L’Occitane reported its FY1H21 results: Revenue was EUR617mn,down 15% YoY (down 13% YoY at constant rates) and net profit wasEUR16mn, down 38% YoY. The company reported FY1H21 revenuepreviously on October 27, 2020.
　　FY1H21 earnings beat on 1) gross profit margin expansion (FY1H21:
　　82.1% vs. FY1H20: 81.2%) due to its favorable channel mix gravitatingtowards online channels which have higher gross margin thanwholesale channels; 2) opex savings on distribution, R&D and othersdue to better revenue mix, rent relief and government subsidies,contributing in total 0.6ppt operating margin improvements, offset byhigher marketing and admin expenses in proportion to sales; and 3)capex saving of Euro 28mn vs. FY1H20.
　　Overall, ELEMIS is the most profitable brand recoding 30.5%operating margin during FY1H21, followed by L’Occitane en Provence(4.4%) and LimeLife (4.1%).
　　Trends to watch
　　Per management during earnings call: 1) the company’s overall salesYoY growth turned positive in October 2020 and is expected to growYoY in November 2020 as well; 2) During Singles Day 2020, L’Occitaneen Provence (LeP) sales grew 41% YoY and ranked number one inboth body care and hand care on Tmall; 3) ELEMIS will open 4-6duty-free outlets in Hainan over the next 6 months; 4) ELEMIS hasentered 149 stores in the Chinese mainland as of October 2020(increased from 125 in September), which will increase to 250 storesby FY4Q21; and 5) the company’s sell-out channel provides a grossmargin of around 90% while sell-in is 70%; e-commerce channel’soperating margin is around 40-50%.
　　Financials and valuation
　　We keep our FY21e/22e revenue forecasts unchanged but raiseFY21e/22e net profit forecasts by 24/21% on better-than-expectedmargins due to favorable channel mix gravitated towards online.
　　The stock is trading at 41x/15x FY2021e/FY2022e P/E. We maintainour OUTPERFORM rating and raise target price by 39% to HK$25.0(22x FY2022e P/E to reflect faster growth and better earnings qualitydriven by ELEMIS), offering 34% upside.
　　Risks
　　Slower-than-expected Elemis ramp up; COVID worsening; forexfluctuation.