Daphne International Holdings (0210.HK) Summary
Core Content
Daphne International Holdings (0210.HK) has been upgraded from Sell to Neutral by Goldman Sachs due to a more balanced risk-reward profile. The company is part of the Asia Pacific Consumer Peer Group, and the analysis reflects its financial and market position.
Main Points
- Fundamental Improvements: Daphne's second-quarter 2014 same-store sales growth (SSSG) improved from -10% to -2%, indicating a partial recovery in demand. Brand investments have started to drive increased footfall, and the firm expects a partial recovery in 2015.
- Earnings Revisions: Earnings per share (EPS) for FY14-16E have been raised by 5–10% to reflect the expected partial recovery and improved operating performance.
- Valuation Update: The valuation model has shifted from asset-based to earnings-based. The current valuation is at 1.1X 2014E P/TVB and 16X 2015E P/E. A new 12-month target price of HK$3.3 is set, reflecting a 9% downside from the current price of HK$3.60.
- Market Outlook: The market is pricing in a 36% probability of a full recovery scenario by 2015, where SSSG and EBIT margins are expected to recover to 5% and 6%, respectively. This is considered a reasonable assumption.
- Downside Risks: The firm remains cautious due to structural pressures from e-commerce, which may negatively impact the mass-market footwear category. Additionally, the HK$700 million convertible bond (11% dilution) has a mandatory conversion clause at HK$4.25, which could limit upside potential.
Key Financial Highlights
| Metric |
12/13 |
12/14E |
12/15E |
12/16E |
| Price (HK$) |
- |
3.60 |
- |
- |
| 12m TP (HK$) |
- |
3.30 |
- |
- |
| Market Cap (HK$ mn / US$ mn) |
- |
6,739.4 / 869.5 |
- |
- |
| EPS (HK$) |
0.19 |
0.22 |
0.23 |
0.24 |
| EPS Growth (%) |
-61.4 |
11.3 |
7.3 |
2.9 |
| P/E (X) |
34.5 |
16.6 |
15.5 |
15.1 |
| P/B (X) |
2.2 |
1.1 |
0.9 |
0.9 |
| EV/EBITDA (X) |
14.1 |
7.8 |
6.1 |
5.8 |
| Dividend Yield (%) |
1.2 |
1.9 |
2.2 |
2.3 |
| ROE (%) |
6.7 |
7.1 |
7.5 |
6.9 |
| CROCI (%) |
11.1 |
10.4 |
10.7 |
10.6 |
Financial Performance (2013A vs. 2014E)
| Metric |
2013A |
2014E |
% Change |
| Revenue (HK$ mn) |
10,447 |
10,322 |
-1% |
| Gross Profit (HK$ mn) |
5,838 |
5,856 |
-1% |
| Opex (HK$ mn) |
(5,354) |
(5,393) |
-1% |
| Operating Income (HK$ mn) |
484 |
463 |
-4% |
| Net Income (HK$ mn) |
329 |
366 |
11% |
| EPS |
0.19 |
0.22 |
5% |
EBITDA and Margin Trends
| Metric |
12/13 |
12/14E |
12/15E |
12/16E |
| EBITDA (HK$ mn) |
796.8 |
791.1 |
869.9 |
893.9 |
| EBIT Margin (%) |
4.6 |
4.5 |
5.1 |
5.0 |
| Net Margin (%) |
3.2 |
3.6 |
4.1 |
4.1 |
Risk Factors
- Demand Recovery: While there are signs of improvement in SSSG, the firm believes it is still premature to assume a full recovery, as demand remains weak in July/August 2014.
- E-commerce Impact: Structural pressure from e-commerce is expected to negatively affect the mass-market footwear category in the long term.
- Convertible Bond Conversion: The HK$700 million convertible bond has a mandatory conversion clause at HK$4.25, which could cap share price upside.
- Operating Costs: SG&A costs are expected to grow at a slower rate in 2014E compared to 2013 due to store closures and cost efficiencies.
Price Performance
| Period |
Absolute Return (%) |
Relative to MSCI China (%) |
| 3 months |
16.9 |
1.2 |
| 6 months |
-4.8 |
-15.0 |
| 12 months |
-37.7 |
-46.3 |
Investment View
- Current View: Shares are expected to remain relatively range-bound due to a balanced risk-reward profile.
- Valuation Approach: The firm now uses an earnings-based multiple (14X 2015E P/E) to reflect the modest recovery in earnings.
- Target Price: HK$3.30 (12-month), which implies a 9% downside from the current price.
- Profitability: Net margins are expected to improve from 3.2% in 2013 to 4.1% in 2015E, with 11% and 19% net profit growth in 2014E and 2015E, respectively.
Analysts
Additional Notes
- The firm is still cautious about full-scale demand recovery.
- The valuation is close to asset-backed support levels.
- The convertible bond conversion could limit upside potential.
- The current price is based on a 36% probability of a full recovery scenario.
- The report is subject to certain disclosures, including potential conflicts of interest and the use of proprietary data.
