20141211-法国巴黎银行-Tough_to_stay_pretty_in_the_current_environment_48页_1mb

Summary of the Document: Tough to Stay Pretty in the Current Environment

Core Content Overview

This report discusses the challenges faced by Hong Kong cosmetic retailers, particularly Sa Sa International and Bonjour Holdings, due to a combination of external and internal factors. The focus is on the impact of slowing PRC tourist inflow, structural changes in the Hong Kong retail market, and the difficulty in expanding into mainland China.

Main Challenges and Trends

• Slowing PRC Tourist Inflow and Spending Power Decline:

  • PRC tourists are shifting to lower-tier cities with less spending power, reducing the average ticket size for Hong Kong cosmetic retailers.
  • A rise in same-day tourists compared to overnight visitors has further depressed sales per transaction.
  • These structural changes are expected to continue, limiting growth opportunities.

• Impact of Pro-Democracy Protests:

  • The ongoing protests in Hong Kong have affected retail performance, especially for companies with a high concentration of stores in affected areas.
  • Bonjour is particularly vulnerable due to its retail network being heavily located in protest zones.

• Restrictions and Costs in China:

  • Chinese consumers face restrictions on parallel imports, limiting the availability of cheaper products in the market.
  • The product registration process is complex and costly, making it difficult for Hong Kong retailers to gain a foothold in China.
  • Chinese retailers have a competitive advantage in terms of lower costs and faster registration.

• House Brand Mix and Profitability:

  • House brands, which have been a key growth driver, are expected to slow in growth due to declining consumer sentiment and preference for international brands.
  • The shift in product mix is anticipated to reduce gross margins, as house brands are typically higher margin than imported products.

• Margin Pressure from Rising Costs:

  • Rental costs are a significant portion of operating expenses and are rising.
  • Sa Sa's rental costs are now around 12% of turnover, while Bonjour's are 14%.
  • The growth in rental costs outpaces turnover growth, leading to margin compression.

Company-Specific Analysis

Sa Sa International

• Market Share: Holds approximately one-third of the Hong Kong cosmetic retail market.
• Performance:
  • 1QFY15 turnover growth was 4.9%, with a 1.9% growth in SSS in Hong Kong & Macau.
  • Average sales per transaction dropped by 3.4%, significantly impacting profitability.
• Profitability:
  • Net profit fell by 4.9% in 1H15 to HKD339.8m.
  • Gross margin declined by 2.4ppt to 44.6%.
  • FY15 net profit is expected to decline by 11.8% to HKD825.0m, 8% below market consensus.
• Valuation:
  • Valued at 15x CY15E P/E, with a target price of HKD4.50.
  • This represents an 18.5% discount from its long-term average P/E of 18.4x.
  • The report recommends a REDUCE rating due to expected margin dilution and weak net profit outlook.

Bonjour Holdings

• Market Share: Holds around one-third of the Hong Kong cosmetic retail market.
• Performance:
  • Retail sales declined by 8% in 1H15, with a 16% drop in SSS.
  • Net profit is expected to fall by 17.4% in 2H14 to HKD122.2m, worse than the 12.4% decline in 1H14.
• Dividend and Share Price:
  • Dividend payout ratio is expected to drop from 80% to 50% due to recent acquisitions.
  • Share price has dropped 50% year-to-date, while the HSI index dropped only 0.1%.
• Valuation:
  • Target price is HKD0.83, based on 12x FY15E P/E, which is below its historical forward P/E of 14.5x.
  • The report recommends a HOLD rating due to fair valuation and potential negative impact from the protests.

Key Risks and Upside Potential

• Key Risks:

  • Continued decline in PRC tourist spending.
  • Persistent challenges in entering the Chinese market.
  • Rising rental and operating costs.
  • Erosion of house brand mix and profitability.

• Upside Risks:

  • Faster-than-expected recovery in Hong Kong retail.
  • Greater-than-expected shift towards house brands.
  • Faster-than-expected breakthrough in the Chinese market.

Valuation and Recommendation Summary

Conclusion

Hong Kong cosmetic retailers are facing multiple headwinds, including a decline in PRC tourist spending, structural changes in the retail environment, and challenges in expanding into mainland China. Both Sa Sa and Bonjour are expected to experience declining profitability and margin compression, with Sa Sa being more significantly impacted. The report recommends a REDUCE rating for Sa Sa and a HOLD rating for Bonjour, citing valuation concerns and operational challenges.