1H15 core performance largely in line with expectations;continual pick up in orders to support momentum in 2H
Rmb appreciation should be slightly positive
Trimmed earnings to factor in one-off costs and inventoryprovision. HOLD maintained with revised TP of HK$20.80
1H15 core earnings in line. Stella’s 1H15 earningsgrowth of 2.7% to US$54m was below expectations, dueto one-off facility closure costs as well as write-down ininventories. Stripping out the one-offs, we estimate coreearnings would have grown at c.16%, in line. As expected,manufacturing was the key growth driver, with shipmentvolumes rising 12% and ASP edging up 0.7% onrestocking from European clients and rising demand from afew US clients expanding overseas. Retail remained weakwith SSS falling 15.6% and lower margins, partly due toinventory clearance. Stella maintained its interim DPSunchanged at HK$0.30, translating into a payout of 57%.
Momentum to continue in 2H. We expect manufacturingto sustain solid momentum in 2H while ASP may see somepressure, given lower leather costs. Yet margins shouldbenefit from better capacity utilisation, especially for itsInland China capacity which is enhancing its capability toproduce higher-value-added items. Rmb depreciationwould also be mildly positive, considering the majority ofits costs are either in Rmb or SE Asian currencies whichhave also devalued significantly yoy. As for retail, weexpect sentiment to stay subdued but the inventoryclearance done in 1H should pave the way for a betterperformance in 2H. We see retail turning profitable in 2Hthough overall contribution should remain negligible forthe time being.
Fair valuation; maintain HOLD. Following its 1H15results, we have trimmed our earnings by 2-4% partly toreflect the one-offs. Trading at 13.5x FY16 PE, valuation isfair and largely in line with historical average, with yieldexpected to stay at a decent c.5%. Maintain HOLD. Weroll over our valuation benchmark to FY16 with TP revisedto HK$20.80, premised on an unchanged 14x PE.