I.T (999 HK)

Oct 30, 2015 Equity Research | Consumer Discretionary

Buy (initiation)

Target price: HK$2.90

1HFY16 results suggest a turning point; initiate at Buy with TP of HK$2.90

Albert Yip, CFA SFC CE No. ADT599 albertyip@gfgroup.com.hk +852 3719 1010 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Initiate at Buy with TP of HK$2.90 I.T is a multi-brand apparel retailer, primarily selling in-house and international brands offering a variety of different clothing styles, mainly in Greater China and Japan. The company’s impressive 33% YoY core net profit growth in 1HFY16 suggests a turning point as growth from China and Japan is now enough to drive the company’s earnings growth even though the HK market remains weak. We forecast core net profit growth of 26%/19% in FY17/18 driven by earnings growth in China and Japan and a stabilization in HK on the back of a tighter network. China and Japan contributed 49% of revenue in 1HFY16 (vs HK’s 47%). We also expect China to become the company’s largest market in terms of revenue by FY17. The positive SSS in China and Japan (led by purchases by mainland visitors) suggests the company’s reputation for fashion trendsetting is being increasingly recognized by Chinese consumers. The stock is currently trading at a trough valuation of 7.9x 1-yr forward P/E, suggesting significant re-rating potential (vs historical range of 8x-22x), if growth strategies can be well-executed. China the key growth driver Despite the softening of the economy, the company still achieved a respectable 5.9% SSSG in 1HFY16, with both staff and rental expenses ratios dropping YoY. Most of its self-operated stores are located in malls in first-tier cities with lease terms of between 3 and 10 years. Assuming a single-digit increase upon rental lease renewal, we believe 3-5% SSSG should be enough to lower its rental expenses ratio. The company’s self-operated store network only covered 19 cities in 1HFY16, implying substantial network expansion potential. We expect low-teen sales footage growth in FY16-18. By having more new stores for its high-margin in-house brands, we anticipate an increase in GM on a better sales mix going forward. Japanese market to benefit from strong growth in mainland visitors Driven by the depreciation of the yen and the relaxation of tourist visa requirements, the number of mainland visitors to Japan has been growing rapidly since Sep 2013. SSSG in Japan has also seen a similar trend, reaching 23% YoY in 1QFY16. Chinese shoppers now account for 40-50% of the company’s sales in Japan. In addition, its business in Japan has strong operating leverage as there is minimal pressure on rental and staff costs. We expect the uptrend in mainland visitors to Japan to continue, driving growth in the market. HK market a challenge, but could stabilize in FY17 The company’s 3.6% YoY decline in retail sales in 1HFY16 outperformed overall apparel retail sales in HK (-8% YoY). Sales footage fell 2% YoY in 1HFY16. We also forecast that sales footage will continue to decline YoY in FY16 (the first time since the company’s listing in FY06) and FY17 as the HK retail market is expected to remain weak in FY17. The tighter retail network could help to stabilize the SSS trend in FY17 as we believe consumers that prefer trendy fashion have higher brand loyalty. Valuation The stock is currently trading at a trough valuation of 7.9x 1-yr forward P/E. The last time the stock traded near its P/E trough (8x 1-yr forward P/E) was between Dec 2013 and Feb 2014 when core net profit fell 26% YoY in FY14. There was then a re-rating as core net profit rebounded 5% YoY in FY15. Our TP of HK$2.90 is based on 11.3x FY16E P/E, in line with its historical average. In terms of its 1-yr forward P/B, the current valuation of 0.9x is also undemanding compared to its historical range 0.7x-4.1x. We also think its 0.9x historical P/B is unjustified as most apparel peers that trade below 1x P/B are loss-making. Risks 1) HK market SSS and GM miss expectation; 2) Changes in consumer fashion preferences.

