Hengdeli Holdings (3389 HK) 9 October 2013

Transcription

1 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Vol m Company Update, Hengdeli Holdings (3389 HK) Buy (Maintained) Consumers Staples - Retail Target Price: HKD2.25 Market Cap: USD1,239m Price: HKD2.00 Still Expecting Better Times Ahead Source: Bloomberg Avg Turnover (HKD/USD) Hengdeli Holdings (3389 HK) Price Close Relative to Hang Seng Index (RHS) m/2.05m Cons. Upside (%) -7.0 Upside (%) wk Price low/high (HKD) Free float (%) 48 Shareholders (%) Zhang Yu Ping 36.3 Swatch Group 9.1 LVMH Group 6.4 Shariah compliant Eugene Mak [email protected] Macro Risks 3 Growth. 3 Value 0 During our recent NDR with Hengdeli, management indicated that its July/Aug mid-end retail sales grew by a mid-teen % y-o-y but its highend retail sales dipped by a high-teen % y-o-y, in line with 1H13 while HK/Macau saw sales up high single digit % y-o-y. Hengdeli now expects a turnaround in 2H14. We maintain BUY, TP: HKD2.25, as we make no changes to our earnings forecasts and target FY14F P/E of 12x. Stable 2H13F, turnaround expected in 2H14. In July/Aug, China s midend retail sales grew by a mid-teen % y-o-y, while high-end retail sales dipped by a high-teen % y-o-y, in line with 1H13. HK/Macau had a high single-digit % y-o-y growth (1H13: 14% y-o-y). 2H13 GPM is expected to remain in line with that of 1H13. Hengdeli expects a recovery by 2H14. Negative impact from ban on forced shopping tours. We expect the ban on forced shopping tours in HK to have a direct negative impact on the group s 70% interest in Harvest Max (HM). Management said it will be able to provide more updates towards end-october. We leave our HM forecasts unchanged pending further updates on its operations. Despite HM s high SG&A/turnover of 64% (16% of the group s 1H13 SG&A), its impact on group earnings may not be significant as most of its SG&A is from commission expense to tours (linked to HM s turnover). Management has yet to disclose HM s commission rate. SG&A growth to stabilise after FY13F. In 1H13, selling expense (excluding HM) grew ~17% y-o-y (+42% y-o-y including HM), as ~70% of its HK stores had their rental contract renewed and saw rental cost increasing by ~40%/store. Starting FY14F, SG&A will stabilise as the group will not face rental pressure in China, while most of its HK stores will not have rental renewal for another three years, with most of HM s SG&A coming from commission expense. Maintain BUY with HKD2.25 TP on expected FY14F turnaround. We leave our TP unchanged with a target FY14F P/E of 12x, and maintain BUY in view of the 13% upside potential. Although we remain positive on Hengdeli s growth prospects as Greater China s largest watch retailer, we retain our target P/E and earnings estimates pending further operational details on HM from Hengdeli. Forecasts and Valuations Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F Total turnover (CNYm) 11,375 12,120 13,520 15,091 17,610 Reported net profit (CNYm) Recurring net profit (CNYm) Recurring net profit growth (%) 43.1 (0.5) (21.1) Core EPS (CNY) DPS (CNY) Dividend Yield (%) Core P/E (x) Return on average equity (%) P/B (x) P/CF (x) EV/EBITDA (x) Net debt to equity (%) Our vs consensus EPS (%) (15.5) (11.8) 2.7 See important disclosures at the end of this report Powered by EFA TM Platform

2 Hengdeli Holdings (3389 HK) Improving operating CF going forward. Hengdeli expects operating cash flow (CF) to improve by FY13F (1H13 operating CF: CNY177m outflow). We now expect operating CF to reach CNY45m in FY13F, and continue to improve going forward as inventory days shorten (increased contribution of mid-end watches which have a higher turnover rate) and as EBIT begins to recover. HKD2.2bn CB refinancing funded by senior note issued in January. Hengdeli aims to pay back all or part of its HKD2.2bn convertible bonds (CB) on 22 Oct 2013 (effective interest of 5.0% due in 2015), refinanced by a USD350m senior note issued in Jan 2013 (6.25% per annum maturing in 2018). Hengdeli explained that the early refinance is due to the uncertainty in the future interest rate outlook. Management expects no further borrowing needs from now until end-fy14f. Net gearing to increase to 33% in FY13F and decline from FY14F. Due to the weak operating CF in FY13F (CNY45m), we now expect net gearing to increase from 22% in FY12 to 33% in FY13F. However, as we expect operating CF to gradually improve, coupled with the company s undemanding capex needs, we project FY14F/15F net gearing to decline to 29% and 23% respectively. Finance cost to significantly increase in FY13F, but decline in FY14F. As the CBs will not be paid off until 22 Oct, the group will incur interest expenses from CBs (a 5% effective interest) for the first 10 months of FY13F, as well as from the senior notes issued in January (6.25% per annum) for the entire FY13F. Hence, we expect FY13F interest expense to increase to CNY309m (effective interest rate of 9.5%) vs. 1H12:CNY266m (effective interest rate of 6.4%). However, as there will be no more CB expenses from FY14F onwards and no new bank borrowings, Hengdeli s interest expense would decline to CNY225m (effective interest rate of 6.5%) for FY14F and FY15F. See important disclosures at the end of this report 2

