2014-03 bossini sunwah kingway

8/11/2019 2014-03 Bossini Sunwah Kingway

1/13

nitiation4 Mar 2014

Bossini BUY 592.HK / 592 HK Initiation

ong Kong/China Consumer

Kingsway Financial Services Group LimitedPlease see the important disclaimer and disclosures (if any) at the end of this report

A great comebackHK$0.64Target price: HK$1.40

Initiate BUY with TP HK$1.40; Almost 8-fold earnings growth in FY14-15 Bossinihas suffered from depressed profitability in recent years but we believe the worse isover. We expect its net profit to increase by almost 8-fold to HKD175m in FY15 from

just HKD22m in FY13. Our TP implies about 13x FY6/15 PE, as we believe Bossinis turnaround story should lead to re-rating towards the sector 11-18x PE.

China/Taiwan on track to profit making Thanks to store closure and cost cutting,China operation is now close to break-even vs. HKD100-150m losses per years.Inventory levels have overall restored to healthy level. SSSG also rose to double digitin recent months as management devoting more time to improve productivity. Weexpect China operation to achieve profit in FY15. Taiwan s losses have also narrowedto HKD9m in 1HFY14 vs. HKD20m last year and we expect Taiwan to break-even inFY15.

Exports growth driven by re-stocking Exports orders are also recovering withdouble digit growth in recent months thanks to re-stocking demand from Middle Eastafter inventory clearance over past 1-2 years.

Unleashing children wear potential We believe Bossinis strategy to cross-overwith various characters including Angry Birds, Winnie the Pooh, Disney , etc can help

to differentiate with peers. Currently, children accounts for about 20% of sales in HongKong but only 10% in China, which implies further growth opportunities there.

Incentivized management Bossinis managements collectively hold about 113mshare option with weighted average exercise price of about HK$0.55. About half ofthese are exercisable after late-2016, which could prompt them to adopt a long-termgrowth strategy instead of a short-term one.

8-9% yield limits downside - On the downside, its net cash position of aboutHK$0.22 per share and potential 8-9% forward dividend yield should provide decentsupport to its current share price, which translate to about 6.8x FY15 PE.

Earnings Forecasts & Valuation Summary

Year ended June FY13 FY14E FY15E FY16E

Sales (HKD m) 2,517 2,432 2,632 2,741EBIT (HKD m) 46 152 213 243Net profit (HKD m) 22 125 175 200Fully diluated EPS (HKD) 0.01 0.07 0.10 0.12

YoY change (%) 38.5% 465.0% 40.3% 14.3%PER (x) 53.2 9.4 6.7 5.9DPS (HKD) 0.03 0.04 0.06 0.07Yield (%) 4.1% 5.5% 9.2% 10.5%

ROE (%) 2% 11% 16% 16%Source: Company data, Sunwah Kingsway Research estimates

Upside: 108%

Share Data52week Hi/Lo (HK$) 0.65-0.37

Avg. daily t/o (US$m) 0.05mMarket cap. (US$m) 112Total issued shares (m) 1,624Public float (%) 32.7%Major shareholder(s):Ma Kuen Tsin 67.32%

Source: HKEx & Bloomberg

Company ProfileBossini retails mass-market causalapparels through about 1,000 stores inGreater China, Southeast Asia, andMiddle East.

Share Price Chart

Source: Bloomberg

Steve Chow, CFA (852) 2283 7306

[email protected]


2/13

Bossini A great comeback | 24 Mar 2014 2

Initiation with BUY with TP HK$1.40

We initiate Bossini with BUY with TP of HKD$1.40, which implies about 108% upside from currentlevel.

Bossinis depressed financial performance over past 1-2 years has led to a low valuation ofsingle-digit PE. However, we believe the worse is over and Bossinis turnaround story should

leading to re-rating towards low-teens PE of other consumer stocks. We conservatively value thecounter at 13x FY6/15 PE, towards the low end of the industry valuation range of 11-18x PE.

On the downside, we also believe its current net cash position of about HK$0.22 per share andpotential 8-9% forward dividend yield should provide support to its current share price, whichtranslate to about 6.8x FY15 PE based on our estimates.

