BUY and raised TP to HK$ 5.89, based on 8x FY21E P/E (rolled over from 8x FY20E). We believe current valuation is highly attractive (8x FY20E P/E, ~1 s.d. below 3 years average of 10x and 9% FY20E yield), especially after mgmt. reiterated its mid-single-digit retail sales growth guidance for 2H20E.
- 1H19 results inline, decline mainly due to trade fair order cut and lower GP margin. China Lilang’s sales/ net profit decline by 29%/ 31% YoY to RMB 1,093mn/ 269mn, inline with profit warning. The drop was mainly due to: 1) cancelation of 2020 Spring Summer trade fair orders of RMB 143mn and 2) lower GP margin. Given a strong B/S and healthy C/F condition, the Company’s dividend payout ratio remained stable at ~69% (vs 73% in 1H19) and FY20E/ 21E yield can be as high as 9%/ 11% if this policy sustains.
- Inventory (both group and channel) increased but remained manageable. Group’s inventory days surged to 185 days in 1H20 (vs 111 in FY19) while channel inventory also jumped to RMB 1.3bn in 1H20 (vs 1.1bn in FY19) since sell-through rate for 2020 Spring/ Summer collections were only at 60%/ 65% (vs 80%+ in past years). But we are not worried as mgmt. is determined to clear inventory by: 1) opening 100 outlet stores by FY20E, and 2) organizing more online and offline clearance activities. Mgmt. believes inventory level is likely to normalize by 2021 CNY festival.
- Mid-single-digit retail sale growth in 2H20E reiterated. Mgmt. reiterated its previous guidance, which, in our view, was supported by positive retail sales growth in Jul-Aug 2020 (vs 15-20% drop/ 40-45% drop in 2Q20/ 1Q20). In fact, retail discounts were highly resilient at 25% off/ 70% off for new/ old products in 1H20, indicating a strong brand image.
- Cautiously optimistic on 2021 Spring Summer trade fair orders. Following a rather conservative 2020 Fall and Winter trade fair orders (CMBI est.: 5% to 10% decline), mgmt. believes the distributors’ sentiment for 2021 Spring Summer trade fair has become far more positive by now.
- E-commerce growth to sustain into 2H20E. Mgmt. is also highly confident on its e-commerce growth in 2H20E (CMBI est. 100-150%), as it is planning: 1) to have more clearance sales online, 2) to sell more online exclusive products (hopefully to become hot selling) and 3) to have more marketing activities, including IP crossovers and a new brand ambassador.
- Maintain BUY and lifted TP to HK$ 5.89. We maintain BUY but lifted TP to HK$ 5.89, based on 8x FY21E P/E (rolled over from 8x FY20E). The counter is attractive at 8x FY20E P/E and 9% yield. We cut our FY20E/ 21E/ 20E EPS estimates by 15%/ 3%/ 6% to factor in 1) trade fair order cut, 2) lower GP margins and 3) one-off acquisition costs of the 228 smart causal stores.
