20170105-广发证券香港-2017_Consumer_Discretionary_Sector_OutlookSelect_earnings_and_margin_recovery_names_17页_1mb

2017 Consumer Discretionary Sector Outlook Summary

Core Content

This document provides an outlook for the Consumer Discretionary sector in 2017, focusing on three sub-sectors: Jewelry, Sportswear, and Ladies Footwear. It highlights key themes, valuation analysis, investment strategies, and top picks, along with associated risks.

Main Points

Sector View

• Jewelry: Expected to return to positive growth in 1H17 due to a low comparable base and a softening gold price. China is the largest market for jewelry retailers, with potential for companies with strong development prospects.
• Sportswear: Long-term outlook remains positive due to favorable government policies and increasing sports participation. However, revenue growth is expected to slow in 2017 after three years of recovery.
• Ladies Footwear: Structural challenges persist, including online competition, declining foot traffic at department stores, and shifting consumer preferences towards sporty styles.

Key Themes

• Jewelry: Focus on gold price, SSSG (Same Store Sales Growth), and the sales mix of high-margin gem-set products.
• Sportswear: Key factors include SSSG, trade fair results, retail discounts, and the sales mix of functional products.
• Ladies Footwear: SSSG remains a key theme.

Valuation Analysis

• Jewelry: Sector is trading at 14.9x one-year forward P/E, slightly above the five-year historical average of 14.6x. Chow Sang Sang shows re-rating potential.
• Sportswear: Sector is at 11.1x one-year forward P/E, in line with the five-year average. Valuation is considered fair.
• Ladies Footwear: Sector is at 10.3x one-year forward P/E, below the five-year average of 13.1x. Valuation is considered fair due to ongoing challenges.

Investment Strategy

• A bottom-up approach is preferred due to sector visibility remaining low.
• Companies expected to see earnings recovery and margin improvements include:
  • I.T (999 HK): Strong growth in China, expansion potential, and improving bargaining power.
  • Chow Sang Sang (116 HK): Expected to benefit from SSSG and earnings recovery, despite lower P/E than peers.
  • Li Ning (2331 HK): Strong forecast for earnings growth due to margin recovery in FY16-18.

Top Picks

• I.T (999 HK, Buy): Reversed net profit decline, China became the largest market in 1HFY17. Significant expansion potential in China.
• Chow Sang Sang (116 HK, Buy): Expected to benefit from SSSG and earnings recovery. Trading at a lower FY17 P/E than peers despite higher EPS growth.
• Li Ning (2331 HK, Buy): Forecast for strong earnings growth driven by margin recovery in FY16-18.

Risks

• Upside risks: Better-than-expected SSSG, trade fair results, M&A, gold price rally, and growth in mainland tourist arrivals.
• Downside risks: Lower-than-expected SSSG and trade fair results, gold price slump, decline in tourist arrivals, policy risks, and competition.

Jewelry Sector Details

• SSSG in China and Hong Kong recovered since Sept 2016 due to low base and increased gold product purchases.
• Chow Sang Sang has the biggest network expansion potential in China, with fewer stores compared to Chow Tai Fook.
• Luk Fook has the lowest ratio of high-margin gem-set products in China.
• Sector P/E is 15.7x, slightly above the five-year average of 14.6x. Only Chow Sang Sang trades below its historical average P/E of 13x.

Sportswear Sector Details

• Long-term growth supported by government policies and increased sports participation.
• Anta (2020 HK): Expected to see 21% net profit growth in FY17, driven by FILA, kids, and e-commerce segments. M&A activity could accelerate earnings growth from FY18 onwards.
• Sector P/E is 11.0x, in line with the five-year average. Valuation is considered fair.

Ladies Footwear Sector Details

• Structural challenges persist, including declining SSSG and volume, online competition, and changing consumer preferences.
• Belle (1880 HK): Underperform due to expected decline in net profit and insufficient segment growth to offset footwear decline.

I.T (999 HK) Analysis

• China market leading growth: China overtook Hong Kong as the largest revenue source in 1HFY17.
• Valuation: Trading at 11.1x one-year forward P/E, below the historical average.
• Key assumptions:
  • Revenue growth in China is expected to continue.
  • Core net profit growth is positive, with a significant increase when excluding onerous provisions.
  • The company's expansion in China, including both self-operated and franchised stores, suggests strong growth potential.
  • The company has a strong multi-brand portfolio, enhancing its bargaining power with retailers.

Valuation Tables

Financial Statements (I.T)

• Income Statement:

  • Turnover: Expected to grow from HK$7,541m in FY16 to HK$8,133m in FY17E.
  • Gross profit: Expected to increase from HK$4,423m to HK$5,022m.
  • Net profit: Expected to grow from HK$209m to HK$341m in FY17E.
  • Core net profit: Expected to increase from HK$275m to HK$341m.

• Cash Flow Statement:

  • Operating cash flow: Expected to increase from HK$319m to HK$557m in FY17E.
  • Capex: Expected to remain stable around HK$300m.
  • Net cash flow: Expected to fluctuate but show positive trends.

• Balance Sheet:

  • Total assets: Expected to increase from HK$1,783m to HK$1,819m in FY17E.
  • Equity: Expected to grow from HK$2,895m to HK$3,160m.

Financial Ratios (I.T)

• Turnover growth: Expected to increase from 5.0% in FY16 to 7.8% in FY17E.
• Gross profit margin: Expected to remain stable around 61.8%.
• Operating profit margin: Expected to increase from 6.4% to 7.5%.
• Core net profit margin: Expected to increase from 4.1% to 4.2%.

Conclusion

The Consumer Discretionary sector in 2017 is expected to see mixed performance, with jewelry and sportswear showing positive growth potential, while ladies footwear faces ongoing structural challenges. Key investment opportunities lie in companies like I.T, Chow Sang Sang, and Li Ning, which are expected to benefit from margin recoveries and growth in key markets. Valuation analysis suggests that some companies may offer re-rating potential, while others are at fair valuations. Risks include gold price volatility, SSSG underperformance, and competition.