Maintain BUY but cut TP to HK$ 5.43, based on lowered EPS and 8x FY20E P/E (from 11x given slower growth ahead). We believe current valuation is attractive enough (7x FY20E P/E and 10% yield) while guidance of mid-single-digit retail sales growth in 2H20E could be a sign of confidence from the management.
- FY19 result slightly below, due to cost of inventory clearance. China Lilang’s sales/ net profit rose by 15%/ 8% YoY to RMB 3,658mn/ 812mn, 1%/ 6% below CMBI est., mainly due to lower GP margin in 2H19 at 36% (vs 40% in 2H18), affected by rebates for distributors to clear Fall Winter and Smart casual collection inventories. However, it maintained high dividend payout of 76%, which translate into 10% yield at current share price.
- 1Q20E retail sales could fall by ~40% YoY but is healthily recovering. Management cited that retail sales growth was strong before CNY, but down by 90% YoY in Feb due to store closures, and now gradually improved to 60-70% YoY drop in Mar. Such performance was not particularly bad as ~70% of the sales was generated by “employees selling on wechat”. The Company also expect sales trend to recover quickly in Apr, as about 80-90% of stores will be re-opened by the end of Mar (70% re-opened as at Mid-Mar).
- Cautiously optimistic for 2H20E. The Company is targeting mid-single-digit retail sales growth in 2H20E. Also, regarding potential inventory pile up in Spring Summer 2020, the Company will open 100 outlet stores in FY20E, and may provide support to distributors again.
- E-commerce sales is finally ramping up. China Lilang started their digital sales late (vs peers), but we are now seeing encouraging progress. E-commerce sales grew by over 100% YoY in FY19, and the Company is targeting another 100%+ growth in FY20E. In addition to its major partner Alibaba, it is expanding its business with JD, VIPS and PDD.
- Changes in Smart causal business model. China Lilang also plans to replace the current consignment model into direct-retail for smart causal since Autumn 2020. This may provide them with greater flexibility to manage inventory, marketing, staff training, store operation and expansion.
- Maintain BUY and trimmed TP to HK$ 5.43. We cut our FY20E/21E EPS estimates by 26.6%/ 25.3%, to factor in 1) virus impact, 2) cost of inventory clearance, and 3) slower store expansion in FY20E. We maintain BUY but revised down TP to HK$ 5.43, based on 8x FY20E P/E (from 11x P/E due to slower growth). The counter is attractive, at 7x FY20E P/E and 10% yield.