Superior PE/Growth metrics versus peers

The chart below shows that Bossini offers a superior estimated growth outlook of almost 8-fold overthe next two years versus other consumer stocks while our target low-teens PE is only in line withits peers.

Valuation

Source: Company, Sunwah Kingsway Research

* FY14-15E earnings growth and FY15E PE for Bossini

Decent dividend/growth outlook also

Bossini also provides good dividend/growth trade-off, as shown in the chart below. We estimatethat its forward yield can reach 8-9%, compared with 2-7% for its peers. Note that for manyconsumer stocks, its high yield is offset by weak growth outlook. For example, some apparel namessuch as Giordano and Trinity are offering 6-7% yield but have weak growth outlook. However,Bossini is an exception.

Pls refer to our recent report Consumer: From growth to yield for more discussions on sectoryields.

6

4

12

14

16

18

2

0

800780740100806040 760

8

10

200-20

2 0 1 4 E P E

2013-14E earning growth (%)

Bossini

Cosmetics

Watch Department store

Footwear

Apparel

SportswearJewelry

Target PE
http://www.kingswayresearch.com/admin/template/attachment/r&m/2014-02%20consumer%20yield.pdfhttp://www.kingswayresearch.com/admin/template/attachment/r&m/2014-02%20consumer%20yield.pdfhttp://www.kingswayresearch.com/admin/template/attachment/r&m/2014-02%20consumer%20yield.pdf


3/13


PE vs. dividend outlook Dividend/Growth metrics

Source: Bloomberg, Sunwah Kingsway Research

* FY14-15E earnings growth, FY15E PE, FY15E yield for Bossini

6

18

16

14

12

10

9

8

6

4

2

0

71 32 4 50 8

Apparel

Sportswear

2014E dividend yield (%)

Bossini

CosmeticsJewelry

Watch

Department store

Footwear

2 0 1 4 E P E

0 76040 6020

0

8

6

5

4

3

2

780

9

1

7

-20 80 100 740 800

Watch

Jewelry

Cosmetics

Bossini

Footwear

Sportswear

2013-14E earning growth (%)

Apparel

2 0 1 4 E

d i v i d e n

d y i e

l d ( % )

Department store

Target PE


4/13


A great comeback

Over the past few years, Bossini has suffered from depressed profitability dragged by China andTaiwan losses, which have collectively wiped out about 80% of Hong Kong profit. As a result, its netmargin stood at less than 1% in FY6/13, significantly lower than the 12% of its closest peerGiordano (709 HK).

However, we believe the worse is over as the China and Taiwan businesses are about toturnaround. In 1HFY14, Bossini experienced 119% profit growth to HKD75m driven by successfulChina and Taiwan restructuring which has lifted the overall net margin to a more reasonable 6%from just 1.5% in FY6/13.

Turnaround in progress


1HFY14 highlights

1HFY13 1HFY14 YoY Remark

Revenue 1,334 1,272 -5%HK 842 888 5% Steady operationChina 223 154 -31% Revenue down but profitability upTaiwan 134 109 -19% Revenue down but profitability upSingapore 134 122 -9%EBITHK 120 106 -11%

China (52) (5) -90%Close to break-even after closing most

loss-making stores

Taiwan (20) (9) -55%Loss narrowing by half. We expect further

improvement ahead

Singapore 2 (3) -288%Group EBIT 49 89 82%Net profit 34 75 119%

SSSG

Group 0% 7%HK 5% 11% Store productivity improvementChina -5% 12% Store productivity improvementTaiwan -19% -6%Singapore 5% -3%


130

16 22

75

4.9%

0.6%0.9%

5.90%

0

20

40

60

80

100

120

140

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

FY6/11 FY6/12 FY6/13 1HFY6/14

Net prof it

Net margin


5/13


Almost 8-fold earnings growth in 2 years

We believe Bossinis turnaround story is far from over. We overall expect net profit to risesignificantly by almost 8-fold to HKD175m in FY6/15 from HKD22m in FY6/13 driven by thefollowings:

Closure of non-performing stores in China and Taiwan.

Productivity improvement of remaining stores through focusing on high growth category suchas children wears.

