20150311-美银美林-Earnings_to_turn_around_in_2015__raise_to_Buy_15页_932kb

Daphne International Holdings Limited Summary

Core Content

Daphne International Holdings Limited is a leading ladies' footwear retailer in China, known for its strong market presence and brand awareness. The report from Bank of America Merrill Lynch (BofAML) upgrades Daphne's investment rating from Neutral to Buy, citing its attractive valuation and potential for strong earnings recovery in 2015.

Main Points

• Valuation: Daphne currently trades at 0.6x P/B and 8x 2015/16 P/E (or 5.5x ex-cash P/E), significantly below the industry average, suggesting the stock is oversold.
• Earnings Growth: The company is expected to achieve a 96% YoY earnings growth in 2015, returning to 2013 levels. This is attributed to margin expansion, reduced financial costs, and improved inventory management.
• Key Drivers of Earnings Recovery:
  • Margin Expansion: Improved gross margin (GPM) due to cheaper rubber prices (down 18% from peak), higher sales mix of in-season products, and lower retail discounts.
  • Inventory Management: Daphne has significantly reduced its inventory days, improving its cash flow and reducing the pressure on margins.
  • Removal of CB Interest Costs: The convertible bonds (CB) will not carry any interest in 2015 due to TPG waiving interest in exchange for extending the exercise date. This reduces financial costs and potential share dilution.
• P/S Ratio: Daphne's 2015 P/S ratio is at 0.3x, much lower than the industry average of 1.3x, indicating significant undervaluation.
• Market Position: Daphne holds the second-largest market share in the ladies' footwear industry in China, with a strong sales network and consumer mind share.

Key Information

• Investment Rating: Buy
• Price Objective (PO): HK$3.30
• Potential Upside: 75% based on the current valuation
• Earnings Forecast:
  • 2015E Net Income (Adjusted): HK$366mn
  • 2015E EPS: 0.223
  • 2016E EPS: 0.258
• Sales Growth: Expected to be soft at 5.5% in 2015, driven by a 3% ASP increase and store openings.
• Inventory Days:
  • 2014E: 195 days
  • 2015E: Expected to improve to 187 days
• Net Cash: Equivalent to 30% of market cap, which is a strong financial position.
• CB Details:
  • Exercise Price: HK$3.5
  • Current Share Price: HK$1.88
  • Expected to Expire Out of the Money: 11% share dilution is expected to be avoided due to sufficient cash reserves.
• Key Metrics:
  • P/B: 0.6x
  • P/S: 0.3x
  • P/E (2015/16): 8x
  • ROE (2014E): 3.7%
  • Net Debt-to-Equity (2015): -17.7%

Investment Thesis

The investment thesis is based on the company's strong earnings recovery potential in 2015, driven by margin expansion, lower financial costs, and improved inventory management. Despite a weak retail environment, Daphne's strong brand position and financial flexibility make it an attractive investment.

Summary of Key Assumptions

• Rubber Price Decline: Expected to be 8% in 2015, leading to a 70bp GPM expansion.
• SG&A Ratio: Stabilizing at around 52.3% in 2014E, with expectations of stability in 2015/16 due to reduced rental and staff costs.
• ASP Increase: Expected to be 3.5% in 2015, driven by in-season product mix.
• GPM Forecast:
  • 2015E: 56.6%
  • 2016E: 57.1%

Charts and Tables

• Chart 1: Daphne's P/S ratio is significantly lower than peers.
• Chart 2: Daphne's P/B ratio is at a historical low.
• Chart 3: Daphne's market share is second in the ladies' footwear industry.
• Table 1: Daphne's P/E and P/S compared to industry peers.
• Table 2: Daphne's sales mix and GPM improvements over time.
• Table 3: Summary of key assumptions and their impact on GPM and earnings.

Conclusion

Daphne's current valuation and expected earnings recovery make it an attractive Buy opportunity, with a 75% potential upside. The company is well-positioned for improvement due to its strong brand, financial flexibility, and strategic cost management.