Pou Sheng International (3813 HK)

Page 1 / 7

17 August 2017

Hayman Chiu

[email protected]

(852) 2235 7677

Trading Data

52-Week Range (HK$)

3 Mth Avg Daily Vol (m)

No of Shares (m)

Market Cap (HK$m)

Major Shareholders (%)

Auditors

Result Due

2.84/1.30

12.36

5,338.5

7,901.1

Yue Yuen (61.27%)

Deloitte

3Q17: Nov 2017

Company description

Established in 1989 and listed in June 2008, Pou

Sheng (PS) is one of the leading sportswear

distributors in China with ~25% market share. In

addition to Nike and Adidas, the company adopts

multi-brand strategy and distributes Puma,

Converse, Under Armour and PONY products etc.

As of June 2017, Pou Sheng’s retail network

comprises of 8,903 stores, in which ~65% are

directly operated stores.

Price Chart

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Sources: Bloomberg, CIRL

1H17 result generally in-line with KPI improved in 2Q17; Management trimmed down FY17E OPM guidance to 5-6%

PS’s 1H17 net profit result was in-line with our forecast, with revenue up 8.7% Yoy to US$1,379mn (53% of our forecast, 1H16 :52% of FY16 revenue), while net profit attributable to shareholders dropped 26.3% to US$43.3mn (53.4% of our FY17E estimates, 1H16: 69% of FY16 revenue), dragged by lower GM (1H17: 34.6%, down 100bps Yoy), and SG&A ratio remained high in 1H17. As mentioned in our last update in May 2017, the lower GM was due to promotional campaigns in 1Q17 in offline stores, while PS also increased their marketing activities in online channel (currently ~5% TL). However, we see slight improvement in 2Q17 KPI, as retail discount was down by 100bps QoQ to 22%, which drove SSSG picked up to 5.6% (vs. 1.9% in 1Q17), hence GM and OPM improved 200bps and 160bps respectively during the quarter. Meanwhile, PS’s SG&A ratio came in at 30.7% of sales in 1H17 (1Q17:30.5% of sales, 2Q17:30.8% of sales ; 1H16 :30.0% of sales), which is still in line with our estimates at 30-31% in FY17E on store closure expenses, rising rental and salary. The high SQ&A ratio in 1H17 included a RMB87mn inventory provision which we believe mainly occurred in the store closure during 1Q17, excluding this expense, the SG&A ratio stayed at 30% in 1H17. PS management still strives for FY17E 6-7% OPM in 1Q17 result call, however in their latest update, they have revised down the target to 5-6% which in our opinion is a more reasonable target to achieve (1H17 OPM at 5.3%, 2Q17:6.1%). We are looking forward to a sustainable recovery in SSSG, stabilizing GM and OPEX in 2H17. FY17E store expansion plan maintained, store efficiency long term

earnings quality; In 1H17, the total number of directly operated stores was down by 96 to 5,464 (vs. 5,560 in end-Dec 2016). We believe most of these stores were small and inefficient stores as mentioned by PS management. PS maintained total net openings at 600-800 in FY17E, we believe it would still remain a challenging task in 2H17 (implying ~450 net openings) to reach the lower bound target. PS will also focus more on increasing store efficiency as well as opening large area megastores going forward, we believe this would enhance earnings quality in the long run. More colours on PCG Bros, Management expects a better 2H17

We are glad to see management disclosed more details on PCG Bros. In 1H17, as PCG Bros was still at ramp up stage, it posted a RMB20mn net loss. With multiple sports event timeline in 2H17, Management expects operations continue to ramp up in 2H17, and a RMB30-35mn net loss for FY17E. FY17E/18E EPS maintained, waiting for more encouraging figures;

Maintain Neutral

We sticked to our FY17E/18E EPS forecast as PS’s KPI’s was in line with our assumption. We expect EPS to grow at 17.3% CAGR in FY16-18E. After PS’s share price tumbled ~30% YTD, it is trading at FY17E/18E 12.2x/10.5x P/E (~30% discount to leading peers), we believe market would continue assess new management’s execution ability, hence limit near term share price upside. We maintain PS’s rating at Neutral, but raised PS’s TP from HK$1.52 to HK$1.68 (20% discount to international peers, which implies FY17E 12.0x target PE vs. 12.6x in our last update in March).

