China Lilang (1234 HK)

Transcription

1 HONG KONG EQUITY Investment Research Ethel Ng H12 Results Review China Lilang (1234 HK) Strong growth amidst the storm BUY Target Price Previous Price HKD7.94 HKD8.73 HKD5.36 RETAIL Lilang is a leading mainstream menswear brand in China. With its core brand, LILANZ and the younger brand L2, Lilang has over 3,268 retail stores operating under its franchise model. Stock Statistics Bloomberg Ticker 1234.HK Share Capital (m) 1,200.7 Market Cap (HK$m) week H L Price (HK$) Avg turnover (3m) US$m 2.4 Avg Vol (3m) 000 1,503.5 YTD returns -18.5% OSK vs. consensus (RMB) OSK Consensus Diff 2F F Major Shareholders Xiao Sheng Intl Ming Lang Investment 6.01 Fidelity International 4.98 Share Performance Month Absolute Relative 1m 5.74% m % m % m % month Share Price Performance Feb Mar Apr May Jun Jul Aug-12 Lilang reported 1H12 net profit rose 21.8% yoy to RMB 278m, 5% above our forecast of HKD264m and 8% above Bloomberg consensus of HKD257m. The board recommended an interim dividend of 13 HK cents (1H11:11 HK cents) with a special dividend of 6 HK cents (1H11: 5 HK cents), implying a dividend payout ratio of 67%. The strong earnings growth was mainly driven by 1) ASP increase of 6.1% 2) sales volume increase of 14.5% 3) Sub-brand L2 grew 128% yoy 4) improvement in GPM from 36.4% in 1H11 to 39.7% in 1H12. Despite the better-than-expected 1H numbers, we keep our 2-14F forecasts unchanged to be conservative. We continue to like Lilang s leading position in China s mainstream menswear sector, the counter is currently trading at an undemanding 7.4x 2F with an 8.7% dividend yield, we reiterate our BUY rating on the counter with a lowered TP of HKD7.94 (from HKD8.73), tagging to 11x 2F P/E (from 12x), at a discount to its post IPO mean of 12.9x. 1H12 results review. Lilang s 1H12 revenue and net profit rose 22% and 21.8% respectively, while GPM improved by 3.3ppt to 39.7%, thanks to Lilang s effective product mix enhancement. During the period, LILANZ s ASP and sales volume grew 6.1% and 14.5% respectively, and L2 continued to record a strong growth of 128% yoy. 1H SSSG remained at a healthy 12.4% yoy, according to management, July SSSG edged down to 10.5%. Focus on inventory management in 2H. Lilang s inventory days have increased to 59 days from 45 days at end 1. Management attributed the increase to the earlier schedule of fall/winter trade fairs and product delivery. On channel inventory, the sellthru ratio of spring and summer 12 products was >70% and >60% respectively, 10% below last year s 80%/70% due to aggressive ordering before. We believe Lilang s inventory is still at acceptable level given the weak retail sentiment from 4Q11 onwards. Lilang will continue to focus on supply chain management through 1) reducing channel inventory with clearance sales in old stores 2) followed by a new round of store upgrades to further enhance its brand image and stimulate sales, and 3) implementation of the ERP system to improve control of channel inventory to maintain sales growth -1,550 LILANZ standalone stores are now connected to the ERP system with the aim to connect all stores by end of this year What s going to happen in 2H? Lilang announced its trade fair results with fall and winter trade fair orders up 16% and 11.5% for LILANZ respectively including a single digit ASP growth from product mix upgrade. Lilang has cut its store opening target prudently to for LILANZ (Previous: 250) and 80 for L2 (Previous: 150), which we believe is sensible given the uncertain economic environment. The slower-thanexpected opening of L2 is mainly due to the brand s focus in T1/T2 cities. Management maintains its LT target for L2 to reach 15% of revenue n 3-5 years (1H12: 6.4%) Trading at an attractive 7.4x 2F with 8.7% yield. The counter is currently trading at 7.4x 2F with an attractive yield of 8.7%. We leave our forecasts unchanged but lower our TP to HKD7.94, tagging to 11x 2F P/E (12x previously), on lower trading multiple of HK/ China retail plays and at approx. 15% discount to Lilang s post-ipo mean of 12.9x. FYE Dec (RMBm) 0A 1A 2F 3F 4F Sales (RMBm) 2,053 2,708 3,353 4,062 4,800 Profit (RMBm) YoY change Reported (RMB) YoY change DPS (RMB) Yield ROE debt/equity Source: Company data & OSK Research estimates. OSK Research See important disclosures at the end of this report 1

