Performance review

Maintain to outperform the industry

1HFY19 performance is in line with our expectations

China trend announced results for the first half of fiscal year 2019: revenue of 899 million yuan, an increase of 14.3% over the same period last year, and net profit of 188 million yuan (corresponding to 0.03 yuan per share), an increase of 36.6% over the same period last year, in line with our expectations. The company declared an interim dividend of 0.02 yuan per share.

Sales in China rose 17.4 per cent year-on-year to 749 million yuan, with Kappa offline and online up 20.1 per cent and 21.9 per cent respectively down 14.8 per cent year-on-year. Retail sales recorded low double-digit growth in the first half of fiscal year 2019, while same-store sales recorded low-and medium-digit growth. Direct sales accounted for 64.3 per cent (up from 59.4 per cent in the first half of fiscal 2018). By the end of September, the number of Kappa retail stores and Kappa children's clothing stores had reached 1176 and 285 respectively (down 33 and 10 respectively from a year earlier). Sales in Japan rose 0.7 per cent year-on-year to 150 million yuan, but sector losses increased.

Gross profit margin rose 4.8 per cent (excluding the impact of inventory impairment losses), thanks to a rise in the share of direct sales; net investment income rose 20.8 per cent year-on-year to 134 million yuan, while operating expenses rate remained flat at 62.8 per cent. The decline in effective tax rates contributed to a 36.6% increase in net profit. Due to changes in sales patterns, inventory turnover days in China increased by 61 days to 290 days.

Trend of development

Channel optimization and reform have become the main drivers of sales growth, which are reflected in: 1) the proportion of direct sales has increased by 5%; 2) the growth of both shopping malls and OUTLETS has accelerated; and 3) the proportion of 18-24-year-old e-commerce customers has increased by 16% to 50%. Management expects same-store sales to maintain positive growth and revenue to record medium-to-high single-digit growth.

Profit forecast and valuation

We keep our profit forecasts for 2019 and 2020 unchanged. The company has changed the fiscal year end date from December 31 to March 31; therefore, we will adjust the historical results and earnings forecast cycle after the 12-month results announcement (the disclosure cycle for the company's results for fiscal year 2019 is 15 months). At present, the company's share price corresponds to the price-to-earnings ratio of 7.9 times / 7.2 times earnings in 2019 / 2020. Maintain an outperform industry rating and a target price of HK $1.24 based on segment plus valuation, corresponding to 11.2 times 2019 price-to-earnings ratio and 10.2 times 2020 price-to-earnings ratio, with 40.6% upside compared to the current share price. Our apparel business is valued at 12 times 2019 p / e. In addition, we give a 30% valuation discount to the company's multi-business model.

Risk.

Consumption slowed further; the clothing industry was weaker than expected.