Product positioning and distribution channels are key focus fortransformation
Management believes privatization is the best solutionconsidering short term volatility and long term development
Maintain Hold with unchanged TP HKD6.30Some structural issues. During the FY17 results briefing, management emphasizedthe increasing demand from consumers for 1） higher value for money; 2） shoppingconvenience and experience and 3） originality and uniqueness. Belle identified twokey issues with the current business: 1） Product positioning: transparency inproduct offerings has led to structural change in customers’ appetite for better valuefor money products and 2） Distribution channel: 80% of footwear sales aregenerated in department stores, which are undergoing consolidation that will likelylead to further store closures in the near term.
　　Rationale for privatisation: With the issues identified, Belle finds it difficult to carryout major transformation as a listed company given the potential profit volatility it willcause. On products, under a high operating expense environment, the companyexpects profitability to be under pressure should they shift focus on mass marketcustomers. Supply chain has to be enhanced too, as a result of fast fashion trend.
　　Their target is to re-gain market share in a potentially shrinking ladies’ footwearmarket. On channel, Belle’s over-reliance on presence in department stores couldremain a drag to business performance as traffic is moving towards shopping mallsand e-commerce. However, the entrance into both channels could lead to highercosts and the ramp-up could take time, particularly as online customers havegenerally different preference to offline consumers. As the organisation culture has tochange along with the business, Belle decided the company requires externalresources and expertise to carry out the transformation. After balancing short termpressure and long term benefits, management believes privatization is the bestsolution for the development of the company.
　　Maintain Hold. Per our report Proposed privatisation at 20% premium on 2 May, ourunchanged TP of HKD6.30 was set at the offer price to reflect the likelihood ofproposed privatisation. This translates into 13.5x FY18e PE. With 3% implied upside,we reiterate our Hold rating. Key upside risks: If the privatisation is approved and theshares are purchased at HKD6.30, a 3% premium to the 15 May closing. Keydownside risks: Privatisation does not go through due to failure to obtainshareholders’approval.