2 1H12 RESULTS REVIEW Figure 1: 1H12 Results OSK estimates RMBm 1H11A 1H12A 1H12 Difference Turnover 1,032 1,259 1,234 2% yoy change 31.2% 22.0% COGS (656) (760) (744) Gross Profit Gross margin 36.4% 39.7% 39.7% Selling expenses (96) (105) (112) Administrative expenses (42) (51) (45) Other revenue Other costs (0) (0) (3) Operating Profit % EBIT margin 24.0% 27.3% 27.7% Finance costs Pre-tax profits Tax (40) (96) (88) Effective tax rate 15.0% 25.6% 25.0% Profit % margin 22.1% 22.1% 21.4% yoy change 63.1% 21.8% (RMB) % yoy change 31.2% 22.0% Interim DPS (HKD) Special DPS (HKD) Total DPS (HKD) % yoy change 18.8% Payout ratio 69% 67% 67% Source: Company, OSK Figure 4: Post-IPO 1-year Forward P/E band Share Price (HK$) SD = 20.1x SD = 16.5x Mean = 12.9x SD = 9.3x SD = 5.6x Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Source: OSK, Bloomberg OSK Research See important disclosures at the end of this report 2

3 Figure 5: Peer comparables HK/China Apparel Company Ticker Price Mkt cap 3-mth avg t/o FY2 YoY% FY2 YoY% 3-Yr Cagr PEG Div yld Div yld P/B P/B China Lilang Ltd 1234 HK HSI 20, (2.8) HSCEI 9, CSI300 2, Adjusted sector avg* Bosideng Intl 3998 HK , (1.0) Trinity Ltd 891 HK , China Outfitters 1146 HK I.T Ltd 999 HK Ygm Trading 375 HK (55.6) 21.5 (11.2) N/A Evergreen Intern 238 HK Gross EV/ EV/ margin ROE ROE Sh px Sh px Company Rev NP Ebitda Ebitda Cur Yr gearing gearing Unlev beta margin ROIC 1-mth % 3-mth % China Lilang Ltd (16.8) HSI HSCEI (3.0) CSI (4.9) (10.9) Adjusted sector avg* (4.2) Bosideng Intl 1, N/A 0.0 N.A Trinity Ltd (10.5) China Outfitters N/A N/A 0.0 N/A N.A (1.3) (5.1) I.T Ltd Ygm Trading N/A 5.0 N/A N/A N.A (2.9) (6.2) Evergreen Intern (1.7) (5.7) Source: OSK, Bloomberg OSK Research See important disclosures at the end of this report 3