Stock valuation

Sources: Company data, GF Securities (HK) estimates

YE Feb Turnover

(HK$ m)

Net profit

(HK$ m)

Core net profit

(HK$ m)

Core EPS

(HK$)

EPS YoY

(%)

P/E Yield

(%)

BPS

(HK$)

P/B ROE

(%)

2014 6,747 280 285 0.232 -26 10.4 4.1 2.3 1.1 10.5

2015 7,181 312 300 0.244 5 9.9 5.0 2.3 1.0 11.1

2016E 7,596 245 318 0.260 6 9.3 3.3 2.4 1.0 10.9

2017E 7,989 400 400 0.328 26 7.4 5.4 2.7 0.9 12.8

2018E 8,459 475 475 0.389 19 6.2 6.4 3.0 0.8 13.6

Stock performance

Source: Bloomberg

Key data

Source: Bloomberg

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HSI I.T

Oct 29 close (HK$) 2.42

Shares in issue (m) 1220.645

Major shareholder Sham Kar Wai (60.7%)

Market cap (HK$ bn) 3.0

3M avg. vol. (m) 0.4

52W high/low (HK$) 3.60/1.85

Oct 30, 2015

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Company report

Hong Kong market a challenge, but could stabilize in FY17 The company is a leading fashion apparel retailer in Hong Kong, which accounted for 4.5% of overall HK apparel sales in FY15, according to our estimates. Amid the slowdown in HK retail sales, and driven by the decreasing number and purchasing power of mainland visitors, the company’s 1HFY16 SSS declined 0.9% YoY. Its 3.6% YoY decline in retail sales in 1HFY16 on the back of a 2% YoY drop in sales footage still outperformed overall apparel retail sales in HK (-8% YoY). We believe 3QFY16 SSS could improve QoQ given a low comparable base, which was a result of protests in the region. Compared to other HK retailers such as jewelry and cosmetics retailers, the company is less dependent on mainland customers (~40% of sales in HK market).

Figure 1: HK market SSS trend

Sources: Company data, GF Securities (HK) estimates

The company increased its promotional discounts in 1HFY16 amid a sluggish market environment, particularly in 2QFY16 due to the stock market crash. GM dropped 3.7pp YoY to 56.9% due an increase in promotional activities. Despite a softening rental trend in the HK market, we estimate a low double-digit growth in rental rates upon lease renewals in 1HFY16 as most shops are located in shopping malls rather than on streets. As most of the lease renewals in FY16 will happen in 2HFY16, we expect the increase in rental rates in 2HFY16 to be lower than in 1HFY16 as the HK rental decline accelerated in 3Q15 and is expected to continue in 4Q15. The company suffered a HK$91.4m loss in the HK market in 1HFY16 (vs HK$3.2m profit in 1HFY15) on lower GM, negative SSS and positive rental reversion. However, on the bright side, sales footage in HK fell 2% YoY in 1HFY16. We also forecast sales footage will continue to decline YoY in FY16 (the first time since the company’s listing in FY06) and FY17 as the HK retail market is expected to remain weak in FY17. The tighter retail network could help to stabilize the SSS trend in FY17 as we believe consumers that prefer trendy fashion have higher brand loyalty. Going forward, we expect the HK market to become less important in terms of its revenue and profit contribution as both the China and Japan markets grow.

Figure 2: FY15 revenue breakdown by market Figure 3: 1HFY16 revenue breakdown by market

Sources: Company data, GF Securities (HK) Sources: Company data, GF Securities (HK)

Year-end Feb 1Q 2Q 3Q 4QFY13 10.1% 5.9% 0.3% naFY14 -10.3% -8.7% -3.4% 6.2%FY15 2.2% 4.8% -4.5% 0.4%FY16 -0.5% -1.3%

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Oct 30, 2015

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Company report

Figure 4: FY15 segment profit breakdown by market

Sources: Company data, GF Securities (HK)

