Hengdeli announced profit warning
On 7 August 2013, Hengdeli announced that its net profit for 1H2013 will record a decrease yoy due to:
1) the impairment provision made on the shares of Ming Fung (860.HK NR), 2) the non-recurring gain from the disp osal of OMAS in early 2012, and 3) the decrease in the overall GPM under unfavorable economic conditions.
Deutsche Bank view
Share price of Ming Fung (15.4% owned by Hendgeli) declined by 27% in 1H13 from HK$0.35/share end of Dec to HK$0.255 end of Jun ((HK$0.235/share as of 7 Aug), a decline of 33% ytd.
GPM in 2013 for watch was affected as there was no price increase by the principles in 2012 given weak market sentiment. For 2013, some selected high-end brands have raised its retail pr ice mid of the year. In the past, watch brands normally increase its retail price by mid to high single digits every year.
To recap, we published Hengdeli’s 1HFY13 results preview on 17 Jul 2013. We expect Hengdeli to report a 21.9% decline in core net profit to RMB335.9m, on an 8% rise in sales. EBIT is expected to decline 12.8%. We expect 12 new stores opened during this period ( 30 for FY13). SSSG for high-end watches remains negative while mass-market watches remain healthy. SSSG for the HK operation (mainly high-end watches) has recovered during this period but has been affected by high rental costs. Inventory should be stable, similar to last year in value terms.