Support the main points of rating

Performance forecast for fiscal year 15. We expect revenue to grow by 14 per cent to HK $1.98 billion, mainly driven by high unit growth in same-store sales in Hong Kong and the opening of new stores in Singapore over the past two years (offsetting the decline in the high number of same-store sales in the region). As the market competition intensified due to the falling exchange rates of the Japanese yen and the euro, the company had to carry out more promotional activities to offset the higher share of direct sales, and the gross profit margin is expected to stabilize at 46.6%. Excluding one-time divestiture gains and IPO charges for fiscal year 14, we expect the profit margin before main income tax to decline by 2.8% to 6.0%, mainly due to rental pressure in Hong Kong and increased losses in other regions (we expect losses in Singapore in the second half of fiscal 15). We expect earnings per share in the main business to fall by 7% to HK $0.15, and the net interest rate in the main business to fall by 1.2 percentage points to 5.3%. We expect the dividend payout rate to be 80%.

Strategy for the future. 1) Hong Kong: international home retail will continue to steadily expand its sales network, adding 15 stores a year. In the future, the company will continue to seek mergers and acquisitions to expand its product line, but will also focus on the mass market. And further improve the level of specialization in the rental market. The company's recent acquisition of Ella, a local retail chain, is a very successful case and is unlikely to enter the upper-class lifestyle market because of limited synergies with existing businesses. 2) Singapore: the company suspended network expansion in the second half of fiscal 15 until same-store sales significantly recovered, maintaining a long-term target of 100 stores, which currently stands at 60. 3) other markets: the company will gradually withdraw from the mainland market because it has not yet found a suitable way of doing business.

Adjust profits. We cut our forecast revenue for fiscal year 15-17 by 2%, 8% and 13% respectively, mainly because of the lower sales revenue forecast for the Singapore business. We have lowered our gross margin forecast to reflect that the company is likely to take more promotional activities and the higher rental charges in Hong Kong may lead to a loss in the Singapore business. Overall, we lowered our earnings per share forecasts by 19%, 22% and 27%, respectively. At present, we expect earnings per share to grow by 10% and 8% respectively for fiscal year 16-17, mainly because the company has slowed its expansion in loss-making markets outside Hong Kong.

Main risks affecting rating

Market competition; overall retail sales growth slowed down; overseas business losses expanded.

Valuation

We lowered the target price from HK $3.46 to HK $2.40. Our new target price is based on 15 times expected earnings per share for FY16 (previously 18 times EPS for FY15 and FY16) and is in line with the historical average since going public. We maintain a buy rating on the stock, with an expected dividend yield of 6% for fiscal year 16.