Net profit increased by 6.6 per cent in the middle of fiscal year 2013. Time announced its interim results for fiscal year 2013 yesterday. Revenue and net profit for the six months ended December 31, 2012 rose 5.7 per cent year-on-year to HK $1.712 billion and 6.6 per cent to HK $190 million, respectively. Revenue from the manufacturing business rose slightly to HK $1.69 billion, while revenue from the retail business surged by 495 per cent to HK $22.6 million. Gross profit margin held steady at 22.3% during the period, compared with 22.6% in the same period a year ago. Due to the company's better tax planning, the effective tax rate has been reduced from 21.0% a year ago to 16.5% during the period when profits are recognized in Hong Kong. The reported net profit is lower than our forecast of HK $205 million by 7.3%, and we believe the main difference comes from our more optimistic assumption of income growth.

Small leather goods and travel goods are both engines of growth. Although time's major customers reported satisfactory results in the second half of 2012, time's handbag business revenue was only flat, at HK $1.402 billion in the six months ended December 31, 2012. On the other hand, revenue from small leather goods and travel goods increased significantly during this period by 29.1% to HK $243 million and 96.3% to HK $45 million, respectively, which have become the growth engines of the manufacturing business. Due to the uncertain economic environment, we believe that customers of the times will remain cautious, which means that the future growth of the manufacturing business will be limited.

The retail business performed brightly. Thanks to the steady growth of the retail market in China and its small base, retail business grew by 495 per cent to HK $22.6 million during the period. The company opened 15 stores during the period and operated a total of 37 stores as of December 2012. Time aims to open 50 retail stores in June 2013, which will focus on the eastern and southwestern regions of China. However, retail accounts for only 1.3 per cent of total turnover during the period, a small share, but we expect its contribution to increase to 4.6 per cent in fiscal year 2015.

Poor visibility of orders. First, the interim results are lower than we expected; second, the main customers of the times continue to take a cautious position. As a result, we lowered our profit forecasts for the fiscal year 2013-2015 by 5.0 per cent to HK $422 million, 10.4 per cent to HK $464 million and 10.1 per cent to HK $527 million, respectively. As a result, we expect a profit of HK $449 million for the calendar year 2013. Due to the low visibility of orders from its major customers, our target price has been lowered from HK $5.74 to HK $4.03, which is equivalent to a price-to-earnings ratio of 9 times earnings for calendar year 2013. The target price will fall by 10.4%. Downgraded to hold.