Upcoming announcement of a weak 3Q SSSG will be no surprise.
At its interim FY13 results announced in August, the company hinted that SSSG in July and August has remained weak. We believe the share price has overcorrected, and a lot of the negatives have been priced in. We believe investors should look at the longer-term development of Daphne rather than short-term pressures. We cut our FY13-15F earnings by 8-14% to reflect 1) higher SG&A expenses given higher rentals, and 2) conservative SSSG in FY14-15. We maintain our BUY call on Daphne with new target price HKD6.14 (previous HKD6.95), based on 14.3x CY14 PER (5 year average P/E). Share price catalysts remain: 1) SSSG improvement, and 2) GP margin expansion. Currently Daphne is tr ading at 9.8x FY14 PER, a 35% discount to its 5-year average PER.
SSSG could rebound beyond 4Q14. We believe the SSSG
deterioration has been priced in. We understand that SSSG in July and August is below management’s expectations, however we believe SSSG will turn positive, likely from 1Q14 onward, given: 1) an easier base of comparison, and 2) recovering consumer sentiment which drives volume.
Gross margins improving. We know that GP margins are likely to contract on a YoY basis. However, on a HoH basis, management is seeing a slight improvement in 2H13 GP margins given less heavy discounting and lower inventory provision. Recall that 1H13 GP margins (58.3%) were better than those in 2H12 (57.7%). Despite higher overall inventory days at 209 days, core brand in ventory is still at healthy levels, according to management.
Online sales O2O might boost top line as earning driver. During its 1H13 results release, management mentioned the company is seeing significant growth in e-commerce business which is meeting internal targets. Management sees the integration and expansion of online and offline channels (i.e. mobile applica tions) will allow for better inventory management.