IT Ltd (999 HK)

Transcription

IT Ltd (999 HK)

Initiating Coverage, 15 Apr 2013
I.T Ltd (999 HK)
Buy
Consumer Cyclical - Retail
Market Cap: US503m
Target Price:
Price:
HKD4.70
HKD3.18
Macro
I.T’s On Sale!
Risks
Growth
Value
IT Ltd (999 HK)
Price Close
Relative to Hang Seng Index (RHS)
107
85
3.6
79
3.4
74
3.2
68
3.0
63
2.8
20
18
16
14
12
10
8
6
4
2
57
Avg Turnover (HKD/USD)
Cons. Upside (%)
Upside (%)
52-wk Price low/high (HKD)
Free float (%)
Shareholders (%)
Sham Kar Wai
Templeton Asset Management Ltd.
JP Morgan Chase & Co.



Source: Bloomberg
4.88m/0.64m
28.6
47.7
2.95 - 4.40
0.37
60.6
10.1
7.0
Shariah compliant

Greater China’s leading fashion retailer. I.T currently has over 600
POS worldwide and is a dominant fashion apparel player in Hong Kong.
It also has a strong foothold in Taiwan and a growing presence in China.
Given that, we are positive on its medium- to long-term outlook.
Earnings set for rebound after poor FY2/13. Since 2012, the Group
has embarked on an aggressive inventory-clearing strategy via heavy
retail discounts, which eroded its GPM and pummeled its share price. We
expect its upcoming FY2/13F earnings for the year ending 29 Feb 2013
to dive by 39% y-o-y but project a 60% y-o-y rebound in FY2/14F,
underpinned by a low base and improving inventory levels. This will be a
catalyst for a revaluation and may stage a rebound in I.T’s stock price.
Unique business model. I.T prides itself on its unique multi-brand
(international and in-house brands), multi-platform (multi-brand and
single brand stores) retail model which enables it to tap into a wide range
of customers both in terms of taste and affordability.
China-focused expansion strategy. The Group will focus on China for
its future expansion while maintaining its dominance in Hong Kong. I.T
currently has 304 POS in China – 213 self-operated, 16 through 50/50
JVs (FCIT China) and 75 through a franchise model. Meanwhile in Hong
Kong, it has 287 self-operated POS and 10 POS under 50/50 JVs (seven
FCUK IT and three ZIT H.K.) equating to a total of 297 POS.
Forecasts and Valuations
Feb-11
Feb-12
Feb-13F
Feb-14F
Feb-15F
3,834
5,742
6,742
7,491
8,235
Net income to ord equity (HKDm)
388
471
289
463
527
Recurring net profit (HKDm)
388
471
289
463
527
Recurring net profit growth (%)
54.1
21.5
(38.7)
60.3
14.0
Core EPS (HKD)
0.33
0.39
0.24
0.38
0.43
DPS (HKD)
0.15
0.15
0.09
0.15
0.17
5.4
Total turnover (HKDm)
Eugene Mak +852 2103 9202
Dividend Yield (%)
4.6
4.8
2.9
4.7
[email protected]
Core P/E (x)
9.6
8.2
13.5
8.5
7.4
Return on average equity (%)
23.3
22.9
12.1
17.4
17.4
P/B (x)
2.06
1.71
1.56
1.40
1.21
8.3
10.8
17.5
2.4
6.2
5.74
4.47
5.58
3.45
3.18
P/CF (x)
EV/EBITDA (x)
Net debt to equity (%)
Ours vs consensus EPS (%)
net cash
net cash
17.2
net cash
net cash
(17.5)
(4.7)
(12.2)
Source: Company data, RHB Estimates
See important disclosures at the end of this report
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0
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0
0
We initiate coverage on I.T Ltd. (I.T) with a BUY rating and TP of .
0
HKD4.70, implying an upside potential of 48%. Our TP is derived from 0
12.5x FY2/14F, in line with its historical 3-year mean P/E. The stock is 0
currently trading at an undemanding FY2/14F P/E of 8.5x and close to its
52-week low, which we think has already priced in most, if not all, of the
bad news. When I.T reports its FY2/13 results in May, we expect it to: i)
report a 39% fall in earnings but ii) a 1Q improvement in inventory and
gross margins (GPM), which could act as a share price catalyst.
Feb-13
90
3.8
Dec-12
4.0
Oct-12
96
Aug-12
101
4.2
Jun-12
4.4
Apr-12
Vol m
4.6
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
Powered by Enhanced Datasystems’ EFATM Platform
IT Ltd (999 HK)
15 Apr 2013
SWOT Analysis
 A leader in the apparel retail sector in the region.
