Still a difficult time for retail sales for luxury products. During the course of the government action on curbing graft and extravagance, lavish spending of all levels has been brought down. YTD in 2014, we did not see obvious improvement in the retail sales for Hengdeli. Going forward, we expect no imminent recovery in overall demand for Hengdeli, especially for the high-end segment.
Weakening inventory position. As of the end of FY13, Hengdeli’s inventory turnover days was 223 days, which wa s considerably higher than that of some of Hengdeli’s peer companies. Although Hengdeli has been working closely with the major watch brands on inventory optimisation, however, we don’t expect inventory turns to improve soon.
Structurally transforming. Hengdeli did make effort in response to market changes and is actively adjusting its pace and schedule in developing the retail network against the backdrop of an economic slowdown. We believe the Company will be able to secure some middle-end markets.
Maintain “Accumulate” with target price of HK$ 1.53. We expect FY14-16 basic EPS to be RMB 0.104, 0.115 and 0.131, respectively. We are still positive on the long term prospect of Hengdeli, as it is transforming its merchandise structure. Current valuation is not expensive. TP trans lates to 11.5x of FY14 PER, 10.4x FY15 PER, 0.7x of FY14 or FY15 PBR.