O'Shudan announced 2Q20 (July-September 2019) sales: total sales rose 21.7 per cent year-on-year to 375 million euros (25.5 per cent at current exchange rates due to a weaker euro), exceeding market consensus expectations of year-on-year growth of about 15 per cent.
In terms of brands, L'Occitane en Provence sales growth accelerated from + 4.1 per cent year-on-year at 1Q20 to + 7.2 per cent at 2Q20, from 14.8 per cent year-on-year decline in 1Q20 to 5.2 per cent year-on-year growth at 2Q20. Elemis growth accelerated significantly from 9.3 per cent year-on-year growth in 1Q20 to more than 30 per cent year-on-year growth in 2Q20 (not yet audited).
From a regional perspective, the UK and the US benefited from the impact of Elemis consolidation and rapid volume expansion, making the greatest contribution to growth, with sales in the UK rising 220 per cent year-on-year and US sales up 34 per cent, while Chinese mainland also recorded 17 per cent year-on-year growth, thanks to the effectiveness of marketing activities. Strong growth in retail sales in Macau and tourism in Asia offset a sharp decline in retail sales in Hong Kong, with combined sales up 6.3 per cent year-on-year.
Comment
We reiterate our earlier view that Elemis will be the main growth driver for Oshudan in fiscal year 2020. Elemis's digital marketing promotion in the United Kingdom and the United States has been very effective, and the development of new markets is also under way. It is believed that it will achieve rapid growth. Elemis's current sales account for 12% of the company's total sales (as of 2Q20), and its operating profit margin is significantly higher than that of Oshudan's main brand L'Occitane en Provence.
We believe that Oshudan's overall operating profit margin will also benefit from the change in revenue structure from retail to wholesale. Historically, the operating profit margin of the retail business is about 28%, while that of wholesale is 51%. As the company's emerging brands Elemis and LimeLife are mainly wholesale, the retail / wholesale revenue composition of Osudan has changed from 72% of 2Q19 to 64% of 2Q20, which is expected to significantly increase the overall operating profit margin.
Valuation proposal
We keep our FY2020e/21e revenue and profit forecasts unchanged. The company is expected to formally disclose 2Q20 performance in late November.
Oshudan's current share price is HK $15.94, which corresponds to 20x/15x FY2020e/21e Pamp E. We reiterate our industry rating, with a target price of HK $22, corresponding to 26x/21x FY2020e/21eP/E, which provides 38.0% upside space over the current share price.