China the key growth driver Driven by consumers’ wider acceptance of apparel fashion and a growing middle-class, China will become the company’s key growth driver going forward. The company’s strategy for China involves both self-operated stores and franchised stores. By the end of 1HFY16, sales footage of self-operated stores had reached 1,015,507 sq ft, (~70% of footage in first-tier cities), representing 301 stores in 19 cities. The company also had 105 franchised stores in 1HFY16 (sales footage reached 143,161 sq ft), mainly focusing on new markets in lower-tier cities. We see substantial store network expansion potential for the company. For self-operated stores, the majority of sales footage is located in shopping malls in first-tier cities. Lease terms range from 3 to 10 years. Given a single-digit increase in rental rates upon lease renewal, we believe a 3-5% SSSG should be enough to lower rental expenses ratio. The remaining sales footage is primarily located in department stores in lower-tier cities. Thanks to the company’s multi-brand portfolio, we believe it can be an anchor tenant for department stores and can therefore benefit from bargaining power. Despite the softening of the economy, the company still achieved a respectable 5.9% SSSG in 1HFY16. More importantly, both staff and rental expenses ratios dropped YoY. We expect a low-teen increase in sales footage in FY16, with more new stores from in-house brands. The sales mix of in-house/international brands is currently about 60%/40%. Going forward, we expect the sales mix of in-house brands to increase gradually, which could improve GM. We also expect improvement in profit margin from the China market.

Figure 5: China market SSS trend (local currency)

Sources: Company data, GF Securities (HK) estimates

Japanese market to benefit from strong growth in mainland visitors The company acquired a 90.3% stake in Nowhere Group in Jan 2011 for JPY230m. Nowhere Group, headquartered in Japan, operates an apparel business under various brand names, including “A Bathing Ape”, “Bape”, “baby milo”, “BAPE STA”, “URSUS BAPE”, “Mr. BATHING APE”, in various countries and owns the relevant trademarks. Thanks to the company’s strong execution, the business turned around quickly in 2HFY12. The company currently has 21 stores in Japan according to its website www.bape.com. Driven by the depreciation of the yen and relaxation of tourist visa requirements, the number of mainland visitors to Japan has been growing rapidly since Sep 2013 (Figure 6). SSS in Japan has also seen a similar trend since 3QFY14 (from Sep to Nov 2013; Figure 8). Sales to local consumers also saw growth. Chinese shoppers account for 40-50% of total sales, according to management. The company’s Japan business has strong operating leverage as there is minimal pressure on labor

HK30%

China24%

Japan31%

Others15%

Year-end Feb 1Q 2Q 3Q 4QFY13 14.4% 11.4% 13.0% naFY14 -5.6% 1.8% -6.0% 10.5%FY15 4.5% 4.1% -0.2% 9.9%FY16 3.5% 8.3%

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Company report

and rental costs. Due to customers’ high loyalty to the brands, the company was able to consolidate its retail network in Japan in FY15 (sales footage dropped 11.5% YoY) to further enhance operating efficiency. In 1HFY16, profit margin in Japan jumped to 39.9% from 27.9% in 1HFY15. In terms of the percentage of the company’s total profit, Japan’s contribution increased from 51.8% in 1HFY15 to 85% in 1HFY16.

Figure 6: Monthly mainland visitor arrivals to Japan

Sources: Japan National Tourism Organization, GF Securities (HK)

Figure 7: JPY exchange rate trend Figure 8: Japan market SSS trend (local currency)

Sources: Bloomberg, GF Securities (HK) Note: month-end exchange rate used

Sources: Company data, GF Securities (HK)

In terms of a price comparison between Japan and China, according to our channel checks, this season’s retail prices for the same “Aape by a Bathing Ape” t-shirt in the company’s self-operated e-shops itezhop) and Zozotown were Rmb599 and JPY7,884 respectively. Based on an exchange rate of JPY18.859 per Rmb (closing price on Sep 30), retail prices in Japan are 30% below those in China. The depreciation of the yen therefore makes shopping in Japan more attractive. There has been consistent growth in mainland visitors to HK for eleven years since the launch of the Individual Visitor Scheme in 2003. At triple-digit growth, the number of monthly mainland visitors to Japan was just 591,500 in Aug this year, which is just 30% of the number of monthly mainland overnight visitors to HK in the same month (2.0m). After considering Japan’s larger area and more abundant tourism resources compared to HK, we would not be surprised to see the number of mainland visitors to Japan surpass HK’s mainland overnight visitors in the future. We therefore think Japan will remain one of the growth drivers for the company over the coming years.

