053 16,221 growth % 37.7% -23.5% -0.9% -15.8% 1.0% - Retail revenue - HK and Macau 12,363 9,889 8,930 6,671 6,248 growth % 35.8% -20.0% -9.7% -25.3% -6.3% store growth (%) 0.0% 5.2% 23.0% -5.3% -1.4% SSS (%) 33.0% -23.0% -11.0% -23.0% -5.0% - Retail revenue - mainland China 7,451 6,908 7,689 7,307 7,900 growth % 32.2% -7.3% 11.3% -5.0% 8.1% store growth (%) 8.0% 8.8% 6.5% 6.4% 6.0% SSS (%) 20.0% -12.0% 6.0% -6.0% 3.0% - Retail revenue - Taiwan growth % 5.3% 5.4% -23.2% -12.0% -3.0% store growth (%) 5.0% 4.8% 4.5% 0.0% 0.0% - Wholesale revenue 5,001 2,108 2,244 1,907 1,907 - Securities and futures brokerage Other businesses Gross profit 4,208 4,295 4,228 4,073 3,999 Gross margin (%) 16.7% 22.3% 22.2% 25.4% 24.7% Product mix (%) gold 69.0% 64.0% 65.0% 62.0% 60.6% non-gold jewelry 27.0% 32.0% 32.0% 35.0% 36.5% watches 4.0% 4.0% 3.0% 3.0% 2.9% Selling expenses ratio (%) 9.6% 13.2% 14.2% 15.9% 15.3% Administrative expenses ratio (%) 1.7% 2.5% 2.7% 3.5% 3.7% Operating profit 1,463 1,306 1, growth % 21.6% -10.8% -15.9% -10.1% -1.8% OP margin (%) 5.8% 6.8% 5.8% 6.1% 6.0% Net profit 1,218 1,082 1, Core profit 1,169 1, growth % 23.4% -10.7% -16.6% -16.1% -2.0% Core profit margin (%) 4.6% 5.4% 4.6% 4.5% 4.4% Payout ratio (%) 38% 38% 37% 38% 38% Sources: Company data, GF Securities (HK) estimates 3

4 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Figure 6: P/E band (HK$) x 17x 13x 9x 5x 0 Sources: Bloomberg, GF Securities (HK) estimates 4

5 Figure 7: Financial statements Income Statement Balance Sheet Year end Dec 31 (HK$ m) FY13 FY14 FY15 FY16E FY17E Year end Dec 31 (HK$ m) FY13 FY14 FY15 FY16E FY17E Revenue 25,142 19,246 19,069 16,053 16,221 Fixed assets Cost of sales (20,935) (14,951) (14,841) (11,980) (12,221) PPE Gross profit 4,208 4,295 4,228 4,073 3,999 Investment properties Prepaid land lease payments Other income Investment in an associate Selling & distribution expenses (2,403) (2,531) (2,709) (2,552) (2,482) Others Administration expenses (437) (478) (518) (565) (599) AFS financial assets Other gains/(losses), net 28 (31) 43 (20) 0 Deferred tax assets Operating profit 1,463 1,306 1, ,926 2,214 2,130 2,110 2,097 Net finance cost (3) Current assets One-off items Inventories 6,866 7,385 6,676 6,737 6,941 FV change of investment properties A/C receivables Share of profit/(loss) of JV Deposits and prepayments Profit before tax 1,512 1,362 1,368 1, Others Income tax expense (288) (277) (238) (270) (271) Receivables arising from securities and futures brokerage Non-controlling interests (5) (3) Cash held on behalf of clients Net profit 1,218 1,082 1, Cash and cash equivalents 1,009 1,009 1,621 1,908 2,091 Core net profit 1,169 1, ,416 10,029 9,881 10,077 10,473 Core EPS (HK$) Total assets 11,342 12,242 12,011 12,187 12,570 Growth rates (%) Revenue 38 (23) (1) (16) 1 Current liabilities Core profit 23 (11) (17) (16) (2) A/C payables Core EPS 23 (11) (17) (16) (2) Other payables Payables arising from securities and futures brokerage Margin & ratios (%) Others Gross profit margin Borrowings Operating profit margin Bullion loans 693 1, Core net profit margin Tax liabilities Effective tax rate ,718 2,908 2,380 2,241 2,171 Payout ratio Non-current liabilities Cash Flow Statement Borrowing Year end Dec 31 (HK$ m) FY13 FY14 FY15 FY16E FY17E Deferred tax liabilities Profit before tax 1,512 1,362 1,368 1, Share of (profit)/loss of JV (2) (2) (0) (0) (0) Net finance cost 3 (15) (9) (12) (16) Equity Dividend income (18) (20) (23) (22) (21) Shareholders' equity 7,935 8,647 9,078 9,492 9,945 FV gain on investment properties (38) (36) (15) 0 0 Non-controlling interests Net gain and FV gain on bullion loans and derivative financial instruments (253) (15) (128) ,018 8,647 9,078 9,492 9,945 Others (189) Depreciation and amortization Total liabilities & equity 11,342 12,242 12,011 12,187 12,570 Change of working capital (157) (751) (208) Tax paid (390) (365) (147) (254) (270) Financial Ratios Operating cash flow , Year end Dec 31 FY13 FY14 FY15 FY16E FY17E Current ratio Capex (280) (189) (172) (150) (150) Quick ratio Disposals Dividends received A/C receivable turnover days Others (31) (72) (4) 0 0 A/C payable turnover days Investing cash flow (269) (240) 71 (128) (128) Inventory turnover days Change of borrowings (235) 58 (264) (200) (100) Asset turnover Change of bullion loans (117) Total assets/total equity Dividend paid (399) (500) (413) (348) (274) Net gearing ratio net cash net cash Interest paid (29) (25) (27) (20) (19) Financing cash flow (260) (134) (821) (538) (368) Core ROE (%) Core ROA (%) Net change of cash flow Forex changes 15 (15) (40) 0 0 Sources: Company data, GF Securities (HK) estimates 5

6 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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