Financial review for the first half of 2013

According to Zhuoyue's 2013 interim results, the Group's operating volume increased to HK$1.43 billion, an increase of 9.3% over the first half of 2012, of which the retail and wholesale business accounted for HK$1.29 billion, while the beauty business accounted for HK$150 million, up 10.4% and 0.8% year-on-year respectively. The gross profit margin of the group was 47.4%, up 1.7 percentage points from the same period last year, due to the increase in gross margin of products purchased from agents to 30-40% from 25-35% in the same period last year. The group's operating profit was HK$150 million, up 51.5% year-on-year, and operating profit increased 2.9 percent to 10.5%, mainly due to a slowdown in rent growth and a lack of share payments during the period (HK$2020 million in the same period last year). The Group's net profit was HK$120 million, up 47.3% from the same period last year, and net interest rate rose to 8.7% from 6.5% in the same period last year. The Board recommended an interim dividend of HK2.5 cents and a special dividend of HK0.9 cents.

Operation Overview

In the first half of 2013, the Group's retail business developed steadily. Sales and same-store sales growth were 10.1% and 19.2%, respectively, and the product mix and gross margin were generally stable. The group opened 3 stores, closed 2 stores, and continued to rent 5 stores during the period. The figures were lower than in the same period last year, which also curbed rent growth. The group's rent expenses, employee costs and promotion expenses as a percentage of revenue during the period were 13.0%, 11.2% and 1.7%, all of which were lower than last year's level.

In terms of beauty business, the group had 20 beauty service centers during the period, one less than at the end of last year. Operating profit was HK$10 million, a decrease of 64.3% year-on-year, mainly due to rising rent expenses and employee costs. Package sales during the period were HK$150 million, down 17.0% year on year.

Our opinion

We believe that Zhuo Yue's growth story continues. The main reasons include i) the large gap in cosmetics prices between China and Hong Kong still exists, and Hong Kong is still the preferred place for Chinese consumers to buy cosmetics. As one of the top two cosmetics retailers in Hong Kong, Zhuo Yue is more well-known than its peers; ii) the share of its own brand sales has continued to rise, and gross margin has maintained an upward trend over the past few years; iii) The Group actively manages stores, and rent increases have been controlled. Coupled with the initial trend of rent increases in Hong Kong retail stores in recent months, it is expected that the pressure on the Group's rising rents will decrease in the future. Although the group's beauty business did not perform well during the period, the performance of the beauty business fluctuated all the time, and it only accounted for 10.2% and 7.0% of the group's total revenue and operating profit, which had little impact. Overall, we believe that the group is growing steadily and that its financial position is good (holding net cash of around HK$220 million), and that the interest rate is close to 4.6%, we believe valuations will continue to improve. With a target price of HK$1.7, there is room for increase of 9.7%.