What's new
I.T announced its 3QFY14 operating data, which were in line with expectations. SSSG: HK -3.4%, Mainland China -6.0% and Japan +18.6%. Gross Margin: +2.4ppt YoY to 61.6%. By region, HK 61.6% (+3.4ppt), Mainland China 58.5% (-0.6ppt), and Japan 71.0%, (+10.3ppt).
Comments
~ 3QFY14 operating data shows some signs of stabilizing.
~ HK business improved slightly: the decline in SSSG narrowed to -3.4% vs. 1HFY14's -9.5%; its gross margin increased to 61.6% vs. 59.1% in 1HFY14.
~ Japan business increased, partly due to low base: I.T realized SSSG of 18.6%, slightly better than our expectation; gross margin was ~71%, stable with that of 1H. The key reasons for these were marketing campaigns, brand anniversary promotion and the lower discount level.
~ Mainland business still under pressure: SSSG was -6.0% in 3QFY14 vs. -1.9% 1HFY14. However, gross margin improved from 55.8% in 1HFY14 to 58.5%.
~ Weak performance in FY14 implies low base, watch for trend. I.T's operations have been hit by a high markdown environment. If the market gradually stabilizes and its sales and inventory are under control, there will be new opportunities.
Valuation and recommendation
Maintain earnings forecasts and ACCUMULATE rating. The recent drop in share price reflects weak sales and secondary market shareholders' reduced holding, further downside risks are relatively limited. FY15 may see some bottoming out trend. Considering current market sentiment and peers' valuations, we revise down our TP from HK$2.65 to HK$2.27 (12x FY15e EPS).
Risks
Slower-than-expected recovery; fashion risks; intense competition.