We have now turned rather cautious about China Lilang in 2H24E, due to both macro conditions and company specific reasons like the DTC transformation and the surge in opex. We still maintain a BUY but that was solely due to its attractive yield (9%) and valuation (9x FY24E P/E).
Turned more cautious about 2H24E, even though the Company is still making progress for product and brand upgrades. Management has revised down their FY24E retail sales growth target to 10% (from 15% in the beginning of year), despite some positives like the robust new retail sales growth was at 37% in 1H24E, and in fact the target was actually raised to 30% (up from 20%). We are also kind of cautious about 2H24E, because of: 1) the high base last year, 2) still unclear momentum (retail sales growth was weak during Jun- Jul 2024 but slightly improved in Aug 2024), 3) potentially more DTC transformation (perhaps in the northeastern China and the size could be higher than that in 1H24), which will result in sales and net profit cut, 4) potential slowdown in smart causal sales growth (already slowed down to just 17% in 1H24 from 35% in FY23), 5) cut in net new store openings (from 100 to 200 in FY24E, to just 50 to 100), etc.. Also margin-wise, we do see more uncertainties, such as: 1) the jump in staff numbers and costs in 1H24 may sustain into 2H24E, 2) the surge in D&A expenses may also last, 3) the renovation plan of 400 stores in FY24E is still intact, but costs as % of sales may increase (as the sales came down more than expected).
The multi-bands strategy has finally released. On top of the 1H24 earnings release, China Lilang has also announced its partnership with Descente (8114 JP, NR) to develop the Munsingwear brand in China by forming a JV which China Lilang will invest RMB 150mn and own 54% stake. China Lilang will also own the trademark of Munsingwear brand in China, with the rights to design, market and distribute products. Munsingwear is a historic golf apparel brand known for its penguin logo, and was founded in the US for over 130 years (while the trademark in Asia was bought by Descente). We do believe the Company's expertise in apparel, supply chain and about the China market will provide a strong boost for Munsingwear in golf wear industry in China, which in turn will also benefit its own growth.
Maintain BUY but trim TP to HK$ 4.85. We revise down FY24E/ 25E/ 26E net profit by 16%/ 17%/ 16% to factor in: 1) slower-than-expected sales growth, 2) DTC transformation and 3) surge in opex. Our new TP is based on 10x FY24E P/E (unchanged), still supported by 8% sales/ 10% OP CAGR during FY23-26E. The counter is now trading at 9x FY24E P/E but has a highly attractive FY24E yield of 9%.
