The performance in the first half of 2020 was lower than we expected.
Good Boys International announced its results for the first half of 2020: revenue fell 16 per cent year-on-year to HK $3.718 billion (down 13.1 per cent in currency neutral terms), while net profit fell 60 per cent to about HK $54.3 million. The company's performance was lower than we expected, mainly due to the impact of the epidemic, resulting in higher-than-expected gross profit margin pressure.
Core strategic brand revenue fell 13.3% year-on-year (all growth rates below are calculated at fixed exchange rates), accounting for 82% of overall sales. Of this total, revenue from the Cybex, gb and Evenflo brands fell 10 per cent, 19.9 per cent and 6.9 per cent respectively from a year earlier. Cybex: as a brand focused on Europe, Africa and the Middle East, Cybex saw a slight decline in revenue, mainly due to later outbreaks in Europe, Africa and the Middle East than in the Asia-Pacific region. The domestic outbreak in the first quarter of 2020 affected gb's core business areas, while the good performance of online platforms and non-durable goods sales partly offset the decline in offline passenger traffic. Evenflo: although the North American market accounts for a large part of Evenflo's business, Evenflo has shown some resilience, mainly due to the fact that the sales terminals of core retailers remained open during the outbreak.
Blue-chip sales fell 7.4 per cent year-on-year, but improved month-on-month in the second quarter of 2020. Sales of tactical brands and retailer-owned brands fell 20.8% year-on-year, mainly due to the impact of the epidemic and the continuous adjustment of customer mix.
The company's gross profit margin fell 1.6 percentage points to 41.6%, mainly due to the poor short-term brand revenue structure and the gradual transfer of domestic consumer passenger flow to online channels with relatively low profitability. We believe that the operating deleveraging on the expense side of the company is still under control, and the operating expense rate has increased slightly by 0.6 percentage points compared with the same period last year. The company recorded a cash inflow of 273 million yuan from operating activities, and the company's working capital situation has improved since the beginning of the year. Development trend since the second half of May, the Cybex brand has shown a strong recovery trend driven by product development and channel expansion. The offline retail outlook of the gb brand in China is still under pressure, but online channels continue to recover. For the Evenflo brand, the company expects the brand to achieve positive growth amid geopolitical uncertainty, while the tariff impact is expected to be limited after the signing of the Sino-US trade agreement in 2020. Overall, the company expects strategic brand market share to grow further.
Profit forecast and valuation
We lowered our 2020 earnings per share forecast by 43.1% to HK $0.07 to reflect the pressure on the company's profit margins in the first half of 2020. We keep our earnings per share forecast for 2021 unchanged at HK $0.15. At present, the company's share price corresponds to 15.1 times 2020 price-to-earnings ratio and 7.3 times 2021 price-earnings ratio. We maintain the company's "neutral" rating, but raise the company's target price by 18% to HK $1.16 (valuation switches to 8 times 2021 price-to-earnings ratio), which is 9% upside from the company's current share price.
Risk
The outbreak affected the global supply chain, resulting in insufficient demand.