Management team holds positive 2016e outlook
We see limited catalysts for margin expansion this year
Maintain Hold with unchanged fair value TP of HKD19.5
Stella presented at our China Conference on 17 May 2016. Below are the keytakeaways from the management presentation.
Positive FY16e outlook from management team: (1) Positive shipment growth forFY16e footwear OEM (95% of group sales); (2) OEM margin expansion continues;and (3) Turnaround to retail business (5% of group sales). Regarding OEM business,Stella sees a volume decline for the casual segment (55% of OEM shipment) thisyear, but stronger growth for the sports footwear category (20%) and a flat shipmentfor premium-end fashion shoes (25%). Stella expects growth from the sportssegment to fully compensate for the decline in the casual category, and managementexpects 2016e OEM shipments to have positive growth of low single digits. The OEMmargin expansion drivers are: (1) operating efficiency improvement for factories inChina (64% of group OEM shipment); and (2) a better control in labour cost (16% ofCOGS). Regarding the retail business, same-store-sales growth (SSSG) has turnedpositive to high single digits in May so far (vs. -22% in 1Q16 and minus high-teenslevel in 2015), led by traffic increase after store reformat in China. In addition, Stellasees two reasons for margin improvement in retail business this year: (1) pricingstrategy review (i.e. less price discount); and (2) cost alleviation on rents due to storere-locations (to shopping malls from street-side) in China.
Our take: Stronger volume growth for sports OEM this year is a positive. However,given its smaller contribution to overall volume, we think it could be difficult for sportsOEM to offset weakness from the casual category. Thus, OEM margin expansioncould also become difficult given the lower utilization rate. Regarding the retail side,SSSG turning positive in May represents a good signal, but we think sustainability into2H16 is more important. Given the small contribution of only 5% to group top-line, theturnaround in the retail business could be of limited help to group bottom-line this year.
Maintain Hold with fair value TP of HKD19.5, based on unchanged 2.0x 2016e PB.The target multiple represents the group’s historical average trading level since listing in
July 2007. Key downside risks to our view: Lower-than-expected orders, higher-thanexpectedwage inflation, lower-than-expected cost savings from shifting productionoutside of Guangdong, and lower-than-expected same-store sales growth (SSSG) in theretail segment. Key upside risks: Higher-than-expected orders, improving product mixand/or higher production efficiency leading to higher gross margin, and higher-thanexpectedSSSG and/or lower operating costs in the retail segment.