 Increasing
competition in
China with other
multi-brand
operators as
well as
international
brands
 Multi-brand/layer strategy targeting different
consumer segments
 Seasoned management with unmatched market
knowledge and foresight in fashion
 Still significant
potential in the
long run in
China retail
business
 Increasing
focus in inhouse brands in
China which
have higher
margins than
international
brands
 Extend
business to
department
store operations
allowing
synergistic
effects
Figure 1
 Susceptible to rising rental and staff costs
 Inventory highly sensitive to over stocking
 Risk of loss making in China as China operating
margins and efficiency remains weaker than Hong
Kong
Figure 2
P/E (x) vs EPS growth
P/BV (x) vs ROAE
-8%
4
-25%
2
-43%
0
-60%
P/E (x) (lhs)
EPS growth (rhs)
1.5
15%
1.0
10%
0.5
5%
0.0
0%
P/B (x) (lhs)
Jan-15
6
20%
Jan-14
10%
2.0
Jan-13
8
25%
Jan-12
28%
2.5
Jan-11
10
Jan-15
45%
Jan-14
12
Jan-13
63%
Jan-12
80%
14
Jan-11
16
Return on average equity (rhs)
Company Profile
The company is a leading operator in apparel retail and wholesale fashion apparel, focusing on the Greater China region. I.T currently
has over 600 POS (308 in Hong Kong/Macau, 229 in China, 20 in Taiwan and 47 overseas) and has a growing presence in China. I.T
prides itself on its unique multi-brand, multi-platform retail model which enables it to tap into a wide range of customers both in terms of
taste and affordability. The Group’s brands are mainly classified as international, in-house or licensed brands. International brands by
which the Group sources mainly from Europe such as: Balanciaga, Alexander McQueen, YSL, etc. In-house brands include izzue,
b+ab, 5cm, etc. I.T also acts as licensee for some international brands such as MLB and Hyoma.
2
IT Ltd (999 HK)
15 Apr 2013
Financial Exhibits
 We expect earnings to recover from FY14 on
stable revenue growth coupled with
progressive GPM recovery.
Profit & Loss (HKDm)
Feb-11
Feb-12
Feb-13F
Feb-14F
Total turnover
3,834
5,742
6,742
7,491
8,235
Cost of sales
(1,405)
(2,202)
(2,737)
(2,968)
(3,197)
Gross profit
Gen & admin expenses
Other operating costs
Operating profit
Operating EBITDA
Depreciation of fixed assets
Amortisation of intangible assets
Operating EBIT
Net income from investments
Feb-15F
2,429
3,540
4,004
4,523
5,038
(1,958)
(2,962)
(3,643)
(3,942)
(4,375)
(8)
463
(3)
575
(6)
355
-
-
581
663
1,127
597
819
736
981
(127)
(217)
(370)
(390)
(6)
(26)
(10)
(10)
(11)
463
575
355
581
663
4
(453)
16
4
(2)
4
Interest income
5
6
6
8
6
Interest expense
(3)
(12)
(21)
(10)
(8)
Pre-tax profit
481
574
338
582
664
Taxation
(93)
(101)
(47)
(116)
(133)
Minority interests
(0)
(2)
(2)
(3)
(4)
Profit after tax & minorities
388
471
289
463
527
Net income to ord equity
388
471
289
463
527
Recurring net profit
388
471
289
463
527
Cashflow (HKDm)
Feb-11
Feb-12
Feb-13F
Feb-14F
Feb-15F
Operating profit
463
575
355
581
663
Depreciation & amortisation
134
243
381
400
464
Change in working capital
(97)
(363)
(488)
679
(443)
Other operating cashflow
Operating cashflow
Interest paid
Tax paid
Cashflow from operations
Capex
Other investing cashflow
25
34
20
24
25
525
489
268
1,684
710
(3)
(12)
(21)
(10)
(8)
(71)
(118)
(24)
(58)
(66)
451
359
223
(489)
(392)
(467)
1,616
(589)
(19)
(38)
(508)
(430)
(462)
(581)
(603)
Dividends paid
(88)
(157)
(191)
(136)
(195)
Increase in debt
267
20
399
(600)
(100)
26
53
-
Cashflow from financing activities
204
(85)
208
(736)
Cash at beginning of period
622
776
627
590
889
Total cash generated
147
(155)
(31)
299
(262)
Cashflow from investing activities
Other financing cashflow
Forex effects
Implied cash at end of period
7
6
776
627
6
635
(608)
8
6
0
(6)
590
0
(295)
-
-
889
626
3
IT Ltd (999 HK)
15 Apr 2013
Financial Exhibits
Balance Sheet (HKDm)
Feb-11
Feb-12
Feb-13F
Feb-14F
Total cash and equivalents
776
627
590
889
626
Inventories
737
1,238
1,820
1,199
1,696
Accounts receivable
121
155
207
222
244
Other current assets
239
240
337
370
398
1,873
2,260
2,955
2,679
2,964
Total current assets
Total investments
Feb-15F
64
118
135
112
107
Tangible fixed assets
926
1,163
1,290
1,529
1,699
Intangible assets
371
373
378
383
389
Total other assets
51
78
88
99
109
Total non-current assets
1,412
1,732
1,890
2,123
2,304
Total assets
3,286
3,992
4,846
4,802
5,268
Short-term debt
215
184
257
157
157
Accounts payable
361
488
607
658
709
Other current liabilities
437
562
662
749
810
1,012
1,235
