A significant decline in profitability in H113
Daphne announced H113 earnings will record a material decline. Q213 SSS wasmerely -13.7% leading to H113 SSS of -9.2%. Net store addition was 212 inH113. Management noted Q213 was affected by 1) weak consumer sentiment; 2)p oor weather conditions and unusually cold spring season; and 3) avian fluoutbreak in Eastern China. ASP declined marginally. Net margin will be mid-single digit compared with 9.1% in 2012.
Current pricing strategy might be wrong
In our sector report “ China Retail Sector: The invisible hand fails”, published on Jun 7, we highlighted Belle might have permanently lost its pricing power and its current pricing strategy might be wrong. We now believe Daphne is alsoexperiencing similar trend. We outline three long-term factors that could constrain on Daphne and Belle’s pricing power.
25% cut to 2013E-15E earnings
We cut our 2013E-15E earnings by 25% to reflect slowing sales trend and higherSG&A. We forecast net margin to be 6.4% in 2013E.
Valuation – Reiterate Sell rating with new PT of HK$4.00
We maintain our Sell rating on Daphne and lower our price target from HK$5.50to HK$4.00. We derive our price target from a DCF- b ased methodology and explicitly forecast long-term valuation dr ivers using UBS’s VCAM tool, assuminga WACC of 9.7%