Share Price HK$7.20
Target Price HK$8.65
Resetting Growth Expectations
Giordano’s APAC segment is likely to face margin and sales pressures given weakening macro numbers and currency weakness in Indonesia. Meanwhile, China is showing marginal improvement as sales growth returns to positive levels and effects of operating leverage kick in after 2H12/1H13’s cost cuts. 2013 core earnings growth will be largely driven by the Middle East’s inclusion. Maintain BUY; target price: HK$8.65.
• Looking away from APAC for growth. Following the 14% and 30% sales and operating profit CAGR in 2010-12 respectively, we expect the established ASEAN markets to enter a stage of tapered growth, catalysed by cost pressures and currency risks in Indonesia, the historical growth driver for Giordano’s Asia Pacific (APAC) business. For 2013 and 2014, we cut APAC’s operating profit forecasts by 14% and 13% to HK$263m and HK$294m, and hence reduce our 2013 and 2014 net profit estimates by 8.7% and 3.3% to HK$768m and HK$868m respectively.
• China sees marginal improvement. Same-store sales growth (SSSG) has recovered to positive levels in 3Q13 and the effects of operating leverage are expected to kick in given the 103bp gross margin improvement to 57.5% in 1H13. Giordano is scaling up its fastmarketing efforts in 2H13, which are expected to drive sustained sales mix and gross margin improvement. For 2013 and 2014, we are looking for a 5.1% and 6.3% yoy operating profit growth to HK$164m and HK$181m respectively, contributing 18.2% and 18.4% of group operating profit.
• Middle East acquisition to drive core earnings growth in 2013. We expect full-year profit contribution from the Middle East to drive Giordano’s forecasted 17.2% and 8.7% core net profit growth in 2013 and 2014. Excluding Middle East operations, net profit is expected to grow 0% and 9.1% in 2013 and 2014 respectively.
• Hong Kong and Taiwan look fairly muted. Despite sales recovering in Taiwan following the successful execution of fast-marketing campaigns since 2Q13, we expect a depressed 2013 due to a very weak 1Q13 in Taiwan and de-leveraging in Hong Kong with rent and labour cost increases outpacing sales growth. With an expected 8.8% operating profit decline in 2013 to HK$245m, we expect segmental profit to recover by 8.7% yoy in 2014, given 1Q13’s low base.
• Gross margin improvement to offset weak APAC. Management has refined its product mix by adding more fashion elements to its core products and seasonal products. This product mix upgrade, along with more fast-marketing campaigns, is expected to further improve gross margin by 132/44bp yoy to 60.0/60.5% in 2013/14 respectively, which will likely offset some of the APAC weaknesses. While we have toned down our earnings expectations, Giordano is still expected to see core net profit growth of 17.2%/13.1% to HK$768m/HK$868m in 2013/14 respectively.
Earnings Revision/ Risk
• We have adjusted our earnings estimates to factor in lower APAC profit contribution primarily driven by slower sales growth and de-leveraging spurred by Indonesia’s currency weaknesses. We have also fine-tuned our China assumptions to expect operating leverage in the segment following 2H13/1H13’s cost cuts as SSSG returns to positive levels in 3Q13. On a net basis, the Middle East’s full-year inclusion in 2013 is expected to represent the bulk of Giordano’s earnings growth in 2013.
• Maintain BUY. A slower APAC is offset by the recovery in China, which saw SSSG returning to positive levels in 3Q13; consolidation efforts and locally relevant fast marketing are beginning to yield operating leverage. Our revised target price of HK$8.65 is based on 16x 2014F historical PE recovery multiple, which remains unchanged.
Publish date: 16/09/13