1,525
1,564
1,676
379
437
763
363
263
51
52
64
72
76
430
489
827
434
338
1,442
1,723
2,352
1,998
2,014
120
122
123
124
124
Retained earnings reserve
1,727
2,149
2,373
2,684
3,134
Shareholders' equity
1,847
2,271
2,496
2,807
3,257
Total current liabilities
Total long-term debt
Other liabilities
Total non-current liabilities
Total liabilities
Share capital
Minority interests
(4)
(2)
(3)
(3)
Other equity
(0)
(0)
(0)
(0)
(4)
0
Total equity
1,843
2,269
2,493
2,804
3,254
Total liabilities & equity
3,286
3,992
4,846
4,802
5,268
Feb-11
Feb-12
Feb-13F
Feb-14F
Feb-15F
Valuation Ratios
PER (Core basic) (x)
Dividend yield (%)
P/BV (x)
9.7
4.6
8.3
4.8
13.6
2.9
8.5
4.7
2.1
1.7
1.6
1.4
28.0
49.7
17.4
11.1
7.5
5.3
1.2
Growth
Revenue (%)
9.9
Operating profit (%)
57.5
24.2
-38.3
63.6
14.0
Core net profit (%)
54.1
21.5
-38.7
60.3
14.0
Per Share Data
HKD
EPS (Core basic)
0.33
0.39
0.24
0.38
0.43
DPS
0.15
0.15
0.09
0.15
0.17
CFPS
0.38
0.30
0.18
1.31
0.51
BV/S
1.54
1.86
2.03
2.27
2.64
Financial Ratios
 We forecast GPM to recover on better
inventory turnover days from FY2/14
Gross margin (%)
63.3
61.7
59.4
60.4
61.2
Operating margin (%)
12.1
10.0
5.3
7.8
8.0
Core net margin (%)
10.1
8.2
4.3
6.2
6.4
Return on asset (%)
14.8
13.0
6.5
9.6
10.5
Return on equity (%)
23.3
22.9
12.1
17.4
17.4
Current ratio (x)
1.9
1.8
1.9
1.7
1.8
32.2
27.4
40.9
18.5
12.9
net cash
net cash
17%
net cash
net cash
147
164
204
186
165
AR T/O (days)
11
9
10
10
10
AP T/O (days)
66
70
73
78
78
Total debt/equity (%)
Net debt/equity (%)
Inventory T/O (days)
4
IT Ltd (999 HK)
15 Apr 2013
Valuation
Battered Fashion Wear Leader in Vogue
Initiate BUY with HKD4.70 TP. We initiate coverage on I.T with a BUY rating and
HKD4.70 TP, which implies a potential upside of 48%. Our TP is derived from a
target FY2/14F P/E of 12.5x and an EPS of HKD0.38, in line with the counter’s
historical mean forward P/E since Jan 2010. Our target P/E for the counter is
premised on: i) I.T is a leading apparel retailer in the Greater China region, with a
dominant position in Hong Kong, an established foothold in Taiwan and a growing
presence in China, ii) the Group operates through a unique multi-brand, multiplatform business model and maintains a good balance of in-house and leading
international brands, which we believe will help its long-term sustainable growth as
well as maintain its leading position, iii) we remain positive on the Group’s growth in
China given the increasing brand awareness and presence in the region coupled with
the economy’s long-term growth potential.
BUY on weakness as bad news likely priced in. Since 2012, I.T has embarked on
an aggressive inventory-clearing strategy through heavy retail discounts and
promotions which ate into its GPM. This is likely to result in its FY2/13F earnings
plunging by 39% y-o-y, in our forecasts. As a result, its share price dropped 28% and
underperformed the HSI by 32% in the past 12 months. It is also trading close to its
52-week low of HKD2.94. However, we think that most, if not all, of the bad news has
already been priced in. In addition, we expect a significant rebound in earnings for
FY2/14F on margin recovery as inventory level improves. This will be a catalyst for a
revaluation and may stage a rebound in I.T’s stock price.
Unjustified discount to peers. Compared to other Hong Kong-listed apparel
retailers, I.T currently trades at 8.5x FY2/14 P/E, slightly below the current sector
average of 9.5x. Given its dominant market position in Hong Kong and growth
potential in China, we believe that the current valuation is unjustified. Our target
12.5x FY2/14 P/E puts I.T in the similar valuation as other leading high-end apparel
retail peers such as Trinity (891HK, NEUTRAL, TP:HKD 4.37) and YGM (375 HK,
BUY, TP:HKD 23.32), which are currently trade at 10.4x FY13F PE (Dec FYE) and
11.6x FY3/14F PE (March FYE) respectively.
Figure 3 The past three years’ one-year forward P/E band
10.00
9.00
+2SD =
23.1X
8.00
Share Price (HKD)
7.00
+1SD = 17.8X
6.00
5.00
Mean =
12.5X
4.00
3.00
-1SD = 7.3X
2.00
1.00
-2SD = 2.0X
0.00
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Source: RHB estimates, Bloomberg
5
IT Ltd (999 HK)
15 Apr 2013
Figure 4 Valuation comparables – HK/China apparel
Com pany
Ticker
I.T Ltd
999 HK
Price
3.18
HSI
21,773
HSCEI
10,441
CSI300
2,437
Mkt cap 3-m th avg
(US$m ) t/o (US$m )
503.2
0.7
PER Hist
(x) PER FY1 (x) PER FY2 (x)
13.5
Adjusted sector avg*
