Pou Sheng International (3813 HK) Rating Maintain Neutral Privatization undone but life still goes on Target price HK$1.19 From HK$1.45 Current Price HK$1.39 Upside: -14.4% Privatization proposal disapproved, no surprise on FY18E guidance Company Update PS announced on Apr 9 that its parent’s (Pou Chen) plan to take the company private had been canceled as 10.8% of the votes held by all the Disinterested Scheme Shareholders voted against the proposal. Under the relevant restrictions 13 April 2018 of the Takeovers Code relating to the making of subsequent offers, Pou Chen, Yue Yuen (551.HK) or any other related party in the privatization proposal cannot Hayman Chiu propose another deal within the next 12 months. PS share price tumbled as [email protected] much as 37.5% after trading resumed on Apr 10. (852) 2235 7677 Management held a call yesterday to clarify the above issue and provide update/guidance on revenue (target low-teens growth Yoy), GM (~FY17 due to Trading Data inventory provision continues), OPM (3.5%-4.0%) which gave us no surpeise, 52-Week Range (HK$) 2.03/1.05 however, the current market consensus for FY18E OPM is higher than PS guidance (average at 4.4%), we expect a new round of earnings downgrade 3 Mth Avg Daily Vol (m) 23.3 cycle would occur again and poses pressure on share price. Meanwhile, PS No of Shares (m) 5,341.0 Market Cap (HK$m) 7,424.0 target ~300 net store openings in FY18E (vs.PS guided 600-800 net openings during FY16 result call in Mar 2018). Though PS would still benefit from both Major Shareholders (%) Yue Yuen (62.41%) Nike and Adidas continued expansion in China, emerging brands is still Auditors Deloitte undergoing de-stocking this year, we believe the net sore openings is still quite Result Due 1Q18: May 2018 challenging task for PS. Company description Transformation still possesses execution risks, current competitive landscape and investors’ lack of confidence remains an overhang Established in 1989 and listed in June 2008, Pou Sheng (PS) is one of the leading sportswear Pou Sheng continue to explore and invest heavily in various new initiatives such distributors in China with ~25% market share. In as i) expanding omni-channel capabilities; ii) planning organized addition to Nike and Adidas, the company adopts promotional activities; iii) enhancing store offering and iv) providing multi-brand strategy and distributes Puma, sports-related content and services. We believe these initiatives may benefit Converse, Under Armour and PONY products etc. Pou Sheng in the long run, however would still involve execution risks that would pose negative impact on Pou Sheng’s near term operation. In addition the As of December 2017, Pou Sheng’s retail network investors’ confidence has not been recovered since the outbreak of the comprises of 8,778 stores, in which ~62% are accounting treatment issue in Jan 17, hence still remains an overhang on Pou directly operated stores. Sheng’s valuation. PCG Bros still ramping up, expect loss narrows in FY18E Price Chart Management mentioned during the call that PCG Bros posted RMB50mn loss in FY17. As the business is still ramping up and recruitment of experienced staff is still required, management still expect the business to be loss-making in the near term (expect loss narrows to ~RMB26mn) Cut FY18E/19E EPS, unattractive valuation on near term fundamentals; Maintain Neutral, investors to stay aside We cut Pou Sheng’s FY18E/19E EPS by 19.5%/10.1% respectively and hence Sources: Bloomberg, CIRL expect a stagnant EPS growth in FY16-19E. Pou Sheng is trading at FY18E 14.4x P/E (~6.5% discount to leading peers) which we believe is unattractive on the grounds of near term fundamentals. We lowered Pou Sheng’s TP from HK$1.45 to HK$1.19 (20% discount to international peers, implying a largely unchanged FY18E 12.3x target PE (vs. 12.2x in our last update in Feb) and reiterate Pou Sheng’s rating at Neutral. We advise investors to