20210824-招银国际-中国利郎-01234.HK-A_transition_year_but_with_attractive_yield_8页_1mb

China Lilang (1234 HK) Company Update Summary

Core Content

China Lilang (1234 HK) is undergoing a transition year with a focus on business model changes, particularly the shift from wholesale to consignment for its core brands. The company's FY21E sales growth is expected to be muted, but the firm believes this will be the bottom, with gradual improvement anticipated in FY22E. Despite short-term challenges, the company maintains a strong retail demand, and its FY21E growth target has been revised upwards to 15%+.

The firm has maintained a BUY rating but lowered the target price (TP) to HK$6.27, based on an 8x FY22E P/E ratio. The current valuation is considered cheap at 6x FY22E P/E and 12% FY22E yield. The company's financials show a net profit of RMB 271mn in 1H21, slightly below the FY21E BBG estimate of RMB 269mn, but management remains confident in achieving its growth target.

Key Financial Highlights

Revenue

• FY19A: RMB 3,658 million
• FY20A: RMB 2,681 million
• FY21E: RMB 2,949 million
• FY22E: RMB 3,421 million
• FY23E: RMB 3,763 million

Net Income

• FY19A: RMB 812 million
• FY20A: RMB 557 million
• FY21E: RMB 620 million
• FY22E: RMB 782 million
• FY23E: RMB 901 million

EPS

• FY19A: RMB 0.678
• FY20A: RMB 0.465
• FY21E: RMB 0.517
• FY22E: RMB 0.650
• FY23E: RMB 0.749

P/E Ratio

• FY19A: 6.3
• FY20A: 8.7
• FY21E: 7.7
• FY22E: 6.1
• FY23E: 5.3

P/B Ratio

• FY19A: 1.4
• FY20A: 1.3
• FY21E: 1.3
• FY22E: 1.2
• FY23E: 1.1

Yield

• FY19A: 12.2%
• FY20A: 9.3%
• FY21E: 9.7%
• FY22E: 12.2%
• FY23E: 14.1%

ROE

• FY19A: 22.5%
• FY20A: 15.3%
• FY21E: 16.2%
• FY22E: 19.1%
• FY23E: 20.7%

Key Assumptions and Adjustments

• Sales Growth: The company's FY21E sales growth is expected to be 10%, with a slight slowdown in 2H21E to 0% YoY due to the business model change.
• Gross Profit Margins: GP margins are improving, with a 47.9% margin in FY21E compared to 40.4% in FY20.
• Operating Profit Margins: OP margins are expected to increase to 24.8% in FY21E, up from 24.3% in FY20.
• Net Profit Margins: NP margins are projected to rise to 21.0% in FY21E, up from 20.8% in FY20.
• Earnings Revisions: The firm has revised its net profit estimates downward by 17%, 11%, and 6% for FY21E, FY22E, and FY23E, respectively, due to delayed sales recognition and higher-than-expected opex.

Earnings Revision Comparison

Valuation Comparison with Peers

Financial Summary

Income Statement Highlights

• EBIT: RMB 980 million (FY19A), RMB 651 million (FY20A), RMB 732 million (FY21E), RMB 917 million (FY22E), RMB 1,058 million (FY23E)
• Pre-tax Profit: RMB 1,024 million (FY19A), RMB 695 million (FY20A), RMB 775 million (FY21E), RMB 965 million (FY22E), RMB 1,113 million (FY23E)
• Net Profit: RMB 812 million (FY19A), RMB 557 million (FY20A), RMB 620 million (FY21E), RMB 782 million (FY22E), RMB 901 million (FY23E)

Cash Flow Summary

• Net Cash from Operating Activities: RMB 609 million (FY19A), RMB 773 million (FY20A), RMB 558 million (FY21E), RMB 1,000 million (FY22E), RMB 939 million (FY23E)
• Net Cash from Investing Activities: RMB -85 million (FY19A), RMB -191 million (FY20A), RMB -88 million (FY21E), RMB -103 million (FY22E), RMB -113 million (FY23E)
• Net Cash from Financing Activities: RMB -617 million (FY19A), RMB -590 million (FY20A), RMB -459 million (FY21E), RMB -516 million (FY22E), RMB -625 million (FY23E)
• Net Change in Cash: RMB -93 million (FY19A), RMB -8 million (FY20A), RMB 11 million (FY21E), RMB 381 million (FY22E), RMB 202 million (FY23E)

Balance Sheet Highlights

• Non-current Assets: RMB 1,033 million (FY19A), RMB 1,394 million (FY20A), RMB 1,337 million (FY21E), RMB 1,291 million (FY22E), RMB 1,269 million (FY23E)
• Fixed Assets: RMB 714 million (FY19A), RMB 924 million (FY20A), RMB 869 million (FY21E), RMB 825 million (FY22E), RMB 804 million (FY23E)
• Intangible Assets & Prepaid Lease Payments: RMB 150 million (FY19A), RMB 130 million (FY20A), RMB 128 million (FY21E), RMB 127 million (FY22E), RMB 125 million (FY23E)
• Current Assets: RMB 3,531 million (FY19A), RMB 3,618 million (FY20A), RMB 3,433 million (FY21E), RMB 3,838 million (FY22E), RMB 4,199 million (FY23E)
• Current Liabilities: RMB 935 million (FY19A), RMB 1,288 million (FY20A), RMB 884 million (FY21E), RMB 975 million (FY22E), RMB 1,035 million (FY23E)

Conclusion

China Lilang is navigating a challenging transition period due to its business model change, but the company is expected to show gradual improvement in FY22E and onwards. Despite the short-term drag on sales and net profit, the firm maintains a BUY rating with a reduced TP of HK$6.27, reflecting its current attractive yield and valuations. The company's improving GP margins and store productivity under the new consignment model are positive signs, although opex is expected to rise. Overall, the firm's outlook is cautiously optimistic, driven by strong retail demand and potential for long-term growth.