Giordano - the DBS Vickers Securities Equities Research

Hong Kong / China Results Snapshot
Giordano
Bloomberg: 709 HK | Reuters: 0709.HK
DBS Group Research . Equity 26 March 2010
Margin rebuilding effort paying off
BUY HK$2.48
(Upgrade from Hold)
Price Target : 12-month HK$3.25
(Prev HK$2.35)
Reporting
Period
FY 2009
Performance Mkt Cap FY EPS
(HK$)
Above HK$3,699m
expectation US$477m
12/09A
12/10F
12/11F
0.193
0.218
0.241
EPS Gth
Pre-Ex
-0.5%
13.0%
10.3%
EPS
Revision
n.a.
up 39%
up 31%
PE
(x)
12.8
11.4
10.3
PBV
(x)
1.8
1.7
1.6
Div Yield
(%)
6.5
7.0
7.8
Result Summary
FY Dec (HK$m) 2008 2009 chg (%)
Total Revenue 4,710 4,233 (10.1)
Gross profit 2,362 2,175 (7.9)
Profit from operation 330 320 (3.0)
Pre-tax profit 381 363 (4.7)
Attrib. profit (cont' operation) 290 288 (0.7)
EPS (HK$) - cont' operation 0.194 0.193 (0.5)
DPS (HK$) 0.095 0.16 68.4
Gross margin (%) 50.1% 51.4% 1.2%
Operating margin (%) 7.0% 7.6% 0.6%
Price Relative
HK$
Relative
Index
4.90
4.40
204
184
3.90
164
3.40
144
124
2.90
104
2.40
84
1.90
64
1.40
44
0.90
24
2006 2007 2008 2009 2010
Giordano (LHS) Relative HSI INDEX (RHS)
Source: Company, DBS Vickers, Bloomberg
At a Glance
• FY09 result beat expectations on stronger margins; total
payout reached 83% with resumption of special dividend
• Positive trends should continue into 2010 as efforts to
rebuild margins continue to pay off
• Raised earnings, and TP to HK$3.25. Upgrade to BUY for
improving earnings outlook and attractive yield
Result Highlights
Giordano’s flat FY09 earnings implied 2H09 earnings jumped
over 130%, way above expectations. Sales were still weak, but
SSS growth recovered to 1.8% in 2H09 (vs -9.2% in 1H09).
The largest earnings swing came from margins – retail gross
margin surged 6.6ppt h-o-h to 56.7% in 2H09 with less
discounting and better supply chain management. Operating
expenses, specifically rental (through store consolidation), and
labour (hiring freezes) also fell, by 9.6%, with 2H09 operating
margin at 11.4%, higher than pre-financial crisis levels. The
resumption of special dividend (suspended in FY08) was a
pleasant surprise, with full year payout reaching 83% and yield
at 6.5%. Considering Giordano’s strong cash position
(HK$750m net cash) and prudent capex (HK$150-200m in
FY10), the high payout is likely to be sustainable.
Recommendation
The trend looked good for Jan-Feb 2010 – sales have not yet
recovered significantly, but gross profit at most of its major
markets continued to register double-digit growth. And given
an improving macro environment, SSS growth is likely to
recover. Coupled with continuous effort to optimize costs
(supply chain and process re-engineering), these should help
offset looming pressure on raw material costs with its decent
margins expected to be sustainable. In terms of expansion,
Giordano is still focused on China (15% store expansion there)
with emphasis on second tier and smaller cities, while
maintaining a prudent stance for other markets, especially
higher-cost ones such as HK. After imputing stronger margins,
we raised FY10-11F earnings by 31% - 39%. Upgrade to BUY
with a higher TP of HK$3.25, based on 15x FY10 PE.
