money talk - · pdf filemoney talk hong kong 09 july 2013 ... of hk$23.2m in 2hfy13, an...

Money Talk Hong Kong 09 July 2013

Stelux Holdings www.utrade.com.hk 1

Stelux Holdings (84 HK)

All eyes on mass market

Company Background

• Founded in 1963 originally as a watch component manufacturer in Hong Kong, the group established its first City Chain store in 1985 and acquired its optical business in 1988. Stelux operates a retail network of over 600 stores under two main brand names, City Chain and Optical 88, in Hong Kong, Macau, mainland China, Taiwan and South-east Asia. It recently rolled out its single-brand concept store, eGG, in China, after a successful trial run in Hong Kong.

Investment Highlights

• Leading player in mid-range watch and optical retail segment. Its house brands, eg Solvil et Titus, which account for 40-45% of sales, enjoy higher gross margins of 70-80% compared with 55-60% for agency brands eg Seiko. Foreign brands account for 40% of sales, with gross margins of 40-55%. Over the past few years, the group has substantially increased overall gross margin by strengthening its house brand product portfolio and subsequently its contribution to sales.

• Same-store sales growth resilient in 1QFY14. Management revealed that

its Greater China operations achieved a high single-digit growth in its top-line, driven by a double-digit and single-digit same-store sales (SSS) growth in Hong Kong and China in 1QFY14 respectively.

• New Chinese CEO and Boyu Capital to strategically lead operations in China back to growth. The new team in China has managed to narrow losses over the last 18 months, from a loss of HK$37.0m in 2HFY12 to a loss of HK$23.2m in 2HFY13, an improvement of 37% yoy. Management targets its operations in mainland China to break even by FY15.

Share Price Catalysts

• Better-than-expected sales in 2QFY14. • Improvement in store productivity in 2QFY14.

Key Financials

Year to 31 Mar (HK$m) 2010 2011 2012 2013F 2014F Net turnover 2,370.2 2,705.6 3,330.9 3,647.2 4,108.5 EBITDA 158.7 256.8 396.4 405.0 528.0 Operating profit 61.3 168.4 298.1 281.3 419.7 Net profit (rep./act.) 24.6 130.8 250.3 232.9 290.5 Net profit (adj.) 24.6 130.8 250.3 232.9 290.5 EPS (fen) 0.0 0.1 0.2 0.2 0.3 P/E (x) 21.2 7.0 7.4 13.1 9.3 P/BV (x) 0.6 0.9 1.6 2.2 1.5 Dividend yield (%) 3.6 3.8 4.1 2.3 3.2 Net margin (%) 1.0 4.8 7.5 6.4 7.3 Net debt/(cash) to equity (%) 37.4 21.4 24.3 30.1 n.a. Interest cover (x) 5.2 18.1 32.3 15.9 n.a. ROE (%) 3.0 14.3 23.2 18.1 20.0 Consensus net profit n.a. n.a. 216.0 257.4 298.3 Net turnover 2,370.2 2,705.6 3,330.9 3,647.2 4,108.5

Source: Stelux, UOB Kay Hian

NON RATED

Share Price HK$2.52

Target Price n.a.

Upside n.a.

Company Description

Stelux Holdings International Limited, through its subsidiaries, retails and distributes watches, glasses, and related optical gears.

Stock Data

GICS sector Retail-Jewelry

Bloomberg ticker: 84 Shares issued (m): 1,046.5 Market cap (HK$m): 2,679.0 Market cap (US$m): 345.7 3-mth avg daily t'over (HK$m): 4.9

Price Performance (%)

52-week high/low HK$3.32/HK$2.295

Major Shareholders %

Mr Joseph Wong 50.85

Price Chart

Source: Bloomberg

Analysts

Mila Wu +852 2236 6752 [email protected]



• Leading player in mid-range watch and optical retail segment. Its house

brands, eg Solvil et Titus and CYMA, which account for 40-45% of sales and enjoy higher gross margins of 70-80% compared with 55-60% for agency brands eg Seiko. Foreign brands, eg Citizen and ENICAR, account for 40% of sales, with gross margins of 40-55%. Over the past few years, the group has substantially increased overall gross margin by strengthening its house brand product portfolio and subsequently its contribution to sales.