Re-stocking of franchised stores in China and overseas.

After FY15, we conservatively expect the company to post normalized low-teens growth in FY16.

Profitability forecastFY6/11 FY6/12 FY6/13 FY6/14E FY6/15E FY6/16E

Revenue

HK 1,410 1,605 1,637 1,719 1,891 1,985

China 655 601 392 274 302 317

Taiwan 293 298 247 203 203 203

Sing/Malay 283 256 257 236 236 236

Total 2,641 2,760 2,533 2,432 2,632 2,741

EBIT

HK 223 250 212 191 208 218

China (58) (156) (116) (15) 5 15

Taiwan (5) (28) (50) (18) 0 5

Sing/Malay 5 (12) 0 (6) 0 5

Total 165 54 46 152 213 243

Net profit 130 16 22 125 175 200

YoY 38% 459% 40% 14%

Net margin 4.9% 0.6% 0.9% 5.1% 6.6% 7.3%


China: On-track to profit marking

The company has been restructuring its China operation by closing underperforming stores andcutting back-end costs in recent years. Its store count has been reduced to about 250 currentlyfrom about 750 at end-2011. Most of the reduction took part in Northern China where Bossini hasweaker market position.

According to the management, industry inventory was a major issue over past few years which ledto aggressive discounting and eroding profitability for many apparel companies. Having said that,industry inventory level has been more normal now which should bode well for profitability goingforward.

As a result, China losses have narrowed significantly to just HKD5m in 1HFY14 vs. HKD52m lastyear thanks to closing underperforming stores and cutting back-end costs. SSSG also improved

significantly to 12% from -5% last year as remaining stores are in Shenzhen and Guangzhou whereBossini has a stronger market position.


6/13


China EBIT China SSSG


Looking forward, the management expects China store count remain stable over next 1-2 years as

most loss-making stores have been cut. The next objective is to raise store productivity which isillustrated by improving SSSG in recent months. As remaining self-operated stores are moreconcentrated in Shenzhen and Guangzhou, managements can spend more time on variousproductivity improvement initiatives. ,

On a longer term basis, the management sees some expansion opportunities around Guangzhouareas as penetration is still low compared with Shenzhen.

For Bossinis franchised store, we believe the general improving inventory situation in the industrycould lead to some re-stocking demand going forwards, where Bossini could enjoy operatingleverage given little overhead for wholesale business.

China store count to stay stable over next 1-2 years after closure


-18

-40

(56)

(101)

(52)(64)

(5)

-120

-100

-80

-60

-40

-20

0

1 HF Y 1 1

2 HF Y 1 1

1 HF Y 1 2

2 HF Y 1 2

1 HF Y 1 3

2 HF Y 1 3

1 HF Y 1 4

8%

14%

-1%

-11%

-5%-3%

12%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1 HF Y 1 1

2 HF Y 1 1

1 HF Y 1 2

2 HF Y 1 2

1 HF Y 1 3

2 HF Y 1 3

1 HF Y 1 4

-

100

200

300

400

500

600

700

800

1HFY12 2HFY12 1HFY13 2HFY13 1HFY14

China franchised store

China s elf op erated store


7/13


We overall expect China operation to turn into a small profit making by FY6/15 driven by ongoingoperational improvement. We overall forecast 10% SSSG in FY14-15 vs. 12% in 1HFY14 to factorin ongoing operational improvement.

In our view, the current run-rate implies that our FY14-15 forecast is not aggressive as restructuringcontinues. For FY6/16, we incorporate a more conservative 5% SSSG for the time being.

China operation forecast (HKD m)FY6/11 FY6/12 FY6/13 FY6/14E FY6/15E FY6/16E

SSSG 11% -6% -4% 10% 10% 5%

Revenue 663 601 392 274 302 317

EBIT -58 -156 -116 (15) 5 15

Store count 771 598 300 253 253 253

Sales per avg store 0.88 0.88 0.87 0.99 1.19 1.25

EBIT margin -9% -26% -30% -6% 2% 5%


Taiwan: Break-even in FY15

Taiwan operation has been difficult in recent years due to soft retail environment in general, postingan HKD50m operating loss in FY6/13 vs. a loss of HKD28m in FY6/12.

