Equity Research Consumer Discretionary Daphne (21 HK) Hold (maintained) Target price: HK$1.7 Takeaways from company visit Maintain Hold We recently visited Daphne to gain a more in-depth insight into its 1Q16 operating and turnaround initiatives. We see key positives from the company s encouraging 1Q16 data which showed improving sales per store and overall profitability, management s determination to turn around the company, and a shortening of lead-time. However, given the high inventory level (218 days in FY15), we believe good execution is required to balance GM and inventory destocking. If the company successfully improves GM, it could boost the likelihood of a turnaround in FY16. We maintain our Hold rating and TP of HK$1.7, based on.4x FY16E P/B. Positive catalyst: improvement in profitability to continue in 2Q16 when 216 spring/summer new products are launched. Albert Yip, CFA SFC CE No. ADT599 albertyip@gfgroup.com.hk +852 3719 11 GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance 3% 2% 1% % -1% -2% -3% -4% -5% -6% -7% Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Improvement in profitability in 1Q16 Revenue from core brands declined 1-15% YoY in 1Q16, in HK dollar terms. This would be 6-11% in Rmb terms (mid single-digit SSS decline vs -2% in 4Q15) given the 4% YoY depreciation in the currency against the HK dollar in 1Q16. Considering the 15% YoY reduction in store number in 1Q16, we believe sales per store should have improved during the period due to the closure of underperforming stores and the better performance at new stores. The profitability improvement was mainly a result of the decrease in opex ratio by closing loss-making stores and downsizing the back office. The 8, reduction in headcount in FY15 was made up of 6, from factories and 2, from the back office. GM also improved slightly YoY due to a better sales mix of new products and lower production costs. Increased supply chain flexibility After the closure of factories in coastal regions in 4Q15, in-house production is now estimated to account for ~2% of total production. Given the large volume of outsourcing, the company has quite strong bargaining power over suppliers and could therefore ask for a production cost comparable to its in-house production, plus other value-added services. For example, suppliers could perform small batch production orders and deliver products to the company s regional warehouses, which could shorten production lead time by a few days and reduce logistics expenses. Inventory destocking Management plans to focus on online platforms such as VIP.com and Tmall to clear old inventories in FY16 in order to avoid heavy discounts at brick-andmortar stores. Enhancing store performance in FY16 The company closed about 15 stores in 1Q16 and will continue to close under-performing stores until SSS become flat, even if that means losing some market share. We expect the street-store ratio to continue to fall this year given this channel s overall lower profitability compared to stores in shopping malls and hypermarkets. The KPIs of frontline sales staff have been changed from meeting a basket of indicators to being focused on gross and operating profits. HSI Daphne Source: Bloomberg Key data Apr 6 close (HK$) 1. Shares in issue (m) 1649.142 Major shareholder Lucky Earn (24.3%) Market cap (HK$ bn) 1.6 3M avg. vol. (m) 1.3 52W high/low (HK$) 3.9/.93 Source: Bloomberg Stock valuation Turnover Net profit Core profit Core EPS (HK$) EPS YoY Core P/E Yield BPS (HK$) P/B ROE 213 1,447 329 358.217-63 4.6 7.7 3.1.3 7.2 214 1,356 176 173.15-52 9.4 3.4 3.1.3 3.5 215 8,379-379 -196 -.12-211 na. 2.7.4-4.1 216E 7,177-23 -23 -.1-94 na. 2.7.4 -.5 217E 7,87 34 34.2-247 48.. 2.7.4.8 Sources: Company data, GF Securities (HK) Note: Core profit excludes impairment loss for intangible assets and one-off costs incurred by rationalization initiatives
2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 Company report Figure 1: Quarterly SSS Figure 2: Store growth 2 14. 15 1 5 5. 2. 6.3 8, 7, 6, 5, 23% 297 19% 563 512 383 34 12% 318 3 285 25% 2% 15% 1% -5-1 -15-2 -25-2.5-13.7-18.1-5.4-9.5-2.4-7.5-15.9-17.7-19.7-2.2 4, 3, 2, 1, 6,369 6,319 6,42 5,62 1% 5,597 % 4,92 4,997 4,997-3% -12% -1% FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 5% % -5% -1% -15% Core brands (LHS) Licensed brands (LHS) Store growth (RHS) Sources: Company data, GF Securities (HK) Figure 3: Inventory turnover days 25 2 15 1 172 188 198 194 218 28 238 5 128 FY1 FY11 FY12 FY13 FY14 FY15 1H14 1H15 Figure 4: Store number for core brands 6,8 6,6 6,4 6,2 6, 5,8 5,6 5,4 6,469 6,581 6,564 6,319 6,266 6,234 6,311 6,42 6,388 6,221 6,2 5,2 5, 5,597 5,447 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16E 2
Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Company report Figure 5: Key assumptions FY12 FY13 FY14 FY15 FY16E FY17E Total revenue 1,529 1,447 1,356 8,379 7,177 7,87 growth % 22.8% -.8% -.9% -19.1% -14.3% -1.2% Core brands SSSG 9.% -1.4% -3.4% -18.5% -5.%.% Gross profit 6,229 5,838 5,738 4,725 4,24 4,212 Gross margin 59.2% 55.9% 55.4% 56.4% 58.6% 59.4% SG&A expenses ratio 47.1% 51.3% 53.4% 6.1% 59.% 59.1% Operating profit margin 12.7% 5.2% 2.3% -3.3%.%.8% Effective tax rate 25.4% 28.% 17.7% 25.8% 25.8% 25.8% Net profit 956 329 176 (379) (23) 34 growth % 2.4% -65.6% -46.5% -315.2% -93.8% -246.6% Core profit 963 357 176-196 -23 34 growth % 3.2% -62.9% -5.7% -211.2% -88.% -114.5% Core profit margin 9.1% 3.4% 1.7% -2.3% -.3%.5% Payout ratio 31.% 4.1% 32.8%.%.%.% Figure 6: P/B band 14 HK$ 12 1 8 6 4.3x 3.3x 2.3x 4 1.3x 2.3x Sources: Bloomberg, GF Securities (HK) estimates 3
Company report Figure 7: Financial statements Income Statement Balance Sheet Year end Dec 31 FY13 FY14 FY15 FY16E FY17E Year end Dec 31 FY13 FY14 FY15 FY16E FY17E Revenue 1,447 1,356 8,379 7,177 7,87 Fixed assets Cost of sales (4,68) (4,618) (3,654) (2,972) (2,876) PPE 1,188 1,377 1,19 1,97 1,24 Gross profit 5,838 5,738 4,725 4,24 4,212 Land use rights 55 77 8 78 75 Intangible assets 85 79 67 62 57 Other income 61 37 37 3 29 Asso & JV 8 6 4 58 58 SG&A expenses (4,395) (4,55) (4,22) (4,235) (4,186) Others 245 191 126 114 113 Operating profit 545 24 (278) (1) 55 Deferred tax assets 151 178 334 334 334 1,731 1,98 1,81 1,742 1,662 Net finance cost (19) 13 17 3 4 Other gains/(losses), net (57) (28) (265) (35) (15) Current assets Fair value change of AFS and derivatives (1) 3 16 Inventories 2,643 2,273 2,92 1,616 1,596 Share of profit of asso and JV (3) (7) (3) A/C receivables 366 327 238 224 243 Profit before tax 464 221 (512) (33) 45 Other receivables 1,64 1,552 1,475 1,39 1,51 Income tax expense (13) (39) 132 9 (12) Entrusted loans 14 3 Non-controlling interests (5) (6) 1 1 1 Income tax recoverable 69 66 66 66 Net profit 329 176 (379) (23) 34 Derivative financial instruments 16 16 16 Core profit 357 176 (196) (23) 34 Structured bank deposit 638 1,65 EPS (HK$).2.11 -.23 -.1.2 Plegded bank deposit 4 7 3 3 3 Core EPS (HK$).22.11 -.12 -.1.2 Time deposit 33 Cash and cash equivalents 699 457 1,72 1,374 1,349 Growth rates 6,91 5,753 4,962 4,689 4,783 Revenue (1) (1) (19) (14) (1) Core profit (63) (51) (211) (88) (114) Total assets 7,822 7,66 6,763 6,431 6,444 Core EPS (63) (51) (211) (88) (114) Current liabilities Margin & ratios A/C payables 1,126 1,5 983 759 735 Gross margin 55.9 55.4 56.4 58.6 59.4 Other payables 589 551 442 379 374 OP margin 5.2 2.3-3.3..8 Others 1 Core margin 3.4 1.7-2.3 -.3.5 Bank borrowings 117 96 621 621 621 Effective tax rate 28. 17.7 25.8 25.8 25.8 CB 689 681 Payout ratio 4.1 32.8... Tax payables 25 56 5 5 5 2,548 2,389 2,96 1,89 1,78 Cash Flow Statement Year end Dec 31 (HK$m) FY13 FY14 FY15 FY16E FY17E Non-current liabilities Others Profit before tax 464 221 (33) 45 CB Share of profit of asso and JV 3 7 Deferred tax liabilities 24 19 18 18 18 Depreciation and amortization 313 38 281 26 24 19 18 18 18 Net finance cost 19 (13) (3) (4) Others 76 38 Equity Change of working capital (155) 22 288 (148) Shareholders' equity 5,44 5,58 4,463 4,419 4,463 Tax paid (288) (113) (1) Non-controlling interests 26 194 187 185 184 Operating cash flow 433 668 na 533 15 5,25 5,252 4,649 4,64 4,647 Capex (343) (518) (32) (18) (18) Total liabilities & equity 7,822 7,66 6,763 6,431 6,444 Interest received 28 42 12 14 Others 2 (54) Financial ratios Change in entrusted loans (14) 99 Year end Dec 31 FY13 FY14 FY15 FY16E FY17E Change in structured bank deposit (633) (436) Change in pledged deposit (4) (2) Current ratio 2.4 2.4 2.4 2.6 2.7 Change in time deposit (33) 32 Quick ratio 1.4 1.5 1.4 1.7 1.8 Investing cash flow (1,88) (783) na (222) (166) Inventory turnover days 198 194 218 228 24 A/C payable turnover days 79 84 99 17 95 Change of borrowings 11 (21) A/C receivable turnover days 12 12 12 12 12 Repayment of CB Others (13) (1) Asset turnover 1.3 1.4 1.2 1.1 1.1 Interest paid (22) (2) (9) (9) Total assets/total equity 1.5 1.5 1.5 1.4 1.4 Dividend paid (247) (91) Net cash (HK$m) 568 752 455 757 731 Share issue 7 Financing cash flow (165) (114) na (9) (9) Core ROE 7.2 3.5-4.1 -.5.8 Core ROA 4.8 2.3-2.7 -.4.5 Net change of cash flow (82) (229) na 32 (26) Forex changes 25 (13) na 4
Company report 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 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% 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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