7.4
EPS FY2
YoY%
3-Yr EPS
Cagr (%)
PEG (x)
Div yld Hist Div yld FY1
(%)
(%) P/B Hist (x) P/B FY1 (x)
59.3
13.6
28.4
10.4
9.6
(0.8)
8.8
6.3
1.7
3.3
3.7
1.4
1.3
8.6
7.7
7.1
11.0
9.0
10.6
0.7
3.6
4.1
1.3
1.2
12.3
10.2
8.7
20.0
17.5
16.3
0.6
2.1
2.5
1.7
1.5
9.5
9.2
8.2
1.2
12.7
8.7
1.3
11.2
6.9
1.9
1.7
(4.3)
8.6
3.5
2.94
7.9
7.0
2.19
1.91
10.4
8.5
EPS FY1
YoY%
0.3
2.9
4.7
1.6
1.4
Bosideng Intl
3998 HK
2.28
2,352
4.0
10.1
10.4
9.6
Trinity Ltd
891 HK
3.49
776
3.5
11.1
10.4
9.1
6.7
14.3
10.1
1.03
6.6
6.7
1.74
1.91
China Outfitters
1146 HK
1.36
604
0.2
8.2
7.2
6.3
12.8
15.3
18.3
0.40
5.4
6.9
2.24
1.75
Ygm Trading
375 HK
22.55
482
0.2
13.5
11.6
9.2
16.0
26.2
19.0
0.61
22.4
5.2
2.66
2.22
Evergreen Intern
238 HK
1.44
176
0.2
7.0
8.2
8.2
(14.6)
0.0
(2.9)
N/A
15.4
6.5
0.79
0.74
China Lilang Ltd
1234 HK
4.51
698
1.5
6.9
7.6
6.8
(9.4)
12.1
4.4
1.73
9.8
8.8
1.81
1.72
Gross
m argin
Hist (%)
Net
m argin
Hist (%)
ROE Hist
(%)
ROE FY1
(%)
Sh px
1-m th %
Sh px
3-m th %
(18.9)
Figure 5 Valuation comparables – HK/China apparel (continued)
Com pany
I.T Ltd
Rev Hist
(US$m )
868.6
EV/
NP Hist
EV/ Ebitda Cur
(US$m ) Ebitda Hist
Yr
37.2
5.6
3.5
Net
gearing
Hist (%)
17.2
Net
gearing
FY1 (%) Unlev beta
0.0
0.9
59.4
4.3
ROIC Hist
(%)
12.1
17.4
(1.9)
HSI
15.4
13.5
12.4
(3.4)
(6.9)
HSCEI
15.1
14.9
(5.3)
(13.0)
CSI300
Adjusted sector avg*
Bosideng Intl
14.0
14.6
(4.1)
(6.1)
6.6
6.0
0.0
0.0
1.1
62.7
21.9
17.5
26.6
18.2
(2.6)
(10.9)
1,354
232
8.2
7.4
0.0
0.0
0.99
50.0
17.2
15.7
22.2
18.5
(7.7)
(4.2)
Trinity Ltd
361
70
8.2
7.1
0.0
0.0
1.19
78.1
19.3
10.8
16.1
14.8
(19.6)
(33.9)
China Outfitters
228
74
N/A
N/A
0.0
N/A
N.A
76.1
32.7
29.3
34.7
25.2
4.6
(15.5)
Ygm Trading
184
36
10.3
8.7
0.0
0.0
0.86
66.5
19.4
18.9
46.7
19.1
5.4
16.8
Evergreen Intern
121
25
1.3
1.6
0.0
0.0
1.22
65.4
20.7
9.7
12.4
8.6
5.9
(10.6)
China Lilang Ltd
451
101
5.1
4.9
0.0
0.0
1.40
40.2
22.4
20.4
27.5
22.9
(4.2)
(18.1)
*“N/A” entries excl. from calculations of averages
Source: RHBRI, Bloomberg
Based on 15 April 2013 closing prices
6
IT Ltd (999 HK)
15 Apr 2013
Earnings & Financials Analysis
Inventory Level is Key
Tough 1H13 as inventory clearing erodes GPM. I.T announced its 1H13 results on
30 Oct 2012 for the six-month period ended 31 Aug 2012. Despite a strong revenue
growth of 23.3% y-o-y to HKD2,965.3m in 1H13, overall GPM declined by 2.7 ppt yo-y to 59.6% and the SG&A cost-to-sales ratio remained at about 54%. The dip in
GPM was enough to cause net profit to shareholders to drop by 21.5% y-o-y to
HKD119.7m as the net margin declined 2.3 ppt y-o-y from 6.3% in 1H12 to 4.0% in
1H13. The declining bottomline, despite strong revenue growth, was the result of I.T’s
priority on clearing inventory through aggressive retail discounts and promotions –
retail discounts averaged at 50% off, and even up to 90% off during season-ending
clearance sales. In 1H13, the Group’s China sales saw the largest decline in GPM,
down by 8.3 ppts y-o-y, while its Hong Kong sales reported a 2.9 ppt y-o-y decline.
We assume that this was due to more aggressive discounts and promotions in China
compared to Hong Kong.
Challenges remain in 2H13. I.T’s inventory turnover days reached a lofty 197 days
in 1H13. Although this was significantly lower than that of its peers, such as >300
days for Trinity (891 HK), its products closely track the latest fashion trends, which
render its inventory highly sensitive to pile-ups. Based on its 3Q13 operational
update, we do not see the Group faring any better in 2H13 as its same-store sales
growth (SSSG) continues to slow down while aggressive discounting persists amid
high levels of inventory turnover days. We expect a weak 4Q13F in view of a weak
Dec 2012, given the high base effect from Dec 2011. Given these factors, inventory
turnover days will creep higher to 204 days by FY2/13F while revenue growth in
2H13F will slow down to 13.2% y-o-y to HKD3,776m and 2H13F GPM is expected to
decline slightly from 1H13’s level to 59.3%.
Figure 6 I.T’s inventory turnover days
Figure 7 I.T’s FY2/13 quarterly operational data
Same-store sales growth
220
Hong Kong
204
China
200
Japan
186
1Q13
1H13
3Q13
10.1%
8.0%
0.3%
5.3%
14.1%
12.9%
13.0%
13.0%
Please fill in the values above
to have them
entered in -19.3%
your report
14.5%
N.A.
Others
180
9M13
-8.5%
N.A.
N.A.
N.A.
N.A.
Hong Kong
62.2%
59.1%
58.3%
58.8%
China
60.8%
58.1%
59.1%
58.5%
Japan
66.8%
N.A.
60.7%
62.3%
Others
N.A.
N.A.
