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Pou Sheng International (3813 HK) Pou Sheng International (3813 HK) Rating BUY Maintain Operating leverage to drive earnings Target Price HKD 3.32 From HK$2.67 Current price HKD 2.59 Upside: +28.1% % 9M19 net profit beat on GM and lower SG&A% ; FY19E guidance Company Update maintained 9 December 2019 Though PS 9M19 revenue was largely in-line with our estimate (71% of our FY19E), its net profit attributable to shareholders was still ahead of our forecasts (83% of our FY19E estimates), which grew 47.7% to US$88.0mn. We attributed Hayman Chiu the beat to i) GM came in at 34.5% (100 bps higher than our FY19E forecast), [email protected] in which 3Q19 GM arrived at 34.2%; ii) 6.0% SSSG in 3Q19 with stable retail (852) 2235 7677 discount, while SG&A ratio was down 29bps Yoy to ~29.8% in 9M19 which drove OPM up 106 bps Yoy to 5.8%, in which 3Q19 OPM improved by 190 bps and reached 4.9% and iii) lower effective tax rate (9M19 :29.0% vs. Trading Data 9M18: 31.7%) even though tax rate was similar to that in 1H19 52-Week Range (HK$) 2.97/1.47 3 Mth Avg Daily Vol (m) 3.69 Management sticked to their guidance in 1H19 result, with revenue to grow mid-high teens, driven by mid-high single digit SSSG and low-mid teens Yoy No of Shares (m) 5,356.5 growth from online sales. PS still expects both GM and OPM to range between Market Cap (HK$m) 13,873.3 Major Shareholders (%) Yue Yuen (62.41%) 34.0-34.5% and 5% respectively (vs.3-4% OPM guidance in FY18). PS re-iterated their OPM to expand 200bps to 7% by FY21E, which would be driven Auditors Deloitte by mid-teens sale growth, emerging and licensee brands turnaround, and Result Due 4Q19: Mar 2019 increased omni-channel sales contribution. We also believe improvement in operating efficiency would also be achieved through PS Product Sharing Company description Platform (PSP) which only will cover 60% of direct brick & mortar stores. Established in 1989 and listed in June 2008, Pou Continue to benefit from Adidas and Nike expansion in China, Sheng (PS) is one of the leading sportswear Omni-channel contribution to increase distributors in China with ~25% market share. In addition to Nike and Adidas, the company adopts PS net store openings came in at 213 in 3Q19, in which ~61% were directly multi-brand strategy and distributes Puma, operated stores. We still believe PS to benefit from both Nike and Adidas Converse, Under Armour and PONY products etc. continued expansion in China, as Adidas mentioned earlier in its 1H19 result that As of Sept 30, 2019, Pou Sheng’s retail network Greater China sales would accelerate in 2H19, while Nike’s Greater China sales comprises of 9,651 stores, in which ~61% are momentum (+27% Yoy on currency neutral basis vs. +10% on Group level) still remains intact in latest quarterly result (As of Aug 2019) directly operated stores. Pou Sheng continue to explore and invest in various new initiatives for future growth, these include i) expanding omni-channel capabilities (would Price Chart HK$ contribute 20% of sales in FY21E vs. 11%/11.9% in FY18/1H19, ii) through 3.5 introducing more in-season sales and more effective off-season products 3.0 rd through various 3 party channels; iii) Product Sharing Platform between 2.5 online and offline stores; iii) enhancing online business through YYSports 2.0 1.5 platform and co-operating with strategic partners, hence achieving economy of scale as fixed costs are relatively lower for online business. 1.0 0.5 We continue to believe these initiatives would be earnings/margin accretive to PS 0.0 in the long run, however would still involve execution risks. Jun-17 Jun-18 Jun-19 Dec-16 Dec-18 Dec-19 Dec-17 Raise FY19E-21E EPS on operating leverage; Maintain BUY, continue to Sources: Bloomberg, CIRL deserve re-rating story We lift Pou Sheng’s FY19E-21E EPS by 10.7%/13.3%/16.4% respectively on higher GM assumption, accompanied by lower SG&A ratio. These would continue to bring operating leverage to PS. PS is trading at FY20E 11.6x P/E (~40% discount to international leading peers) which we believe is undemanding as PS’ business is back on the right track, both operating efficiency