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YGM Trading Limited (YGM貿易)
BUY Target Price: HK$29 (+54%) Price: HK$18.86 HKEx Code: 375 Tue, 07 Jun 2011
Overlooked fundamental change has taken place Equity Research
Consumer / China .
YGM Trading (375.HK) is a premium fashion retailer established in Hong
Kong since 1976. The company recently acquired all intellectual property
rights of the British premium brand “Aquascutum” in the Asia Pacific region
and became a fashion brand owner from a fashion brand licensee.The
company also comes back to the expansion track again since FY07. We
initiate YGM Trading with a BUY rating, TP at HK$29, implying the sum of
14x FY12E PE and HK$2 value to be unlocked upon properties sale.
Key points:
Changing from a premium fashion brand manager to an owner.
YGM Trading acquired the British premium fashion brand
“Aquascutum” in the Asia Pacific region in 2009. Without fear of the
brand license being bought back, the company gains sustainability and operation freedom, which we believe the market has not fully priced in.
Store expansion back on track. Due to store consolidation for the
loss-making “Michel Rene” brand, no. of stores decreased in recent years.
For the first time since FY07, management decides to open 27 stores per year, at a rate of 10% p.a., starting from Sep 2010.
Strong growth momentum expected. For the six months ended 30 Sep
2010, the group recorded SSS growth of 27% for the shops in PRC and
6.5% for HK outlets. Given the strong industry momentum in both the
PRC and HK, we are of the opinion that the stores of YGM Trading are well-established to capture the trend.
Valuation. The counter is current trading at a 9.6x FY12E PE. We
recommend buying this counter with a TP of HK$29, representing the
sum of 14x forward PE and HK$2 value to be unlocked upon properties sale, offering 54% upside.
Godfrey Leung
Oriental Patron Securities Ltd
+852 2842 5803
Initial Coverage
Key Data
Close price (HK$) 18.86
12 Months High (HK$) 24.65
12 Month Low (HK$) 7.80
3M Avg Daily Vol. (mn) 0.25
Issue Share (mn) 162.62
Market Cap (HK$mn) 3,067.07
Fiscal Year 03/2010
Major shareholder (s) Chan’s Family (50%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 3/6/2011 All figures are subject to rounding
Price Chart
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%375 HK MSCI CHINA
OP vs Consensus
BLOOMBERG Cons OP
FY11E FY12E FY11E FY12E
Turnover 1,288 1,520 1,174 1,430
Net profit 270 337 249 326
Gross margin 66.00 66.20 67.39 67.51
Net margin 20.96 22.17 21.25 22.77
EPS 1.66 1.94 1.56 1.96
Exhibit 1: Investment Summary
Year to Mar (HK$ mn) FY09 FY10 FY11E FY12E FY13E
Revenue 971.9 991.1 1,173.6 1,429.8 1,736.2
Growth (%) (12.4) 2.0 18.4 21.8 21.4
Net profit 82.0 195.3 249.4 325.6 421.0
Growth (%) (52.0) 138.1 27.7 30.5 29.3
Diluted EPS (HK$) 0.535 1.243 1.558 1.958 2.538
Change to previous EPS (%)
N/A N/A N/A
Consensus EPS (HK$)
1.660 1.935 2.470
EPS growth (%) (51.5) 132.2 25.3 25.7 29.6
ROE (%) 10.3 20.7 22.7 25.1 27.0
ROA (%) 8.3 16.4 17.4 19.4 21.2
P/E (x) 35.6 15.3 12.2 9.7 7.5
P/B (x) 3.8 3.2 2.9 2.4 2.0
Source: Bloomberg, OP Research
Oriental Patron Research
7 June 2011 Page 2 of 26
Table of Contents
Investment Highlights .................................................................................................................................... 3
From a brand manager to a premium brand owner ....................................................................................... 4
Robust demand for premium fashion brands in Hong Kong and PRC ........................................................... 7
Fashion brands with a wide spectrum ......................................................................................................... 11
Expansion back on track ............................................................................................................................. 12
Other notable fundamentals ........................................................................................................................ 13
Financials and key assumptions ................................................................................................................. 15
Recommendation: BUY with TP at HK$29 .................................................................................................. 17
Financial Summary ..................................................................................................................................... 18
Risks ........................................................................................................................................................... 20
Appendix 1: Business ................................................................................................................................. 21
Appendix 2: Management profile ................................................................................................................ 23
Appendix 3: Shareholding Structure ............................................................................................................ 24
Oriental Patron Research
7 June 2011 Page 3 of 26
Investment Highlights
YGM Trading is a premium fashion brand owner. Since its acquisition of the intellectual
property rights of the British premium brand “Aquascutum” in the Asia Pacific region, YGM
Trading has essentially transformed from a fashion brand manager, which risks its brands
being bought back from the original brand holder, to a brand owner itself.