Figure 1: Brand Portfolio

House Brands Agency & Distribution Brands Foreign Brands

Solvil et Titus SEIKO Citizen

CYMA SUUNTO ENICAR

PRONTO Agnes b. Casio

EGG ROTARY GUESS

OBAKU Fossil

Yonger & Bresson Sultana

Claude Bernard

Vivienne Westwood Source: Stelux, UOB Kay Hian

• HK & Macau performance defy industry downtrend. Segmental revenue

from City Chain increased 15.6% yoy to HK$1,281.6m in FY13, with mainland Chinese tourists remaining as the key contributor, accounting for 60-70% of revenue. Gross margin improved by 1.8ppt to 66.6% in FY13 from 64.8% in FY12 due to an increase in contribution from house brands with higher gross margins and stable pricing policies. Management noted that they did not engage in discounting activities but focused on improving store operating efficiency to drive sales.

Figure 2: Revenue By Geographic Location Figure 3: Revenue By Business Segment

Greater

China

69.7%

SE Asia

30.3%

Citi Chain

55.1%

Optical 88

31.8%

Wholesale

12.4%

Others 0.7%

Source: Stelux, UOB Kay Hian Source: Stelux, UOB Kay Hian • SSS growth resilient in 1QFY14. Management revealed that its Greater

China operations achieved a high single-digit growth in its top-line, driven by a double-digit and single-digit SSS growth in Hong Kong and China in 1Q14 respectively.

• Mass-market spending unaffected by crackdowns on lavish spending. Management noted that spending by the mainland Chinese remained rather resilient despite the Chinese government's crackdown on gifting activities and conspicuous consumption, when compared with luxury counters who all reported further declines in net profit, SSS growth and margins in FY13.



• New Chinese CEO and Boyu to lead operations in China back to growth. In Dec 12, Boyu Capital, founded by the grandson of former president Jiang Zemin, entered into a strategic partnership with Stelux by subscribing for HK$371m of convertible bonds due in 5 years. With the help of Boyu, Stelux appointed Mr Ren Yi as the new China CEO. He has extensive knowledge of the Chinese retail market. Over the past 18 months, the new team has managed to reduce operating losses from a loss of HK$37.0m in 2HFY12 to a loss of HK$23.2m in 2HFY13, an improvement of 37% yoy. Management targets its operations in mainland China to break even by FY15.

• Continual restructuring of operations to focus on tier-2/3 cities. Despite the closure of non-performing stores (about 11% of total stores in China in FY13), watch sales in mainland China maintained a revenue growth of 3.5% yoy to HK$164.9m in FY13, due to active measures taken to improve store productivity. Management noted that the slowdown in tier-1 cities, where most of its stores are located, was more serious than expected. In the coming quarters, the new China team will focus on expanding into tier-2/3 cities, where sales are much more resilient and rental costs much lower, and on improving store productivity by optimising product offerings to adapt to local taste. The group has opened 4 stores in Wuhan, Wuxi, Chongqing and Hangzhou, where demand for its watches in such cities are significantly stronger than in tier-1 cities. Figure 4: Store Portfolio in Asia as of End-Mar 13

Store Portfolio No. of Stores Chg

Citi Chain HK & Macau 113 +15

China 88 -13

Southeast Asia 199 -2

400 --

Optical 88 HK & Macau 93 -7

China 40 +5

Southeast Asia 94 -3

227 +1

eGG HK 8 +5

China 1 +1

9 +6

Total 636 +7

Source: Stelux, UOB Kay Hian

• Optical 88: Strategic shift to target ageing demographic population. Hong

Kong/Macau sales remained satisfactory with revenue of HK$752.1m, up 4.1% yoy, and gross margin remained at 65% in FY13, amid intense competition. Local customers accounted for 70-80% of sales. In contrast, the majority of Stelux's eyewear sales focus on lower-margin sunglasses in China, as a high proportion of its customers are tourists, whereby sales are often one-off and unstable. Management noticed a lack of optical shops that provide professional eye care services in China; hence the group will focus on developing its presence in the optometry market by opening stores in residential areas to target an affluent ageing population.