The company has transferred some HK managements to improve the operation, which hasachieved good progress. In 1HFY14, losses narrowed to HKD9m vs. HKD20m last year. SSSGimproved to -6% vs. -19% last year.

Taiwan EBIT Taiwan SSSG


We overall expect Taiwan to experience a similar turnaround path compared with China. In ourview, the smaller store network in Taiwan vs. China should lead to an easier restructuring thanChina. As China operation is getting stabilized, we believe the management is able to devote moretime and effort in Taiwan leading to further progress ahead.

We now forecast a break-even situation in FY15.

-5

0.2

(12)(16)

(20)

(30)

(9)

-35

-30

-25

-20

-15

-10

-5

05

1 HF Y 1 1

2 HF Y 1 1

1 HF Y 1 2

2 HF Y 1 2

1 HF Y 1 3

2 HF Y 1 3

1 HF Y 1 4

5%

1%

-2%

-12%

-19%

-15%

-6%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

1 HF Y

1 1

2 HF Y

1 1

1 HF Y

1 2

2 HF Y

1 2

1 HF Y

1 3

2 HF Y

1 3

1 HF Y

1 4


8/13


Taiwan operation forecast (HKD m)FY6/11 FY6/12 FY6/13 FY6/14E FY6/15E FY6/16E

SSSG 3% -7% -17% -5% 0% 0%

Revenue 293 298 247 203 203 203

EBIT -4.8 -28 -50 -18 0 5

Store count 94 102 85 78 78 78


EBIT margin -2% -9% -20% -9% 0% 2%


Hong Kong: Steady as she goes

Overall, HK market generally performed better than China and Taiwan in recent years despiteongoing rental pressure. It generally achieved HKD200-250m EBIT contribution per year and10-15% EBIT margin.

In particular, Macau market was strong and the company has recently opened a flagship store there.Mainland tourists now accounted for about half of the sales in tourist areas.

Hong Kong EBIT Hong Kong SSSG


SSSG has improved to 11% in 1HFY14 vs. 5% in 1HFY13 driven by productivity improvement andthe trend has continued into CY2014 according to the management. This should mitigate ongoing

rental pressure.

Bossini is opening more stores in emerging tourist areas in New Territories to capture mainlandtourist. For example, its Sheung Shui store has achieved good performance. Currently, mainlandtourists accounted for about 50% of revenues for stores located in tourist areas.

We overall expect HK to generate about HKD190-220m of EBIT per year in FY14-16 driven byabout 5-10% SSSG. This implies about 11% EBIT margin vs. 12% in 1HFY14, as we conservativelyincorporated ongoing rental pressure into our model.

117106

149

101120

92106

0

20

40

60

80

100

120

140

160

1 HF Y 1 1

2 HF Y 1 1

1 HF Y 1 2

2 HF Y 1 2

1 HF Y 1 3

2 HF Y 1 3

1 HF Y 1 4

9%

13%15%

11%

5%

1%

11%

0%

2%

4%6%

8%

10%

12%

14%

16%

1 HF Y 1 1

2 HF Y 1 1

1 HF Y 1 2

2 HF Y 1 2

1 HF Y 1 3

2 HF Y 1 3

1 HF Y 1 4


9/13


Hong Kong operation forecast (HKD m)FY6/11 FY6/12 FY6/13 FY6/14E FY6/15E FY6/16E

SSSG 11% 13% 3% 10% 10% 5%

Revenue 1410 1605 1637 1,719 1,891 1,985

EBIT 223 250 212 191 208 218

Store count 39 41 41 41 41 41


EBIT margin 16% 16% 13% 11% 11% 11%


Exports: Driven by re-stocking from Middle East

Exports, which accounts for about 20% of revenues, are also recovering with teens growth in recentmonths mainly driven by Middle East. According to the management, Middle East operations haveundergone a de-stocking over past 1-2 years. Now inventory level has back to normal which led tore-stocking demand.

Bossini currently has about 590 export franchised stores in Southeast Asia and Middle East,accounting for about 60% of the groups total store count.

