Company Update Hong Kong 10 November 2017 Consumer Cyclical | Retailing Buy (from Sell) Trinity Ltd Target Price: HKD1.20 Price: HKD0.75 New Shareholder To The Rescue Market Cap: USD168m Bloomberg Ticker: 891 HK Trinity announced on 9 Nov that Ruyi is to subscribe to new shares and Share Data become its new majority shareholder (51.3%). The existing Fung brothers, Avg Daily Turnover (HKD/USD) 7.24m/0.93m management, and associates would have their stake diluted to 20% (from 52-wk Price low/high (HKD) 0.40 - 0.75 44%). The pricing – with the buyer paying HKD1.20 (ie 60% over the last close) – is very premium. We upgrade to BUY (from Sell), with a HKD1.20 Free Float (%) 56 TP (from HKD0.40, 60% upside). We note that the upside is wholly Shares outstanding (m) 1,747 dependent on the price willingly paid by the strategic buyer and cannot be Estimated Return 60% justified by Trinity’s fundamentals. Shareholders (%) Who is the buyer? Shandong Ruyi Group (Ruyi) is a private textiles Fung family 41.0 manufacturer in China. It is known for manufacturing high-quality garments for Schroders PLC 7.0 global brands such as Hugo Boss, Ermenegildo Zegna and Armani, among Citigroup 6.0 others. Ruyi has been on an acquisition spree in recent years, buying both brands and textile companies. In 2017, it purchased both the Aquascutum Share Performance (%) brand from YGM Trading (375 HK, NR) for USD117m and Lyrca – the synthetic YTD 1m 3m 6m 12m textiles makers – from Koch Industries for >USD2bn. From earlier acquisitions, Absolute 29.3 59.6 59.6 41.5 31.6 it owns France’s SMCP SAS (SMCP) (SMCP FR, NR) and Japan’s Renown Inc Relative (3.1) 56.7 54.6 24.4 1.6 (3606 JP, NR). Source: Bloomberg Buyer paying a big premium for control. Trinity is to issue 1.8bn new shares to Ruyi – representing 51.3% of enlarged capital – at a higher price of HKD1.20 Trinity Ltd (891 HK) Price Close Relative to Hang Seng Index (RHS) (last close: HKD0.75). The Fung brothers, management and associates would 0.80 120 have their stake diluted to 20% (from 44%). We understand that Trinity’s 0.70 104 0.60 88 existing management is to stay on board – as explained by the announcement 0.50 72 and looking at Ruyi’s previous arrangement with SMCP, where the French 0.40 56 0.30 40 management continues to run operations. 120 100 Likely to be approved. We believe the subscription price represents a 80 60 significant value to existing shareholders, as it represents 85% of the BVPS. 40 We have earlier said that Trinity has HKD3.2bn of intangibles on its books. It 20 has also not had any major impairments to date. Furthermore, the company is Volm 16 17 17 17 17 17 - - - - - - Jul Jan Mar Nov Sep facing financial issues, with a net debt position of HKD891m and widening May negative operating cash flow. A cash injection would be highly needed for Trinity’s survival and turnaround (if any). Source: Bloomberg Upgrade TP to HKD1.20 and BUY (from Sell). We keep our forecasts unchanged, as it would still take significant time to put into action any reform plans from Ruyi. Thus, it is still highly likely that the company would be loss- making for the next two years. We hypothesise that the group may redirect most of Trinity’s manufacturing into the former’s operations in China (from Europe previously) to help reduce costs while accelerating the latter’s e-commerce operations in China, ie similar to its previous playbook for SMCP. We peg our TP to HKD1.20, which hinges on the subscription price paid by Ruyi. This represents 0.85x P/BV (based on 1H17). Our previous HKD0.40 TP was based on 0.3x FY17F P/BV. The downside risk is Ruyi failing to complete the new subscription deal. Forecasts and Valuations Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total turnover (HKDm) 1,914 1,777 1,797 1,903 2,090 Reported net profit (HKDm) (89) (441) (287) (203) (60) Recurring net profit (HKDm) (174) (403) (287) (203) (60) Recurring net profit growth (%) (425.6) 132.0 (29.0) (29.3) (70.3) Recurring EPS (HKD) (0.10) (0.23) (0.16) (0.12) (0.03) DPS (HKD) na na na na na Recurring P/E (x) na na na na na P/B (x) 0.41 0.48 0.54 0.59 0.61 P/CF (x) 13.2 na na na 54.7 Dividend Yield na na na na na Analyst EV/EBITDA (x) 45.3 na na na 45.2 Robin Yuen, CFA Return on average equity (%) (2.7) (15.0) (11.2) (8.8) (2.8) Net debt to equity (%) 15.4 26.8 48.7 63.0 69.5 +852 2103 9202 Our vs consensus EPS (adjusted) [email protected] Source: Company data, RHB