Possibly better trends in 2H
Expect 1Q results to remain muted; pick-up likely in 2H
Attractive 5% yield should provide some support to the share price
Pending more signs of recovery, maintain HOLD rating andHK$18.10 TP (pegged to 14x FY14 PE)
Soft start to FY14, but expect a better 2H. Manufacturing sales likely remained soft in 1Q14 but should pick up from 2Q onwards based on current orders, and with utilisation expected to improve to c.90%. Coupled with higher ASP, we expect manufacturing sales to resume single-digit growth for full year FY14. For margins, the continual ramp-up of inland capacity should improve efficiency and reduce overheads; we expect more material improvem ent in 2H as utilisation picks up. Meanwhile, the handbag business, likely to be consolidated in 2H14, could be a longer-term driver. Annual production is c.900k units currently but the company sees potential to grow into a 5m-bag business in 3-4 years.
Retail: focus on efficiency. Following the completion of store consolidation last year , Stella will now focus on improving store efficiency and lo ok for larger per store space (with potential to cater multi-br ands), but expect overall store count to remain stable in 2014. The company has stopped participating in heavy discounting (e.g. Nov 11th event and Women’s Day on March 8th); these may hurt volume (SSS fell in 4Q13) but should benefit margins.
Yield to stay attractive; HOLD. Stella is maintaining a 70% dividend payout policy. But given their strong cash position (US$248m net cash as of Dec 13), robust operating cash flow and lower capex (budgeted US$60m in FY14 vs US$97m spent in FY13), we believe there is room to raise payout. We expect yield to remain attractive at 5%+, which should limit downside. Maintain HOLD, with TP unchanged at HK$18.10 (14x FY14 PE).