2014 outlook
remains cautious; 2013 results below expectation
2013 NP was way below our and market expectations. While Hengdeli remains positive on the long-term outlook (urbanization and rise in middle income class), 2014 remains a year full of uncertaint ies, although it is likely to be better than 2013 in terms of sales growth. Ho wever, the recovery of high-end watches took much longer than we expected and operating deleverage remains in 2HFY13. We thus lower our FY14/15 NP by 32/40% and introduce the 2016 forecast. Our revised target price is HK$1.67 (from HK$2.38) (with similar adjustment in earnings forecast). Given the limited upside and a longer-than-expected recovery, we downgrade to Hold.
2013 results below expectations on lower GPM and higher opex ratio
Core net profit, excluding the impairment provision for Ming Fung and the non-recurring gain from the disposal of OMAS in 2012, declined by 33% to RMB531m. Core net profit is -13%/-9% below our expectation (RMB610m) and market forecast (RMB581m). Sales are 7.5% below our forecast due to the weaker-than-expected retail sales, but they were in line with market consensus. The company declared a fi nal dividend of RMB0.025 per share, representing a payout ratio of 30% (20% in FY12).
We lower our FY14/15 NP by 32/40% and introduce 2016 forecast
We previously expected that after over a year of slowdown due to anticorruption measures since 4Q12, performance will start to improve from 2HFY13. However, it did not happen. We lower our FY14/15 NP by 32/40%. The adjustment was partly due to the lo wer sales assumption given the limited store opening plan, resulting in a higher opex ratio.
Target price revised to HK$1.67, implying 12x/11x 2014/2015E PE
Our DCF-derived target price is based on Deutsche Bank’s new China COE of 9.9% and a higher beta of 1.3 to reflect the corporate governance risk. Downside risks: 1) macro slowdown; 2) working capital risk; 3) corporate governance; and 4) the impact of anti-cor ruption policy in China. Upside risks: 1) macro outlook improves with rising SSSg; and 2) brands increase their retail price in 2014.