Store expansion back on track. Due to store consolidation of the “Michel Rene” brand,
number of total point of sales dropped in 2010. It shows a false impression that YGM Trading
has been contracting in recent years, yet YGM Trading was expanding in terms of gross sales
area. On sales location with strong growth momentum, the company expands the sales area by
renting another shop within the same department store. By the end of FY10, management
decided to put the company back onto the expansion track at a rate of 30 (~10% yoy) outlets
per annum.
Trading at a steep discount to its peers. YGM Trading’s closest peer, Trinity (891.HK), is
trading at 28x consensus forward PE. We identify a number of issues which make YGM
Trading being valued in a discount to Trinity. Such factors include (i) lower trading liquidity;
(ii) less diversified brand portfolio; (iii) less research coverage, etc. Yet, we strongly believe
that YGM Trading’s current valuation of 9.6x FY12E PE is severely underrated.
Robust sales growth in HK supported by PRC tourists. Revenue in HK amounts to
approximately 50% of the group revenue in 1H11 and is the major geographical region for the
group. According to the Census and Statistics Department of Hong Kong, yoy growth of retail
sales value of the wearing apparel category was reported at 40% for Apr 2011, outperforming
total sales value yoy growth of 28% for the same period by 12%, largely driven by the
demand of PRC tourists. Same store sales growth for the “Aquascutum” outlets in HK
recorded ~16% in 1H11, we believe growth momentum was even more robust for the second
half of FY11.
Strong industry growth momentum in PRC. Revenue contributed by PRC was 36% of the
total group revenue in 1H11. Same store sales growth figures released by listed China
department stores were promising and some reported same store sales growth as high as
30% yoy for 1Q11. This would benefit Aquascutum, which has the majority of its stores
as department store outlets.
Properties sales value to be unlocked. On 12 Oct 2010, YGM Trading announced its
consideration to dispose of two shops located in Park Lane in Tsim Sha Tsui. Although the
tender is closed at this moment, management remains open for the sale of these two shops. It
is expected that these properties would unlock HK$350-400mn value for YGM Trading.
Unbroken dividend payout record. Since its listing in 1988, dividend payout record was
unbroken at a dividend payout ratio of 53% on average.
Valuation. The counter is current trading at a 9.6x FY12E PE, representing a PEG ratio of
0.3x, which is deeply underwater in our opinion. We recommend buying this counter with a
TP of HK$29, representing the sum of 14x FY12E PE and HK$2 value to be unlocked upon
properties sale, offering 54% upside.
Oriental Patron Research
7 June 2011 Page 4 of 26
From a brand manager to a
premium brand owner
YGM Trading used to be a premium fashion brand licensee. In Sep-09, the group completed
acquisition of the intellectual property rights of the brand “Aquascutum” in relation to the
Asia region. “Aquascutum” is a British brand founded in 1851. YGM Trading obtained
licensing rights of the brand in 1998. It has been positioned as a luxury and contemporary
fashion brand. At the moment of the acquisition, “Aquascutum” had distribution channels
over the world, YGM Trading was the then licensee for the Greater China, Singapore,
Malaysia and Thailand region, operating 150 outlets under the brand in Mainland China,
Hong Kong, Macau and Taiwan. We regard the acquisition as a positive fundamental change
for the company with the following reasons:
Restricted operation for “Aquascutum” before 2009. Before 2009, the company operated
most of its brands (with the exception of “Michel Rene” and “Hang Ten”) through a “license
to manufacture and distribute”. That is, YGM Trading had the rights to design, manufacture
and distribute apparel and accessories under respective brands, yet YGM Trading has to first
get consent from the brand owner. Also, there were certain products to which YGM Trading
did not have the right to design and manufacture, these products were usually sold in a lower
gross margin.
Visibility and sustainability gained after the acquisition. In 2009, YGM Trading acquired
all intellectual property rights of “Aquascutum” in 42 Asia Pacific countries. Since then, the
company enjoys a number of benefits:
1. Ownership of the entire intellectual property for the brand “Aquascutum” in the Asia
Pacific region, no fear for buy back and sustainability in brand development;
2. The absolute freedom in the whole development process, including design, manufacture
and distribution; and
3. More room for product extension, and optimization of product mix, so as to improve
gross margin.
