Company trends
Maintain to outperform the industry
The current situation of the company
China trend releases operating data for the second quarter of 2019. Kappa stores (excluding KappaKids and Japan) saw a low-unit decline in same-store sales in the overall offline channel (1Q19 was a low-unit decline); retail sales achieved medium-unit growth (1Q19 was medium-unit growth).
Comment
Channels: by the end of June 2019, 48 new stores had opened and brought the total number of Kappa stores to 1228 (a net increase of 21 sales terminals in the second quarter of 2019). By channel category, online channels achieved 30-35% growth in same-store sales and retail sales, while physical same-store sales and retail sales declined in high and low units, respectively. During the transition, the company said it might move its stores from department stores to shopping malls.
Products: offline sales of short-sleeved products were weak in the second quarter of 2019, but the removal rate of Kappa vulcanized shoes was still strong and its share in the footwear sector increased, partially offsetting the negative impact of seasonal fluctuations in clothing. In addition, after the completion of the development of two national logistics centers and cloud warehouse systems, the company will be able to further reduce response time.
Valuation proposal
We maintain our earnings per share forecasts for 2019 and 2020 unchanged, at 0.10 yuan and 0.11 yuan, respectively, corresponding to year-on-year increases of 86.9% and 10.1%.
The company's current share price corresponds to 9 times 2019 earnings and 8.2 times 2020 earnings.
We maintained our outperforming industry rating, but slightly lowered our target price by 5% to HK $1.41 (40% upside compared to the current share price), mainly considering changes in segment plus aggregate valuation assumptions. The apparel business is valued at 14 times its target price-to-earnings ratio for 2019 to 12 times.
In addition, we have a 20% discount on the company's multi-business model valuation.
Risk.
Consumption slowed further; the clothing industry fell short of expectations.