N.A.
N.A.
Overall
62.6%
59.6%
59.2%
59.5%
165
164
Gross margins
160
147
140
120
Title:
Source:
116
120
125
100
FY2/08
FY2/09
FY2/10
FY2/11
FY2/12
FY2/13F FY2/14F FY2/15F
Source: Company data, RHB estimates
Inventory levels to improve by 1H14F with gradual GPM recovery. I.T’s earnings
rebound will be determined by its GPM recovery, which is in turn pinned to the
Group’s ability to lower its inventory levels back to a relatively healthy level. Its
management has guided that it expects the first signs of major improvement in
inventory turnover days to be in Aug 2013 (late 1H13) through a combination of
continuous inventory clearing coupled with a much more disciplined inventory
ordering (ordering of inventory for FY2/14F starts at around 4Q13F) and effective
retail promotions. We forecast inventory turnover days to gradually improve starting
from 2Q14F, and to gradually decline from our expected peak of 204 days for
FY2/13F to 186 days for FY2/14F and 165 days for FY13F. With the lower inventory
days, we also expect overall GPM to recover from 59.4% in FY2/13F to 60.4% in
FY2/14F and 61.2% in FY2/15F.
7
IT Ltd (999 HK)
15 Apr 2013
EPS to decline 39% y-o-y in FY2/13F, then rebound by 59% y-o-y in FY2/14F.
Due to the GPM decline, we expect FY2/13F EPS to decrease by 39% y-o-y to
HKD0.24, despite a revenue growth of 17% y-o-y to HKD6,741.8m. However, with
the expected GPM improvement and stabilised revenue growth starting FY2/14F, we
expect EPS to rebound by 59% y-o-y for FY2/14F and 14% y-o-y in FYFY2/15F.
Gradual SSSG decline in FY2/13F, relatively healthier growth ahead. Despite the
Group’s aggressive discount and promotional strategy to drive volume sales, SSSG
slowed down in line with the general retail market, mainly due to the high base effect
from the year before, especially in the second half of CY2012. Going forward, we
expect SSSG to stabilise as the Group tunes down its aggressive promotional and
sales strategy, and operates from a more reasonable base from the year before.
Stable SG&A cost-to-sales ratio despite rising rental, labour costs. Despite
rising rental and staff costs, we expect the total SG&A cost-sales ratio to remain
relatively stable at 53%-54% of total revenue going forward. The Group, in its 1H13
results, showed its ability to control operating cost ratios despite rising costs and a
tough retail environment. Although we do expect continual hikes in rental and staff
costs, the rate of rental growth is expected to slow down in Hong Kong while
revenue-sharing terms in China should remain relatively stable going forward. The
increase of such costs should be partially-offset by a more prudent expansion
strategy in China, as well as stable revenue growth.
According to I.T’s management, the Group will continue to focus on increasing its
POS and expanding its exposure in China. We expect advertising and promotion
expenses growth to remain low, at 1% of revenue. Its main advertising and promotion
channels include magazines, billboards, celebrity PR events and fashion shows.
In addition, the Group’s operating costs in 1H13 and FY2/13F were inflated due to a
HKD9.4m non-cash loss from the forex-hedging facilities on its recent CNY loan
(another income component in its P&L). We expect the loss to narrow in 2H13F and
assume a minimal impact from the forex hedging going forward, which will help
operating margins.
Losses from JVs in FY2/13F, but back to the black the following year. I.T
operates a small portion of its POS through 50/50 JVs with other international retail
operators (French Connection and Zadig & Voltaire). The Group recently added a
new JV partner, namely the renowned Galaries Lafayette, to establish department
stores in China. Due to the increase in expense to set up a Beijing department store
(which will complete in 2H CY2013), the Group will incur a loss in its FY2/13F from its
JVs. However, once the department store is complete, expenses should decline and
correspondingly, its JVs should once again be profitable in FY2/14F.
FY2/13F net gearing to reach 17% but balance sheet remains solid. We expect
I.T’s net gearing (net debt-to-average equity) to worsen to 17% in FY2/13F, in
comparison with the Group’s historical net cash position due to its inventory build-up
and the decline in profit margins negatively impacting operating cashflow. It also took
new bank loans amounting to HKD396.8m to finance its expansion in China.
However, we expect its net gearing to fall back into the net cash territory as it lowers
its inventory level and profit margins recover. It will continue to target a cash position
of around HKD600m or above.
