Belle announced FY17 results after market close on 15 May 2017It recorded an NP decline of 18% to RMB2,403m, which is in line with theprofit warning it announced on 19 Mar. Excluding impairments, EBIT declined16.2% to RMB4,658m, 4.5% ahead of our forecast. Core NP declined 18% toRMB3,506m, in line with the DB forecast. The board proposed DPS ofRMB0.18 （RMB0.22 in FY16）， indicating a flat payout of 61%. As there was noextra dividend declared exceeding RMB0.06/share, the privatization offer priceremains RMB6.3/share.
　　Key takeaways from analyst briefing
　　Management pointed out several challenges that Belle is unable to address,given its current operational capabilities and macro headwinds.
　　1） Increasingly mature customers’ value-for-money demand. This is difficult toaddress as retailers in China bear much higher operating costs than othermature markets, mainly rental cost and tax cost. For instance, rent as apercentage of sales for Moussy in China is 26%, vs 9% in Japan, while staffcost as a percentage of sales is only 3ppt lower than Japan. For its sportswearbusiness, rental ratio is around 18% vs 10% or lower for Footlocker in the US.
　　Thus it is hard for Belle to significantly lower retail prices in physical channels.
　　2） Over-reliance on department stores, which generated 80% of sales and90% of profit, implies that they have higher profitability than other channels,e.g. shopping malls and ecommerce. Belle has the highest penetration in thedepartment store channel, accounting for 20% of its footwear counters at eachdepartment store on average and 28% of total footwear sales accordingly.
　　While it expect the number of department stores to continue a declining trend,this would result in fewer POS for Belle as well. Meanwhile, its online businessis restricted to a certain size as Belle’s market share in each online platform islow in a much more fragmented market than offline.
　　Thus management realizes that it is time to find longer-term solutions viaexternal resources and privatization may enable the company to executetransformation in a more efficient way. The transformation focus will be on a）digitalization, accurate and efficient targeting; b） convenience: providingproducts and service via a more convenient approach; and c） automation: Asapplied to manufacture, retail and branding.
　　If privatization is not approved, Mr Sheng will initiate transformation,potentially sacrificing short-term profit. He also plans to terminate thedisclosing of quarterly operation updates as they do not want investors to beshort-term oriented. If privatization is passed, Mr Sheng will assist thecompany and new shareholders to execute the transition in the following twoto three years.