Daphne International Holdings (0210.HK) Summary
Core Content
Daphne International Holdings (0210.HK) is a Chinese consumer goods company primarily engaged in the footwear and apparel industry. The company has been under pressure due to its weak brand equity and the challenges posed by e-commerce. The report maintains a Sell rating for Daphne, despite recent efforts to enhance its brand image through the endorsement of Korean celebrity Ms. Jeon Jihyun.
Main Points
What's Changed
- Daphne is expected to experience short-term financial pain due to its brand-building efforts.
- The company forecasts a 10% decline in EBIT for 2014E due to margin pressure from increased A&P spend and weak SSSG.
- The EPS for 2014E and 2015E is revised downward by 7% and 17% respectively.
- The share price has retraced 70% since January 2013, implying a 1X 2014E tangible book valuation, which provides some support.
- The CB extension includes a conversion clause if the share price reaches HK$4.25, which could dilute EPS by 11%.
Implications
- Daphne has historically underinvested in brand building, with A&P spend at 1% of sales in 2013, compared to 5% for most peers.
- The company's operating margin is low at 5%, making it vulnerable to margin erosion from increased marketing spend.
- The endorsement of Ms. Jeon Jihyun is a strategic move, but it may not yield immediate results. The talent fees alone are expected to be HK$10mn, or 3% of 2014E net income.
- The company's plan to double A&P spend in 2014 is expected to impact net income by 15%, although this may be partially offset by other factors.
- The report suggests that SSSG improvement may take time, and Daphne may not see a significant recovery until the end of 2014E.
- The company is expected to clear excess inventory over the next 6-9 months, which could lead to another few quarters of weak performance.
Valuation
- The report switches valuation methodology to 1X 2014E tangible book (from 9X14E P/E), reflecting the market's focus on asset value rather than earnings.
- The 12-month target price (TP) is raised to HK$3.1 from HK$2.1.
- The price-to-sales (P/S) ratio has reached a historical low of 0.5X since the end of 2008, indicating a potential turnaround.
Key Risks
- Better-than-expected SSSG and cost inflation are identified as key risks that could impact the company's performance.
Investment Profile
| Metric |
12/13 |
12/14E |
12/15E |
12/16E |
| Price (HK$) |
3.10 |
3.10 |
3.10 |
3.10 |
| Market Cap (HK$ mn / US$ mn) |
5,077.5 / 655.0 |
5,077.5 / 655.0 |
5,077.5 / 655.0 |
5,077.5 / 655.0 |
| Foreign Ownership (%) |
-- |
-- |
-- |
-- |
| EPS (basic, pre-except) (HK$) |
0.20 |
0.21 |
0.22 |
0.22 |
| EPS (basic, post-except) (HK$) |
0.20 |
0.21 |
0.22 |
0.22 |
| EPS (diluted, post-except) (HK$) |
0.19 |
0.21 |
0.21 |
0.22 |
| P/E (X) |
34.5 |
15.1 |
14.7 |
14.2 |
| P/B (X) |
2.2 |
1.0 |
0.9 |
0.9 |
| EV/EBITDA (X) |
14.1 |
7.0 |
6.3 |
6.0 |
| Dividend Yield (%) |
1.2 |
2.7 |
2.8 |
2.9 |
Key Risks
- Better than expected SSSG and/or cost inflation.
Investment List Membership
Analysts
Key Campaign
- Daphne signed Ms. Jeon Jihyun, a popular Korean celebrity, for its 2014 campaign.
- The celebrity is known for her role in the hit Korean drama "My Love from the Star", which had 1.3bn online viewings in China.
Branding Strategy
- Daphne's branding strategy has been historically weak, with A&P spend at 1% of sales in 2013.
- The company is now increasing A&P spend to 2% of sales in 2014, which is still below industry standards.
Peer Comparison
- Daphne's return potential is 1%, which is significantly lower than the 15% average for the China consumer coverage.
- The report references Le Saunda (0738.HK), a peer company, as an example of the long-term benefits of celebrity endorsements, which did not yield immediate results.