stay aside. Page 1 / 5 Exhibit 1 :We cut Pou Sheng’s FY18E/19E EPS forecasts and introduce FY20E estimates Exhibit(USD Mn) 1: FY18 (old) FY18 (new) Diff FY19 (old) FY19 (new) Diff FY20E Yoy PorkRevenue 2,754 3,052 10.8% 3,000 3,411 13.7% 3,833 12.4% products 1,068 11.1% 1,200 14.3% 1,348 12.4% soldGP in 961 1,050 supermark etGPM counters 34.9% 35.0% 10bps 35.0% 35.2% 20bps 35.2% flat Net Profit 79 64 -19.1% 95 85 -10.5% 118 38.9% EPS 0.015 0.012 -19.5% 0.018 0.016 -10.1% 0.022 38.9% Source: CIRL estimates Exhibit 2:Pou Sheng’s 4Q17 SSSG and GM improved Exhibit16.0 1: 38.0 36.3 36.3 14.0 14.0 36.0 35.8 Pork 36.2 35.6 34.9 34.5 12.0 12.3 34.0 33.4 34.7 33.2 33.6 products10.0 10.0 32.0 31.1 9.0 8.6 30.530.8 30.3 30.9 8.0 8.0 8.0 30.3 29.8 sold in 7.5 30.0 29.6 29.5 29.7 29.7 28.9 29.4 29.1 29.0 6.0 6.0 5.9 5.6 28.0 28.3 supermark5.0 5.0 27.4 4.0 26.0 3.0 2.0 et counters 1.9 1.5 24.0 0.0 (1.0) 0.4 (1.0) 22.0 (2.0) 20.0 1Q13 2Q13 3Q13 1Q14 3Q14 4Q14 1Q15 2Q15 4Q15 1Q16 2Q16 3Q16 1Q17 3Q17 4Q17 2Q14 3Q15 4Q16 2Q17 (2.0) 4Q13 (4.0) 2Q11 4Q11 2Q12 4Q12 5Q12 2Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 2Q16 4Q16 2Q17 4Q17 1Q11 3Q11 1Q12 3Q12 4Q13 2Q14 4Q14 2Q15 4Q15 3Q16 1Q17 3Q17 Pou Sheng's SSSG (Yoy%, Year ended 31 Dec) Pou Sheng's GPM (%) Source: Company data, CIRL Exhibit 3: Nike’s Greater China sales picked up last quarter while Adidas growth momentum continues Exhibit 1: 35.0 32.0 30.0 30.0 Pork 30.0 30.0 26.0 28.0 28.0 products 25.0 25.0 21.0 20.0 20.0 sold in 19.0 16.0 15.0 13.0 13.0 15.0 supermark 13.0 10.0 11.0 9.0 11.0 11.0 et counters 8.0 6.0 5.0 6.0 5.0 0.0 3Q12 4Q12 1Q13 4Q13 1Q14 2Q14 1Q15 2Q15 3Q15 2Q16 3Q16 4Q16 3Q17 4Q17 1Q12 2Q12 2Q13 3Q13 3Q14 4Q14 4Q15 1Q16 1Q17 2Q17 Adidas (Greater China) Overall Source: Company data, CIRL Page 2 / 5 Exhibit 4: Increased franchised stores net openings drove Pou Sheng’s total store counts slightly increased in 3Q17 QoQ PouExhibit Sheng's store 1: count FY12 FY13 FY14 FY15 FY16 FY17 *1Q17 **2Q17 **3Q17 **4Q17 DirectPork operation 3,659 3,665 4,263 4,943 5,560 5,465 5,545.0 5,464.0 5,464 5,465 Franchised 2,276 2,263 2,689 2,893 3,199 3,313 3,298.0 3,036.0 3,152 3,313 Totalproducts 5,935 5,928 6,952 7,836 8,759 8,778 8,843 8,500 8,616 8,778 Direct stores' growth 0.2% 16.3% 16.0% 12.5% -1.7% -0.3% -1.5% 0.0% 0.0% Franchisedsold in stores' growh -0.6% 18.8% 7.6% 10.6% 3.6% 3.1% -7.9% 3.8% 5.1% Totalsupermark growth -0.1% 17.3% 12.7% 11.8% 0.2% 1.0% -3.9% 1.4% 1.9% Direct stores (%) 61.7% 61.8% 61.3% 63.1% 63.5% 62.3% 62.7% 64.3% 63.4% 62.3% Franchisedet counters stores (%) 38.3% 38.2% 38.7% 36.9% 36.5% 37.7% 37.3% 35.7% 36.6% 37.7% Source: Company data, CIRL (*1Q17 growth data vs. FY16, **2Q-4Q17 growth rate are on QoQ basis) Exhibit 5: Peers’ profitability comparison Exhibit 1: bloomberg ROE (%) ROA (%) Net Gearing (%) FY17 code FY17 FY17 FY17 GM (%) OM (%) NM (%) Pork Sportswear distributors ABC-MARTproducts INC 2670 JP 13.4 11.5 (52.5) 54% 18% 12% 11% CALERES INC CAL US 14.2 6.2 41.0 41% 4% 3% 43% FOOTsold LOCKER in INC FL US 24.8 17.1 (33.9) 34% 13% 9% 106% DSW INC-CL A DSW US 12.7 8.4 (22.3) 28% 7% 5% 39% GENESCOsupermark INC GCO US 9.3 5.9 3.8 49% 5% 3% 53% FINISH LINE-A FINL US 9.1 5.7 (20.1) 30% 3% -1% 30% DICK'Set counters SPORTING DKS US 17.3 8.4 (8.3) 30% 6% 4% 26% JD SPORTS FASHIO JD/ LN 39.8 18.9 (36.9) 49% 10% 8% -3% Average 20.1 N/A N/A 39% 8% 6% 44% POU SHENG INTL 3813 HK 22.0 23.4 (64.8) 35% 4% 2% -3% Source: Bloomberg , CIRL Exhibit 6: Financial Summary Income statement Cash flow YearExhibit to Dec (US$ 1: Mn) FY16A FY17A FY18E FY19E FY20E Year to Dec (US$ Mn) FY16A FY17A FY18E FY19E FY20E Revenue 2,444 2,775 3,052 3,411 3,833 Pre-tax profit 125 97 102 133 184 GrossPork profit (reported) 868 972 1,068 1,200 1,348 Taxes paid (37) (35) (42) (45) (51) EBITDA 172 162 172 212 271 Depreciation & amortization 38 50 54 59 66 Depreciationproducts 38 50 54 59 66 Associates & Others 59 67 73 78 89 EBIT 135 112 119 152 205 CFO bef.