Morgan

Topics: Morgan Stanley, Morgan Stanley Smith Barney, Financial services Pages: 12 (6055 words) Published: April 26, 2015
Giordano International | November 24, 2014

MORGAN STANLEY RESEARCH
MORGAN STANLEY ASIA LIMITED+

November 24, 2014

Robby Gu

Giordano International

Robby.Gu@morganstanley.com

Tough Outlook for 2015, Downgrade to
UW
Industry View
In-Line

Stock Rating
Underweight

Price Target
HK$3.50

+852 3963-0277

Angela Moh
Angela.Moh@morganstanley.com

+852 2848-5405

Morgan Stanley appreciates your support in the Institutional Investor 2015 All-Asia Research and Sales Team Survey. Voting will open in January.

Giordano International ( 0709.HK , 709 HK )

We see limited improvement in 2H14 and 2015 in view of a
challenging retail environment and Giordano's eroding pricing power. New headwinds in Hong Kong and ASEAN retail could also cause near-term weaknesses.
What's Changed?
Giordano International
Net profit, 2014e
Net profit, 2015e
Price Target
Rating

From:

To:

HK$586mn
HK$606mn
HK$4.80
Equal-weight

HK$414mn
HK$449mn
HK$3.50
Underweight

Limited effects from new initiatives so far: We see muted improvement in Giordano's sales performance into 2H14 and 2015. The various initiatives to counter sales declines in core markets in Greater China have been in place for a year, but results have been mixed. We see good feedback from the crossover campaign with Lowe Alpine. After a few licensing attempts (Jack Wolfskin in 2013, Hello Kitty and Lowe Alpine in 2014-2016), we expect Giordano to introduce more crossovers in 2015 to enhance brand and diversify revenue streams. Rollout of the new brands (Beau Monde, Eula) is under way but the visibility on their impact remains low.

New headwinds add to the pinch: Our main concerns for Giordano are increasing competition, stagnant brand development, and weakening pricing power. Post 3Q14 trading update, we saw some worrying trends that further plagues the near-term fundamentals and triggers our downgrade: 1) negative impact from Occupy Central in Hong Kong. Due to the protests in Hong Kong, Giordano is seeing 20% sales decline in its three flagship stores in Mongkok, Admiralty and Causeway Bay. As a result, we expect annual Hong Kong sales to decline for the first time in five years, leading to greater operating deleverage. 2) Slowdown in ASEAN. SSSG in ASEAN also decelerated more quickly than we thought amid a deteriorating economic outlook and global credit tightening. 3) Sales in China, including online sales, remain fairly stagnant (sales during Double 11 were flat YoY, missing company's target of 50% increase). Valuation: Our DCF-based price target of HK$3.5 implies 12x 2015 P/E and 6.5% 2015 dividend yield. Giordano shares have corrected by 46% YTD, vs. +0.6% for the Hang Seng Index, making risk-reward more balanced. However, we downgrade the stock to Underweight for two main reasons: 1) further downside risk to consensus earnings outlook – we are 8% below consensus for 2015 and 14% below for 2016; 2) lack of a compelling near-term bull case.

Hong Kong/China Discretionary / Hong Kong
Stock Rating
Industry View
Price target
Up/downside to price target (%)
Shr price, close (Nov 21, 2014)
52-Week Range
Sh out, dil, curr (mn)
Mkt cap, curr (mn)
EV, curr (mn)
Avg daily trading value (mn)
Fiscal Year Ending
ModelWare EPS (HK$)
Prior ModelWare EPS
(HK$)
EPS (HK$)**
Consensus EPS (HK$)§
Revenue, net (HK$ mn)
P/E**
P/BV
RNOA (%)
ROE (%)
Div yld (%)
Leverage (EOP) (%)

Underweight
In-Line
HK$3.50
(7)
HK$3.75
HK$7.20-3.75
1,576
HK$5,909
HK$5,523
HK$12.85

12/13
0.46
0.65

12/14e
0.26
0.59

12/15e
0.27
0.61

12/16e
0.30
0.63

0.43
0.47
5,848
16.3
2.8
25.2
19.2
5.7
(13.6)

0.27
0.29
5,644
14.1
1.5
14.5
10.5
5.6
(13.6)

0.29
0.31
5,843
13.0
1.4
14.3
10.6
6.1
(13.5)

0.30
0.34
6,066
12.6
1.4
15.3
11.6
6.3
(11.5)

Unless otherwise noted, all m etrics are based on Morgan Stanley ModelWare fram ework § = Consensus data is provided by Thom son Reuters...
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