Investment positives
We initiate coverage of I.T with an ACCUMULATE rating and a 12-month TP of HK$2.65.
I.T is a fashion-forward company in the Greater China region; it targets the mass/luxury consumer segment with a wide range of brands. I.T?s product portfolio consists of >300 international designer labels, and >10 in-house and JV brands. This dual branding strategy allows I.T to diversify brand risks.
Increasing store coverage in Greater China: I.T still has a low penetration rate in China and maintains good relationships with shopping malls (especially HK operators). We expect I.T to open stores more prudently at a 12% CAGR in China in FY13~16e (vs. 25% in FY10~13A), but placing more emphasis on the profitability of new stores, after suffering a loss in the China market in 1HFY14. In October I.T opened its first department store, Lafayette in Beijing – with French JV partner Galaries Lafayette; it follows a differentiated model and has had good consumer feedback.
Operation likely to bottom in 2HFY14: In 1HFY14, company operations have been affected by a high markdown environment and deleveraged operations from sales slowdown. Going forwards, the company will: 1) focus on store profitability by consolidating non-performing stores; and, 2) inventory has returned to a more normalized level in 1HFY14, following a steep discount period; these efforts will likely bear fruit in FY15.
Financials
We expect EPS to grow by 26% and 35% in FY15e and FY16e (financial year end in end-February), after a 52% decline in FY14e (mostly priced in).
Valuation and recommendation
We apply 14x FY15e EPS to arrive at our HK$2.65 target price. This should be a reasonable level compared to other brands, given I.T?s competitive advantages (multiple brands and DOS network).
Risks
Slower-than-expected recovery; fashion risk; intense competition.