We believe the acquisition is a positive fundamental change to the company.
“Aquascutum” is the major sales contributor of the company. Up to 1H10, its self-owned
brand “Aquascutum” and “Michel Rene” contributed 56% and 11% of the company’s
turnover respectively. “Aquascutum” becomes the bread-and-butter of the company.
Oriental Patron Research
7 June 2011 Page 5 of 26
Exhibit 2: Revenue contribution of different brands in 1H11
Aquascutum56%
Michel Rene11%
Guy Laroche6%
Ashworth14%
J.Lindenberg0% Export
9%
Others4%
Source: Company, OP Research
No risk of “Aquascutum” being bought back. In the industry, there were cases when
licensees of various international brands were making good sales, the brand owner would
bought back their respective licenses. In 1997, the brand “Valentino”, which license was held
by YGM Trading then, was bought back by its original brand owner. In recent years,
international renowned brands such as “Hugo Boss” and “Prada” has also bought back the
licensing rights of their brands in the Greater China region, stripping off the prospect of its
licensees.
The brands are now either owned or in long term license. Since the acquisition, the
company holds a portfolio with a mixture of owned and licensed brands, with breakdown as
follows:
Exhibit 3: Brand portfolio
Brand Rights Period Region
“Aquascutum” All intellectual property right of 42 Asia
Pacific countries
Owned Asia Pacific
“Ashworth” Licensing rights Rights till 2028 Greater China
“Michel Rene” Self-owned brand Owned Greater China
“Guy Laroche” Licensing business Owned European, ASEAN and the U.S.
“J. Lindeberg” Exclusive distribution right Rights till 2020 Greater China
“Hang Ten” Self-owned brand, with passive
shareholdings
Owned Asia
Source: Company
Current valuation has not reflected the positive change. YGM Trading gains sustainability
and freedom in operation which allows room for improvement in operating efficiency. We see
this as a huge improvement in company fundamentals. With its closest peer Trinity (891.HK)
trading at 28x FY11E PE, YGM Trading’s valuation shows that the market has not fully
priced in this fundamental change.
Oriental Patron Research
7 June 2011 Page 6 of 26
Exhibit 4: Historical PE of YGM Trading remains at a minimal level
0
5
10
15
20
Jan/09 May/09 Sep/09 Jan/10 May/10 Sep/10 Jan/11 May/11
Announced acquisition of "Aquascutum" in Asia
Source: Company, OP Research
Oriental Patron Research
7 June 2011 Page 7 of 26
Robust demand for premium
fashion brands in Hong Kong and
PRC
The HK retail market is largely driven by PRC tourists’ demand. Hong Kong market is a
major segment of the company. For the six months ended 30 Sep 2010, Hong Kong segment
contributes 50% of the revenue.
Exhibit 5: Geographical revenue breakdown in 1H11
Hong Kong50%
China36%
Taiwan8%
Others6%
Source: Company, OP Research
Hong Kong retail market benefits from the increase in number of tourists, particularly in the
luxury goods segment. Proportion of tourists from China has been increasing steadily in
recent years, while demand in high end and luxury goods is largely driven by mainland
tourists. This is evidenced by the high correlation shown between the number of mainland
tourists’ arrival and apparel sales growth.
Exhibit 6: Monthly no. of Chinese tourists arrival is increasing
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11
Source: Company, OP Research
Oriental Patron Research
7 June 2011 Page 8 of 26
Exhibit 7: Apparel tops the spending behaviour of tourists in HK
Ready-made wear24%
Cosmetics, skin care
16%
Snacks / Confectioneries
15%
Shoes / Other
footwear11%
Handbag / Wallets / Belts
9%
Souvenirs / Handicrafts
7%
Medicine / Chinese Herbs
6%
Perfume5%
Personal care5%
Toys and gaming machines
3%
Source: Hong Kong Tourism Board, OP Research
Exhibit 8: HK retail apparel sales is in line with mainland tourists arrival
-40%
-20%
0%
20%
40%
60%
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Mainland tourists arrival yoy growth HK wearing apparel sales yoy growth
Source: Census and Statistics Department, Hong Kong Tourism Board, OP Research
HK retail sales growth for apparel in Apr 2011 was as high as 40% yoy. Riding on the strong
growth momentum, we believe performance for 2H11 would be better than that of 1H11.