3 Share Price (HKD) Hengdeli Holdings (3389 HK) Figure 1: Hengdeli s five-year historical forward P/E band SD = 22.3x +1SD = 18.1x 3.00 Mean = 14.0x SD = 9.9x SD = 5.7x 0.00 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Source: RHB estimates, Bloomberg Figure 2: Valuation comparables Hong Kong-listed jewellery and watch retailers Company Ticker Price Mkt cap (USDm) 3-mth avg t/o (USDm) P/E Hist EPS FY1 EPS FY2 (x) P/E FY1 (x) P/E FY2 (x) y-o-y% y-o-y% 3-Yr EPS CAGR (%) PEG (x) Div yld Div yld FY1 Hist (%) (%) P/BV Hist (x) Hengdeli Holding 3389 HK , (21.1) HSI 23, (3.2) HSCEI 10, CSI300 2, Adjusted sector avg* Chow Tai Fook Je 1929 HK , Chow Sang Sang 116 HK , Luk Fook Hldgs I 590 HK , Emperor Watch & 887 HK (16.7) Oriental Watch 398 HK Stelux Hldg Intl 84 HK P/BV FY1 (x) Figure 3: Valuation comparables Hong Kong-listed jewellery and watch retailers (continued) Company Rev Hist (USDm) NP Hist (USDm) EV/ EV/ Ebitda Ebitda Cur Hist Yr Net gearing Hist (%) Net gearing FY1 (%) Unlev beta Gross margin Hist (%) Net margin Hist (%) ROIC Hist (%) ROE Hist (%) ROE FY1 (%) Sh px 1-mth % Hengdeli Holding 1, HSI HSCEI CSI Adjusted sector avg* Chow Tai Fook Je 7, Chow Sang Sang 2, Luk Fook Hldgs I 1, (4.2) 42.5 Emperor Watch & Oriental Watch Stelux Hldg Intl (0.4) 8.5 * N/A entries excl. from calculations of averages Source: RHB estimates, Bloomberg Based on 8 October closing prices Sh px 3-mth % See important disclosures at the end of this report 3

4 Hengdeli Holdings (3389 HK) Figure 4: Hengdeli's semi-annual results breakdown and forecasts Actual (CNYm) FY end-dec 1H12 2H12 1H13 2H13F FY13F Total turnover 5,750 6,371 6,294 7,226 13,520 y-o-y change 6.3% 6.7% 9.5% 13.4% 11.6% - China Retail 2,825 2,803 2,852 2,904 5,756 y-o-y change 8.8% 7.3% 1.0% 3.6% 2.3% % of total turnover 49% 44% 45% 40% 43% - HK/Macau Retail 1,415 1,699 1,593 1,895 3,488 y-o-y change -2.4% -0.5% 12.6% 11.5% 12.0% % of total turnover 25% 27% 25% 26% 26% - Taiwan Retail y-o-y change -3.0% -3.9% -9.4% -11.3% -10.4% % of total turnover 2% 2% 1% 1% 1% - Wholesale 1,284 1,830 1,361 1,944 3,305 y-o-y change 11.1% 31.2% 6.0% 6.2% 6.1% % of total turnover 22% 29% 22% 27% 24% - After-sales operations y-o-y change 22.2% -33.3% -10.3% 10.2% -1.9% % of total turnover 2% 1% 2% 1% 2% - Harvest Max y-o-y change % of total turnover - - 5% 4% 4% COGS (4,214) (4,752) (4,621) (5,370) (9,991) Gross Profit 1,536 1,619 1,673 1,856 3,529 y-o-y change 10.3% 10.5% 9.0% 14.6% 11.9% Gross margin 26.7% 25.4% 26.6% 25.7% 26.1% Selling expenses (710) (842) (1010) (1,162) (2,173) Administrative expenses (148) (208) (133) (187) (320) Other costs Other income Operating Profit ,126 y-o-y change 4.6% 6.4% -17.8% -13.1% -15.6% Operating margin 12.6% 9.5% 9.5% 7.3% 8.3% Finance costs (136) (131) (156) (153) (309) Finance income Share results from JV Exceptional items 140 (74) (62) 0-62 Pre-tax profits Tax (158) (128) (117) (90) (207) Effective tax rate 20.4% 27.8% 27.9% 22.0% 25.0% Minority interest (51) (39) (30) (31) (61) Reported net Profit y-o-y change 25.6% -20.3% -51.6% -1.3% -34.4% Recurring net Profit y-o-y change -5.6% 6.2% -21.0% -21.2% -21.1% Recurring net margin 7.4% 5.7% 5.3% 4.0% 4.6% See important disclosures at the end of this report 4

