1H16 (Mar to Aug) results review
I.T’s reported a 1H16 HK$31mn loss in earnings (1H15: HK$49mn profit). Excluding non-recurring items (HK$15mn gain in senior note repurchases in 1H15 and a HK$67mn forex loss in 1H16 from conversion of the group’s RMB fixed deposits to HK$), recurring earnings grew 5% YoY to HK$36mn. Revenue also grew 5% YoY, driven by 17% YoY growth inMC and 8% YoY growth in Japan/Macau/overseas, offsetting HK’s revenue decline of 4.4% YoY which was mainly due to decline in C hinese visitors. HK/MC SSSG were -0.9%/+5.9% while the group’s GPM fell 2.2ppt YoY to 59.7% as GPM from both HK and MC slid due to increased retail discounts. Due to rising rental costs and decline in revenue, HK reported an operating loss of HK$91mn which dragged down the group’s EBIT by 6% YoY to HK$111mn.
Valuation attractive but HK outlook caps upside for now
Although we expect strong performance of MC and Japan to continue, the outlook for HK market (47% of group revenue) remains highly uncertain and we expect this factor to continue to limit the upside potential in share price despite its current undemanding valuation. Going forward, the group will continue its focus on expansion in MC as operating leverage and SSSG continues to drive earnings. As 1H16 results were generally in line with our full-year expectations we marginally lowered our FY16E/17E recurring earnings by 3%/1%, mainly on higher effective tax rates. Our FY16E-18E EPS is +2%/+7%/+7% vs consensus.
Waiting for signs of improvement in HK market
Despite I.T’s 20% discount to current peer average of 10x forward P/E, we remain cautious and maintain our NEUTRAL rating on I.T given the risk of further deterioration in retail conditions in HK and the current low investor risk appetite amid weak market sentiment. New TP is set at HK$2.19 (from HK$2.31) as we rolled over our TP to FY17E from FY16E and lowered our target P/E from 11x (forward mean P/E) to 7x (1SD below forward mean P/E) on high earnings uncertainty.