4 Financial Summary (Year ended Dec) Valuation and Growth Financial Ratios 2010A 2011A 2012F 2013F 2014F 2010A 2011A 2012F 2013F 2014F Valuation Ratios Gross margin (Basic ) Operating margin Dividend yield margin P/BV Payout ratio Total debt/equity Growth debt/equity Revenue Current ratio Operating profit Inventory T/O (days) profit AR T/O (days) AP T/O (days) Per Share Data Return on asset RMB 2010A 2011A 2012F 2013F 2014F Return on equity (Basic) DPS CFPS Balance Sheet (RMBm) BV/S A 2011A 2012F 2013F 2014F Fixed assets Income Statement Others RMBm 2010A 2011A 2012F 2013F 2014F Non-current assets Revenue 2,053 2,708 3,353 4,062 4,800 LILANZ 2,012 2,579 3,132 3,708 4,279 Inventories L AR ,040 1,225 COGS (1,275) (1,653) (2,011) (2,426) (2,850) Others Gross Profit 778 1,055 1,342 1,635 1,950 Cash 847 1,241 1,268 1,318 1,472 Current assets 2,144 2,185 2,386 2,722 3,096 Selling expenses (224) (274) (362) (443) (524) Administrative expenses (81) (89) (97) (107) (119) AP other income Other current liabilities EBIT ,102 1,324 Bank loans Current liabilities finance costs PBT ,145 1,371 Bank loans Tax (69) (130) (237) (321) (384) Deferred tax profit Others Non-current liabilities EBITDA ,134 1,360 EBITDA margin % 24% 27% 27% 28% 28% Total assets 2,408 2,595 2,887 3,263 3,683 Shareholder's equity 1,860 2,177 2,029 2,261 2,572 (RMB) Share capital change YoY Reserves 1,754 2,071 1,923 2,155 2,466 DPS (RMB) Cash Flow (RMBm) F 2013F 2014F PBT ,145 1,371 Depreciation and amort' interest Income (11) (44) (50) (43) (47) Changes in WC 68 (405) (122) (220) (178) Income tax paid (49) (92) (237) (321) (384) Others Operating Capex (49) (120) (120) (50) (50) Interests received Others (272) Investing (311) 462 (70) (7) (3) FCF Issue of shares/options Dividends paid (192) (300) (462) (536) (642) chg in bank loans (1) Others (0) (0) Financing (192) (300) (462) (536) (642) change in Opening ,241 1,268 1,318 Adjustment (11) (2) Closing 847 1,241 1,268 1,318 1,472 OSK Research See important disclosures at the end of this report 4

5 OSK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclaimer This report is published by OSK Securities Hong Kong Limited ( OSKSHK ), a subsidiary of OSK Investment Bank Berhad ( OSKIB ). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This report is prepared for internal circulation. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addresses only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or financial advice. OSKSHK and OSKIB accept no liability whatsoever for any direct or consequential loss arising from any use of this report or further communication given in relation to this report. This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. This report is for the use of intended recipients only and may not be reproduced, distributed or published for any purpose without prior consent of OSKSHK. OSKSHK, OSKIB and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other services for the company covered in this report. OSKSHK, OSKIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company. OSKSHK, OSKIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. Risk Disclosure Statements The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. OSHSHK does not maintain a predetermined schedule for publication of research and will not necessarily update this report All Rights Reserved. Published and printed by : OSK SECURITIES HONG KONG LIMITED (A subsidiary of OSK Investment Bank Berhad, Malaysia) Kuala Lumpur Hong Kong Singapore Malaysia Research Office OSK Research Sdn. Bhd. 6 th Floor, Plaza OSK Jalan Ampang Kuala Lumpur Malaysia Tel : +(60) Fax : +(60) Hong Kong Office OSK Securities Hong Kong Ltd. 12 th Floor, World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) Fax : +(852) Singapore Office DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore Tel : +(65) Fax : +(65) Jakarta Shanghai Phnom Penh PT OSK Nusadana Securities Indonesia Plaza CIMB Niaga, 14th Floor, Jl. Jend. Sudirman Kav.25, Jakarta Selatan 12920, Indonesia. Tel : (6221) Fax : (6221) Shanghai Office OSK (China) Investment Advisory Co. Ltd. Room 6506, Plaza 66 No.1266, West Nan Jing Road Shanghai China Tel : +(8621) Fax : +(8621) OSK Indochina Securities Limited No. 263, Ang Duong Street (St. 110), Sangkat Wat Phnom, Khan Daun Penh, Phnom Penh, Cambodia. Tel: (855) Fax: (855) OSK Research See important disclosures at the end of this report 5