5 Hengdeli Holdings (3389 HK) Figure 5: Major forecast parameters (CNYm) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F Total turnover 11,375 12,120 13,520 15,091 17,610 y-o-y change 38.5% 6.6% 11.6% 11.6% 16.7% China Retail Operations China Turnover 5,210 5,628 5,756 6,401 7,378 y-o-y change 38.2% 8.0% 2.3% 11.2% 15.3% % of total turnover 45.8% 46.4% 42.6% 42.4% 41.9% Stores High-end net additions 3 (4) (10) - - Mid-end net additions Subtotal net additions High-end retail turnover 2,337 2,116 1,502 1,390 1,487 y-o-y change NA -9.5% -29.0% -7.5% 7.0% % of total turnover 20.5% 17.5% 11.1% 9.2% 8.4% Mid-end retail turnover 2,873 3,512 4,255 5,011 5,891 y-o-y change NA 22.2% 21.2% 17.8% 17.6% % of total turnover 25.3% 29.0% 31.5% 33.2% 33.5% SSSG High-end NA -15% -19% 7% 7% Mid-end NA 8% 1% 7% 7% Gross margin 31.7% 33.9% 32.0% 33.0% 33.0% HK/Macau Retail Operations HK/Macau Turnover 3,157 3,114 3,488 3,802 4,659 y-o-y change 30.9% -1.4% 12.0% 9.0% 22.5% % of total turnover 27.8% 25.7% 25.8% 25.2% 26.5% Stores (high-end only) net additions 3 3 (3) 3 - SSSG 7% -16% 11% 10% 10% Gross margin 23.7% 24.2% 22.0% 22.0% 22.5% Taiwan Retail Operations Taiwan Retail turnover y-o-y change 15.3% -3.4% -10.4% 8.1% 4.0% % of total turnover 2.0% 1.8% 1.4% 1.4% 1.2% SSSG -14% -12% -14% 4% 4% Gross Margin 33.6% 32.2% 33.6% 33.6% 33.6% Wholesale Operations 2,551 2,925 3,305 3,814 4,394 y-o-y change 53.5% 14.7% 13.0% 15.4% 15.2% % of total turnover 22.4% 24.1% 24.4% 25.3% 25.0% Gross Margin 11.8% 11.6% 11.6% 11.6% 11.6% After-sales Operations y-o-y change 30.9% 1.6% -12.0% 14.8% 14.0% % of total turnover 2.1% 2.0% 1.6% 1.6% 1.6% Gross Margin 35.3% 37.2% 34.1% 33.8% 33.8% Harvest Max y-o-y change NA NA NA 10.0% 10.0% % of total turnover 0.0% 0.0% 4.2% 4.1% 3.9% Gross Margin 0.0% 0.0% 70.6% 70.6% 70.6% See important disclosures at the end of this report 5

