2019 interim results are in line with our expectations
Revenue and net profit for the first half of 2019 increased 0.2% and 2.1% year-on-year respectively to HK$4,434 million and HK$136 million, with earnings of HK$0.08 per share, in line with our expectations.
Focusing on profitable business strategies rewards the company's performance. (1) Core strategic brand revenue increased 5.6% year over year (10.3% year over year based on constant exchange rate), contributing 82% to the company's total sales revenue, mainly due to strong growth in Cybex revenue (year-on-year growth rate of 29.6%) and stable revenue from Good Kids and Infant Fortune (the year-on-year decline was only 5.5% and 0.4%). (2) Affected by the uncertainty of the tariff policy, the company's leading customers increased their procurement efforts in the first half of 2018. As a result, the company's sales from leading customers fell 15.8% in the first half of this year due to the higher base for the same period last year. (3) Since the company still focuses entirely on core strategic brands, sales of non-strategic brands fell 24% year over year (20.6% year over year at constant exchange rates). By region, sales in EMEA (Europe, Middle East, and Africa) and the Americas increased 20.3% and 0.7%, respectively, while sales in the Asia-Pacific region fell 5.5%, mainly because the decline in sales of Xiaolong Huff offset the positive effects of Goodboy brand growth.
As the share of high-margin core strategic brands in the company's sales revenue increased and the company's cost efficiency improved, gross margin increased 1.2 percentage points year-on-year to 43.2% in the first half of the year.
Meanwhile, the company's operating expenses ratio increased 0.4 percentage points due to increased marketing expenses and storage and transportation costs. Higher tax rates in the EMEA region led to a 6 percentage point increase in the effective corporate tax rate.
Development trends
On the brand side, the company expects Cybex's strong growth trend to remain unchanged in the second half of 2019; the Goodboy brand is likely to maintain the reversal trend seen at the end of the first half of 2019, particularly in overseas markets and durable goods sales. Furthermore, the company expects operational optimization in the context of macro-uncertainty to drive a slight increase in the Yingfu brand.
Profit forecasting and valuation
We keep our earnings per share forecasts unchanged for 2019 and 2020. We expect net profit per share to be HK$0.12 and HK$0.14 respectively this year and next two years, up 18.8% and 21.3%, respectively. The company's current stock price corresponds to 12.7 times the predicted price-earnings ratio for 2019 and 10.5 times the predicted price-earnings ratio for 2020. Maintain a neutral rating. However, considering the uncertainty of international trade and the risks faced by the company's multinational business, we lowered our target price by 7.5% to HK$1.70 (corresponding to 12 times the predicted price-earnings ratio for 2020), leaving room for 14.7% of the current stock price.
risks
Online brands compete for the company's business; growth is slowing.