20210319-招银国际-中国利郎-01234.HK-A_prudent_retail_sales_target_and_attractive_yield_9页

CMB International Securities | Equity Research | Company Update Summary

Core Company Overview

• Company Name: China Lilang (1234 HK)
• Sector: Apparel
• Parent Company: China Merchants Bank
• Current Price: HK$5.35
• Target Price: HK$6.76
• Rating: BUY
• TP Change: +26.4% from previous target of HK$5.89
• Auditor: KPMG

Financial Performance

Earnings Summary (YE 31 Dec)

2H20 Results

• Net Profit: Declined by 31% YoY to RMB 557mn

• Missed Estimates: Missed CMBI and BBG estimates by 9% and 16% respectively

• Reasons for Miss:

  1. Reduction in trade fair orders to facilitate channel destocking
  2. Inventory buyback provision of RMB 390mn
  3. Improved GP margin due to increased sales from self-owned smart casual business

• DPS: HK$44 cents declared, translating to 11%–12% FY21E/22E yield

FY21E Revenue and Net Profit Growth

• Revenue Growth: 18.7% YoY
• Net Profit Growth: 35.9% YoY
• EPS Estimate: Cut by 10% for FY21E and 6% for FY20E to factor in trade fair order cut and one-off costs, but increased wholesale prices offset some of the impact

Strategic Changes

• Retail Sales Growth Target: 10%+ for FY21E, with optimism due to:

  1. Strong YTD 2021 retail sales growth of 20–25%, accelerating from 10–15% in 4Q20
  2. E-commerce sales growth of 120% in FY20 and continued momentum
  3. Limited inventory pressure, especially after inventory buybacks and trade fair order cuts

• Store Model Transition:

  • 56% of core brand stores will switch to consignment model
  • Online stores will be converted to self-owned model
  • Benefits:
    1. Increased motivation for distributors and store managers
    2. Enhanced O2O inventory sharing
    3. Higher GP margin due to increased wholesale discounts (to 60% from 59%)
    4. Higher profit consolidation
    5. Better management, design, and marketing support
    6. Better synergies with the group

Valuation Analysis

• Current Valuation:
  • P/E: 7x FY21E (1 s.d. below 3-year average of 8x)
  • Yield: 11% FY21E
• Attractive Valuation:
  • The current valuation is considered highly attractive
  • Raised target price to HK$6.76 (from HK$5.89), based on 9x FY21E P/E

Peer Comparison

H Shares Apparel

A Shares Apparel

International Apparel

Key Assumptions

Shareholding and Performance

• Shareholding Structure:

  • Mr Wang & Family: 67.51%
  • Value Partners: 4.98%
  • Free Float: 27.51%

• Stock Data:

  • Market Cap: HK$6,407mn
  • 3-Month Average Turnover: HK$7.65mn
  • 52-Week High/Low: HK$5.95 / HK$4.05
  • Total Issued Shares: 1,197.5mn

• Share Performance:

  • 1-Month: -1.8% (Absolute), +2.1% (Relative)
  • 3-Month: +4.1% (Absolute), -6.2% (Relative)
  • 6-Month: +28.0% (Absolute), +6.4% (Relative)
  • 12-Month: +18.9% (Absolute), -9.9% (Relative)

Key Figures and Analysis

• Earnings Revision:

  • Revenue: Revised down by -6.9% for FY21E, -1.1% for FY22E
  • Gross Profit: Revised down by -14.7% for FY21E, -12.2% for FY22E
  • EBIT: Revised down by -12.2% for FY21E, -10.6% for FY22E
  • Net Profit: Revised down by -13.5% for FY21E, -9.8% for FY22E

• CMBIS Estimates vs Consensus:

  • Revenue: -15.3% for FY21E, -12.7% for FY22E
  • Gross Profit: -14.7% for FY21E, -12.2% for FY22E
  • EBIT: -12.2% for FY21E, -10.6% for FY22E
  • Net Profit: -13.5% for FY21E, -9.8% for FY22E
  • Diluted EPS: -10.0% for FY21E, -5.7% for FY22E
  • Gross Margin: +0.3ppt for FY21E, +0.2ppt for FY22E
  • EBIT Margin: +1ppt for FY21E, +0.7ppt for FY22E
  • Net Profit Margin: +0.5ppt for FY21E, +0.8ppt for FY22E

Conclusion

China Lilang's recent 2H20 results missed due to trade fair order reductions and inventory buybacks, but the firm believes this is likely a one-off event. The company is maintaining its BUY rating with an increased target price to HK$6.76, based on improved fundamentals and an attractive 9x FY21E P/E. The current valuation at 7x FY21E P/E and 11% yield is viewed as favorable. The retail sales growth target for FY21E is optimistic, driven by strong YTD performance, e-commerce momentum, and reduced inventory pressure. Strategic shifts in store models are expected to enhance operational efficiency and profitability.