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Asia Pacific Equity Research |
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12 March 2014 |
China Lilang Ltd. (1234 HK) FY13 Result - 5% Beat Due to Gross Margin Expansion. Trade Fair Sales Turning Positive |
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Neutral Price: HK$5.49 10 March 2014 Price Target: HK$4.20 PT End Date: |
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China Lilang has reported a stronger than expected FY13 result, beating JPMf by ~5% at the NPAT line. The beat came mainly from stronger than expected gross margin expansion. Furthermore, the company indicated trade fair sales are now turning positive.
FY13 result
· FY13 revenues RMB2,299m (JPMf RMB2,356m), down 17.7% yoy (JPMf -15.7%). This implies 2H13 revenues of RMB1,206m (JPMf RMB1,263m), down 21.4% yoy (JPMf -17.6%).
· FY13 gross profit RMB980m (JPMf RMB955m), implying gross margin of 42.6% (JPMf 40.5%). This implies 2H13 gross margins of 45.0% (JPMf 41.0%).
· FY13 EBIT RMB582m (JPMf RMB560m), implying EBIT margin of 25.3% (JPMf 23.8%). This implies 2H13 EBIT of RMB307m (JPMf RMB284m).
· FY13 NPAT RMB516m (JPMf RMB490m, Consensus RMB492m), implying a decline of 17.7% yoy.
· Pleasingly, the company indicated that 2014 fall trade fair orders for the core LILANZ brand has returned to “moderate growth” (versus 2014 Spring/Summer down LSD).
· Final dividend HK16cps with special dividend of HK5cps (v JPMf HK19cps, Consensus HK21cps).
J.P. Morgan comment
· Overall, this result beat our forecasts at the EBIT and NPAT level by ~4% and 5% respectively, with the beat mainly attributed to stronger than expected gross margins.
· Furthermore, we note this result may be taken positively by the market due to: (1) The company reporting trade fair orders turning positive; (2) Trade receivable balances reducing in absolute dollar terms.
· Nevertheless, our own channel checks indicate that the menswear category has generally been performing relatively poorly in department stores with pricing one of the key reasons for weak performance. Hence, we query whether continued gross margin expansion is sustainable for Lilang over the longer term.
We are Neutral on China Lilang. Overall, we note the company is reporting improving momentum with respect to trade fair orders and improved inventory position. However, we are cautious about the menswear category which we understand has been performing relatively poorly and, over the longer term, we are concerned about risk of EBIT margin compression.
Our Dec-14 PT of HK$4.20 is based on 0.5x PEG (a discount to the average trading PEG of 0.8x due to lower market capitalisation and liquidity, and likelihood of ongoing negative sentiment associated with the risk of excess channel inventory in the Lilang system) and an average two-year earnings growth of 17% from Dec-14.
Upside
risks to our view include: (1) an improvement to the general retail
environment, which in turn supports China Lilang distributor sales
and leads to
an improvement in distributors' inventory positions; (2)
improvement in SSSG at
the China Lilang distributor level from improved execution; and (3)
better-than
expected execution with respect to inventory management by
distributors.
Downside risks to our view include: (1) a change in the company’s
dividend
policy, where company reduces its dividend significantly; (2) a
further
downturn in the Mainland China retail environment; (3) further
increases in
inventory held by distributors such that Lilang is required to take
refunds on
inventory; (4) deterioration in the financial position of Lilang
distributors,
which leads to further increases in trade receivable days for
Lilang; and (5) unexpected
increases in sourcing costs.
Consumer Shen Li, CFA AC (852) 2800 8523 shen.w.li@jpmorgan.com Bloomberg JPMA SHLI <GO> J.P. Morgan Securities (Asia Pacific) Limited |
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Coverage Universe: Li, Shen Wei: Anta Sports Products Ltd. (2020.HK), China Lilang Ltd. (1234.HK), Daphne International (0210.HK), Giordano (0709.HK), I.T Ltd. (0999.HK), Li Ning Co Ltd (2331.HK), Ports Design (0589.HK), Sa Sa International Holdings Limited (0178.HK), Trinity Limited (0891.HK), Xtep International Holdings Limited (1368.HK)
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