With a high dividend but weak full-year performance, Sasha announced its annual results for the year ending March 31, 2019, with revenue of HK $8.376 billion, up 4.5% over the same period last year, and net profit of HK $471 million, up 7% from the same period last year. However, excluding the one-time impact of withdrawing from the Taiwan market, continuing operating net profit increased by 1.5%. The gross profit margin fell from 42.1% to 40.8% compared with the same period last year, in view of the decrease in the proportion of exclusive agents with better gross margin. We believe that Sasha's traditional business model of selling cost-effective "parallel imports" is outdated. The company's problems are: 1) the stability of upstream procurement sources and the procurement competition brought about by the rise of cross-border e-commerce in the mainland; 2) structural changes in the customer base, reducing the shopping willingness of mainland tourists to Hong Kong 3) in view of the limited supply of international brands for parallel imports, the company is faced with the diversion of local counters in Hong Kong, large cross-border e-commerce in China and duty-free shops; 4) superimposed external factors, including the RMB exchange rate, purchasing agents to Japan and South Korea and other sources of goods, and the recent special activities in Hong Kong. Although the company expects to open more than 10 new stores in China and Hong Kong in the new fiscal year, including 7-8 in the Greater Bay area; working with Fan Bingbing to create a Fan Beauty mask that hopes to use the star effect to stimulate consumption; and rent reduction when some stores renew their rents, we still do not think it can bring enough power to turn around.

The diversion of internal and external troubles is inevitable, and the wealth of Wangding continues to spread.

Sasha has faced fierce competition from the upstream inventory channel. Due to the lack of economies of scale, fewer well-known brand products can be purchased and the cost increases. Sasha relies on the cost-effective mode of operation of "parallel imported international brands". At a time when counter demand is already strong, coupled with the rise of large cross-border e-commerce in the mainland in recent years, and the rise of more decentralized purchasing agents, the difficulty and stability of "parallel imports" procurement have been seriously affected. Through parallel imports, Sasha's big-brand products have high cost performance and low gross profit margin, but they are the "bargaining chips" to attract customers into the store and increase the flow of customers. At present, Sasha, in view of the limitations of procurement, the store needs to display some exclusive brands and products, although they have a high gross profit margin, but the demand is weak, showing the decline of their product structure and sales. The cost of superimposed parallel imports has risen, and the current VIP membership discounts do not include well-known brands such as Lancome.

Although Sasha tries to boost passenger flow and sales by promoting trendy products and enriching the product portfolio, her efforts have not been effective in the overall retail decline and fierce market competition in Hong Kong. In China, the company is facing the accelerated rise of large-scale and standardized cross-border e-commerce platforms represented by Tmall International, NetEase, Inc koala, Shunfeng Haitao, Xiaohongshu and so on. They can drive down prices through large-scale purchases, while giving full play to the advantages of inland warehousing and logistics and e-commerce networking. After the baptism of the New Electronic Commerce Law, the purchasing agency industry, which is more scattered in business, has become more cautious. For the time being, it is difficult for the RMB exchange rate to return to its high level in the first half of 18 years, and the superimposed travel to South Korea has gradually recovered, causing the frustrated purchasing agency industry to switch to other channels, or directly to Japan and South Korea to pick up goods. In Hong Kong, drugstores are actively opening stores in tourist areas, while Wanning and Watsons are also selling low-and middle-end Japanese and Korean skin care products. In addition, in the absence of high-end international brands, consumers can only switch to counters and duty-free shops, all of which divert Sasha's market share.

As far as the client is concerned, mainland tourists to Hong Kong are less willing to shop. After the opening of the Hong Kong-Zhuhai-Macao Bridge in October last year, the clearance of entry and exit passengers exceeded 10 million, but the increase in passenger flow at the lower end was mainly tasting tourism, which was difficult to translate into actual purchasing power. Although the passenger flow of high-speed rail has made a great contribution to the company, it is also difficult to offset the decline in other regions. Sasha is going to expand stores near the high-speed rail station and the Greater Bay area, but we think it will take time for the policy dividend to be released. Due to the trade frictions between China and the United States, the uncertainty of RMB exchange rate fluctuations and some special circumstances of Hong Kong, we believe that the willingness of tourists to spend in Hong Kong will still be suppressed. Although mainland tourists to Hong Kong rose 5.3 per cent in April from a year earlier, retail sales in Hong Kong fell 4.5 per cent in April from a year earlier, of which the categories of drugs and cosmetics fell 6 per cent, and "Wangding not prosperous wealth" continued to spread.

Maintain "sell" and lower the target price to HK $1.90

We believe that it will take time for Sasha's business model to reach an inflection point at a time when the four hidden worries are lingering. Although the decline in same-store sales in Hong Kong and Macao narrowed to the number of units in May-June, some group incidents in Hong Kong in June may also hurt Hong Kong's Q2 tourism retail market. At one point in June, Sasha's shares were close to a 16-year low of HK $2, and continued weakness in the retail market could further depress Sasha's valuation. However, the current annual dividend is HK $0.16, with a dividend rate of more than 100%, while the dividend yield is 7%, which is more attractive. We believe that the current 15x PE may still have room for downside and continue to maintain the "sell" rating, with the target price lowered to HK $1.90.

Risk hint: the new passenger flow is higher than expected, the retail industry in Hong Kong is picking up, and the company's performance is improving.