JV with Galeries Lafayette The company and Galeries Lafayette (GL) established a 50:50 JV on Nov 21, 2010, to operate and manage department stores under the “Galeries Lafayette” trademark in major cities in China. GL, founded more than a century ago, is a leading department store operator in France. The deal shows that the company has a good relationship with GL and strong expertise in the China retail market, which can help foreign brands/retailers to develop their businesses.

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Year-end Feb 1Q 2Q 3Q 4QFY13 14.5% na -19.3% naFY14 -6.1% na 18.6% naFY15 20.2% na 13.5% naFY16 23.2% na

Oct 30, 2015

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Company report

The JV’s first department store, with a GFA of 48,000 sqm, was opened in Xidan, Beijing, in Oct 2013. There are 500+ brands in the store, including 300+ brands entering the China/Beijing market for the first time. This mix of brands will differentiate the department store from peers. According to an interview with the CEO of the JV quoted in the media, total sales jumped by an impressive 34% YoY in 1Q15. We believe the store is on track to break even in FY17. We expect the JV to open new department stores when the Beijing Xidan store becomes profitable. In Jun 2015, the JV opened an outlet store in the Surprise Outlet in Beijing.

More large stores to improve store efficiency

The company has been increasing its number of large stores that sell multiple brands to improve its store efficiency in China and HK (Figure 10). Annual retail sales per average sales footage remained stable from FY11 to FY15 (Figure 11), and as both sales footage per staff and annual revenue per staff increased (Figure 10), staff expenses ratio dropped from 17.2% to 16.1%. We believe the company will continue to open more large stores to improve store efficiency.

Figure 9: Store efficiency is improving

Sources: Company data, GF Securities (HK)

Figure 10: Per store area Figure 11: Annual retail sales per average sales footage

Sources: Company data, GF Securities (HK) Sources: Company data, GF Securities (HK)

Growth outlook 1HFY16 results suggest a turning point The company suffered a net loss of HK$31.3m in

1HFY16 (vs HK$49.2m net profit in 1HFY15). Excluding the non-recurring forex loss totaling HK$79.6m in 1HFY16 and the HK$12.8m after-tax gain from the repurchase of its senior notes in 1HFY15, core net profit increased 33% YoY to HK$48.4m in 1HFY16. Despite a loss of HK$91.3m in the HK market, OP still rose 5% YoY thanks to strong profit growth in Japan (+55% YoY) and China (+161% YoY). We believe this is a turning point as growth from China and Japan is now enough to drive the company’s earnings growth even though the HK market remains weak.

Operating expenses ratio fell 2.0pp YoY to 56.2%, led by a lower staff expenses ratio (-1.4pp YoY)

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Oct 30, 2015

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Company report

and depreciation expenses ratio (-0.4pp YoY). More importantly, inventory turnover days dropped by 9 days YoY to 168 in 1HFY16.

Figure 12: 1H16 results review

Sources: Company data, GF Securities (HK)

We estimate FY16 net profit will drop by 21% YoY, mainly due to rental pressure and declining revenue in the HK market, and the one-off realized forex loss. However, this was partly offset by profit growth in China (5% SSSG) and Japan (26% revenue growth in local currency) and a narrowing loss in its JV with GL. Excluding the one-off realized forex loss, core net profit is estimated to grow by 6% YoY. Positive net profit growth trend beginning FY17 We forecast 26%/19% core net profit growth in

FY17/18, on 5%/6% revenue growth and a 1.2pp/0.7pp OP margin improvement. In FY17, China is estimated to surpass HK and become the largest market in terms of sales for the company, led by 5% SSSG and 12% sales footage growth. For HK, we assume 8% decline in sales footage and forecast that SSS will maintain at flat in FY17 thanks to a tighter retail network. For Japan, we estimate 15% revenue growth in the local currency thanks to continuing growth in mainland visitors. For OP margin, we expect the 1.1pp improvement to come from: 1) a 0.3pp GM rebound to 61.0% due to a low base in the HK market in 1HFY16 on the back of heavy retail discounts and an increasing sales mix for in-house brands in China, and 2) a 0.8pp decline in the SG&A expenses ratio on positive operating leverage in China and Japan.

