Maintain Buy The company reported a strong 1QFY18 as GPM unexpectedly increasedby 2.1pp YoY (vs our forecast for +0.5pp in full-year FY18), helped by lower retaildiscounts and a more favorable forex impact. The company issued a positive profit alertgiven the material improvement in 1QFY18 operating data driven by the better GPM (nogrowth range for net profit was provided). Looking into 2QFY18, we believe the companymay increase retail discounts slightly to push sales growth. The recent strength of therenminbi should be positive for the company’s operations in China, in terms of GPM,revenue and profit. Although 1Q is a fairly insignificant season in terms of revenuecontribution, we still see the improvement in operating data as very encouraging. We keepour target price at HK$5.22, still based on 15x FY18E P/E.
GPM surprises Overall GPM jumped by 2.1pp YoY to 64.9%, helped by lower retaildiscounts and a more favorable forex impact. GPM in Hong Kong was up 2.5pp YoY to62.9%, also thanks to lower retail discounts. GPM in China widened 2.1pp to 63.6%,mainly driven by renminbi appreciation, while GPM in Japan dropped by just 0.3pp due toappreciation of the yen. Excluding the forex impact, we estimate GPM in China and Japanimproved.
HK SSS remained soft SSS in Hong Kong dropped 5% YoY in 1QFY18 on sluggishconsumer sentiment. China SSSG came in at 5% YoY, in line with our expectation. JapanSSSG was strong at 35% YoY.
Lafayette store opening in Shanghai The company's JV, Galeries Lafayette (China)(GL China), entered into a letter of intent with Lujiazui (600663 CH) to open a “GaleriesLafayette” department store in the L+ Mall, at 889 Pudong South Road. The store has aGFA of around 23,100 sqm and occupies part of the L+ Mall, which also has three officetowers within the complex. Lujiazui will assist GL China in fitting out the store while otherstore opening expenses will be funded by GL China’s internal resources. The store willbe opened no later than Dec 31, 2018. The company does not expect additional fundinginjections into GL China to be required. The 12-storey L+ Mall, which has a total GFA of140,000 sqm, is located at the junction of Pudong South Road and Century Avenue, whichwe consider a prime location as its L1 floor is connected to two metro line stations, DongChang Road and Shang Cheng Road. Given its location, smaller store area and thesmaller investment required, we think the store could break even quicker than GL China’sBeijing store (within 3 years). The impact of start-up losses related to the store on FY19earnings will be insignificant, in our view.