We think the miss in 2H20 result is likely one-off. Thanks to improving fundamentals and attractive yield, we maintain BUY and raised TP to HK$ 6.76, based on 9x FY21E P/E (from 8x FY21E). Current valuation is highly attractive at 7x FY21E P/E (~1 s.d. below 3-year average of 8x) and 11% FY21E yield.
- 2H20 results missed, due to trade fair orders cut. China Lilang’s net profit decline by 31% YoY to RMB 557mn, missing CMBI/ BBG est. by 9%/ 16%. We believe the miss was attributable to: 1) reductions of 2020 Fall and Winter trade fair orders to facilitate channel destocking, 2) provisions of inventory buyback of RMB 390mn and also 3) beat in GP margin given more sales from the self-owned smart casual business. We are not worried by this miss as it is likely to be just one-off. Noted that DPS of HK$ 44 cents was declared, which could be translated into 11%/ 12% FY21E/22E yield.
- Targeting 10%+ retail sale growth in FY21E, and we are more optimistic. We are more optimistic on the retail sales growth in FY21E, thanks to :1) robust retail sales growth of 20-25% in YTD 2021, which accelerated from 10-15% in 4Q20, according to management (Sales in Jan-Feb/ Mar 2021 recovered to 90-95%/ 100% vs 2019 level), 2) strong growth momentum from E-commerce sales, after 120% growth in FY20 and 3) limited inventory pressure in the channel, especially after series of inventory buybacks and cut in trade fair orders. Noted that sell-through rate for 2020 Spring/ Summer/ Fall/ Winter seasons were healthy at 68%/ 75%/ 71%/ 75%.
- 56% of core brand store would switch to consignment model while online store would switch to self-owned. Management decided to strengthen its retail operation efficiency by converting 56% of LILANZ core brand stores into consignment model since the 2021 SS season. We agreed that this would: 1) motivate distributors and store managers to improve product allotments in stores, 2) allowing more O2O inventory sharing, and 3) improve GP margin as wholesale discounts will be raised to 60% (from 59%), but with a greater inventory burden. The online store will also be converted to self-owned, which we think is positive, because: 1) higher profit to be consolidated and 2) it can enjoy better management, design and marketing support as well as better synergies with the group.
- Maintain BUY and lifted TP to HK$ 6.76. We maintain BUY but lifted TP to HK$ 6.76, based on 9x FY21E P/E (from 8x FY21E). The counter is attractive at 7x FY21E P/E and 11% yield. We cut our FY21E/ 20E EPS estimates by 10%/ 6% to factor in 1) trade fair order cut, 2) one-off costs related to inventory buyback but 3) increase in wholesale prices.