Y/E Feb (HK$m) 1H16 1H15 Change (%)

Revenue 3,392.5 3,227.6 5%

COGS (1,366.4) (1,229.3) 11%

Gross profit 2,026.1 1,998.3 1%

Operating expenses (1,905.1) (1,877.6) 1%

Other (losses)/gains 3.3 (2.6) -228%

Operating profit 124.3 118.2 5%

Finance income, net (8.7) (14.8) -41%

Other gains/(losses) (79.6) 15.3 -621%

Share of profit/(loss) of JCE (13.9) (20.0) -31%

Profit before taxation 22.1 98.6 -78%

Taxation (53.1) (49.2) 8%

Non-controlling interests (0.2) (0.2) 37%

Net profit (31.3) 49.2 -163%

EPS (HK$) (0.03) 0.04 -165%

DPS (HK$) 0.00 0.01 na

Core net profit 48.4 36.4 33%

Margin & ratios (%) Change ppt

Gross margin 59.7 61.9 (2.2)

Operating margin 3.7 3.7 0.0

Net margin (0.9) 1.5 (2.4)

Operating expenses ratio 56.2 58.2 (2.0)

Effective tax rate 240.6 49.9 190.7

Payout ratio 0.0 25.0 (25.0)

Working capital

Change

(days)/(%)

Inventory turnover days 168 177 (9)

A/R turnover days 12 11 1

A/P turnover days 52 64 (12)

Net cash/(debt) (HK$m) 408 326 25

Oct 30, 2015

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Company report

We expect 6% revenue growth from the China market in FY18, driven by 5% SSSG in China, 10% revenue growth in Japan (local currency) and 12% sales footage growth in China. For the 0.8pp OP margin expansion, we assume a 0.3pp GM improvement driven by the China market on a higher sales mix of in-house brands plus a higher proportion of revenue from Japan, and a 0.4pp decline in SG&A expenses ratio due to positive operating leverage in China and Japan.

Figure 13: Key assumptions

Sources: Company data, GF Securities (HK) estimates

Valuation We value the company at HK$2.90, based on 11.3x FY16E P/E, the same as its historical average. We think this valuation multiple is justified by the increasing recognition of the company’s fashion trendsetting reputation among Chinese consumers, which is underpinned by positive SSSG in China and Japan. Since its trading debut in 2005, the stock has traded at between 8x and 22x 1-yr forward P/E, most of the time. The stock is currently trading at a trough valuation of 7.9x 1-yr forward P/E, suggesting significant re-rating potential if growth strategies can be well-executed. The last

time the stock traded near its P/E trough (8x 1-yr forward P/E) was between Dec 2013 and Feb 2014 when core net profit fell 26% YoY in FY14. There was then a re-rating as its core net profit rebounded 5% YoY in FY15. The stock’s current valuation of 7.9x 1-yr forward P/E is below its historical average of 11.8x. The surprising and impressive 33% core net profit growth in 1HFY16 has changed market’s expectation on earnings outlook, which trigger a 20% surge of share price on 29 Oct. Looking into FY17, we forecast core net profit growth will accelerate to 26%, still driven by China and Japan. We also do not expect significant forex losses in FY17 as the risk of an excessive Rmb cash exposure has been largely eliminated following the conversion of Rmb1.2bn of deposits into HK$ deposits at the spot rate, and by forward contracts in Aug 2015. For the HK market, we believe earnings pressure in the region could be partly eased by stabilizing SSS at flat growth, driven by a net decrease in sales footage in FY16 and FY17, and a softer rental trend in FY17. The stock’s current valuation is also undemanding in terms of P/B. The stock is now trading at 0.9x 1-yr forward P/B, which is very close to the low end of its 1-yr forward P/B range (0.7x - 4.1x). The healthy positive SSSG in China and strong SSSG in Japan (primarily driven by purchases by

