20230320-招银国际-中国利郎-01234.HK-Turning_around_with_attractive_yield_8页_1mb

China Lilang (1234 HK) Summary

Core Content

China Lilang is a Hong Kong-listed company in the consumer discretionary sector. The company has experienced a turnaround in performance, with a strong year-to-date (YTD) showing and a revised FY23E guidance that aligns with expectations. The stock is currently rated BUY, with a target price of HK$4.83, up from the previous HK$4.46. The current price is HK$4.15, indicating a potential upside of 16.5%.

Main Points

• Performance Turnaround: Despite a poor FY22 due to pandemic impact, the company has shown improvement in FY23E with a 10.8% YoY revenue growth. Retail sales improved significantly, with growth rates reaching close to 10% in March 2023, compared to a 23% drop in 4Q22.

• Margin Expansion: The gross profit margin increased to 46.0% in FY22 due to provisions and write-back adjustments. Adjusted gross profit margin rose by 1.2ppt, and net profit margin improved to 14.5% from 13.9%. The company expects net profit margin to rise to 15.1% in FY23E, driven by GP margin expansion and operating leverage.

• Business Model Shift: The company has transitioned from wholesale to consignment and direct retail, which has positively impacted its sales and margin performance. Inventory days increased slightly to 195 in FY22, but are still healthier than the 217 days in 1H22.

• Store Expansion: The company plans to open 100 net new stores in FY23E, split evenly between LILANZ and Smart Casual, compared to 89 store closures in FY22. This expansion is expected to boost sales.

• New Retail Initiatives: The company is increasing its efforts in new retail, including opening more live-streaming workshops across the country, from 2 to about 20.

• Earnings Revision: CMBIGM has revised its earnings forecasts downward for FY23E and FY24E by 24%, primarily due to the pandemic's impact. However, the company's new NP margin forecast is based on a 10x P/E multiple, which is considered attractive given the 9% dividend yield and the completion of the capex cycle.

• Valuation: The company's P/E ratio is currently at 8.6x for FY23E, down from 9.9x. The forward 12-month P/E valuation band is shown in the chart. The company's P/B ratio is at 1.1x, with a P/CFPS of 6.9x.

Key Financial Highlights

Key Assumptions

• Sales by Segment:

  • LILANZ: Expected to grow by 9.9% in FY23E, with a 15.0% growth in Smart Casual.
  • Total sales growth is expected to be 10.8% in FY23E and 8.2% in FY24E.

• Sales Network Growth:

  • Smart Casual is expected to see a 19.9% growth in FY23E, while LILANZ is expected to grow by 2.1%.

• Cost Structure:

  • A&P expenses are expected to remain at 10%–13% of sales, with a focus on marketing and overseas fashion shows.
  • Operating expenses are projected to remain stable, with staff costs at 3.3%, D&A at 3.7%, and R&D at 4.3%.

Shareholding and Performance

• Shareholding Structure:

  • Mr. Wang & Family: 67.3%
  • Value Partners: 1.1%

• Stock Performance:

  • 1-month: +3.8%
  • 3-month: +5.9%
  • 6-month: +20.6%
  • 12-month: +20.6% (based on the chart)

• Market Cap: HK$415.0 million

• Average 3-month Turnover: HK$4.0 million

• 52-week High/Low: HK$4.15 / HK$3.25

Analyst Notes

• The company's 10%+ retail sales growth target for FY23E is achievable due to:

  1. A low base from FY22.
  2. Improved productivity from business model reforms.
  3. Resumption of store openings.
  4. Increased focus on new retail initiatives.

• The BUY rating is maintained, with the target price increased to HK$4.83, reflecting improved fundamentals and a lower P/E multiple.

Conclusion

China Lilang has shown signs of recovery with improved YTD performance and a turnaround in FY23E. The company's new retail initiatives and store expansion are expected to drive growth. Despite the downward revision of earnings forecasts, the company's valuation is seen as attractive, especially with its 9% dividend yield and a 10x P/E multiple. The company is well-positioned for continued margin expansion and growth.