ANALYST: Alice Hui, CFA +852 2971 1960
alice_hui@hk.dbsvickers.com
In Singapore, this research report or research analyses may only be distributed to Institutional Investors,
Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.
www.dbsvickers.com
Refer to important disclosures at the end of this report
ed-SGC / sa- DC

Results Snapshot
Giordano
Result summary & comments
FY Dec (HK$m) FY08 FY09 yoy chg
Comment
(%)
Segmental
Turnover by market
PRC 1,689 1,633 (3) Turnover in China still posted mild decline in Jan-Feb 10
but gross profit continued to grow
Hong Kong 850 775 (9) Affected by closure of 7 high-cost locations
Taiwan 634 555 (12) Despite sales decline (net closure of 18 stores), profit
turnaround recorded in 2H for Taiwan
Singapore 368 310 (16) A smaller decline of 13% in local curr terms for
Singapore
Australia 218 180 (17) Affected by store consolidation
Others 496 460 (7) Has decided to completely exit from Japan in 2010
Retail & Distribution 4,255 3,913 (8)
Export & licensing 501 350 (30) Export affected by global financial crisis
Manufacturing & others 119 137 15
Inter-segment (165) (167) 1
Total turnover 4,710 4,233 (10)
Comp store sales growth (yoy)
PRC 6.1% -7.1% SSS drop narrow to 4.5% in 2H09
Hong Kong -1.7% -1.2% SSS in HK recovered to positive 7.2% in 2H09
Taiwan -3.2% -1.8% Taiwan posted 7.6% growth in SSS in 2H
Singapore -7.7% -4.7% Despite negative SSS, gross margin expanded in
Singapore
Australia 0.2% -3.6% Australia saw signficant gross margin improvement in
Jan-Feb 10
Overall -1.5% -3.7% Overall SSS recovered to 1.8% in 2H09
Comp store gross profit gw (yoy) -4.7% -1.2% 2H09 comp store gross profit surged 13.1%
Profit & Loss
Turnover 4,710 4,233 (10)
Gross profit 2,362 2,175 (8)
Other income 141 110 (22)
Distribution expense (1,680) (1,545) (8) Rental cost down 5.5%; labour cost down 8.8%
Administration (168) (169) 1
Other operating expense (325) (251) (23)
Operating profit 330 320 (3)
Disposal gain 17 0 (100)
Finance expense (2) (1) (50)
Associates & JV 36 44 22 Korea contribution increased from HK$22m in FY08 to
HK$38m
Pretax profit 381 363 (5)
Tax (82) (64) (22) Lower profit contribution from higher tax regime
Discontinued operation 18 0 (100)
Minority interest (6) (11) 83
Net profit 311 288 (7)
Net profit - continued operation 290 288 (1)
Source: Company, DBS Vickers
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Results Snapshot
Giordano
Result summary & comments (Continued)
FY Dec (HK$m) FY08 FY09 yoy chg
(%)
Comment
EPS (HK$) 0.208 0.193 (7)
EPS (HK$) - cont operation 0.194 0.193 (1)
DPS (HK$) 0.095 0.160 68 Payout reached 83%
Gross margin (%) 50.1% 51.4% 1.2%
Operating margin (%) 7.0% 7.6% 0.6%
Key Balance Sheet & Cash Flow Items
DOS Inventory 23 25 Inventory remained healthy
Net cash 454 750
Net cash per share (HK$) 0.30 0.50
Source: Company, DBS Vickers
PE band chart
PB band chart
Share Price (HK$)
8
6
4
2
0
Jan-99
Aug-99
Mar-00
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Sep-03
Apr-04
Nov-04
Jun-05
Jan-06
Aug-06
Mar-07
Oct-07
May-08
Dec-08
Jul-09
Feb-10
33x
25x
18x
10x
3x
Share Price (HK$)
9
8
7
6
5
4
3
2
1
0
Jan-99
Aug-99
Mar-00
Oct-00
May-01
Dec-01
Jul-02
Feb-03
Sep-03
Apr-04
Nov-04
Jun-05
Jan-06
Aug-06
Mar-07
Oct-07
May-08
Dec-08
Jul-09
Feb-10
5.8x
4.5x
3.2x
2.0x
0.7x
Source: Bloomberg, DBS Vickers
Source: Bloomberg, DBS Vickers
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Results Snapshot
Giordano
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Results Snapshot
Giordano
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