1H13 result in-line. We transfer coverage to Terence Lok. Daphne reported a decrease of 36% yoy net profit for 1H13 which was generally in line our forecast, but above ma rket expectations by 10%. The surprise was due to in better-than-expected cost control in SG&A. We urge investors to consider Daphne’s long-term development despite near-term pressure. Focus on fundamentals. 1H SSSG fell 9.2%, implying 1Q and 2Q SSSG were -2.5% and -13.7%. Poor sales was highlighted in the May profit warning due to 1) poor weather conditions leading to weak traffic.
2) Avian flu outbreak. 3) High base of 1H12 of growth 16%. Whether or not the macro environment shows improvement, we believe mass market will be the key theme for near-term consumption recovery. We don’t know if SSSG could rebound near term, especially if July and August were to remain sluggish, but we see a higher chance for SSSG to turn around given 1) 2H13 has a relative low base vs. 1H13; 2) Maturity of stores after 39 non-performing stores, boosting SSSG.
Margin to stabilize on cost control. Core brands in 1H13 have not seen heavy discounting and ASP only dropped 1%, implying volume was the key behind negative SSSG due to poor traffic. Despite average inventory days was more than 200 days, over 80% inventories were still less 1-2 years. Cost control in rental and staff has already seen improvement for 1H.
Maintain BUY; Target price HKD6.95. The recent 39% correction since May has priced in weaker sa les led by SSSG deterioration. Our key catalyst remains SSSG recovery. Daphne is trading at 10x FY14 P/E, a 30% discount to its 5-year average P/E. Daphne still has a net cash position of HK$589mn with dividend payout of 32% (yield: 3%). Our target price implies 13.5x FY14 P/E.