20131114-美银美林-Cut_2014_earnings_on_slow_improvement__keep_U_P_11页_608kb

Yue Yuen (YY) Summary

Core Content

Yue Yuen (YY) is a major manufacturer of branded athletic and casual footwear with operations in China, Vietnam, and Indonesia. It has expanded into sport apparels through stakes in Eagle Nice and Yuen Thai, which are OEM apparel makers for Nike and Adidas, respectively. The company's primary product is athletic shoes, accounting for 61% of sales, followed by casual shoes (15%) and soles & components (19%). Its largest market is the US, representing over 40% of total sales, and it also has a small but growing China retail business.

Key Financial Highlights

• Earnings Performance:

  • YY reported a 1% recurring earnings growth in 3Q13, while 74% reported earnings growth including non-recurring items.
  • For 2014, the company's earnings are expected to grow by mid-single digits, with a 5% reduction in the earnings forecast due to slow retail improvement and margin recovery.
  • The Price Objective (PO) was lowered to HK$21, with a current stock price of HK$21.80.

• Margins and Costs:

  • The OEM core operating profit (OP) increased by 5.6% on a 10% sales increase, driven mainly by higher average selling prices (ASP).
  • However, the OEM operating margin (OPM) fell slightly by 30 basis points (bps) YoY to 6.6% and decreased by 150 bps QoQ due to a higher SG&A ratio and less leverage from slower sales.
  • In 3Q13, the retail core OP/NP showed a US$1.6/2.4mn loss, worse than the US$10/0.8mn in 2Q13, attributed to increased retail discounts and operating deleverage due to a 3% SSS decline.

• Uncertainty for 2014:

  • The likely aggressive minimum wage increase in Southeast Asia may affect YY's margins in 1H14.
  • Management is focusing on automation and production efficiency to counter rising labor costs, though these changes take time to reflect in margins.

Financial Projections (Dec)

Valuation Metrics (Dec)

Investment Opinion

• The investment opinion is Underperform, citing weak OEM sales due to soft demand in the US and EU, and margin pressure from rising wages in Asia and production transition challenges.
• The company's recurring earnings growth is seen as too slow to justify a positive outlook, with uncertainty still present in the 2014 earnings forecast.

Key Metrics and Trends

• Sales Growth (YoY): Expected to be mid-single digit in 2014, with volume growth only at low single digit.
• Core Operating Profit Growth (YoY): Deteriorated in 3Q13, and is expected to slowly improve in 2014.
• Adjusted Earnings Growth (YoY): Varies significantly across quarters, with a notable drop in 3Q13 and improvement in 2Q13.
• Gross Margin: Has fluctuated, with a slight decline in 3Q13 and expected to stabilize in 2014.
• Core Operating Margin: Declined in 3Q13 but is expected to recover slightly in 2014.
• Net Margin: Improved in 2013 but remains uncertain for 2014 due to cost pressures and soft demand.

Stock Data

• Price: HK$21.80
• Price Objective: HK$21.30
• Date Established: 15-Aug-2013
• Investment Opinion: B-3-8
• Volatility Risk: MEDIUM
• 52-Week Range: HK$18.60 - HK$27.65
• Market Value / Shares Out (mn): US$4,636 / 1,648.9
• Market Value (mn): HK$35,947
• Average Daily Volume: 1,695,343
• BofAML Ticker / Exchange: YUEIF / HKG
• Bloomberg / Reuters: 551 HK / 0551.HK
• ROE (2013E): 9.9%
• Net Debt to Equity (Dec-2012A): 7.0%
• Est. 5-Yr EPS / DPS Growth: 6.0% / 6.0%
• Free Float: 33.3%

Analysts and Contact

• Tony Tseng, CFA: Research Analyst at Merrill Lynch (Hong Kong), contact: +852 2161 7177, email: tony.tseng@baml.com
• Raymond Ching: Research Analyst at Merrill Lynch (Hong Kong), contact: +852 2161 7992, email: raymond.ching@baml.com

Key Financial Ratios

• Return On Capital Employed (ROCE): Varies from 13.6% to 7.3% across years.
• Return On Equity (ROE): Varies from 25.8% to 12.2%.
• Net Debt-to-Equity Ratio: Varies from 7.0% to -5.2%.
• Interest Cover: Varies from 11.6x to 16.0x.

Disclosure

• The report is issued by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under FINRA rules.
• Investors should be aware of potential conflict of interest due to BofA Merrill Lynch's business relationships with the company.
• Important disclosures are referenced on pages 9 to 11 and the analyst certification is on page 7.

Conclusion

Yue Yuen's financial performance in 3Q13 was mixed, with recurring earnings growth slowing and retail performance deteriorating. The company is expected to have mid-single digit sales growth in 2014, but margins remain under pressure due to wage increases and soft demand. The investment rating remains Underperform until consistent improvement and higher earnings visibility are achieved. The Price Objective is HK$21, with a current stock price of HK$21.80. The analysts emphasize the uncertainty in 2014 and the ongoing challenges in margin recovery and production efficiency.