O'Shudan reported FY3Q20 (October-December 2019) revenue performance: total sales rose 17.9% year-on-year to 579 million euros (15.2% at a constant exchange rate), slower than 25.5% of FY2Q20 (21.7% at a constant exchange rate).
L'Occitane en Provence sales growth slowed to 8.8 per cent year-on-year from 10.6 per cent in FY2Q20 during the FY3Q20 period. The year-on-year growth rate of LimeLife accelerated to 14.4% from 10.1% of FY2Q20. Elemis has slowed from 25 per cent growth in FY1H20 to 20 per cent growth in FY9M20 (unaudited).
Thanks to the successful Singles Day event and holiday-themed package, Chinese mainland's revenue growth accelerated from 18.6% in FY2Q20 to 34.0% in FY3Q20. The deceleration in the UK and US markets was mainly due to a decline in Elemis growth, the main driver of growth. Japan's consumption tax rise has had a significant impact (the tax rate rose from 8 per cent to 10 per cent in October 2019), while FY3Q20 grew by just 3.0 per cent compared with FY2Q20's 11.4 per cent year-on-year growth (down 3.5 per cent at a constant exchange rate). The decline in sales in Hong Kong was offset by strong retail sales in Macau and tourism in Asia, where total sales rose 1.8 per cent year-on-year.
Comment
Despite the slower-than-expected growth of Elemis, we remain bullish on the future of Osudan in Chinese mainland (now its second largest market) and believe that Elemis will revive its growth after its official entry into Chinese mainland (expected in FY1Q21, April-June 2020).
Valuation proposal
Taking into account the lower-than-expected growth of Elemis, we adjusted the FY2020e/21e revenue forecast by-0.9% and-1.3%, and the FY2020e/21e profit forecast by-2.6% and + 0.3%.
We maintain an outperforming industry rating with a target price of HK $24, corresponding to the price-to-earnings ratio of 26x/21xFY2020e/21e. The company's current share price is HK $18.92, corresponding to the 21x/17xFY2020e/21e price-to-earnings ratio, our target price has 26.8% room to rise over the share price.
Risk.
Elemis volume falls short of expectations; Elemis's performance in emerging markets, including China, is uncertain; exchange rate movements.