Pou Sheng International (3813 HK)

2Q17 improved but not enough Rating Maintain Neutral

Target price

HK$1.68 From HK$1.52

Current price

HK$1.48 Upside：13.4%

Page 2 / 7

Exhibit 1:Pou Sheng’s 2Q17 SSSG picked up on currency neutral basis

Exhibit 1:

Pork

products

sold in

supermark

et counters

Source: Company data, CIRL

Exhibit 2: Pou Sheng’s GM rebounded in 2Q17 on lowered retail discount

Exhibit 1:

Pork

products

sold in

supermark

et counters

Source: Company data, CIRL

Exhibit 3: Adidas’ revenue and Nike’s trade order continue to deliver stable growth in China

Exhibit 1:

Pork

products

sold in

supermark

et counters

Sources: Company Data, CIRL

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Pou Sheng's SSSG (Yoy%, Year ended 31 Dec)

30.5 30.8 30.3

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Page 3 / 7

Exhibit 4: Growth of Pou Sheng’s total store count openings stayed flat in 1H17

Exhibit 1:

Pork

products

sold in

supermark

et counters

Source: Company data, CIRL (*1Q17 growth data vs. FY16, **2Q17 growth rate vs. 1Q17)

Exhibit 5:Pou Sheng partners with international brands to open megastores

Exhibit 1:

Pork

products

sold in

supermark

et counters

Sources: Company Data

Pou Sheng's store count

FY12 FY13 FY14 FY15A FY16A *1Q17 **2Q17

Direct operation 3,659 3,665 4,263 4,943 5,560 5,545 5,763

Franchised 2,276 2,263 2,689 2,840 3,199 3,298 3,140

Total 5,935 5,928 6,952 7,783 8,759 8,843 8,903

Direct stores' growth 0.2% 16.3% 16.0% 12.5% -0.3% 3.9%

Franchised stores' growh -0.6% 18.8% 5.6% 12.6% 3.1% -4.8%

Total growth -0.1% 17.3% 12.0% 12.5% 1.0% 0.7%

Direct stores (%) 61.7% 61.8% 61.3% 63.5% 63.5% 62.7% 64.7%

Franchised stores (%) 38.3% 38.2% 38.7% 36.5% 36.5% 37.3% 35.3%

Page 4 / 7

Exhibit 6: Pou Sheng’s current partners and events

Exhibit 1:

Pork

products

sold in

supermarket

counters

Sources: Company data

Page 5 / 7

Exhibit 7: Financial Summary

Exhibit 1:

Pork

products

sold in

supermark

et counters

Sources: Company Data, CIRL estimates

Income statement Cash flow

Year to Mar (US$ Mn) FY14A FY15A FY16A FY17E FY18E FY19E Year to Mar (US$ Mn) FY14A FY15A FY16A FY17E FY18E

Revenue 1,981 2,300 2,444 2,594 2,754 3,000 Pre-tax profit 20 86 126 120 139

Gross profit (reported) 581 766 868 903 969 1,056 Taxes paid (17) (14) (15) (18) (19)

EBITDA 63 126 173 169 191 215 Depreciation & amortization 32 33 38 41 43

Depreciation 32 33 38 41 43 45 Associates & Others 54 41 46 43 44

EBIT 31 93 135 129 148 170 CFO bef. WC change 89 146 194 187 207

Net interest income (exp.) (6) (6) (8) (7) (7) (8) Change in working cap 21 45 (13) (29) 10

Associates (4) (1) (2) (2) (2) (2) Cashflow from operation 110 191 181 157 217

Exceptionals/others 0 0 0 0 0 0 CAPEX (28) (47) (78) (50) (50)

Profit before tax 20 86 126 120 139 160 Free cash flow 81 144 103 107 167

Tax expenses (14) (24) (39) (38) (43) (50) Dividends 0 0 27 25 29

Minority interest 2 (2) 1 1 1 1 Balance sheet adj. (29) (16) (266) (173) (186)

Net profit 5 64 85 81 94 109 Sharse issued (1) 0 0 0 0

Dividends 0 0 27 25 29 34 Others 0 0 0 0 0

Diluted EPS (RMB) 0.00 0.01 0.02 0.02 0.02 0.02 Net cash flow 51 128 (136) (41) 11

Net cash (debt) start (204) (153) (25) (161) (202)

Balance sheet Net cash (debt) at year-end -153 -25 -161 -202 -192

Year to Mar (US$ Mn) FY14A FY15A FY16A FY17E FY18E FY19E

Cash & equiv 44 46 69 63 105 79 Ratios

Trade receivables 316 320 347 381 405 441 Year to Mar (US$ Mn) FY14A FY15A FY16A FY17E FY18E

Other receivables 0 0 0 0 0 0 Growth rate (%)

Inventories 597 595 633 685 711 781 Revenue 11.4% 16.1% 6.2% 6.2% 6.2%

Other current assets 0 1 43 43 43 43 EBITDA 109.5% 100.3% 37.4% -2.3% 12.7%

Fixed assets 94 108 130 135 141 144 EBIT -350.6% 200.4% 45.3% -5.0% 14.7%

Intangible assets 196 185 165 159 148 136 Net profit -112.1% 1287.2% 32.1% -4.7% 15.7%

