20180104-中国银河国际证券-周生生-00116.HK-Small_Is_Beautiful._Initiate_with_BUY._9页_1mb

Chow Sang Sang Holdings [116.HK] Summary

Core Content

Chow Sang Sang (CSS) is a Hong Kong-based jewelry retailer that has been initiated with a BUY rating due to its potential for growth and undervaluation relative to its peers. Despite being the smallest among the three leading jewelers in Hong Kong, the company is expected to show more visible growth in the current recovery cycle. The report highlights three key investment points: store additions, rental cost reductions, and e-commerce expansion.

Main Points

• Store Additions and POS Growth:
  CSS has maintained a strict self-operated model, which has helped preserve brand quality but limited its expansion pace. In FY2017E, the company is expected to add 50 new POS in Mainland China, leading to a 10.6% increase in total POS, which is higher than its peers. This growth is expected to be more visible due to its smaller base.

• Rental Cost Reductions:
  CSS has been actively reducing its rental expenses, which as a percentage of retail revenue dropped from 6.7% in FY2016 to 6.2% in 1H FY2017. These reductions are expected to support margin improvement, with NPM (Net Margin) forecasted to rise from 4.9% in FY2016 to 5.8% in FY2019E.

• E-commerce Expansion:
  E-commerce is expected to play a significant role in supplementing CSS's revenue. It currently accounts for 13% of Mainland China revenue and is projected to reach HK$1.3bn in FY2017E, or 15% of Mainland China revenue. This growth is expected to help CSS reach more consumers outside its limited physical network.

• Potential Asset Disposal:
  CSS holds non-core assets such as retail brokerage and property investments. Disposing of these could provide significant disposal gains, particularly in the Hong Kong property market. For example, selling the “229 Nathan Road” property at a HK$7,000 per sqft profit could result in a HK$200m gain, equivalent to 19% of FY2018E net profit.

Key Financial Forecasts

Investment Highlights

• Store Additions Could Have a Meaningful Impact:
  The 50 new stores in Mainland China are expected to increase total POS to 522 by the end of FY2017, a 10.6% increase, which is higher than its peers.

• Rental Reductions Lifting Overall Margins:
  The reduction in rental expenses is expected to contribute to margin expansion, especially in Hong Kong where the proportion of POS is higher than for its peers.

• E-commerce Expected to Supplement Sales:
  E-commerce is projected to grow significantly, with a 15% share of Mainland China revenue in FY2017E. This will help CSS reach new consumer segments in smaller cities.

• Potential Upside for Disposing Non-core Assets:
  The disposal of non-core assets such as retail brokerage and property holdings could improve the company's valuation and provide additional cash flow.

Valuation and Market Position

• CSS is currently the cheapest among the big three Hong Kong jewelers, with a PER of 15.1 in FY2017E and a target price of HK$23.00, based on a 16x FY2018E PER.
• The target multiple is considered undemanding when compared to peers like Chow Tai Fook (20x) and Luk Fook (17.5x).
• The company's net cash position is strong, with HK$600m in net cash on hand as of 30 June 2017, and a steady dividend payout ratio of around 38-39%.

Financial Position

• Healthy Balance Sheet:
  CSS has a strong net cash position and is expected to maintain it, with a dividend payout ratio of approximately 38-39%.
• Free Cash Flow:
  Free cash flow is expected to increase from HK$157m in FY2017E to HK$455m in FY2018E, indicating improved liquidity and financial flexibility.

Conclusion

CSS is positioned for growth in the current recovery cycle due to its strategic focus on quality, controlled expansion, and e-commerce integration. The potential for asset disposal and strong net cash position further support its attractive risk-reward profile. While the company's small size may have limited its growth in the past, it is expected to outperform its peers in the near term, making it a BUY candidate.