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Equity Market Summary: Sa Sa International Holdings Limited (178 HK)

Core Content

This document provides an overview of the equity market performance and a detailed analysis of Sa Sa International Holdings Limited (178 HK), a leading cosmetics retailing group in Asia. It includes market data, company performance metrics, financial summaries, strengths, weaknesses, opportunities, and threats, as well as analyst opinions and valuation indicators.

Market Overview

• Hong Kong Equity Market:

  • HSI (Hang Seng Index) fell by 0.99%.
  • HSCEI (Hang Seng China Enterprises Index) declined by 0.63%.
  • Total turnover reached HK$105.0 billion, up 15% from the previous 30-day average.
  • SSE Composite and SZSE Component also saw declines of 0.47% and 0.93%, respectively.

• Sector & Stock Tracking:

  • Oil & Gas showed the best 1-day growth at 1.2%, while Construction had the lowest at 0.3%.
  • Stock Tracking highlighted CHANGAN RH-H (8139) and MANFIELD CHEMICA (1561) with strong 1-day and 1-quarter growth.

Sa Sa Overview

• Company Profile:

  • Founded in 1978, Sa Sa is a leading cosmetics retail chain in Asia and one of the top 10 retail groups in Hong Kong.
  • Operates over 265 retail stores and counters in Hong Kong, Macau, China, Singapore, and Malaysia.
  • Sells over 700 beauty brands, including skincare, fragrance, make-up, hair care, body care, and health/beauty supplements.
  • Employed approximately 5,000 staff in FY 2018.03.

• Market Sentiment & Sales Recovery:

  • Market sentiment has improved, with retail sales returning to positive growth of 2.2% in 2017 compared to -8.1% in 2016.
  • Cosmetic retail sales also showed a 5.5% increase in 2017.
  • Same Store Sales (SSS) growth improved significantly, turning positive in 2017/18 with 3.9% yoy growth.

• Financial Performance (2016.3 to 2018.3):

  • Revenue: Increased from HKD 7.791 billion (2016.3) to HKD 8.018 billion (2018.3), a 6.2% yoy growth.
  • Gross Profit: Rose from HKD 3.373 billion (2016.3) to HKD 3.374 billion (2018.3).
  • Operating Profit: Grew from HKD 461 million (2016.3) to HKD 549 million (2018.3).
  • Net Profit: Increased by 34.7% yoy to HKD 440.1 million.
  • Net Margin: Improved to 5.5% in 2018.3.
  • EPS (HKD): Rose to 0.146 in 2018.3.
  • DPS (HKD): Increased slightly to 0.175.
  • Free Cash Flow: Improved to HKD 582 million in 2018.3.
  • Net Gearing Ratio: Not applicable (NC), indicating a net cash position.

Key Strengths

• Market Leadership: Ranked as the leading cosmetic retail chain in Asia and one of the top 10 retail groups in Hong Kong (2017 ranking).
• Diverse Product Portfolio: Offers a wide range of quality products from over 700 global beauty brands.
• Healthy Balance Sheet:
  • Current Ratio: 297% (indicating strong liquidity).
  • Debt-to-Equity Ratio: 44% (low leverage).
  • No borrowings in 2018.3.

Key Weaknesses

• Taiwan Market: Recorded losses for 6 consecutive years, leading to the closure of all 25 stores in February 2018.
• Revenue Concentration: 82.1% of revenue comes from Hong Kong & Macau, making the company highly dependent on this region.

Opportunities

• Improved Market Sentiment: Retail sales and cosmetic retail sales have returned to positive growth in 2017.
• PRC Tourist Recovery: PRC tourist arrivals began to recover from December 2016, boosting outbound travel and consumption in Hong Kong.
• Strong Dividend Payouts: Dividend payout remained strong at 121% in 2018.3.

Key Risks

• Dependence on Tourism: The company is heavily reliant on Hong Kong's tourism industry, particularly PRC tourist arrivals.
• RMB Weakening: A weaker RMB could discourage outbound travel and consumption by mainland residents, which is crucial for Sa Sa's performance in Hong Kong & Macau.
• Market Volatility: The Hong Kong equity market is volatile, and the company's performance is closely tied to it.

Valuation Metrics

• P/E Ratio: 26.0x, slightly below the 5-year average of 20.0x.
• P/B Ratio: 4.6x, below the 5-year average of 6.9x.
• Dividend Yield: 4.6%, indicating a dividend-focused investment.

Analyst Opinion

• Peter Choi (SFC CE: AYP113) certifies that the views expressed in the report reflect his personal opinion.
• Relative Performance: Sa Sa has outperformed the HSI since March 2018, indicating positive market momentum.
• Overall View: Sa Sa has a healthy balance sheet, strong dividend payouts, and improved market sentiment. However, the high concentration of revenue in Hong Kong & Macau and dependence on tourism pose significant risks.

Disclaimer

• The report is provided by Orient Securities (Hong Kong) Limited, and investors should be aware of potential conflicts of interest.
• No liability is accepted for any losses arising from reliance on the report.
• The report is not a solicitation to buy or sell any securities and is subject to change without notice.
• Past performance is not indicative of future results.

Summary

Sa Sa International Holdings Limited has shown recovery in revenue and net profit in 2018.3, driven by improved market sentiment and strategic cost control and store relocations. The company is well-positioned in the Asian cosmetics retail market, with a healthy balance sheet and strong dividend payouts. However, it remains highly dependent on Hong Kong's tourism industry, particularly PRC tourist arrivals, and is vulnerable to RMB fluctuations. While the P/E and P/B ratios are favorable, the concentration of revenue in Hong Kong & Macau and historical losses in the Taiwan market highlight key risks. Investors should consider these factors in their decision-making process.