20180815-信达国际控股-中国利郎-01234.HK-Near-term_outlook_remained_positive_3页_344kb

Lilang Summary: Near-term Outlook and Financial Performance

Core Content

Lilang, a leading domestic menswear brand in China, has demonstrated a positive near-term outlook despite recent challenges in consumer sentiment. The company has focused on optimizing its sales network and introducing new product collections to drive growth and improve profitability.

Main Points

• Revenue and Profit Growth: Lilang reported a 26.5% year-over-year (yoy) revenue growth to RMB1,293 million in 1H18, with a 25.9% yoy increase in net profit to RMB341 million. This growth was driven by a high-single-digit sales growth in the SSSG (Smart, Sporty, Smart Casual) segment and an expanded sales network.

• Sales Network Optimization: The company has restructured its distribution channels, increasing the proportion of tier 1 distributors and sub-distributors to 50% each as of end 1H18, compared to 37% and 63% in FY15. The number of sub-distributors also decreased from 1,113 to 853, indicating a more focused and efficient distribution model.

• Product Strategy: Lilang has ceased operations of the underperforming sub-brand "L2" since 2016 and concentrated on its core brand "Lilanz". The introduction of the smart casual collection in late 2016 has been well-received, with new stores dedicated to this collection showing better profitability than others. As of end 1H18, the company has 154 specialty stores for the smart casual collection.

• Gross Margin and Operating Expenses: The gross margin (GPM) slightly declined by 0.8 percentage points (ppt) to 41.9% due to the "improving product quality without raising prices" strategy and the lower GPM of the smart casual collection. However, the SG&A to sales ratio decreased by 2.2ppt to 15.4%, reflecting improved operating leverage. The effective tax rate increased by 3.5ppt to 19.1% due to higher income tax rates for some subsidiaries in 2018.

• Trade Fair Performance: Trade fair orders for "Lilanz" returned to the positive zone since 2017 Fall, with 21%, 31%, and 33% yoy growth in the 2018 Spring-Summer, Fall, and Winter fairs respectively. Management remains optimistic about achieving high single-digit SSSG growth in 2H18E and expects the 2019 Spring-Summer trade fair to see no less than 21% yoy growth in orders.

• Valuation and Dividend Yield: Based on Bloomberg consensus, Lilang is trading at 11.8X and 10.0X PER for FY18E and FY19E respectively. The company offers a dividend yield of 5.6% and 6.5% for the same periods, which could help protect investors in a volatile market.

Key Financial Data

Market and Company Information

• Trading Data:

  • 52-Week Range: HK$4.98 to HK$13.08
  • 3-Month Average Daily Volume: 2.0 million shares
  • Number of Shares: 1,185 million
  • Market Cap: HK$10,848 million
  • Major Shareholders: Management team (61.5%)
  • Auditors: KPMG
  • Result Due: FY18: March

• Company Description:

  • Listed in 2009
  • Operates under the self-owned brand "LILANZ", a mid-high end business casual brand
  • As of end Jun 2018, has 2,512 POS in the PRC

Rating Policy

Analysts

Analyst Certification

Lewis Pang certifies that all views expressed in this report reflect his personal opinions and that no part of his compensation is related to the specific recommendations or views in the report.

Disclaimer

This report is prepared by Cinda International Research Limited. The information and opinions are based on reliable sources but are not guaranteed for accuracy or completeness. The report is for informational purposes only and should not be considered as an offer to buy or sell securities. Cinda International disclaims any liability for direct or consequential losses arising from the use of this document.