2018 results fell slightly short of expectations. Revenue increased 1.8% year over year to HK$5,509 million. Revenue in the first half of 2018 surged 9.2% year over year, but revenue for the second half of 2018 fell 5.2% year over year. Overall gross margin fell 0.5 percentage points year over year to 59.0%. The average sales price increased 7.6% year over year, but was offset by an 8.5% increase in average product cost and a 6.3% decrease in sales volume. Net profit declined 4.0% year over year to HK$480 million. The final dividend was HK$0.165 per share, bringing the full-year dividend ratio to 110.0%.

Earnings forecasts per share for 2019 and 2020 were lowered by 6.1% and 6.4% to HK$0.346 and HK$0.380, respectively, based on lower revenue forecasts. We lowered our 2019 and 2020 revenue forecasts by 3.5% and 4.0% respectively, mainly due to a more uncertain outlook on the global economic environment, the trend of trade frictions between China and the US, and weak consumer sentiment. We expect gross margin to improve by 0.5 percentage points, 0.2 percentage points and 0.1 percentage points, respectively, to 59.5%, 59.7%, and 59.8% in 2019-2021, driven by an increase in average selling prices.

Maintain the “buy” and the target price of HK$4.60. Giordano management said that the business was still under some pressure in the first two months of 2019, but management expects business growth in 2019 to be better than the level of the second half of 2018. Furthermore, the company will continue to maintain a high payout ratio over the next few years, which makes its dividend return very attractive. Our target price is equivalent to 13.3 times, 12.1 times, and 11.2 times the price-earnings ratio for 2019, 2020, and 2021, respectively, and room for growth of 15.3%.