Garment sales outperforms the general retail market in PRC. Consumer goods sales,
particularly in the department stores of PRC, have been on the uptick since 2009. As at April
2011, total yoy growth of retail sales in the PRC reported 17%. Garment sales reported 27%,
outperforming the general retail market by 10%.
Oriental Patron Research
7 June 2011 Page 9 of 26
Exhibit 9: PRC garment retail sales outperform total retail sales of
consumer goods
-20%
0%
20%
40%
60%
Jan/09 Apr/09 Jul/09 Oct/09 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11
Total Retail Sales of Consumer Goods: yoy %
Retail Amount: Clothing, Shoes, Hats, Knitwear and Textile: yoy %
Source: Wind, OP Research
Exhibit 10: PRC garment retail sales is at a period of high growth rate
-10%
10%
30%
50%
70%
0
20
40
60
80
Jan-2007 Aug-2007 Mar-2008 Oct-2008 May-2009 Dec-2009 Jul-2010 Feb-2011
Monthly garments retail sales (RMB bn, LHS) Yoy growth (RHS)
Source: Wind, OP Research
Department stores deliver good results in 1Q11. 1Q11 same store sales growth figures
released by listed China department stores were as high as 30%. YGM Trading, with the
majority of its PRC outlets located in department stores, would benefit from this growth trend.
The group achieved 27% same store sales growth for 1H11 in the PRC segment, we are of the
opinion that YGM Trading should perform better in 2H11.
Oriental Patron Research
7 June 2011 Page 10 of 26
Exhibit 11: Robust same store sames growth of PRC department stores
0
0.1
0.2
0.3
0.4
1H09 2H09 1H10 2H10 1Q11
Golden Eagle (3308) Intime (1833) Maoye (848)
Parkson (3368) New World (825)
Source: Company announcements, OP Research
Oriental Patron Research
7 June 2011 Page 11 of 26
Fashion brands with a wide
spectrum
Brands under management cover a wide variety of clients. The group possesses a brand
portfolio of six brands with different focuses, covering the luxury European fashion segment
to mainstream fashion. The brands include premium fashion brands (i.e. Aquascutum, Guy
Laroche), fashion and sports apparel (i.e. Ashworth, J.Lindeberg) and mainstream fashion (i.e.
Michel Rene, Hang Ten). With a portfolio of diversified clientele, we believe YGM trading is
well positioned to serve different clientele and is more resilient in times of market turbulence.
Exhibit 12: YGM Trading possesses a wide spectrum of fashion brands
A wide spectrum of fashion brands
Luxury
European Fashion
International Fashion
&
Sports Apparel
Mainstream
Fashion
Source: Company presentation
Introduction of new brands in 2010. Moreover, a new brand “J.Lindeberg” was launched in
2010 with an exclusive distribution right in the Greater China region, contract term is due
2020. The brand was established in Sweden in 1996, with products available in more than 25
countries. It is expected that the brand would attract younger consumers with its more trendy
and fashionable line.
Oriental Patron Research
7 June 2011 Page 12 of 26
Expansion back on track
Expansion for the first time since FY09. YGM Trading has been closing distribution outlets
since Mar 2009, number of stores decreased from 321 as at 31 Mar 2009 to 295 stores as at 30
Sep 2010. This was mainly due to the consolidation of loss making “Michel Rene” outlets. As
of 1H11, “Michel Rene” segment became breakeven. Management plans to put the company
back to the expansion track again.
Management targets to open 83 stores by Sep 2013, with the majority of the stores opened in
the PRC. Apart from increase in point of sales, YGM Trading has also been expanding by
increasing square footage of each point of sales. In outlets where sales were satisfactory,
YGM Trading would expand the sales footage by renting another store front in the same
department store, enriching products lines available at the same place.
Exhibit 13: New stores added for the past years
-10%
-5%
0%
5%
10%
-40
-20
0
20
40
FY08A FY09A FY10A FY11E FY12E FY13E
store opened/ (closed) (LHS) store expansion yoy (RHS)
Consolidation of "Michel Rene" stores
Source: Company presentation, OP Research
Active penetration into the 3rd
and 4th
tier cities. YGM Trading is actively penetrating the
3rd
and 4th tier cities. As at Feb 2011, number of stores at 3
rd to 4
th tier cities amounts to 31%
of the total number of store count in China. We believe YGM Trading shall be able to capture
the rising purchasing power of people in the 3rd
and 4th tier cities.
