20141211-法国巴黎银行-Valuation_premium_should_narrow_20页_799kb

Sa Sa International Summary

Core Content

Sa Sa International is a leading cosmetics retailing group in Asia, with a strong presence in Hong Kong & Macau, which accounts for 81.3% of total turnover and 109.5% of total profit in 1HFY15. The company has historically grown its top and bottom lines, driven by PRC tourist inflows and a shift toward higher-margin exclusive brands. However, the company is currently facing multiple headwinds that are affecting its growth trajectory.

Main Challenges

• Hong Kong & Macau Market Pressures:

  • The recent pro-democracy protests have impacted Sa Sa's short-to-medium-term growth.
  • A shift in PRC tourist mix to lower-tier cities with lesser purchasing power has reduced average ticket size.
  • The retail network in HK & Macau is already well-penetrated, with limited room for expansion.
  • Management is attempting to grow business outside of Hong Kong, but this is unlikely to offset the slowdown in the core market.

• Margin Compression:

  • Gross margin declined by 2.4ppt to 44.6% in 1FY15 due to slower growth of exclusive brands.
  • Exclusive brands, which previously accounted for 44-45% of total sales, are expected to remain flat in FY15-17.
  • The company's historical valuation premium over Hong Kong retail peers is considered unwarranted due to these margin pressures and slower growth.

• China Market Struggles:

  • China remains a loss-making market, with Sa Sa reporting an operating loss of HKD67.8m in FY14.
  • The highly fragmented and competitive nature of the Chinese cosmetics market, combined with complex product registration requirements, has limited store productivity.
  • The company is focusing on southern China and reducing SKUs to 3,000-4,000 from 7,000 to improve efficiency.

• E-commerce and Other Markets:

  • Sasa.com reported a 5.5% turnover growth in 1HFY15, but with a net loss of HKD1.8m.
  • Sales to other markets (Australia, US, etc.) have decreased, partially offsetting growth in Mainland China.
  • Malaysia and Singapore are contributing smaller portions of total turnover, with Malaysia showing slight growth and Singapore experiencing declines due to market saturation and operational challenges.

Key Financial Highlights

Investment Thesis

• Valuation Premium Narrowing: Sa Sa has historically commanded a valuation premium due to its market leadership, margin expansion, and strong balance sheet. However, with the shift in tourist mix, margin fatigue, and limited growth outside of Hong Kong, this premium is expected to narrow.
• Target Price and Rating: The report initiates coverage with a REDUCE rating and a target price of HKD4.50, based on a 15x CY15E P/E, which is 18.5% lower than its long-term average P/E of 18.4x.
• Growth Outlook: Turnover and net profit growth is expected to slow to 6.7% and 5.6% CAGR for FY15-17, respectively, significantly below the previous 18.5% and 22.9% CAGR.

Key Risks

• Positive Catalysts:
  • Faster-than-expected recovery in the Hong Kong market, including better-than-expected PRC tourist arrivals.
  • Successful growth in its China business, which could lead to a re-rating.
  • Higher-than-expected demand for exclusive brands, potentially improving gross margins.
• Negative Risks:
  • Slower-than-expected growth in the HK & Macau market.
  • Continued margin compression and operating cost pressures.

Conclusion

Sa Sa International is a well-managed cosmetics retailer, but its growth is now constrained by structural changes in the Hong Kong market and challenges in expanding its business in other regions. The company's valuation premium is expected to narrow, and we recommend a REDUCE rating due to the headwinds affecting its performance and outlook.