• eGG: the future growth engine of its optical business. Stelux

launched its single-brand concept eGG in Hong Kong, an eyewear fashion accessories brand aimed at younger fashion-conscious customers. The frames are manufactured by OEMs in China and Korea and the lenses are manufactured by Japan's Hoya. The optical glasses are priced at HK$380-780, enjoy high gross margins of above 70% and boast a quick service turnaround time of less than 2 hours. After a successful trial run in Hong Kong, Stelux subsequently rolled out eGG stores in China. For now, there are 13 shops in Hong Kong, Beijing, Shanghai and Chongqing. Management expects eGG to drive the growth of its optical business in the near future.

Financials

• Stelux's net gearing ratio increased by 5.8ppt to 30.3% in FY13 from 24.5% in FY12. Return on equity decreased by 4.6ppt to 16.6% in FY13 from 21.2% in FY12. Both developments were due to a substantial increase in net debt from the convertible bonds issued to Boyu. Stock turnover days increased to 292 days from 256 days. However, the group improved inventory control in 2HFY13 by 7 days from 1HFY13 (299 days).

Risks

• Rental costs and overheads continue to increase. • Delay in narrowing losses at its China operations. Valuation/Recommendation

• Stelux is trading at around 13.1x 2013F PE and 2.2x 2013F P/B with a dividend yield of 2.3%. Stelux has been substantially rerated over the last 12 months due to Boyu Capital entering as a strategic partner and its inclusion in the MSCI Global Small Cap Indices. If the group continues to deliver above-industry SSS growth in the next few quarters, we expect the upward momentum in its share price to continue.



Bloomberg Consensus

Recommendation Buy Sell Hold Valuation Ratios 3/10 3/11 3/12 3/13E 28/06/2013 88% 0% 13% P/E 21.2x 7.0x 7.4x 13.1x Target Price (HK$) 3.42 3.42 EV/EBIT 13.8x 6.7x 7.2x 12.4x Upside 36% 36% EV/EBITDA 5.3x 4.4x 5.5x 8.6x P/S 0.2x 0.3x 0.6x 0.8x Income Statement (HK$m) 3/10 3/11 3/12 3/13E P/B 0.6x 0.9x 1.6x 2.2x Revenue 2370.2 2705.6 3330.9 3647.2 Div Yield 3.6% 3.8% 4.1% 2.3% Gross Income 1422.7 1658.8 2055.3 2285.3 Operating Income 61.3 168.4 298.1 281.3 Profitability Ratios % 3/10 3/11 3/12 3/13E Pretax Income 63.4 182.9 310.4 300.5 Gross Margin 60.0 61.3 61.7 62.7 Net Income Adjusted* 24.6 130.8 250.3 232.9 EBITDA Margin 6.7 9.5 11.9 11.1 EPS Adjusted 0.0 0.1 0.2 0.2 Operating Margin 2.6 6.2 9.0 7.7 Dividends Per Share 0.0 0.0 0.1 0.1 Profit Margin 1.0 4.8 7.5 6.4 Payout Ratio (%) 77.2 26.2 34.2 32.8 Return on Assets 1.4 7.2 11.9 9.1 EBITDA 158.7 256.8 396.4 405.0 Return on Equity 3.0 14.3 23.2 18.1

