20171024-招商证券_香港_-I.T-00999.HK-1H18_recurring_earnings_boosted_by_GPM_recovery_8页_817kb

I.T (999 HK) Summary Report

Core Content

I.T (999 HK) reported a significant surge in recurring earnings for 1H18, rising by 55% YoY to HK$60 million, surpassing CMS estimates by 13%. This was driven by a recovery in gross profit margin (GPM), which increased by 3 percentage points YoY to 61.6%, primarily due to RMB appreciation reducing purchasing costs in HK$ terms. Total revenue for 1H18 edged up 0.2% YoY to HK$3.7 billion, with Mainland China (MC) and Japan showing strong growth while Hong Kong and Macau experienced a decline.

Main Points

1H18 Performance

• Recurring Earnings: Increased by 55% YoY to HK$60 million (13% above CMS estimates).
• Total Revenue: Rose 0.2% YoY to HK$3.7 billion.
• Net Operating Cashflow: Surged three-fold to HK$321 million.
• HK/Macau: Revenue dropped 11% YoY to HK$1.5 billion, but operating loss was kept at HK$112 million through cost control.
• Japan/USA: Both showed strong revenue and EBIT growth, with Japan's EBIT rising to HK$457 million (+31% YoY) and USA's EBIT to HK$194 million (+34% YoY).
• Mainland China: Revenue increased only 5% YoY, driven by a 13% increase in sales area, but was offset by negative SSSG in 2Q18. EBIT still grew 16% YoY to HK$95 million.
• Galaries Lafayette (GL): Turned profitable in Beijing, contributing HK$4 million in profits from the joint venture (1H17: HK$4 million net loss).

Transformation Strategy

• I.T is transitioning from an apparel retailer to a lifestyle conglomerate.
• Expansion in Mainland China, entry into F&B, and multi-brand product lines (e.g., "i.t blue block") are key components of this transformation.
• The group is becoming a multi-channel operator with a focus on providing a one-stop shopping experience for the younger generation.

Earnings Revisions

• Trimmed FY18E-20E recurring earnings by 5%/4%/3% due to lower revenue.
• Adjusted forecasts:
  • HK SSSG: Lowered from 1% to -3% due to a tough retail environment.
  • Japan SSSG: Raised from 15% to 35% due to better-than-expected performance.
  • MC SSSG: Trimmed from 4% to 0% due to weaker performance in 1H18.
  • GPM: Increased by 0.2ppt to 62.1%.
• Revised FY18E-20E EBIT and operating profit forecasts reflect these changes.

Financial Metrics

• Recurring Net Profit: Increased by 30% YoY to HK$408 million for FY18E.
• Recurring EPS: Rose to HK$0.34 for FY18E.
• DPS: Increased to HK$0.16 for FY18E.
• Recurring P/E: Reduced to 12.3x for FY18E, reflecting lower visibility as the valuation rolls over to FY19E.
• P/B: Reduced to 1.6x for FY18E.
• ROAE: Increased to 12.7% for FY18E.

Key Information

Price Performance

• 1H18 Price: HK$4.20.
• New Target Price (TP): HK$4.63 (+10% potential upside).
• 12-month Target Price: HK$4.63 (from previous HK$4.49).
• Price Performance (1m/6m/12m): 4.2% / 28.2% / 46.9%.
• HSI Performance: 1.5% / 17.7% / 21.1%.

Shareholding Structure

• Sham Brothers: 61.92%.
• Yeung Chun Kam: 5.27%.
• Jiang Jinzhi: 5.04%.
• NTAsian Discovery Master Fund: 5.03%.
• No. of Shares Outstanding: 1,196 million.
• Free Float: 35%.

Valuation

• New TP: HK$4.63, based on a lower target P/E of 11x (from 12x).
• Sector Average P/E: 14.5x.
• I.T's Forward P/E: 12.3x for FY18E, 10.2x for FY19E, and 7.9x for FY20E.
• PEG: 1.3x.
• Dividend Yield: 3.1% (Historical) and 3.9% (FY1).

Balance Sheet and Cashflow

• Net Cash Position: Improved from HK$-509 million in end-FY17 to HK$626 million in 1H18.
• Inventory Turnover Days: Increased to 200 days (1H17: 186 days) due to expansion and weaker HK market performance.
• Expected Inventory Days: Lower by end-FY18E due to seasonality and expected promotions.

Market Overview

• Sector: Textile & Garment.
• Market Cap: HK$5,022 million.
• Avg. Daily Volume: 0.79 million shares.
• BVPS: HK$2.27.

Conclusion

The report highlights I.T's strong 1H18 performance driven by GPM recovery, despite challenges in the Hong Kong and Macau markets. The company is on a transformation path to become a lifestyle conglomerate, with expansion in Mainland China, entry into the F&B sector, and increased product diversity. The valuation remains positive, with a revised target price and continued "BUY" recommendation. Financial health is maintained, with a healthy balance sheet and improved cash flow. The company is expected to continue its growth trajectory, with positive earnings growth and margin improvements anticipated in the coming years.