20180829-广发证券_香港_-周生生-00116.HK-July-Aug_SSSG_momentum_continued,_management_cautiously_optimistic_on_2H18__upgrade_to_Buy_5页_576kb

Chow Sang Sang (116 HK) Equity Research Summary

Core Content Overview

This report provides an equity research analysis of Chow Sang Sang (116 HK), focusing on its financial performance, strategic initiatives, and valuation. The stock is upgraded from Hold to Buy, with a target price of HK$18.38, based on improved revenue and profit growth expectations, as well as a favorable retail environment in key markets.

Key Financial Highlights

1H18 Performance

• Revenue growth: 19% YoY, driven by 22.8% growth in mainland China and 24% growth in HK & Macau.
• Net profit growth: 54% YoY, with an NPM of 6.3% (up 1.4pp YoY).
• GPM increase: 0.3pp to 24.7%, due to:
  • Higher proportion of fixed-price gold products (high-margin).
  • Increased mainland China revenue (higher GPM than HK & Macau).
  • Decline in low-margin wholesale revenue.
• OP growth: 54.4% YoY, with OPM rising to 8.3% (up 1.9pp YoY).
• SG&A expense ratio: Fell 1.1pp to 17.5%, primarily due to a 1.2pp drop in rental expenses.

2H18 Outlook

• SSSG growth in HK & Macau is expected to be in the high teens, with mainland China growth improving to teen-level.
• Management remains cautiously optimistic about the second half of 2018 despite ongoing trade tensions and a depreciating renminbi.

Strategic Developments

Store Expansion

• China: Plans to add at least 50 stores by end-2018. 34 new stores were opened in 1H18, with 8 for the MINTY GREEN brand and 14 closures.
• HK & Macau: No expansion plans are currently in place.

Rental Renewals

• Negotiations for two large street-level shops in Hong Kong are ongoing.
• If unfavorable, the company may close the shops and open in different locations.
• Expected rent reductions, though likely less significant than previous years (14-15% in FY17), due to a positive retail environment.

Valuation and Financial Projections

Revenue Growth

• 2018E: 12.6% growth.
• 2019E: 4.3% growth.
• Mainland China: Expected to drive 13.8% revenue growth in 2018E and 9.8% in 2019E.
• HK & Macau: Revenue growth is expected at 15.3% in 2018E and -1.4% in 2019E.

Profit Growth

• 2018E: Net profit is expected to grow by 34.6%.
• 2019E: Net profit growth is expected to be 2.4%.

P/E Adjustments

• The target price of HK$18.38 is based on a 12.5x 2018E P/E, slightly below the five-year average of 13x, to account for macroeconomic uncertainties.

Key Assumptions

• SSSG growth for HK & Macau: 16.7% (up from 6% previously).
• Online sales growth: 25% (up from 20% previously).
• Focus on China market and fixed-price gold products is expected to drive performance.

Risks

1. Trade war and renminbi depreciation may negatively impact 2H18 sales growth.
2. Rental expenses could exceed expectations, especially if negotiations do not yield significant rent reductions.

Financial Ratios (as of FY18E)

Stock Valuation Metrics

Conclusion

The report highlights strong performance in 1H18, particularly in mainland China, and positive momentum in SSSG growth. The upgrade to Buy reflects improved revenue and profit forecasts, along with a strategic focus on China and online sales. While macroeconomic uncertainties are acknowledged, the retail environment remains favorable, and management's cautious optimism supports the positive outlook. The target price is set at HK$18.38, with valuation metrics indicating potential upside.