Investment, associates etc 80 59 57 57 57 57 Fully diluted EPS -112.2% 1298.0% 34.5% -4.7% 15.7%

Total assets 1,328 1,313 1444 1524 1609 1680 Margins (%)

Gross margin (reported) 29.3% 33.3% 35.5% 34.8% 35.2%

Account payables 207 315 288 310 327 356 EBITDA 3.2% 5.5% 7.1% 6.5% 6.9%

Other payables 0 11 9 9 9 9 EBIT 1.6% 4.1% 5.5% 5.0% 5.4%

Short-term debt 197 71 231 265 296 296 Net margin 0.2% 2.8% 3.5% 3.1% 3.4%

Other current liabs 2 6 9 9 9 9 Other ratios

Long-term debts 0 0 0 0 0 0 ROE (%) 0.5% 7.3% 9.7% 9.1% 10.2%

Deferred tax and others 48 28 25 25 26 27 ROA (%) 0.3% 4.9% 6.2% 5.5% 6.0%

Other long-term liabs 0 0 0 0 0 0 Net gearing (%) 17.5% 2.9% 18.3% 22.3% 20.3%

Total liabilities 453 432 562 617 667 697 Interest coverage (x) -4.9 -16.1 -17.8 -19.6 -21.2

Receivables days 61.3 50.5 49.8 51.2 52.1

Share capital 7 7 7 7 7 7 Payables days 53.9 75.0 66.8 66.8 66.8

Reserves 854 867 871 896 930 972 Inventory days 155.7 141.5 146.6 147.9 145.3

Shareholders' equity 861 874 877 903 937 979 Effective tax rate (%) -68.1% -27.6% -31.3% -31.3% -31.3%

Minorities 15 7 4 4 4 4

Total equity 875 881 882 907 942 983

Net cash (debt) -153 -25 -161 -202 -192 -218

Page 6 / 7

Exhibit 8: Peers comparison

Exhibit 1:

Pork

products

sold in

supermark

et counters

Source: Bloomberg, CIRL estimates

Exhibit 9: Pou Sheng’s 12 month Forward P/E Ratio

Exhibit 1:

Pork

products

sold in

supermark

et counters

Source: Bloomberg, CIRL

Risk Factors

Downside risks include: 1) Nike and Adidas sales slowdown in China; 2) excess

inventory in distribution channels; 3) rising overheads; 4) increasing competition

from international and PRC peers, 5) slower than expected ramp up in PCG Bro’s

China business & 6) coporate governance issue.

0

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Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

avg.-1std.

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+1std.

a

--1std.

bloomberg Mkt Cap Price Share Price Movement (%) PER (x) Yield (%)

code (HKD mn) (HKD) 3M YTD FY14 FY15 FY16 FY17E FY18E FY14 FY15 FY16 FY17E FY18E

PRC - Sportswear peers

LI NING CO LTD 2331 HK 12,562 5.77 13.6 18.5 -9.4 17.0 46.2 23.4 15.7 0.1% 0.0% 0.1% 0.1% 0.6%

ANTA SPORTS PROD 2020 HK 78,911 29.40 36.4 27.5 35.7 31.5 28.5 20.7 17.2 1.5% 2.0% 2.3% 2.6% 3.2%XTEP INTL 1368 HK 7,105 3.20 8.5 (1.0) 12.0 9.5 11.8 9.9 9.3 4.4% 4.4% 5.9% 6.4% 6.5%

361 DEGREES 1361 HK 5,851 2.83 13.7 (5.7) 10.0 9.9 10.0 9.0 7.8 2.5% 3.1% 4.1% 6.3% 4.6%

HOSA INTL LTD 2200 HK 3,985 2.39 (2.4) (9.8) 12.8 - - 12.8 12.1 4.3% 2.8% 0.0% 0.0% 0.0%HONMA GOLF LTD 6858 HK 4,416 7.25 (1.0) (19.4) - - 12.8 17.2 12.4 3.0% 3.0% 0.0% 4.4% 2.1%YUE YUEN IND 551 HK 56,888 34.50 7.8 22.6 19.0 17.7 15.2 15.2 12.9 4.1% 4.1% 3.3% 3.9% 7.2%