Bossinis global store network (Dec 2013)

Source: Company


10/13


11/13


Strong cash position with potential 8-9% yield

On the balance sheet front, Bossini is debt free with net cash position of HKD351m as at Dec 2013,translating to about HK$0.22 per share or 30% of current share price.

Net cash position throughout recent years (HKD m)


With no significant capex plan over next 1-2 year, the management targets over 50% payout ratiogoing forwards compared with 56% in 1HFY14. This implies close to 9% forward dividend yield(FY15) if assuming 60% payout ratio.

Managements are incentivized

In our view, Bossinis managements are incentivized to execute a successful restructuring plan.The following table shows senior managements and other staffs collectively hold about 113m shareoption with a weighted average exercise price of about HK$0.55.

In addition, we estimate that about half of these options are only exercisable after late-2015, inwhich 45% would only become exercisable by Nov 2016. In our view, this could prompt themanagement to adopt a long-term growth strategy instead of a short-term one.

Share option at a glance Vesting schedule

No. of option

(m shares)

Weighted avg

exercise price

(HK$)

Chairman 6.5 0.70

CEO 25.7 0.57

CFO 6.7 0.47

Other employees 74.0 0.54

Total 112.9 0.55

% of outstanding shares 6.9%


400

331

248

338 351

-

50

100

150

200

250

300

350

400

450

FY10 FY11 FY12 FY13 1HFY14

Net cash positio n

Exercisablenow47%

Exercisableby Oct20158%

Exercisableby Nov

201645%


12/13


Financial forecast

Income Statement FY12 FY13 FY14E FY15E FY16E Ratios FY12 FY13 FY14E FY15E FY16E

Turnover 2,744 2,517 2,432 2,632 2,741 Sales growth (%) 4% -8% -3% 8% 4%

COGS 1,450 1,318 1,240 1,342 1,398 EBIT growth (%) -68% -15% 230% 40% 14%

Gross profit 1,294 1,199 1,192 1,289 1,343 Net profit growth (%) -88% 38% 459% 40% 14%

Other income 19 19 19 19 19

SG&A 1,259 1,173 1,059 1,096 1,119 Gross margin (%) 47% 48% 49% 49% 49%

Operating profit 54 46 152 213 243 EBIT margin (%) 2% 2% 6% 8% 9%

Finance costs (9) 0 0 0 0 Net margin (%) 1% 1% 5% 7% 7%

Pre-tax profit 46 46 152 213 243 Payout ratio (%) 111% 210% 50% 60% 60%

Tax 29 24 27 38 44

Minority interests 0 0 0 0 0 Return on asset (%) 1% 2% 11% 16% 16%

Net profit 16 22 125 175 200 Return on equity (%) 2% 3% 17% 22% 24%

YoY% -88% 38% 459% 40% 14%

Total debt/equity (%) 3% 0% 0% 0% 0%

EPS (HKD) 0.01 0.01 0.08 0.11 0.12

Fully diluted EPS 0.01 0.01 0.07 0.10 0.12 Inventory T/O (days) 98 93 100 100 100

AR T/O (days) 3 6 6 6 6

DPS(HKD) 0.01 0.03 0.04 0.06 0.07 AP T/O (days) 11 12 12 12 12

Cash conversion cycle 90 88 95 95 95

Cash Flow FY12 FY13 FY14E FY15E FY16E

PAT 16 22 125 175 200 Balance Sheet FY12 FY13 FY14E FY15E FY16E

D&A 83 71 80 80 80 Fixed assets 155 132 122 122 122

Others adjustments 12 12 2 2 2 Intangible asset 0 0 0 0 0

FFO 111 105 207 257 282 Others 81 86 86 86 86Chg in working cap (39) 53 (32) (11) (6) Non-current assets 236 219 209 209 209

