by winston » Thu Feb 13, 2014 7:39 pm
not vested
Sa Sa International Holdings – In the middle of difficulty, lies opportunity
Rating: Accumulate
Closing price: 7.40
Target price: 8.12
Sa Sa’s share price had significant correction recently, which slid 18.3% in January (vs. HSI fell 5.5% over the same period).
We attributed it to :-
1.) Concern on slower gross margin expansion after the Group announced its 3QFY14 operational data: 3QFY14 SSSG in HK & Macau was 15.8% (vs. 11.1% in 2QFY14), but the market think the promotions and discount activities to exchange for the considerable sales growth would hurt the Group’s gross margin, and it extended to worry whether Sa Sa can keep the SSSG at high level in coming quarters.
2.) Concern on declining growth rate of the number of mainland visitor: According to Hong Kong Tourism Board data, the number of mainland visitor in 4Q2013 rose 11.1% YoY to 10.6 mn (vs. YoY growth rate of 16.7% for full-year), the growth trend is obviously slowing down.
3.) A magazine reported that Sa Sa’s staffs wiped away the expiry date of products and sell the expired products, which hurt the Group’s brand.
4.) Concern on Sa Sa’s inability to have turnaround in Mainland China market in near-term: Sa Sa posted operating loss of HKD27.2 mn in Mainland China in 1HFY14 (vs. HKD19.8 mn loss in 1HFY13), the loss situation worsened.
Sa Sa continued to have gross margin expansion in past few years (from 43.7% in FY09 to 46.4% in FY13). Although the gross margin may be lower than market expectation after promotion activities from mid-October of last year, management said that the fine-tune of marketing strategy would reverse the downtrend of gross margin in 4QFY14. Sa Sa recorded gross margin of 47.0% in 1HFY14 (vs. 45.7% in 1HFY13), we conservatively estimate the gross margin will expand 1.2 ppts to 46.4% in FY14.
Sa Sa is trading at FY14 forecast P/E of 21.4x (vs. 5-year average is 20.9x), we expect Sa Sa’s FY14/15 EPS to be HKD 34.6/40.6 cents, net profit’s 2-year CAGR is 17.9% (vs. 29.3% CAGR for past 3-year).
We give a target price of HKD8.12, based on FY15 forecast P/E of 20.0x. We give a “Accumulate” rating with upside potential of 9.7%.
The major downside risks are:-
1.) contraction of gross margin,
2.) weaker spending power of mainland visitors,
3.) a significant increase in rental/staff costs.
Source: Phillips
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