Exhibit 14: Current distribution of store outlets
1st & 2nd tier cities, 131
3rd tier cities, 39
4th tier cities, 19
Source: Company presentation
Oriental Patron Research
7 June 2011 Page 13 of 26
Other notable fundamentals
Sale of two properties in Tsim Sha Tsui is going to unlock shareholders’ value. On 12 Oct
2010, YGM Trading set up a public tender to dispose of two shops situated at the Park Lane,
Tsim Sha Tsui. Although the tender was closed on 11 Dec 2010, management is always open
for any buyers bidding with a price satisfactory to them. Management is targeting for
HK$350-400mn, it is expected that the sales will unlock the property value equivalent to
HK$2 per share.
Exhibit 15: Properties open for sale in Tsim Sha Tsui
Source: OP Research
Unbroken record of dividend payout since listing in 1988. Backed by its solid business,
YGM Trading has continually paid dividend since its listing in 1988. Payout ratio has never
dropped below 30% even in the toughest years. In the most recent six financial years, payout
ratios were above 40% and management stated that dividend payout would be relatively stable
in the coming years.
Exhibit 16: Payout ratio staying at a level higher than 40%
0
20
40
60
80
2005 2006 2007 2008 2009 2010
Source: Bloomberg, OP Research
Oriental Patron Research
7 June 2011 Page 14 of 26
Management starts to actively attend non-deal road shows in the recent year. In fear of
the license rights of “Aquascutum” being bought back or terminated by the original holder,
management was reluctant to engage in disclosures, promotions and road shows. Even
revenue for each of the brands was not disclosed in the annual reports. With the acquisition of
the intellectual properties of “Aquascutum” in 2009, management now actively participates in
investor relation exercises and reveals to investors its hidden strong growth potential. We see
re-rating on the horizon.
Oriental Patron Research
7 June 2011 Page 15 of 26
Financials and key assumptions
Revenue growth resumes as “Aquascutum” runs out as the largest revenue contributor.
During FY05 – FY08, revenue growth was slow in the range of -0.9% to 8.5% around
HK$1bn for several years since performances of the brands under management varied. In
those years, the brand “Aquascutum” grew fast and ran out as the largest revenue contributor
of the group. For 1H11, revenue contributed by the brand amounts to 56%. Backed by store
expansion, we believe the group revenue will go back to the growth period again.
Revenue growth backed by store expansion and strong same store sales. According to the
management, growth drivers for the group are mainly “Aquascutum” and “Ashworth”. It is
expected that “J.Lindeberg” will emerge as a new growth driver in the future. On the back of
the strong sales demand and store expansion pace of 10% p.a. (in store count), we estimate
revenue growth to be 18%, 22% and 21% for FY11, 12, and 13 respectively.
Exhibit 17: Revenue forecast
0
500
1,000
1,500
2,000
FY09 FY10 FY11E FY12E FY13E
(HK
$m
n)
Source: Company, OP Research
Exhibit 18: Net profit forecast
0
100
200
300
400
500
FY09 FY10 FY11E FY12E FY13E
(HK
$m
n)
Source: Company, OP Research
Oriental Patron Research
7 June 2011 Page 16 of 26
Gross margin to improve slightly due to more room in product mix optimization. Since
the acquisition of “Aquascutum”, YGM Trading enjoys more freedom in introducing higher
margin accessories and products. Also, customers for high end fashion brands are less
price-sensitive. Management is confident to pass on the cost increment onto their customers.
We estimate gross margin to slightly improve.
Exhibit 19: Gross margin forecast
60%
62%
64%
67%
69%
FY09 FY10 FY11E FY12E FY13E
Source: Company, OP Research
High operating leverage translates to EBIT margin improvement. Due to strong same
store sales growth and the administration expenses being fixed, we forecast the growth rate of
the total SG&A to be lower than that of the revenue growth. Apart from the expenses
associated with the opening of new stores and those relating to distribution, the remaining
SG&A are pretty stable. We expect the EBITDA margin to increase each year at a rate of
around 1%.
Exhibit 20: EBITDA margin forecast
10%
15%
20%
25%
30%
FY09 FY10 FY11E FY12E FY13E
Source: Company, OP Research
Other financial assumptions. Our assumptions for other items are as follows: (i) tax rate and
cash conversion cycle are to remain stable; capital expenditure for new stores opening is
around RMB30mn p.a.