Average 21,253 9.6 4.1 17.9 17.1 20.7 15.5 12.5 2.8% 3.2% 3.1% 3.9% 4.0%

POU SHENG INTL 3813 HK 7,901 1.48 (2.6) (33.6) 218.8 15.6 11.6 12.2 10.5 0.0% 0.0% 2.7% 2.5% 2.9%

International - Sportswear peers

NIKE INC -CL B NKE US 751,889 458.08 11.0 15.2 39.9 33.2 27.4 24.4 24.1 0.7% 0.8% 0.9% 1.1% 1.2%

ADIDAS AG ADS GR 372,331 1,779.63 9.7 29.5 66.1 57.5 44.1 29.6 24.5 0.9% 0.7% 0.8% 0.9% 1.3%

UNDER ARMO-C UA US 59,937 130.32 (7.3) (33.8) - - 28.3 51.6 36.0 0.0% 0.0% 0.0% 0.0% 0.0%

LULULEMON ATH LULU US 63,629 465.43 18.9 (8.4) 31.8 33.0 32.9 27.8 25.9 0.0% 0.0% 0.0% 0.0% 0.0%

PUMA SE PUM GR 49,320 3,269.99 (2.1) 43.1 76.1 147.7 95.4 42.6 31.4 0.2% 0.2% 0.1% 0.2% 0.3%

ASICS CORP 7936 JP 24,917 124.61 (7.3) (24.4) 19.2 37.5 25.7 21.9 19.2 0.8% 0.9% 1.2% 1.3% 1.4%

MIZUNO CORP 8022 JP 6,202 46.67 3.3 16.2 33.6 28.2 33.4 55.5 46.6 1.7% 1.6% 1.4% 1.5% 1.5%

COLUMBIA SPORTSW COLM US 31,661 453.93 6.4 (0.5) 32.4 25.2 22.3 20.7 19.1 0.8% 1.0% 1.1% 1.2% 1.3%

Average 86,857 3.1 3.1 42.7 51.8 38.7 34.3 28.3 0.8% 0.8% 0.9% 1.0% 1.2%

POU SHENG INTL 3813 HK 7,901 1.48 (2.6) (33.6) 218.8 15.6 11.6 12.2 10.5 0.0% 0.0% 2.7% 2.5% 2.9%

Sportswear distributors

ABC-MART INC 2670 JP 35,485 429.95 (5.1) (8.0) 21.8 20.4 19.3 17.8 17.3 0.9% 0.9% 1.2% 1.9% 2.1%

CALERES INC CAL US 8,333 193.84 (5.0) (24.5) 18.1 14.9 12.6 12.2 11.4 1.1% 1.2% 1.2% 1.1% 1.2%

FOOT LOCKER INC FL US 48,408 368.67 (34.4) (33.5) 17.0 13.7 11.1 9.9 9.3 1.5% 1.7% 1.9% 2.1% 2.3%

DSW INC-CL A DSW US 10,064 125.78 (13.8) (29.0) 8.7 9.9 10.9 11.5 11.1 1.5% 3.0% 4.6% 4.9% 5.0%

GENESCO INC GCO US 4,054 206.90 (46.9) (57.4) 5.2 5.5 6.1 6.7 6.8 0.0% 0.0% 0.0% 0.0% 0.0%

FINISH LINE-A FINL US 3,938 98.09 (10.0) (33.3) 7.7 7.7 10.6 10.2 11.1 1.6% 2.3% 2.5% 2.8% 3.2%

DICK'S SPORTING DKS US 23,642 210.19 (34.5) (49.4) 10.1 9.7 9.4 8.8 8.8 1.8% 1.8% 1.9% 2.0% 2.3%

JD SPORTS FASHIO JD/ LN 35,396 36.37 (20.8) 13.6 54.9 43.5 27.4 21.3 16.1 8.7% 10.2% 12.2% 14.4% 15.5%

Average 21,165 (21.3) (27.7) 17.9 15.7 13.4 12.3 11.5 2.4% 3.0% 3.6% 4.2% 4.5%

POU SHENG INTL 3813 HK 7,901 1.48 (2.6) (33.6) 218.8 15.6 11.6 12.2 10.5 0.0% 0.0% 2.7% 2.5% 2.9%

Page 7 / 7

Rating Policy

Rating Definition

Stock Rating Buy Outperform HSI by 15%

Neutral Between -15% ~ 15% of the HSI

Sell Underperform HSI by -15%

Sector Rating Accumulate Outperform HSI by 10%

Neutral Between -10% ~ 10% of the HSI

Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected]

Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]

Lewis Pang Senior Research Analyst (852) 2235 7847 [email protected]

Wilfred Yuen Research Analyst (852) 2235 7131 [email protected]

Chloe Chan Research Analyst (852) 2235 7170 [email protected]

Johnny Yum Research Assistant (852) 2235 7619 [email protected]

Analyst Certification

I, Hayman Chiu, Research Director of Cinda International Research Limited., hereby certify that all of the views

expressed in this report accurately reflect my personal views about the subject company or companies and its or their

securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the

specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions

contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International

Research Limited cannot and does not warrant the accuracy or completeness of any such information and analysis.

The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients

should understand and comprehend the investment objectives and its related risks, and where necessary consult their

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forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable

and mutable situation, so may contain uncertainty. Any opinions expressed in this report are subject to change without

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