FY1H20 profit margin improvement
Ou Shudan disclosed FY1H20 results: revenue reached 727 million euros, a year-on-year increase of + 22.1% (+ 19.0% at a constant exchange rate), and net profit reached 25 million euros, an increase of 267% over the same period last year. Oshudan earlier disclosed FY1H20 revenue on October 22, 2019.
1H2020 exceeded expectations because operating profit margins increased by 4.7 percentage points compared with the same period last year, mainly due to the shift of Elemis consolidation and volume to a higher-margin wholesale model (FY1H20 wholesale accounted for 34% of total sales vs FY1H19 27%), increased operating leverage and streamlined marketing expenses (the proportion of marketing expenses in total sales decreased from 14.6% of FY1H19 to 12.7% of FY1H20). However, because Elemis is dominated by the distribution model, the gross profit margin is lower than L'Occitane en Provence, the main brand of Oshudan, pulling down the overall gross profit margin by 1.2 percentage points compared with the same period last year.
Trend of development
On the earnings call, management said: 1) Travel retail in Chinese mainland and South Korea both recorded double-digit growth in October and November 2019, benefiting from demand from Hong Kong; 2) based on seasonal historical data, management expects FY2H20's overall profit margin to increase month-on-month. 3) Management believes that the growth of e-commerce channels will offset the revenue impact of physical store closures (mainly those with lower profit margins in the United States).
Over the past 10 years, the average operating profit margin of Osudan retail channel is about 31%, and that of wholesale channel is about 49%. With the consolidation of wholesale-based Elemis and subsequent volume, we expect the company's operating profit margin to continue to improve in FY2020 and FY2021.
Profit forecast and valuation
Due to the better-than-expected Elemis volume, we raised the FY2020e/FY2021e revenue forecast by 5.8% and 5.4% respectively, and we raised the FY2020e/21e profit forecast by 11.2% and 4.1% respectively based on improved sales channels.
The company's current share price corresponds to 20.2x/16.5x FY2020/FY2021 Pamp E. We maintain our outperform industry rating, raising our target price by 9 per cent to HK $24.0 (corresponding to 26x/22xFY2020/FY2021 Pamp E), which is 31.3 per cent higher than the current share price.
Risk
Elemis volume fell short of expectations; Hong Kong market continued to drag on overall performance; exchange rate movements.