Oriental Patron Research
7 June 2011 Page 17 of 26
Recommendation: BUY with TP at
HK$29
Valuation deeply underwater. In comparison with its closest peer Trinity (891.HK), YGM
Trading at a steep discount. The counter is trading at 9.6x FY12E PE, while Trinity is trading
at a FY11E PE of 28x.
Exhibit 21: Comparison between YGM Trading (375.HK) and Trinity
(891.HK)
YGM Trading Trinity Market capitalisation (HK$mn) 3,067 13,118 Forward PE 9.6x 28x^ FY10A ratios:
Revenue (HK$mn) 991 2,011 Net profit (HK$mn) 198 341 Gross margin 64.6% 77.2% EBIT margin 17.3% 21.4% Net margin 19.8% 16.9% Brands under management - Aquascutum
- Ashworth
- Guy Laroche
- J.Lindeberg
- Michel Rene
- Hang Ten
- D'urban
- Gieves & Hawkes
- Kent & Curwen
- Cerruti 1881
- Intermezzo
- Altea Notes:
^ Bloomberg consensus
* FY12E
Source: Company, OP Research, Bloomberg
Business model of YGM Trading is close to that of Trinity, save as a bit smaller in terms of
revenue and the portfolio being more concentrated. The management team has extensive
experience in the industry. We believe there is only one step forward for YGM Trading to
becoming the next Trinity by improving its investor relation after the acquisition of
“Aquascutum”.
We agree that YGM Trading deserves a trading discount to its peers at this moment in view
of:
Smaller in size and its thin trading liquidity;
Concentrated portfolio with the largest brand contributing more than 50% of the group’s
revenue;
Less investors’ confidence in the aggressiveness of the management team; and
Low-profile investor relation activities before.
Recommend BUY with TP at HK$29. Yet we believe with Trinity trading at FY11E PE of
near 30-ish, a valuation of 14x FY12E PE, representing roughly half the valuation of Trinity,
is not demanding for YGM Trading. We recommend buying this counter, with a TP of HK$29,
representing the sum of 14x FY12E PE and HK$2 value to be unlocked upon properties sale,
offering 54% upside.
Oriental Patron Research
7 June 2011 Page 18 of 26
Financial Summary
Exhibit 22: Profit and loss
Year to Mar (HK$ mn) FY09A FY10A FY11E FY12E FY13E
Revenue 972 991 1,174 1,430 1,736 EBITDA ( ex-assoc) 120 194 290 369 468 Depreciation (36) (25) (29) (29) (29) EBIT( ex-assoc) 84 169 260 339 439 Net interest inc/(exp) 3 2 3 8 15 Associates' profits 17 29 35 42 51 Exceptional items/others (13) 28 0 0 0 Pre-tax profit 91 229 299 390 505 Tax (12) (31) (46) (59) (77) Minority interest 3 (3) (4) (5) (7) Preference dividends 0 0 0 0 0 Net profit 82 195 249 326 421 Others 0 0 0 0 0 Dividends (59) (84) (100) (130) (168) Retained earnings 23 111 150 195 253 Source: Company, OP Research
Exhibit 23: Balance sheet
Year to Mar (HK$ mn) FY09A FY10A FY11E FY12E FY13E
Cash & deposits 239 215 388 540 742 ST marketable sec's 0 0 0 0 0 Trade debtors 52 81 95 116 141 Other debtors 0 0 0 0 0 Inventories 140 102 121 147 179 Other current assets 62 48 48 48 48 Intangible assets 108 287 287 287 287 Investment, associates and Other LT assets 210 271 306 349 400 Fixed assets 181 191 192 192 193 Total assets 992 1,194 1,437 1,679 1,990 Trade creditors 40 41 48 59 72 Other creditors 0 0 0 0 0 ST debt 15 47 47 47 47 Other current liabs 125 146 228 259 297 LT borrowings 3 2 2 2 2 Deferred taxation and others 11 14 14 14 14 Other LT liabilities 0 0 0 0 0 Total liabilities 193 249 339 380 431 Share capital 77 77 77 77 77 Reserves 702 845 995 1,190 1,443 S'holders' funds 779 922 1,072 1,267 1,520 Minorities 19 22 26 31 38 Total 992 1,194 1,437 1,679 1,990 Net cash (debt) 221 166 340 491 694 Total cap employed 798 944 1,098 1,299 1,558 Source: Company, OP Research
Oriental Patron Research
7 June 2011 Page 19 of 26
Exhibit 24: Cash flow
Year to Mar (HK$ mn) FY09A FY10A FY11E FY12E FY13E