YE Feb (HK$ m) FY14 FY15 FY16E FY17E FY18ESales footage (sqft) (Exclude JV and franchised stores)HK 626,258 631,292 606,040 557,557 557,557growth (%) 1% 1% -4% -8% 0%China 871,518 978,854 1,096,316 1,227,874 1,375,219growth (%) 24% 12% 12% 12% 12%Japan 52,685 46,601 46,601 46,601 46,601growth (%) -2% -12% 0% 0% 0%Taiwan, Macau and others 81,364 73,804 68,005 68,005 68,005growth (%) 8% -9% -8% 0% 0%

SSSGHK -4.0% 0.7% 0.0% 0.0% -1.0%China 0.0% 4.5% 5.0% 5.0% 5.0%

RevenueHK 3,625 3,630 3,525 3,350 3,205growth (%) -2% 0% -3% -5% -4%China 2,372 2,771 3,221 3,721 4,261growth (%) 16% 17% 16% 16% 15%Japan 445 460 518 575 642growth (%) -13% 3% 13% 11% 12%Taiwan, Macau and others 305 320 333 342 351growth (%) 7% 5% 4% 3% 2%

GM (%) - Overall 59.9% 62.2% 60.7% 61.0% 61.3%HK 59.3% 60.7% 58.0% 58.2% 58.2%China 57.3% 61.0% 60.5% 60.8% 61.1%Japan 72.7% 76.4% 71.5% 71.5% 71.5%Taiwan, Macau and others 69.5% 68.6% 74.1% 73.1% 72.7%

SG&A expenses ratio (%) 53.8% 55.3% 54.0% 53.2% 52.8%

Effective tax rate (%) 18.9% 28.3% 38.4% 32.5% 33.1%

Oct 30, 2015

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Company report

mainland visitors) shows the company’s fashion trendsetting reputation is increasingly recognized by Chinese consumers. At 1x historical P/B, the company’s valuation is at the low end of its peers’ range of 0.6x - 5.4x (Figure 16). We think such a low valuation is unjustified as most peers that are trading below 1x historical P/B such as Global Brands (787 HK, NR), Trinity (891 HK, NR) and YGM (375 HK, NR) reported a loss in their latest results.

Figure 14: P/E band

Sources: Bloomberg, GF Securities (HK) estimates

Figure 15: P/B band

Sources: Bloomberg, GF Securities (HK) estimates

Figure 16: Apparel sector valuation table

Source: Company data, GF Securities (HK) estimates, Bloomberg #Company year-end in Mar. Its financial year 2015/2016/2017 data are shown as FY14/15E/16E to facilitate data comparison. ^Company year-end in Jan. Its financial year 2015/2016/2017 data are shown as FY14/15E/16E to facilitate data comparison. *Company year-end in Feb. Its financial year 2015/2016/2017 data are shown as FY14/15E/16E to facilitate data comparison.

