Giordano International | November 24, 2014
MORGAN STANLEY RESEARCH
MORGAN STANLEY ASIA LIMITED+
November 24, 2014
Tough Outlook for 2015, Downgrade to
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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.
Net profit, 2014e
Net profit, 2015e
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$3.5 implies 12x 2015 P/E and 6.5% 2015 dividend yield. Giordano shares have corrected by 46% YTD, vs. +0.6% for the Hang Seng Index, making risk-reward more balanced. However, we downgrade the stock to Underweight for two main reasons: 1) further downside risk to consensus earnings outlook – we are 8% below consensus for 2015 and 14% below for 2016; 2) lack of a compelling near-term bull case.
Hong Kong/China Discretionary / Hong Kong
Up/downside to price target (%)
Shr price, close (Nov 21, 2014)
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Avg daily trading value (mn)
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ModelWare EPS (HK$)
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Consensus EPS (HK$)§
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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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