Pre-tax profit 104 201 299 390 505 Taxes paid (13) (21) (18) (46) (59) Depreciation/amort'n 36 25 29 29 29 Associates' adj. (17) (29) (35) (42) (51) Exceptional items 13 (28) 0 0 0 Gross cash flow 123 147 275 332 424 Capex 1 (19) (30) (30) (30) Change in working cap (63) 11 (26) (37) (44) Free cash flow 62 138 219 265 350 Dividends (59) (84) (45) (113) (147) Investments 0 (240) (35) (42) (51) Disposals 31 0 0 0 0 Share issues (59) 143 0 0 0 Others 28 (40) 35 42 51 Net cash flow 2 (83) 174 152 203 Net cash (debt) start 231 221 166 340 491 Net cash (debt) at Y/E 221 166 340 491 694 S'holders' funds + MI 798 944 1,098 1,299 1,558 Net debt/equity (%) (28) (18) (31) (38) (45) Source: Company, OP Research
Exhibit 25: ROE decomposition
Year to Mar FY09A FY10A FY11E FY12E FY13E
EBIT margin (%) 8.69 17.05 22.18 23.73 25.29 Pre-tax/EBIT (x) 1.08 1.35 1.15 1.15 1.15 Net profit/pre-tax (x) 0.90 0.85 0.83 0.83 0.83 Asset turnover (x) 0.98 0.83 0.82 0.85 0.87 Assets/equity (x) 1.24 1.26 1.31 1.29 1.28 ROE (%) 10.27 20.67 22.71 25.07 27.02 Source: Company, OP Research
Exhibit 26: Statistics and ratios
Year to Mar FY09A FY10A FY11E FY12E FY13E
Growth rate (%) Revenue (12) 2 18 22 21 EBITDA (ex-assoc) (9) 62 49 27 27 EBIT (ex-assoc) (12) 100 54 30 29 Net profit (52) 138 28 31 29 Fully diluted EPS (51) 132 25 26 30 Margins (%) EBITDA (ex-assoc) 12 20 25 26 27 EBIT (ex-assoc) 9 17 22 24 25 Other ratio Effective tax rate (%) 11 15 15 15 15 Payout ratio (%) 71 43 40 40 40 Net ROE (%) 10 21 23 25 27 Net gearing (%) -28 -18 -31 -38 -45 ROA (%) 8 16 17 19 21 Interest coverage (x) 49 186 268 280 302 Debtors (days) 19 30 30 30 30 Creditors (days) 15 15 15 15 15 Stock (days) 53 38 38 38 38 Source: Company, OP Research
Oriental Patron Research
7 June 2011 Page 20 of 26
Risks
Execution risks. YGM Trading has undergone store consolidation of the loss-making brand
“Michel Rene”. For the first time since Mar 2009, YGM Trading comes back to the expansion
track again. Risks include expansion speed falls below the originally planned (30 stores, or
10% p.a.).
Lawsuit regarding “Guy Laroche”. YGM Trading went into a lawsuit with a licensee of
“Guy Laroche”. According to the management, daily operation of “Guy Laroche” is not
affected. The involved licensee attributes only a small portion of the total license income of
the brand. Currently the court case is put onto the Court of Appeal of Paris, the court is not
expected to hear this case before 2012. The counsel of the company is of the opinion that no
provision needs to be made. In the worst case, YGM Trading is expected to pay EUR2.6mn
indemnity to the licensee.
Concentrated brand portfolio. Over 55% of the group revenue comes from the brand
“Aquascutum”, brand portfolio is concentrated.
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7 June 2011 Page 21 of 26
Appendix 1: Business
YGM Trading Limited (“YGM Trading”, 375.HK) was established in 1976 as a local fashion
retailer with its own brand “Michel Rene” launched. Over the years, YGM Trading had
evolved into a multi-brand manager.
Exhibit 27: Company milestone
Year Event
1976 Established and launched own brand “Michel Rene”
1988 Listed on the HKEx
1996 Acquired “Hang Ten” brand worldwide
1998 Obtained licensing right of “Aquascutum” for the Greater China region;
Signed a 30-year licensing right of the brand “Ashworth”
2002 Spun off “Hang Ten” Group (448.HK)
2004 Acquired “Guy Laroche” worldwide
2009 Acquired all rights of “Aquascutum” in 42 Asia Pacific countries
2010 Obtained an exclusive distribution right of “J.Lindeberg” in Greater China Region
Source: Company
For the brands with licensing rights, YGM Trading would perform design and manufacturing
process, finished goods are either sold to the franchisee stores or distributed through the
company’s self-operated retail outlets.