See important disclosures at the end of this report 1 Powered by the EFA Platform Trinity Ltd Hong Kong Company Update 10 November 2017 Consumer Cyclical | Retailing Financial Exhibits Financial model updated on: 2017-11-10. Asia Financial summary Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Hong Kong Recurring EPS (HKD) (0.10) (0.23) (0.16) (0.12) (0.03) Consumer Cyclical EPS (HKD) (0.05) (0.25) (0.16) (0.12) (0.03) Trinity Ltd BVPS (HKD) 1.83 1.55 1.38 1.27 1.23 Bloomberg 891 HK Weighted avg adjusted shares (m) 1,747 1,747 1,747 1,747 1,747 Buy Valuation metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Valuation basis Recurring P/E (x) na na na na na P/BV. P/E (x) na na na na na P/B (x) 0.41 0.48 0.54 0.59 0.61 Key drivers FCF Yield (%) 3.0 (16.6) (31.9) (16.3) (7.3) New CEO implementing cost-cutting and better EV/EBITDA (x) 45.3 na na na 45.2 efficiency practices. EV/EBIT (x) na na na na na Key risks Income statement (HKDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Extended financial losses over a longer period of time. Total turnover 1,914 1,777 1,797 1,903 2,090 Gross profit 1,385 1,213 1,258 1,342 1,484 Company Profile EBITDA 40 (278) (156) (77) 62 Trinity is a luxury high-end menswear retailer with six Depreciation and amortisation (157) (142) (133) (128) (125) international brands in its portfolio, including self- owned brands Kent & Curwen, Cerruti 1881, and Operating profit (118) (421) (289) (205) (63) Gieves & Hawkes. As at end-2013, Trinity had 441 Net interest (16) (19) 4 4 4 point-of-sales (POS) in the Greater China Region (360 Income from associates & JVs 4 (1) (1) (1) (1) in China, 40 in HK/Macau, and 41 in Taiwan). The Pre-tax profit (129) (441) (287) (203) (60) company is also beginning to expand overseas to Taxation 40 (1) 0 0 0 markets such as Europe and the US with its self- Recurring net profit (174) (403) (287) (203) (60) owned brands. Cash flow (HKDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Change in working capital 23 196 (149) (23) (46) Cash flow from operations 99 (98) (297) (93) 24 Capex (60) (120) (120) (120) (120) Cash flow from investing activities (85) (112) (83) (83) (83) Dividends paid (75) 0 0 0 0 Cash flow from financing activities 49 1,117 (33) 228 (33) Cash at beginning of period 523 235 581 129 172 Net change in cash 64 907 (414) 52 (92) Ending balance cash 586 1,143 167 181 80 Balance sheet (HKDm) Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Total cash and equivalents 235 581 129 172 71 Tangible fixed assets 172 150 137 129 124 Intangible assets 3,263 3,253 3,253 3,253 3,253 Total other assets 476 387 387 387 387 Total assets 5,033 5,063 4,745 4,805 4,748 Short-term debt 566 739 739 1,000 1,000 Total long-term debt 160 566 566 566 566 Other liabilities 722 689 689 689 689 Total liabilities 1,842 2,362 2,331 2,594 2,596 Shareholders' equity 3,191 2,701 2,414 2,212 2,152 Total equity 3,191 2,701 2,414 2,212 2,152 Net debt 491 724 1,175 1,393 1,494 Total liabilities & equity 5,033 5,063 4,745 4,805 4,748 Key metrics Dec-15 Dec-16 Dec-17F Dec-18F Dec-19F Revenue growth (%) (27.0) (7.2) 1.1 5.9 9.8 Recurrent EPS growth (%) (423.8) 132.0 (29.0) (29.3) (70.3) Gross margin (%) 72.4 68.3 70.0 70.5 71.0 Operating EBITDA margin (%) 2.1 (15.7) (8.7) (4.1) 3.0 Net profit margin (%) (4.6) (24.8) (15.9) (10.6) (2.9) Capex/sales (%) 3.1 6.8 6.7 6.3 5.7 Interest cover (x) (5.39) (15.44) (8.77) (6.22) (1.90) Source: Company data, RHB See important disclosures at the end of this report 2 Trinity Ltd Hong Kong Company Update 10 November 2017 Consumer Cyclical | Retailing SWOT Analysis High-end menswear retailer in the Greater China Increasing region competition from international and Owns several high-end international menswear brands, such as Kent & Curwen, Cerruti 1881, Gieves domestic brands in China & Hawkes and Durban Negative impact from China’s recent anti-corruption campaign New CEO Mr Jeremy Hobbins may provide fresh leadership and be a catalyst for effective change Shandong Ruyi shareholder may help reduce manufacturing costs and improve e- Negative impact from rising rental costs in HK and commerce rising staff costs in China capabilities Weak HK retail market environment Loss-making stores in China Recommendation Chart Date Recommendation Target Price Price Price Close 2017-03-17 Sell 0.40 0.61 6 Recommendations & Target Price 2016-08-10 Sell 0.50 0.59 24 37 92 73 61 57 50 00 24 27 84 00 40 .