Financials
Profit Model
| Item |
12/13 |
12/14E |
12/15E |
12/16E |
| Total Revenue (HK$ mn) |
10,446.5 |
10,399.8 |
10,767.6 |
11,366.4 |
| Cost of Goods Sold (HK$ mn) |
(4,608.3) |
(4,499.4) |
(4,607.8) |
(4,840.5) |
| SG&A (HK$ mn) |
(5,354.4) |
(5,462.6) |
(5,716.4) |
(6,065.6) |
| EBITDA (HK$ mn) |
796.8 |
768.8 |
775.3 |
810.7 |
| Depreciation & Amortization (HK$ mn) |
(312.9) |
(331.0) |
(331.9) |
(350.4) |
| EBIT (HK$ mn) |
483.9 |
437.8 |
443.4 |
460.3 |
| Net Income (HK$ mn) |
329.1 |
348.1 |
357.7 |
370.2 |
Growth & Margins
| Metric |
12/13 |
12/14E |
12/15E |
12/16E |
| Sales Growth (%) |
(0.8) |
(0.4) |
3.5 |
5.6 |
| EBITDA Growth (%) |
(48.1) |
(3.5) |
0.8 |
4.6 |
| EBIT Growth (%) |
(62.0) |
(9.5) |
1.3 |
3.8 |
| Net Income Growth (%) |
(65.6) |
5.7 |
2.8 |
3.5 |
| Gross Margin (%) |
55.9 |
56.7 |
57.2 |
57.4 |
| EBITDA Margin (%) |
7.6 |
7.4 |
7.2 |
7.1 |
| EBIT Margin (%) |
4.6 |
4.2 |
4.1 |
4.0 |
Ratios
| Ratio |
12/13 |
12/14E |
12/15E |
12/16E |
| CROCI (%) |
11.1 |
10.4 |
10.6 |
10.7 |
| ROE (%) |
6.7 |
6.8 |
6.7 |
6.6 |
| ROA (%) |
4.4 |
4.4 |
4.6 |
4.9 |
| ROACE (%) |
10.5 |
10.0 |
10.4 |
10.5 |
| Inventory Days |
198.5 |
219.2 |
218.8 |
208.3 |
| Receivables Days |
64.1 |
70.8 |
71.2 |
70.6 |
| Payable Days |
124.2 |
137.5 |
130.6 |
120.9 |
| Net Debt/Equity (%) |
0.0 |
1.4 |
(8.2) |
(8.2) |
| Interest Cover - EBIT (X) |
72.4 |
NM |
NM |
NM |
Cash Flow Statement
| Item |
12/13 |
12/14E |
12/15E |
12/16E |
| Net Income pre-preferred dividends (HK$ mn) |
329.1 |
348.1 |
357.7 |
370.2 |
| D&A add-back (HK$ mn) |
312.9 |
331.0 |
331.9 |
350.4 |
| Minorities interests add-back (HK$ mn) |
5.2 |
5.5 |
5.6 |
5.8 |
| Net (inc)/dec working capital (HK$ mn) |
(1,041.9) |
(253.2) |
(129.0) |
(150.8) |
| Other operating cash flow (HK$ mn) |
0.0 |
0.1 |
0.9 |
0.0 |
| Cash flow from operations (HK$ mn) |
(394.6) |
431.3 |
567.2 |
575.6 |
| Capital Expenditures (HK$ mn) |
(315.2) |
(370.4) |
(383.1) |
(404.1) |
| Dividends Paid (HK$ mn) |
(131.9) |
(139.5) |
(143.4) |
(148.4) |
Balance Sheet
| Item |
12/13 |
12/14E |
12/15E |
12/16E |
| Cash & Equivalents (HK$ mn) |
807.9 |
729.4 |
580.9 |
604.0 |
| Accounts Receivable (HK$ mn) |
1,969.4 |
2,064.6 |
2,137.6 |
2,256.5 |
| Inventory (HK$ mn) |
2,642.9 |
2,760.4 |
2,764.7 |
2,759.1 |
| Total Current Assets (HK$ mn) |
6,090.9 |
6,225.1 |
5,653.8 |
5,790.2 |
| Net PP&E (HK$ mn) |
1,187.7 |
1,229.3 |
1,283.1 |
1,340.0 |
| Net Intangibles (HK$ mn) |
139.4 |
137.2 |
134.6 |
131.5 |
| Total Assets (HK$ mn) |
7,822.3 |
7,995.7 |
7,475.6 |
7,665.8 |
| Accounts Payable (HK$ mn) |
1,715.2 |
1,674.7 |
1,622.9 |
1,583.8 |
| Short-term Debt (HK$ mn) |
806.2 |
806.2 |
117.0 |
117.0 |
| Total Current Liabilities (HK$ mn) |
2,548.0 |
2,507.4 |
1,767.3 |
1,729.8 |
| Total Liabilities (HK$ mn) |
2,572.5 |
2,531.8 |
1,791.8 |
1,754.3 |
| Total Common Equity (HK$ mn) |
5,043.7 |
5,252.3 |
5,466.6 |
5,688.4 |
| Minority Interest (HK$ mn) |
206.1 |
211.6 |
217.2 |
223.1 |
| Total Liabilities & Equity (HK$ mn) |
7,822.3 |
7,995.7 |
7,475.6 |
7,665.8 |
| BVPS (HK$) |
3.06 |
3.19 |
3.32 |
3.45 |
Summary
Daphne's recent marketing strategy, including the endorsement of Korean celebrity Ms. Jeon Jihyun, is a long-term move aimed at improving brand equity. However, the company is expected to face short-term earnings pressure due to increased A&P spend and the need to clear excess inventory. The company's return potential is low, and the market is currently valuing it based on asset value rather than earnings. The report maintains a Sell rating, citing the low return potential and the potential for further margin compression.