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Price TP Mkt CapApparel Ticker Rating (Oct 29 2015) (HK$) (HK$ m) FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY16E FY14 FY15E FY15EPrada ^ 1913 HK NR 30.85 na 78,940 19.8 21.8 19.8 (38) (9) 10 (1) 5 4 3.0 2.7 2.9 3.1 2.9 13.9Esprit 330 HK NR 8.58 na 16,681 78.0 -7.8 -44.2 (104) (1094) (82) (6) (20) (8) 0.2 0.2 0.0 1.4 1.1 -8.8Global brands 787 HK NR 1.61 na 13,493 16.6 13.9 11.7 na 20 19 5 1 6 0.0 0.0 0.0 0.7 0.7 4.2Cosmo Lady 2298 HK NR 7.66 na 14,603 24.5 20.0 15.8 na 22 27 37 31 26 1.3 1.7 2.1 5.4 4.4 24.2Bosideng Intl # 3998 HK NR 0.73 na 5,845 5.8 na na (10) na na 1 na na 6.7 na na 0.7 na naGiordano Intl 709 HK NR 4.19 na 6,580 16.1 14.7 13.5 (39) 10 9 (5) 4 5 6.4 6.6 7.0 2.3 2.3 15.5China Lilang Ltd 1234 HK NR 6.57 na 7,942 11.3 10.3 9.3 7 10 11 6 11 11 4.6 7.0 7.6 2.4 2.2 22.5La Chapelle 6116 HK NR 13.30 na 6,555 8.3 8.9 7.6 na (7) 18 26 20 18 3.0 6.8 8.0 1.8 1.6 18.4Koradior 3709 HK NR 9.87 na 5,004 27.0 na na na na na 48 na na 1.0 na na 6.0 na naChina Outfitters 1146 HK NR 0.68 na 2,343 9.1 na na (47) na na na na na 5.4 na na 1.2 na naTrinity 891 HK NR 1.16 na 2,026 12.5 na 21.9 (45) (116) (453) (3) (17) 5 3.7 1.0 2.9 0.6 0.6 -0.6I.T Ltd * 999 HK Buy 2.42 2.90 2,954 9.9 9.3 7.4 5 6 26 6 6 5 5.0 3.3 5.4 1.0 1.0 10.9YGM # 375 HK NR 6.20 na 1,028 na na na na na na na na na 6.5 na na 0.7 na naCabbeen 2030 HK NR 5.15 na 3,662 na na na na na na na na na 3.8 na na 3.7 na naAverage 19.9 11.4 7.0 (34) (129) (46) 10 5 8 3.6 3.3 4.0 2.2 1.9 11.1

P/E (x) EPS growth (%) Revenue growth (%) Yield (%) P/B (x) ROE (%)

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Company report

Company background

The company offers a wide range of fashion apparel and accessories that offer a variety of different styles through its multi-brand business model, sold at varying retail price points and targeted at a variety of customer groups. Apart from its ten in-house brands, the company also sells more than three hundred international brands and certain licensed brands. For in-house brands, the company has self-operated stores in China, HK, Japan, Macau, Taiwan and the US, as well as franchised stores in new markets such as China (in lower-tier cities), Singapore, South Korea, Indonesia, Europe and Canada. The company mainly sells international brands in China and HK through self-operated stores. The company established a JV with Galeries Lafayette to operate department stores under the “Galeries Lafayette” trademark in China. The JV currently operates one department store and one outlet in Beijing. The company has also established JVs with French Connection in HK, Macau and China, with Zadig & Voltaire in HK, and with Camper in China. The company is affected by significant seasonality. Historically, the first half of the year contributes 40-45% of full-year revenue and 10%-30% of full-year net profit. The fourth quarter is the peak season of its financial year.

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Company report

Figure 17: Financial statements

Sources: Company data, GF Securities (HK) estimates

YE Feb (HK$ m) FY14 FY15 FY16E FY17E FY18E YE Feb (HK$ m) FY14 FY15 FY16E FY17E FY18E

Turnover 6,747 7,181 7,596 7,989 8,459 Fixed assets HK 3,625 3,630 3,525 3,350 3,205 Furniture and equipment 913 836 878 936 990 China 2,372 2,771 3,221 3,721 4,261 Intangible assets 343 322 316 309 302

Japan 445 460 518 575 642

Investments in and amounts due

from jointly controlled entities 220 167 145 139 143 Others 305 320 333 342 351 Rental deposits 307 317 317 317 317COGS (2,703) (2,716) (2,986) (3,115) (3,276) Deferred tax assets 136 132 132 132 132Gross profit 4,044 4,464 4,610 4,874 5,183 Others 17 42 42 42 42