Figure 8 Revenue breakdown by region
100%
3%
4%
1%
4%
90%
80%
23%
25%
Figure 9 Operating profit breakdown by region
4%
10%
4%
10%
4%
9%
27%
26%
30%
27%
70%
100%
80%
60%
50%
50%
74%
30%
68%
61%
59%
57%
20%
10%
10%
12%
17%
100%
85%
30%
20%
10%
2%
7%
40%
71%
Title:
7%
Source:
28%
13%entered in y
31% fill in25%
Please
the values above to
have them
70%
60%
40%
5%
10%
90%
62%
62%
62%
63%
FY11
FY12
1H12
1H13
0%
0%
FY09
FY10
FY11
Hong Kong
FY12
China
1H12
Japan
Other
1H13
FY09
FY10
Hong Kong
China
Japan
Other
8
IT Ltd (999 HK)
15 Apr 2013
Figure 10 I.T’s staff expense-to-sales ratio
Figure 11 I.T's rental expense-to-sales ratio
%
18.5
%
21.0
18.0
20.5
17.7
20.1
17.5
17.3
17.2
17.0
Title:
Source:
20.6
18.0
Please20.0
fill in the values above to have them entered in y
20.0
17.0
19.4
19.5
16.8
19.3
19.2
FY2/14F
FY2/15F
16.5
16.5
18.8
19.0
18.5
15.9
16.0
18.5
15.5
18.0
15.0
17.5
14.5
17.0
FY2/08
FY2/09
FY2/10
FY2/11
FY2/12
FY2/13F FY2/14F FY2/15F
FY2/08
FY2/09
FY2/10
FY2/11
FY2/12
FY2/13F
Figure 12 Breakdown of 1H13 operating expenses
Employment
costs,
30.6%
Other,
36.6%
Advertising
and
promotions,
2.3%
Operating
lease
rentals,
30.6%
9
IT Ltd (999 HK)
15 Apr 2013
Figure 13 Semi-annual and annual profit & loss statement
Profit & Loss (HKDm)
Feb-11
Feb-12
Feb-13F
Feb-14F
Feb-15F
1H12
2H12
1H13
2H13F
Total Turnover
3,834.4
5,741.6
6,741.8
7,490.9
8,235.1
2,404.6
3,337.0
2,965.3
3,776.5
28.0%
49.7%
17.4%
11.1%
9.9%
23.3%
13.2%
y-o-y chg
Hong Kong
2,612.4
3,408.5
3,680.4
4,034.9
4,187.1
y-o-y chg
22.8%
30.5%
8.0%
9.6%
3.8%
1,455.8
% of total turnover
68.1%
59.4%
54.6%
53.9%
50.8%
60.5%
58.5%
614.0
930.4
China
1,024.8
1,544.5
2,258.1
2,544.3
3,008.0
y-o-y chg
34.2%
50.7%
46.2%
12.7%
18.2%
% of total turnover
26.7%
26.9%
33.5%
34.0%
36.5%
25.5%
Japan
43.5
560.0
504.0
539.3
577.0
247.4
y-o-y chg
N.A.
1187.4%
-10.0%
7.0%
7.0%
1,952.7
1,701.1
1,979.2
16.9%
1.4%
57.4%
52.4%
878.0
1,380.1
43.0%
48.3%
27.9%
29.6%
36.5%
312.6
266.1
237.9
7.5%
-23.9%
% of total turnover
1.1%
9.8%
7.5%
7.2%
7.0%
10.3%
9.4%
9.0%
6.3%
Other areas
153.7
228.6
299.3
372.5
462.9
87.4
141.3
120.1
179.2
y-o-y chg
46.5%
48.7%
30.9%
24.4%
24.3%
37.5%
26.8%
% of total turnover
4.0%
4.0%
4.4%
5.0%
5.6%
3.6%
4.2%
4.1%
4.7%
(1,405.5)
(2,201.7)
(2,737.3)
(2,967.7)
(3,197.0)
(906.8)
(1,294.9)
(1,198.5)
(1,538.8)
19.4%
56.6%
24.3%
8.4%
7.7%
2,428.9
3,540.0
4,004.4
4,523.2
5,038.1
y-o-y chg
33.5%
45.7%
13.1%
13.0%
11.4%
Gross Margin
63.3%
61.7%
59.4%
60.4%
Cost of goods sold
y-o-y chg
Gross Profit
SG&A and other opex
32.2%
18.8%
1,766.8
2,237.6
1,497.8
2,042.2
18.0%
9.6%
61.2%
62.3%
61.2%
59.6%
59.3%
(1,965.8)
(2,964.7)
(3,649.3)
(3,942.2)
(4,375.4)
(1,303.5)
(1,661.1)
(1,620.0)
(2,029.3)
% of sales
51.3%
51.6%
54.1%
52.6%
53.1%
54.2%
49.8%
54.6%
53.7%
Operating profit
463.1
575.3
355.1
581.1
662.7
194.3
381.0
146.8
208.3
y-o-y chg
57.5%
24.2%
-38.3%
63.6%
14.0%
-24.4%
-45.3%
Operating profit margin
12.1%
10.0%
5.3%
7.8%
8.0%
8.1%
11.4%
4.9%
5.5%
2.2
(5.6)
(15.0)
(2.6)
(2.9)
(2.6)
(3.0)
(8.2)
(6.8)
Income from JV
15.9
4.1
(2.0)
4.0
4.0
3.4
0.7
(3.5)
Pretax income
481.3
573.8
582.5
663.8
195.0
378.7
Pretax margin
12.6%
10.0%
5.0%
7.8%
8.1%
8.1%
11.3%
4.6%
5.4%
(93.1)
(100.7)
(47.3)
(116.5)
(132.8)
(43.3)
(57.4)
(13.9)
(33.4)
Effective tax rate
19.3%
17.5%
14.0%
20.0%
20.0%
22.2%
15.1%
10.3%
16.4%
Minority interest
(0.2)
(1.8)
(2.0)
(3.3)
(3.7)
0.7
(2.5)
(1.3)
Interest income (net)
Tax
338.1
Net profit to ord equity
387.9
471.3
288.7
462.7
527.3
y-o-y chg
47.7%
21.5%
-38.7%
60.3%
14.0%
Net margin
10.1%
8.2%
4.3%
6.2%
Core EPS - basic (HKD)
0.330
0.387
0.236
y-o-y chg
45.0%
17.4%
DPS (HKD)
0.146
0.154
y-o-y chg
39.0%
5.5%
135.0
1.5
203.1
(0.7)
152.4
318.9
6.4%
6.3%
9.6%
4.0%
4.5%
0.376
0.427
0.126
0.261
0.098
0.138
-39.1%
59.3%
13.6%
-22.2%
-47.3%
0.094
0.152
0.171
-39.1%
62.3%
12.6%
0.025
0.129
119.7
169.0
-21.4%
-47.0%
0.000
0.094
-100.0%
-27.3%
10
IT Ltd (999 HK)
15 Apr 2013
Growth Drivers & Forecasts
China Focused Growth Strategy
Greater China’s leading fashion retailer. The Group currently has over 600 POS
worldwide and is a dominant fashion apparel player in Hong Kong. It also has a
strong foothold in Taiwan and a growing presence in China. I.T prides itself on its
unique multi-brand, multi-platform retail model which enables it to tap into a wide
range of customers both in terms of taste and affordability. As the group is a
prominent player in Hong Kong and has a growing presence in China, we are positive
on its medium- to long-term outlook despite its recent challenges in FY2/13F.
