Company trends
The current situation of the company
The company announced the operation of 4QFY22 (January-March 2022): Kappa brand (including Kappa children's wear) retail flow year-on-year decline in the number of units, same-store sales decline in the number of units, month-on-month improvement. For the whole year of FY22, the retail flow of the Kappa brand declined by medium and high units compared with the same period last year, while same-store sales declined by double digits.
Comment
The growth rate of Kappa brand sales slowed down due to the epidemic in March. From a high base of 60-70 per cent year-on-year growth in 4QFY21, the Kappa brand achieved year-on-year growth from January to mid-March, but the domestic epidemic since mid-March has slowed the number of units in the quarter to a year-on-year decline, and there are still more than 170 stores temporarily closed. 4QFY22 retail discounts (including Ole channels) are about 35%, down 1ppt from the same period last year. For the whole year of FY22, the retail flow of the Kappa brand declined by medium and high units compared with the same period last year, while same-store sales declined by double digits, and the inventory-to-sales ratio increased.
As of the end of March, the Kappa brand (including Kappa children's wear) had 1375 stores, the same as the same period last year.
The investment business is still under some pressure. As of the end of September 2021, the company held a total of 9.7 billion yuan in investment and cash, of which 67% were investments in financial assets. The investment division of 1HFY22 (March to September 2021) lost a total of 660 million yuan. The management expects that the 2HFY22 investment business has not yet improved, in which the primary market investment is under some pressure, but the FY22 is expected to achieve positive returns for the whole year, while the secondary market investment still has a certain loss in 2HFY22.
Product reform and channel optimization are carried out continuously. FY22 continues to promote product reform, readjust the product team and build a single-store profit model. In the past, the company's main market was the prefecture-level market, and there was a certain gap between the company and the target customer group. during the season, the company launched some brand-new products with the orientation of "new people, new prices, new products" for testing, and achieved good results. Product reform will take some time. In terms of channels, the company's direct stores have a good gross profit margin, with an average gross profit margin of more than 70%, but the low store efficiency leads to slow inventory turnover. The management said that it will adjust some stores that make profits but have slow inventory turnover. At the same time, it will also speed up the adjustment of some inefficient stores under the epidemic. Pinduoduo channel will be added online this year, and the company also plans to continue to strengthen Douyin channel construction from the perspective of stores, content marketing and explosives.
Profit forecast and valuation
Considering the impact of the epidemic on the decline in sales and investment income, we lowered the annual EPS of FY22 to-0.12 yuan (previously-0.005 yuan), lowered the annual EPS forecast of FY23 to 69% to 0.03 yuan, and introduced the annual EPS forecast of FY24 to 0.08 yuan. the current stock price corresponds to 5 times the annual Pamp E of FY23/24, maintaining an industry rating that outperforms. The valuation switched to FY23, valuing the apparel business at 8 times FY23 Pamp E, and considering the uncertainty of the company's investment business returns, we gave a 70% valuation discount to the company's multi-business model (previously 63%). Taken together, we lower our target price based on segment plus total valuation of 32% to HK $0.56, with 25% upside room.
Risk.
The epidemic continues repeatedly, the terminal retail environment is not as expected, the reform is not as expected, and the investment income fluctuates.