Exhibit 28: Business process
Outsourced manufacturingLicensing / owned Design Franchisees
Distribution Retailer shops
Source: Company, OP Research
In FY09, YGM Trading consolidated “Michel Rene” shops with lower operation efficiency.
Management decides to put the company back to the expansion track again, and targets a 28%
increase in number of “point-of-sales” to 378 by 20 Sep 2013.
Exhibit 29: POS according to brands
0
50
100
150
200
FY08 FY09 FY10
Aquascutum Ashworth Michel Rene
Source: Company
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7 June 2011 Page 22 of 26
Exhibit 30: POS according geographical coverage as at 1H11
China, 198
HK & Macau, 53
Taiwan, 39
SE Asia, 12 Europe, 1
Source: Company
Recently, approximately 69% of point of sales in the PRC is located in tier 1 & tier 2 cities,
the company will further expand their retail sales network into 3rd
and 4th tier cities in order to
capture the increasing consumption power from lower tier cities.
Oriental Patron Research
7 June 2011 Page 23 of 26
Appendix 2: Management profile
Chan Wing Fui, Peter (陳永奎), Chairman, joined the group in 1969. He was appointed
director and managing director of the group in 1971 and 1980 respectively. Later in 1987, he
was appointed as vice chairman of the group. Recently in 2010, he was appointed as chairman
of the group. Mr. Chan has been actively involved in the industry in Far East and USA for
over 30 years.
Chan Wing Sun, Samuel (陳永燊), Vice Chairman, joined the group in 1974 as the
company secretary and a director. He was appointed managing director in 1987 and the CEO
in 2006. Recently in 2010, he was appointed vice chairman of the company. Mr. Samuel Chan
was a qualified Chartered Accountant.
Chan Suk Ling, Shirley (周陳淑玲), CEO, joined the group in 1973. She was appointed
director in 1983, vice managing director in 1987 and managing director in 2006. In May 2010,
she was appointed CEO of the company. She has extensive experience of management in the
garment retail and wholesale business.
Fu Sing Yam, William (傅承蔭), Managing Director, joined the group in 1985. He was
appointed director in 1995 and vice managing director in 2006. In May 2010, he was
appointed managing director of the company. He has extensive experience in fashion retailing,
wholesaling, marketing and merchandising.
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7 June 2011 Page 24 of 26
Appendix 3: Shareholding
Structure
Exhibit 31: Shareholding structure
Chan’s Family Public Shareholders
YGM Trading
50% 50%
Source: HKEx Shareholding Disclosures
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7 June 2011 Page 25 of 26
Exhibit 32: Peer Group Comparison
Bloomberg Year Mkt Cap Price PER (x) P/B (x)
code End (HKD mn) (HKD) FY10A FY11E FY12E FY10A FY11E FY12E
Close comparison
TRINITY LTD* 891 HK 31st Dec 13,118 7.74 35.8 27.5 20.5 5.5 4.4 4.0
YGM TRADING 375 HK 31st Mar 3,067 18.86 14.7 11.4 9.7 3.1 N/A N/A
Average 25.3 19.3 15.1 4.3 4.4 4.0
Median 25.3 19.3 15.1 4.3 2.2 2.0
Other peers
I.T LTD* 999 HK 28th Feb 9,509 7.79 33.9 25.8 18.7 6.1 5.2 4.2
CHINA LILANG LTD* 1234 HK 31st Dec 13,014 10.84 27.1 19.7 15.7 5.9 4.9 4.1
PORTS DESIGN LTD* 589 HK 31st Dec 11,313 19.90 20.6 16.5 13.6 5.8 4.9 4.1
ESPRIT HLDGS* 330 HK 30th Jun 36,197 28.05 8.4 10.1 9.0 2.2 2.1 1.9
Average 22.5 18.0 14.2 5.0 4.3 3.6
Median 23.9 18.1 14.7 5.9 4.9 4.1
Note: * Bloomberg Consensus
Source: Bloomberg, OP Research
Oriental Patron Research – Equities
7 June 2011 Page 26 of 26
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