Headline net profit of -18% yoy was in line with profit warning;excluding impairment, operating profit margin was -2.5pp yoy
Footwear OP margin -3pp yoy mainly due to deleveraging;sportswear margin declined modestly as inventory normalized
Maintain Hold with unchanged TP HKD6.30
No surprise. FY17 revenue was up 2% but profit was down 18% to RMB2.4bn, in linewith the 15-25% decline provided in profit warning (FY17 profit warning; footweardecline narrows, 20 March 2017). Excluding one-off impairment charges on intangiblesof RMB1.36/1.1bn in FY16/17, operating profit would be -16% yoy and margin -2.5pp yoy.The tax rate went up mainly as impairment charges were not tax deductible. Theproposed final DPS was RMB6cents, which together with interim DPS of RMB12cents,implies a 63% payout of earnings, in line with FY16 and our estimates. By segment:
Footwear segment (45% of sales, 62% of OP): Sales was down 10% on adouble-digit decline in same-store-sales (SSS) driven by volume. A net total of700 stores (5% of number of stores in end-2016) were closed throughout FY17.Excluding impairment charges, OP margin was down 3pp yoy to 15.7% due to:1) a 0.4pp compression in gross margin likely due to product repositioning; and2) operating deleveraging as opex only dropped 5% yoy. Specifically, margin in2H FY17 was down 3.3pp to 14.9% despite a modest rebound in gross margin.
Sportswear segment (55% of sales, 38% of OP): Healthy growth momentumwas sustained with top-line registering a 15% increase yoy. Apart from mid-singledigitSSS growth, this is driven in part by 8% store additions during FY17. Bellenow has 7,654 stores vs 8,843 stores by key peer Pou Sheng (3813 HK, not rated).A 0.7pp decline in OP margin (to 8.1%) was mainly driven by a similar decreasein gross margin as the tight inventory situation from FY16 normalizes and, hence,the retail discount loosened.
Valuation and risks-maintain Hold. Management sees consumers demandingmore for: 1) higher value for money; 2) shopping convenience and experience; and3) originality and uniqueness. They have engaged a leading consultancy to repositionthe company to adapt to the changing environment. As stated in Proposedprivatisation at 20% premium, 2 May 2017, our unchanged TP of HKD6.30 was set atthe offer price to reflect the likelihood of proposed privatisation. This translates into13.5x FY18e PE. With 3.3% implied upside, we reiterate our Hold rating. Key upsiderisks include whether the privatisation is approved and the shares are purchased atHKD6.30, a 3% premium to the 15 May closing. Key downside risks includeprivatisation not going through due to failure to obtain shareholders’ approval.