Growth outside China
Giordano’s operating performance should have been resilient in 2Q13 despite China’s overall market weakness due to bad weather, the avian flu and a sluggish economy. We look beyond China to2014, when its restructuring should be completed.
Thanks to contributions from its newly-acquired Middle-East market, we expect core net profit to grow 15% yoy to HK$354min 1H13on7% topline growth. Maintain Outperform and target price, based on15x CY14 P/E, its 10-year average. Catalysts are expected from improving China operations and sustainable margin expansion.
Suffering from unusually cool and wet weather and the avian flu in Eastern China in 2Q13, the group’s SSSG had contracted by a high single digit in Apr(-7% in 1Q)in China. However, sales gradually recovered in May and Jun with mom improvements, thanks to the closure of non-performing stores in the past 15months ( > 160 stores) and effective localised marketing campaigns. Taiwan’s recovery was on track with SSSG turning positive in 2Q (-14% in 1Q) on the back of successful promotions while Hong Kong kept its low-single-digit SSSG (+3% in 1Q). Singapore is sure to be poor given Jun’s air pollution, which kept people indoors.
What We Think
We believe2Q’s overall performance was stable, compensated by Indonesia and Thailand (>20% SSSG in 1Q) as well as the recovery in Taiwan. We expect China’s profitability to improvefrom:1) healthy inventories; 2) fewer discounts offered by its rivals; and 3) gross-margin preservation. Store expansion will focus on Taiwan and South-East Asia while stores in China will stay around 1,200.
What You Should Do
We like Giordano’s prudent expansion with diversification in Greater China, South-East Asia and the Middle East (new contributor) to balance its business risks and growth. Stay invested for its 5.7%dividend yields and strong balance sheet with HK$1.3bn of net cash on hand.
Publish date: 16/07/13