We expect Hengdeli to report a decline of 9.3% YoY in EBIT to RMB532m on a 4.6% YoY rise in revenue to RMB6.6bn. Core NPAT (excluding any one-off item) on our estimates will decrease by 19.1% YoY to RMB301m. Hengdeli has an investment in Ming Fung (860.HK, NR), which suffered a share price drop in 1H14, and we therefore expect Hengeli to incur a one-off investment loss of ~RMB29m (not included in our forecast currently). We expect GPM to declineby 1.4ppt YoY because of increased promotional activities. We expect theOPEX ratio to remain stable thanks to management’s focus on improving efficiency, and therefore EBITM to drop from 9.3% in 1H13 to 8.1%.
With the high base effect for HK (1H13 HK sales grew by 12.6% YoY) and theprevailing austerity policy continuing to put pressure on the HK market, we expect HK sales to decrease by 6% YoY. To recap, HK sales started to decline in 2H13 (-8% YoY). With increased market pressure and competition from peers, we think the company will offer more discounts, and therefore the GPMshould decline.
We expect Mainland China’s performance to have been better than that of HK,with a decline in sales from high-end watches narrowing to single digit, and we expect China’s retail performance to increase by 8% YoY to RMB3.1bn. Further, the company has been conducting store consolidation in Mainland China to improve profitability.
The impact from the watchcase manufacturing and counters & stores decoration businesses acquired in July and December 2013, respectively, should be minimal on Hengdeli’s financials for 1-2 years. To recap, at the 2013 analyst meeting in March, management reiterated the Chairman’s plan to repay the loan of USD100m from Swatch (UHR.VX, Buy, CHF 525) upon expiry in Jl2014