As a domestic leader in mid- and high-end women's wear with leading profitability in the industry, EEKA adopts a platform architecture to empower brand building, focusing on category differentiation strategies that deeply fit the tone of each brand. Starting from 2022, EEKA has been promoting a sweeping product system reform on multiple fronts of category-based R&D, product structure categorization, fabrics and manufacturing, laying the foundation for its long-term growth. We expect EEKA to achieve attributable net profit of Rmb824mn/997mn/1,222mn in 2022E-24E, corresponding to EPS forecasts of Rmb1.20/1.46/1.78. Based on PE and PEG valuation methods, we initiate coverage with a “BUY” rating and a target price of HK$14 on 10x 2022E PE or 0.45x 2022E PEG.
　　 Company overview: A domestic leader in mid- and high-end women's wear with leading profitability in the industry.
　　Through independent incubation and acquisitions, EEKA has created eight brands to cover mid-/high-end and mass-market customer groups with products focusing on business and leisure categories. In 2021, the Company's direct/distributor/online sales increased by 13.80%/77.51%/23.56% YoY, respectively, with direct sales accounting for about 80%; its three core brands Koradior/NAERSI/NEXY.CO achieved revenue of Rmb2,325mn/1,381mn/ 871mn, accounting for 37%/22%/14%, respectively. In 2021, the Company recorded revenue/net profit of Rmb6,355mn/562mn （+19.3%/27.9% YoY）， respectively. Since the brand restructuring in 2019, the Company has posted a revenue/net profit CAGR of 23.77%/19.46%, respectively. In 2021, its blended gross profit margin （74.56%） was at the leading level in the industry and has been steadily increasing every year. The selling expense ratio was high but shows visible room for improvement.
Industry overview: The proportion of mid- and high-end women's wear has increased, and domestic brands are on the rise.
　　China's industry value of women's wear exceeded Rmb1.1trn in 2021 and may exceed Rmb1.3trn in 2026, implying a CAGR of about 4%. Considering the significant gap between China's per capita expenditure and that of developed countries, the industry should present vast potential. In 2021, the CR10 of China's branded women's wear industry was 12.83%, showing a slow trend of concentration. Benefiting from the trend of consumption upgrading and the recovery of offline retailing, the proportion of mid- and high-end women's clothing has increased, while sales via online channels have accelerated significantly, accounting for more than 10%. In the past five years, the recognition of homegrown brands by domestic consumers has gradually increased, and the share of domestic women's wear brands has increased year by year. Among them, the growth rate of top brands such as JuZui, Dazzle and Koradior is higher. With the development experience of Gucci as a reference, we believe that the pursuit of unique classic styles, continuous innovation, digital marketing and a multi-category & multi-brand presence is the only way for high-end fashion brands to achieve breakthroughs.
　　Core strengths: The platform architecture enables brand differentiation, and the product system reform lays the foundation for long-term growth. 1） Branding: EEKA established a platform to empower all brands. The main categories of its brands are differentiated, deeply fitting the brand positioning, and the Company has sought to impress all types of consumers at first sight by deepening the brand memory by shaping core brand symbols, creating classic styles, setting up brand days, integrating regional signatures and other industry initiatives. 2） Channel building: EEKA had 2,041 offline stores in 2021, mostly dedicated to mid- and high-end women's wear. For self-operated stores, it has shifted the focus to quality, seeking to consolidate its competitive advantage in mid- and high-end department stores and increase the coverage of shopping centers. For online channels, the Company has adopted the strategy of differentiated promotions by increasing the proportion of new products via Tmall, capturing the user traffic dividends of Douyin/Tiktok, setting up an in-house livestreaming team and continuing to deepen the development of the EEKA online mall. 3） Products: As the first in the industry to put forward the concept of category-based R&D in 2022, EEKA has moved to reshape the pyramid product structure. It has also promoted the reform of fabric procurement, processing and manufacturing suppliers in the direction of "categorization and centralized development" and developed innovative fabrics in cooperation with upstream fabric producers, with exclusive use secured for some fabrics. 4） Marketing: EEKA has stepped up marketing, improved team building and increased brand strength using a combination of marketing means, including airport advertising, spokesmen, fashion shows, crossover collaborations, new retail tools and others.
Potential risks: Product innovation missing expectations; the macroeconomic environment leading to disappointing demand for the Company's products; fluctuations in raw material prices or interruption of supply from suppliers; intensified competition in the industry; the Company’s product system reform not up to expectations; expense control falling short of expectations; regional Covid flare-ups weighing on retail sales.
Investment recommendation: As a domestic leader in mid- and high-end women's wear with leading profitability in the industry, EEKA adopts a platform architecture to empower brand building, focusing on category differentiation strategies that deeply fit the tone of each brand. Starting in 2022, EEKA has been promoting a sweeping product system reform on multiple fronts of category-based R&D, product structure categorization, fabrics and manufacturing, laying the foundation for its long-term growth. We expect EEKA to achieve attributable net profit of Rmb824mn/997mn/1,222mn in 2022E-24E, corresponding to EPS forecasts of Rmb1.20/1.46/1.78. Based on PE and PEG valuation methods, we initiate coverage with a “BUY” rating and a target price of HK$14 on 10x 2022E PE or 0.45x 2022E PEG.