6 Hengdeli Holdings (3389 HK) Financial Exhibits Profit & Loss (CNYm) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F Total turnover 11,375 12,120 13,520 15,091 17,610 Cost of sales (8,518) (8,966) (9,991) (11,107) (12,966) Gross profit 2,857 3,154 3,529 3,984 4,644 Gen & admin expenses (369) (356) (320) (365) (406) Selling expenses (1,325) (1,552) (2,173) (2,503) (2,797) Other operating costs Operating profit 1,265 1,334 1,126 1,207 1,549 Operating EBITDA 1,340 1,447 1,241 1,325 1,674 Depreciation of fixed assets (72) (107) (110) (111) (118) Amortisation of intangible assets (3) (6) (6) (7) (7) Operating EBIT 1,265 1,334 1,126 1,207 1,549 Net income from investments (1) Interest income Interest expense (178) (266) (309) (225) (225) Exceptional income - net (62) - - Pre-tax profit 1,198 1, ,042 1,386 Taxation (280) (285) (207) (250) (333) Minority interests (103) (90) (61) (76) (101) Profit after tax & minorities Reported net profit Recurring net profit Cash flow (CNYm) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F Operating profit 1,265 1,334 1,126 1,207 1,549 Depreciation & amortisation Change in working capital (873) (782) (858) (351) (436) Other operating cash flow 2 (3) (39) Operating cash flow ,005 1,270 Dividends received (28) (38) (45) (55) (65) Tax paid (247) (376) (253) (318) (423) Cash flow from operations Capex (208) (434) (120) (175) (175) Other new investments (2) (22) (305) - - Other investing cash flow (58) (95) Cash flow from investing activities (268) (552) (338) (93) (80) Dividends paid (185) (281) (112) (143) (190) Shares repurchased - (10) Increase in debt 953 (119) 1, Other financing cash flow (88) (358) (2,431) (324) (324) Cash flow from financing activities 680 (768) (1,259) (467) (514) Cash at beginning of period 3,410 3,942 2,870 1,318 1,391 Total cash generated 608 (1,072) (1,551) Forex effects (75) Implied cash at end of period 3,942 2,870 1,319 1,391 1,578 See important disclosures at the end of this report 6

7 Hengdeli Holdings (3389 HK) Financial Exhibits Balance Sheet (CNYm) Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F Total cash and equivalents 4,104 2,871 1,318 1,391 1,578 Inventories 4,521 5,570 6,195 6,664 7,390 Accounts receivable 1,115 1,369 1,622 1,811 2,113 Other current assets Total current assets 9,740 9,810 9,135 9,866 11,082 Total investments 786 1, ,682 1,512 Tangible fixed assets ,007 1,071 1,128 Intangible assets Total other assets Total non-current assets 1,849 2,676 2,651 3,588 3,482 Total assets 11,589 12,486 11,786 13,455 14,563 Short-term debt 2,089 3,622 1,099 1,099 1,099 Accounts payable 1,759 2,163 1,798 2,777 2,982 Other current liabilities Total current liabilities 4,022 5,815 2,930 3,913 4,124 Total long-term debt ,346 2,346 2,346 Other liabilities 2, Total non-current liabilities 2, ,400 2,404 2,408 Total liabilities 6,259 6,572 5,330 6,316 6,532 Share capital Retained earnings reserve 4,870 5,436 5,885 6,457 7,219 Shareholders' equity 4,891 5,457 5,907 6,480 7,242 Minority interests Total equity 5,331 5,914 6,456 7,138 8,031 Total liabilities & equity 11,589 12,486 11,786 13,455 14,563 Valuation and Growth Dec-11 Dec-12 Dec-13F Dec-14F Dec-15F Valuation Ratios Core P/E (x) Dividend yield (%) P/BV (x) Growth Revenue (%) Gross profit (%) Recurring net profit (%) Per Share Data (CNY) Core EPS DPS Payout Ratio (%) BVPS Financial Ratios Gross margin (%) Operating margin (%) Recurring net margin (%) Current ratio Total Debt/equity (%) Net debt/equity (%) Inventory days Receivable days Payable days ROA (%) ROE (%) See important disclosures at the end of this report 7

8 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Hengdeli Holdings (3389 HK) SWOT Analysis China s largest watch retailer Distributes both high- and mid-end watches through four different store formats Swatch Group and LVMH as major strategic shareholders Long-term growth potential in both luxury and mid-end watch demand in China Continues to expand presence in China through expansion into lower-tier cities A slowdown in China/Hong Kong s retail sector China s economic slowdown persists More unfavourable policies from the Chinese Government on luxury spending Increasing competition from other distributors Non-core businesses (Ming Fung Jewellery and Harvest Max) drag down overall group performance Pricing controlled by watch suppliers Balance sheet / cash flow health remains a concern P/E (x) vs EPS growth P/BV (x) vs ROAE % % % 43% 29% 15% 1% -13% -26% % 23% 20% 17% 13% 10% 7% 3% % 0.0 0% P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile Hengdeli is the largest watch retailer of international renowned brands in China and Greater China with 452 stores as of end See important disclosures at the end of this report 8

9 NR Hengdeli Holdings (3389 HK) Recommendation Chart Price Close 5.1 Recommendations & Target Price Oct-08 Jan-10 Apr-11 Jul-12 Buy Neutral Sell Trading Buy Take Profit Not Rated Source: RHB estimates, Bloomberg Date Recommendation Target Price Price Buy Buy Buy Buy Buy Buy Source: RHB estimates, Bloomberg See important disclosures at the end of this report 9

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