Net cash from 72 158 175 246 276

Inventories 365 305 340 368 383

Capex (72) (60) (70) (80) (80) AR 38 48 42 45 47

Investments 5 17 0 0 0 Others 178 174 162 167 170

Others 0 0 0 0 0 Cash 273 338 368 429 505

Investing cash (67) (43) (70) (80) (80) Current assets 854 866 911 1,009 1,105

FCF 5 115 105 166 196 AP 79 80 77 83 87

Bank loans 24 0 0 0 0

Dividends paid (86) (27) (75) (105) (120) Others 257 273 262 281 292

Net change in bank (105) (25) 0 0 0 Current liabilities 360 354 339 364 379

Others 0 3 0 0 0

Financing cash (191) (50) (75) (105) (120) Non-current liabilities 4 2 2 2 2

Net change in cash (186) 65 30 61 76 Shareholder's equity 729 729 778 848 928



13/13

Disclaimer

This document is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this documentmay not be eligible for sale in some jurisdiction. Neither this document nor any portion hereof may be taken distributed or transmitted directly orindirectly into such jurisdiction nor to any resident thereof. Any failure to comply with this restriction may constitute a violation of the applicable lawsand regulations and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. Thisdocument has been produced for private circulation and may not be copied, photocopied, duplicated, or redistributed without prior written consent ofKingsway Financial Services Group Limited (KFS ) and its affiliated companies (collectively, Kingsway Group).

This report is distributed in Hong Kong Special Administrative Region of the Peoples Republic of China (Hong Kong) by K FS which is registered asa licensed corporation under the Securities and Futures Ordinance (Cap.571 of The Laws of Hong Kong) with the Securities and FuturesCommission of Hong Kong (SFC) and its SFC CE number is ADF346.

The information contained in this report has been taken from sources believed to be reliable but no representation or warranty expressed or impliedis made as to their accuracy or correctness. This report is published for the assistance of recipients but is not to be relied upon as authoritative ortaken in substitution for the exercise of judgment by any recipient. It is not to be construed as an offer, invitation or solicitation to buy or sell anysecurities of the company or companies covered herein. Any recommendation contained in this report does not have regard to the specificinvestment objectives, financial situation and the particular needs of any specific addressee. All opinions and estimates reflect our judgment on thedate of this report and are subject to change without notice.

KFS, including its parent, subsidiaries and/or affiliates, may act as lead or co-manager in an offering of the securities of any issuer discussed herein,may from time to time perform financial services or other advisory services for, or solicit financial services or other business from, any issuer.

Within the past year, KFS, including its parent, subsidiaries and/or affiliates, may have acted as market maker or traded on a principal basis in thefinancial instruments of any issuer discussed herein and may act as underwriter, placement agent, advisor or lender to such issuer.

KFS, including its parent, subsidiaries, affiliates, shareholders, officers, directors, and employees may have long or short positions in, and buy or sell,the securities, commodities or derivatives (including options) or any other financial instruments thereof, of any issuers.

An employee of KFS, including its parent, subsidiaries and/or affiliates, may act as director, or be represented on the boards of directors, of any suchentities or issuers.

Additional information is available upon request.Copyright 2014 Kingsway Group. All rights reserved.

Head Office Affiliated & Overseas Offices Hong KongKingsway Financial Services Group Limited7/F, Tower One, Lippo Centre,89 Queensway, Hong KongTel: 852-2877-1830Fax: 852-2877-2665

CanadaKingsway Capital of Canada Inc.,Suite 1200, 8 King Street East,Toronto, Ontario,Canada M5C 1B5Tel: 416-861-3099Fax: 416-861-9027

ChinaKingsway Financial Services Group LimitedBeijing Representative Office

Beijing Kingsway Financial Consultancy LimitedRm 801, Building A,Beijing Fortune Plaza,No.7, Dongsanhuan Zhong Road,Chaoyang District, Beijing,100020, PRCTel: 8610-6530-8791Fax: 8610-6530-8795

Shanghai Kingsway Financial Consultancy

Limited2039, 20/F, Catic Building,212 Jiangning Road. Jingan,Shanghai, 200041 PRCTel: 8621-5049-0358Fax: 8621-5049-0368

Shenzhen Kingsway Financial ConsultancyLimited701, Tower A,

Aerospace Skyscraper,4019 Shennan Road,Futian District, Shenzhen,518048, PRCTel: 86-755-3333-6539

Fax: 86-755-3333-6536

2014-03 bossini sunwah kingway

Documents