Soft 1H13 results. Hengdeli reported a 1H13 turnover of RMB 6,294.2 million, rose 9.5% YoY, in which 4.9 ppt was contributed by Harvest Max. If excluding the one-off items, Hengdeli’s core net profit dropped 26.8% YoY to RMB 352.3 million, in-line with the post warning market consensus.
No sign of a recovery in luxury product retail sales. Sales for Hengdeli’s high-end products dropped 17.6% YoY in 1H13, the anti graft and extravagance campaign in China is st ill extending and the slowdown trend of the segment in 1H13 continued throughout July and August, we expect no imminent recovery in overall demand, the near term retail sales is expected to remain unexciting.
Structurally downgrading. Though the management intended to modify the model of Harvest Max by enriching pr oduct category, however, the business is considered to dilute Hengdeli's OPM, Al so we expect the pressure of rental costs to continue not only in mainland China but also in Hong Kong despite acceptable sales growth was recorded in the district.
Investment rating “Accumulate” with target price of HK$ 2.00. We expect FY13-15 basic EPS to be RMB 0.138, 0.165 and 0.189 respectively. As the largest Swiss watch retailer in China, we are positive on the long term prospect of Hengdeli. Current valuation is not expensive. TP translates to 11.3x of FY13 EPS, 9.4x FY14 EPS, 1.2x of FY13 BPS or 1.1x of FY14 BPS.