Figure 14: I.T’s global POS coverage at 1H13 and FY2/12
Source: Company data
Maintaining dominance in Hong Kong. Despite the increasing competition, I.T
continues to maintain its dominance in Hong Kong as one of the leading fashion
brand retailers. As at end-1H13 (end-Aug 2012), the Group has 287 self-operated
POS and 10 POS under 50/50 JVs (seven FCUK IT and three ZIT H.K.) equating to a
total of 297 POS. We expect that in terms of available areas for expansion, future
sales area growth will be limited and we maintain a conservative approach in
forecasting its sales area growth in Hong Kong given that rental costs remain high
amid limited attractive retail space. However, we expect I.T to remain opportunistic
and will add new POS if locations and rental costs are favourable. The breakdown
between its international/in-house brands is about 50/50 and this ratio is expected to
remain relatively stable going forward.
Figure 15 Key parameters for I.T’s Hong Kong business
Retail revenue (HKD mn)
y-o-y change
SSSG
Self-operated retail area (sqf)
y-o-y change
Sales / sqf (HKD '000) *
FY2/09
FY2/10
FY2/11
FY2/12
FY2/13F
FY2/14F
FY2/15F
1H12
1H13
2,026.2
2,127.4
2,612.4
3,408.5
3,680.4
4,034.9
4,187.1
1,455.8
1,701.1
10.1%
5.0%
22.8%
30.5%
8.0%
9.6%
3.8%
4.5%
5.5%
13.5%
14.9%
3.3%
5.0%
5.0%
17.5%
8.0%
421,154
427,769
512,984
581,141
615,841
615,841
634,316
548,583
612,777
25.0%
1.6%
19.9%
13.3%
6.0%
0.0%
3.0%
5.66
Hong Kong operating Margin
Operating costs as % of sales
11.7%
5.03
5.82
6.43
6.24
6.55
6.75
-11.1%
15.7%
10.5%
-3.0%
5.0%
3.0%
60.5%
61.8%
62.9%
61.0%
58.6%
59.5%
60.0%
7.1%
12.3%
11.2%
10.5%
5.6%
7.9%
8.0%
8.1%
5.4%
53.4%
49.5%
51.7%
50.5%
53.0%
51.6%
52.0%
53.9%
53.7%
y-o-y change
Hong Kong gross margin
16.9%
2.97
2.89
-2.9%
62.0%
59.1%
Note *: all sales/sqf figures based on RHB estimates
11
IT Ltd (999 HK)
15 Apr 2013
China-focused expansion strategy. According to management, the Group’s future
expansion will be China-centric. As at end-1H13, I.T had 304 POS in China with 213
self-operated POS in the region, 16 POS through 50/50 JV (FCIT China) and 75 POS
through franchise models. The breakdown between its international/in-house brands
is about 40/60 and we expect the proportion of in-house brands (i.e. CHOCOLATE
and Aape) to increase. Though in-house brands generally have lower ASPs, they
command higher GPMs. This is a strategic response to the fact that ASPs in China
are generally higher than in Hong Kong due to various taxes, such as VAT and the
construction tax. The Group’s new POS in China will primarily be in first-tier cities and
prime second-tier cities, despite the heavy competition, as its brand positioning is
focused on fashion trends that are more readily embraced in such markets. In
addition, its multi-brand and multi-platform retail model enables it to open a lot more
POS in the same area compared to a single-brand retail model.
I.T’s China operations are run through three back offices situated in Shanghai,
Beijing and Guangzhou, with a managing director helming each one. The Group
targets to have its POS situated in shopping malls which generally provide more
room and project a grander image. Shopping malls also allow more flexibility for
brand building and store images.