and profitability would further improve after having launched various initiatives, which would still favour the re-rating cycle. We derived Pou Sheng’s new TP at HK$3.32 (unchanged 20% discount to international peers), implying FY20E 14.8x target PE and maintain Pou Sheng’s rating at BUY. Page 1 / 5 Exhibit 1: We revised up Pou Sheng’s FY19E-21E EPS forecasts (USDExhibit Mn) 1: FY19 (old) FY19 (new) Diff FY20 (old) FY20 (new) Diff FY21 (old) FY21 (new) Diff RevenuePork 4,051 4,051 0.0% 4,689 4,689 0.0% 5,490 5,427 -1.1% products GPsold in 1,377 1,390 0.9% 1,608 1,622 0.8% 1,894 1,894 0.0% supermark GPM 34.0% 34.3% +30 bps 34.3% 34.6% +30 bps 34.5% 34.9% +40 bps et counters Net Profit 105 117 10.7% 132 149 13.3% 163 190 16.4% EPS 0.020 0.022 10.7% 0.025 0.028 13.3% 0.031 0.036 16.4% Source: CIRL estimates Exhibit 2:Pou Sheng’s 3Q19 SSSG at mid-single digit growth, while GM expanded Yoy Exhibit16.0 1: 38.0 14.0 36.236.3 Pork 14.0 36.0 35.8 35.6 36.3 35.2 34.9 34.7 34.5 34.6 12.0 12.3 33.4 34.0 33.6 33.9 33.5 products 33.2 33.833.3 33.2 10.0 10.0 10.1 32.0 9.0 31.1 30.9 8.6 8.98.7 8.4 sold8.0 in 8.0 8.0 30.0 6.0 7.5 29.129.5 29.0 30.329.8 29.7 28.9 28.329.4 supermark6.0 5.9 5.6 6.028.0 5.0 27.4 4.0 4.2 26.0 3.0 et2.0 counters 2.2 1.9 1.5 24.0 0.4 0.0 22.0 (1.0(2.0)) (2.0) (1.0) 20.0 2Q13 3Q13 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q13 1Q14 2Q14 3Q14 4Q16 1Q17 2Q17 3Q17 (4.0) 2Q12 3Q12 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 4Q12 5Q12 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 Pou Sheng's SSSG (Yoy%, Year ended 31 Dec) Pou Sheng's GPM (%) Source: Company data, CIRL Exhibit 3: Nike’s Greater China sales momentum remains intact last quarter Exhibit 1: 40.0 Pork products30.0 sold in 20.0 supermark et counters 10.0 0.0 (10.0) (20.0) Nike (Greater China growth %, ex-FX) Footwear Apparel Euqipment Source: Nike, CIRL Page 2 / 5 Exhibit 4: Pou Sheng’s total store net openings reached 665 by 3Q19 PouExhibit Sheng's store 1: count FY17 FY18 *1Q17 **2Q17 **3Q17 **4Q17 **1Q18 **2Q18 **3Q18 **4Q18 **1Q19 **2Q19 **3Q19 DirectPork operation 5,465 5,648 5,545.0 5,464.0 5,464 5,465 5,517 5,531 5,585 5,648 5,733 5,895 5,995 Franchised 3,313 3,551 3,298.0 3,036.0 3,152 3,313 3,319 3,417 3,397 3,551 3,660 3,756 3,869 Totalproducts 8,778 9,199 8,843 8,500 8,616 8,778 8,836 8,948 8,982 9,199 9,393 9,651 9,864 Directsold stores' in growth -1.7% 3.3% -0.3% -1.5% 0.0% 0.0% 1.0% 0.3% 1.0% 1.1% 1.5% 2.8% 1.7% Franchised stores' growh 3.6% 7.2% 3.1% -7.9% 3.8% 5.1% 0.2% 3.0% -0.6% 4.5% 3.1% 2.6% 3.0% Totalsuperm growth ark 0.2% 4.8% 1.0% -3.9% 1.4% 1.9% 0.7% 1.3% 0.4% 2.4% 2.1% 2.7% 2.2% Directet countersstores (%) 62.3% 61.4% 62.7% 64.3% 63.4% 62.3% 62.4% 61.8% 62.2% 61.4% 61.0% 61.1% 60.8% Franchised stores (%) 37.7% 38.6% 37.3% 35.7% 36.6% 37.7% 37.6% 38.2% 37.8% 38.6% 39.0% 38.9% 39.2% Source: Company data, CIRL (*1Q17 growth data vs. FY16, **1Q17-2Q19 growth rate are on QoQ basis) Exhibit 5: Peers’ profitability comparison Exhibit 1: bloomberg ROE (%) ROA (%) Net Gearing (%) FY18 code FY18 FY18 FY18 GM (%) OM (%) PM (%) Pork Sportswear distributors ABC-MARTproducts INC 2670 JP 13.1 11.3 (52.5) 53% 17% 12% CALERES INC CAL US 13.6 6.1 41.0 42% 5% 3% FOOTsold LOCKER in INC FL US 20.1 13.5 (33.9) 32% 7% 4% GENESCO INC GCO US 5.7 3.6 3.8 48% 3% -5% DICK'Ssupermark SPORTING DKS US 17.5 8.2 (8.3) 29% 6% 4% ACCENT GROUP LTD AX1 AU 11.6 7.2 15.5 57% 9% 6% SPORTSet counters DIRECT IN SPD LN 8.5 4.0 14.7 40% 6% 1% JD SPORTS FASHIO JD/ LN 37.6 17.7 (36.9) 48% 9% 7% Average 25.6 14.3 N/A 41% 8% 6% POU SHENG INTL 3813 HK 22.0 23.4 (64.8) 35% 4% 2% Source: Bloomberg, CIRL Exhibit 6: Financial Summary Income statement Cash flow ExhibitYear to Dec (US$ 1: Mn) FY17A FY18A FY19E FY20E FY21E Year to Dec (US$ Mn) FY17A FY18A FY19E FY20E FY21E Revenue 2,775 3,422 4,051 4,689 5,427 Pre-tax profit 97 124 180 226 284 PorkGross profit (reported) 972 1,147 1,390 1,622 1,894 Taxes paid (29) (38) (39) (51) (59) EBITDA 175 223 233 285 349 Depreciation & amortization 63 77 27 29 30 productsDepreciation 63 77 27 29 30 Associates & Others 71 64 76 92 100 EBIT 112 146 205 256 318 CFO bef.
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