20131203-吉隆坡万信证券-Murky_Outlook_Continues_11页_522kb

Oriental Watch (398 HK) Summary

Core Content

Oriental Watch (OW) is a consumer discretionary retail company with a market cap of USD150 million. The stock is currently priced at HKD2.04, with a target price of HKD1.98, reflecting a neutral outlook. The company faces a murky outlook due to poor earnings visibility and various operational challenges.

Main Points

• Earnings Decline:

  • OW's 1H14 earnings dropped by 62% year-over-year (y-o-y) to HKD20m.
  • The decline was attributed to lower turnover, gross profit margin (GPM) pressure, and a surge in rental costs.
  • Rental costs increased by 12.3% y-o-y to HKD114m, comprising 40% of total operating costs.

• Turnover and Sales:

  • 1H14 turnover slipped by 4.7% y-o-y to HKD1,710m.
  • HK turnover (66% of total turnover) fell by 2.4% y-o-y, while Macau/China/Taiwan turnover (34% of total turnover) dropped by 9.4% y-o-y due to lower sales volume.
  • Retail discounts were raised, contributing to the GPM decline.

• SSSG Performance:

  • SSSG (Same Store Sales Growth) declined in all operating areas in 2Q14 compared to 1Q14.
  • HK SSSG was flat, China SSSG declined by 13% y-o-y, and Macau SSSG grew by 10% y-o-y but only accounts for 5% of turnover.

• Earnings Forecasts:

  • Forecasts for FY14F-16F earnings were cut by 84% / 61% / 55% respectively.
  • The company is considering selling four self-owned stores, which are estimated to be worth at least HKD553m.
  • Breakup value is estimated at HKD2.3bn, or HKD4.0/share, based on inventory and net debt.

• Valuation:

  • The target price (TP) was revised to HKD1.98 from HKD2.60.
  • The valuation shifted from a target P/E to a P/BV (Price-to-Book Value) of 0.5x.
  • The TP represents a 50% discount to the estimated breakup value, which is viewed as reasonable.

• Balance Sheet and Cash Flow:

  • Despite the earnings decline, the company's net gearing improved to 7.7% from 14.0%.
  • Net operating cash flow improved to HKD204m in 1H14, compared to HKD27m outflow in 1H13 and HKD91.8m inflow in FY13.
  • Inventory management contributed to the improvement in cash flow.

• Dividend Policy:

  • The 1H14 dividend payout ratio remained at 22%, with an interim dividend of 0.75 HK cents per share.
  • The full year payout ratio is expected to stay at 25%.

• Financial Exhibits:

  • Profit and loss statements show a significant decline in reported and recurring net profit.
  • Operating cash flow and other financial metrics are presented with a focus on the company's financial health.

Key Information

• Shareholders:

  • Yeung Ming Biu: 27.3%
  • FMR LLC: 14.1%
  • TIG Advisors LLC: 5.1%

• Free Float: 71%

• Key Financial Metrics:

  • 1H14 Turnover: HKD1,710m
  • Gross Profit: HKD309m (GPM: 18.9%)
  • Operating Profit: HKD21m
  • Net Profit: HKD20m
  • Recurring Net Profit: HKD27m
  • Recurring Net Margin: 1.2%
  • Inventory Days: 257 (excluding HKD53m inventory from Taiwan expansion)
  • Net Debt to Equity: 6.8%

• Valuation Metrics:

  • P/BV (Price-to-Book Value): 0.5x
  • EV/EBITDA: 16.8x
  • P/CF (Price-to-Cash Flow): 4.9x
  • Dividend Yield: 0.6%

• Market Outlook:

  • The company's performance is expected to remain weak in the second half of 2014.
  • The outlook is neutral, with a target price of HKD1.98.

Summary Table

Conclusion

Oriental Watch faces significant challenges in its earnings and sales, primarily due to a drop in turnover, GPM pressure, and increased rental costs. However, the company shows signs of financial improvement with better inventory management and a reduced net gearing. The target price is adjusted to reflect the current P/BV valuation, and the breakup value is seen as a support for the share price. The outlook remains neutral, and the company is expected to maintain a stable dividend payout ratio.