Peer Comparison Ticker Price @ Market ------PE------ ------P/B------ Yield

08 Jul 13

(HK$) Cap

(HK$m) FY12

(x) FY13F

(x) FY12

(x) FY13F

(x) FY13F

(%) Stelux Holdings 84 HK 2.52 2,637.1 7.45 9.42 1.59 1.55 3.39 Luk Fook Holdings 590 HK 17.76 10,462.6 9.71 7.98 2.48 1.44 4.47 Chow Tai Fook Jewellery Group 1929 HK 8.07 80,700.0 17.96 12.77 4.24 2.13 2.51 Emperor Watch & Jewellery 887 HK 0.59 4,060.6 15.83 8.47 1.56 0.92 5.32 Chow Sang Sang Holdings 116 HK 15.4 10,424.6 12.36 9.08 1.74 1.35 3.61 Hengdeli Holdings 3389 HK 1.72 8,261.0 11.47 8.50 1.80 1.09 4.04 Oriental Watch Holdings 398 HK 2.46 1,403.7 11.44 10.55 0.90 0.62 2.43 Time Watch Investments 2033 HK 0.79 1,643.2 n.a. 7.27 n.a. 1.16 6.16

Average 14,949.1 12.32 9.25 2.05 1.28 3.99

Source: Bloomberg, UOB Kay Hian:



Traders’ Corner Weigao (1066 HK): Likely to pull back soon Current downtrend remains intact unless Weigao finds support near the broken resistance line near HK$7.70 to set up a rebound base. Given the steepness of the decline of the stock, the stock is likely to pull back soon. An upward breakout from the downtrend resistance line will make way for the stock to test the initial resistance at the psychological barrier of HK$9.00.

Kunlun (135 HK): Tracing out a parallel downtrend channel Kunlun has been tracing out a parallel downtrend channel since Mar 13. With reference to the WLPR, the stock seems to have slowed down its downward momentum as it approaches the parallel channel bottom near the previous low of HK$11.31. If the stock could find support in the neighbourhood of HK$11.31 and penetrate HK$13.00 thereafter, we will have to shift the resistance higher to HK$13.60. Our above preferred view will remain valid unless the stock closes decisively below the previous low of HK$11.31.

PICC (2328 HK): Bullish divergence of RSI In the wake of the bullish divergence of RSI with PICC’s stock price, PICC is consolidating between HK$8.16 and HK$8.89. Given the bullish divergence, the completion of the consolidation is likely to be followed by upward momentum. Once the 0.38x retracement level at HK$8.89 is breached by the upward momentum, we expect the next resistance to be situated at the 0.62x retracement level at HK$9.34.

Source: HKETNet Barole Shiu, CAIA. CMT

+852 22366716 [email protected]



As of 9 July 2013, the analyst and his / her immediate family do not hold positions in the securities recommended in this report. We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian (Hong Kong) Limited only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add to or dispose of any such securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for only institutional clients, is an authorised person in the meaning of the Financial Services and Markets Act 2000 and is regulated by Financial Services Authority (FSA). In the United States of America, this research report is being distributed by UOB Kay Hian (U.S.) Inc ("UOBKHUS") which accepts responsibility for the contents. UOBKHUS is a broker-dealer registered with the U.S. Securities and Exchange Commission and is an affiliate company of UOBKH. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact UOBKHUS, not its affiliate. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates herein reflect our judgement on the date of this report and are subject to change without notice. This report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, the firm preparing this report or its affiliates or the principals or employees of such firm or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal in transactions in any of these securities. Any such non-U.S. persons may have purchased securities referred to herein for their own account in advance of release of this report. Further information on the securities referred to herein may be obtained from UOBKHUS upon request. UOB Kay Hian (Hong Kong) Research Department Room 901, 9/F, Aon China Building, 29 Queen's Road Central, Hong Kong Tel: (852) 2521 8787, Fax: (852) 2845 1655 http://research.uobkayhian.com MCI (P) 122/03/2013 RCB Regn. No. 198700235E

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