1,937 1,817 1,829 1,874 1,925Other income and gains 7 20 19 24 30SG&A expenses (3,628) (3,971) (4,101) (4,253) (4,467) Current assetsOperating profit 424 513 527 645 746 Inventories 1,117 1,261 1,372 1,431 1,505

A/C receivable 181 244 258 271 287Net finance cost (31) (22) (33) (45) (38) Other prepayments 251 286 302 318 336Other gains/losses (6) (19) (73) 0 0 Others 36 72 72 72 72Share of profit of JVs (42) (36) (22) (6) 4 Cash and cash equivalents 2,315 2,294 2,307 2,497 2,703Profit before taxation 345 436 399 594 712 3,900 4,156 4,312 4,589 4,904Taxation (65) (124) (153) (193) (235)Non-controlling interests (0) (0) (1) (1) (1) Current liabilitiesNet Profit 280 312 245 400 475 A/C payables 358 385 424 442 465Core net profit 285 300 318 400 475 Other payables 574 708 778 812 854

Others 24 34 34 34 34ST borrowings 496 267 217 167 117

YE Feb (HK$ m) FY14 FY15 FY16E FY17E FY18E Income tax liabilities 32 101 126 158 1931,485 1,495 1,579 1,613 1,663

Profit before tax 345 436 399 594 712Depreciation & amort 280 308 295 279 283 Non-current liabilitiesInterest income (44) (64) (48) (31) (33) LT borrowings 1,495 1,469 1,419 1,369 1,319Interest expenses 75 85 81 76 71 Others 17 134 136 136 137Change of working capital 102 (92) (33) (36) (44) Deferred tax liabilities 45 34 34 34 34Others 23 12 (35) (47) (51) 1,556 1,637 1,589 1,539 1,490Tax paid (77) (88) (138) (173) (214)Operating cash flow 705 598 521 662 724 Share capital 123 123 122 122 122

Reserves 2,673 2,716 2,850 3,187 3,552Capex (259) (275) (330) (330) (330) Equity 2,796 2,839 2,972 3,309 3,674Interest received 40 63 48 31 33Others (57) (26) 0 0 0 Non-controlling interests 1 1 1 2 3Investing cash flow (275) (238) (282) (299) (297)

Change of bank loans 964 (99) (100) (100) (100) YE Feb (HK$ m) FY14 FY15 FY16E FY17E FY18EShare issue/buyback 1 (3) (15) 0 0Buyback of senior notes 0 (120) 0 0 0 Turnover growth 3.1% 6.4% 5.8% 5.2% 5.9%Dividend paid (37) (135) (110) (73) (120) Core net profit growth 4.2% 4.2% 4.2% 5.0% 5.6%Financing cash flow 928 (357) (225) (173) (220)

Gross profit margin 59.9% 62.2% 60.7% 61.0% 61.3%Net Cash Flow 4 182 147 (155) 336 Operating profit margin 6.3% 7.1% 6.9% 8.1% 8.8%Effect of forex change (4) (25) 0 0 0 Core net profit margin 4.2% 4.2% 4.2% 5.0% 5.6%

Current ratio 2.6 2.8 2.7 2.8 2.9Quick ratio 1.9 1.9 1.9 2.0 2.0

Inventory turnover days 157 160 161 164 164

Core ROE 10.7% 10.6% 10.9% 12.8% 13.6%Core ROA 5.5% 5.1% 5.2% 6.4% 7.2%

Income Statement Balance Sheet

Cash Flow Statement

Financial Ratios

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Company report

Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months

Company ratings

Buy Stock expected to outperform benchmark by more than 15%

Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15%

Hold Expected stock relative performance ranges between -5% and 5%

Underperform Stock expected to underperform benchmark by more than 5%

Sector ratings

Positive Sector expected to outperform benchmark by more than 10%

Neutral Expected sector relative performance ranges between -10% and 10%

Cautious Sector expected to underperform benchmark by more than 10%

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