Figure 16 Key parameters for I.T's China business
FY2/09
FY2/10
FY2/11
FY2/12
FY2/13F
FY2/14F
FY2/15F
1H12
1H13
578.1
706.4
938.9
1,426.6
2,108.8
2,386.1
2,826.3
564.5
813.2
N/A
22.2%
32.9%
51.9%
47.8%
13.1%
18.5%
23.6%
10.3%
15.3%
8.0%
12.1%
8.0%
8.0%
17.6%
12.9%
250,962
274,466
399,199
604,834
653,221
751,204
863,884
468,113
617,646
22.1%
9.4%
45.4%
51.5%
8.0%
15.0%
15.0%
y-o-y change
SSSG
Self-operated retail area (sqf)
y-o-y change
Sales / sqf (HKD '000)*
2.67
y-o-y change
2.75
3.07
3.17
3.42
3.52
3.63
3.0%
11.6%
3.1%
8.0%
3.0%
3.0%
Wholesale Revenue (HKD mn)
58.7
57.2
85.9
117.9
149.3
158.2
181.7
y-o-y change
N/A
-2.5%
50.2%
37.2%
26.7%
6.0%
14.9%
POS (franchise)
42
42
56
78
78
87
97
Additions (y-o-y)
-6
0
14
22
0
9
10
55.3%
58.7%
63.8%
62.5%
58.5%
59.3%
60.0%
China gross margin
44.1%
31.9%
1.21
1.32
9.2%
49.5
64.8
30.8%
63
75
12
66.4%
58.1%
China operating Margin
-9.8%
3.9%
14.0%
9.4%
2.5%
5.7%
6.0%
9.3%
1.2%
Operating costs as % of sales
65.1%
54.8%
49.8%
53.1%
56.0%
53.6%
54.0%
57.1%
56.9%
Note *: all sales/sqf figures based on RHB estimates
Profitability to continue to grow in Japan. I.T acquired a 90.27% stake in Nowhere
Group, Japan on 31 Jan 2011 for JPY230m (~USD2.5m), making it owners of the
“Bathing Ape” brand lines (A Bathing Ape, Bape, baby milo, BAPE STA, URSUS
BAPE and Mr. BATHING APE). Since the acquisition, it has also introduced a new
line called “Aape”, which sells items with lower ASPs. The Group has since
successfully turned the business in Japan around, with the formerly loss-making unit
posting a positive operating profit of HKD18.8m in 1H13. Its management believes
that there is still more room for operational efficiency as well as profitability to
improve. However, there are currently no plans for more POS in Japan. As at end1H13, I.T self-operates 23 POS in Japan, all under the Nowhere Group.
12
IT Ltd (999 HK)
15 Apr 2013
Figure 17 Key parameters for I.T’s Japanese operations
FY2/09
FY2/10
FY2/11
0.0
0.0
43.5
y-o-y change
POS (self-operated)
0
0
FY2/12
0.0%
FY2/15F
1H12
1H13
247.4
266.1
560.0
504.0
539.3
577.0
-10.0%
7.0%
7.0%
25
23
23
23
4
(2)
0
0
2.5%
6.5%
7.3%
7.3%
21
0.0%
FY2/14F
1187.4%
Additions (y-o-y)
Japan operating margin
FY2/13F
-16.4%
7.5%
22
23
1
-1.3%
7.1%
Overseas markets remain robust. As at end-1H13, I.T has 55 POS in other
overseas markets (20 self-operated POS in Taiwan, 10 self-operated POS and one
FCIT 50/50 JV POS in Macau, one self-operated POS in the USA and 23 franchise
POS in other parts of the world), which remain robust with strong revenue growth and
operating margins. I.T will continue to leverage on its in-house brands through the
franchise model and aims to increase the number of its POS in new markets which
include the Middle East, South East Asia, East Asia and North America.
Figure 18 Key parameters for other areas
Revenue (HKD mn)
y-o-y change
POS (Self-operated and franchise)
Additions (y-o-y)
Operating margin
FY2/09
FY2/10
FY2/11
FY2/12
FY2/13F
FY2/14F
FY2/15F
1H12
1H13
70.3
105.0
153.7
228.6
299.3
372.5
462.9
87.4
120.1
282.4%
49.3%
46.5%
48.7%
30.9%
24.4%
24.3%
36
38
47
52
54
56
58
9
2
9
5
2
2
2
-12.9%
15.8%
22.2%
25.3%
20.0%
22.0%
22.0%
37.5%
46
55
9
25.6%
20.9%
JV with Galeries Lafayette. To further increase the Group’s opportunities and
competitiveness, I.T has also entered into a 50/50 JV with internationally-renowned
operator Galeries Lafayette to establish and operate department stores under the
latter’s trademark in China. The first Galeries Lafayette department store will be
opened in Beijing in 2H CY2013. We believe I.T should be able to also benefit from
the JV as it will have easier access to its market through the location – the potentially
prime shopping area in Xidan, a commercial district in Beijing which is popular for its
trendy, youthful styles.
13
IT Ltd (999 HK)
15 Apr 2013
Company Background
A Leading Fashion Trendsetter
Multi-brand, multi-platform business model. The Group’s multi-brand and multiplatform business model provides maximum coverage and flexibility in retailing its
items. Its POS are divided between multi-brand and single-brand stores, showcasing
a portfolio of over 300 brands which include leading international names that are
sourced from abroad or via JVs with international operators (i.e. French Connection
and Zadig & Voltaire) as well as from official licensees. I.T also operates several wellestablished in-house brands. International brands are sold through multi- and singlebrand stores, while in-house brands are sold primarily through single-brand stores.
We are comfortable with the Group’s well-diversified sales mix given its large portfolio
of brands.
Figure 19 Brand portfolio of over 300 brands
International brands
Figure 20 Multi-brand store categories
In-house
brands
Licensed
brands
Name
Target Segment
I.T
Upscale men and
All international brands,
women (mainly
sophisticated, high-fashion,
women) apparel
Euorpean style
with ASP of
<HKD2,000-30,000
Alexander
McQueen,
Givenchy,
Bathing Ape,
Tsumori Chisato
i.t
Less up-scale than
I.T with ASP of
<HKD1,000
onwards
A stronger Japanese
influence, less extreme
designs in general, mainly
international brands with
some in-house brands
Beams Boy,
Camper, As
Know As,
Hyoma, Fred
Perry
ete!
Tailored to trendy
customers in their
late teens - thirties
Footwear and accessories
Anna Sui, FIN,
NIKE, Puma,
RAS
- Balanciaga
- Isabel
- izzue
- MLB
- Celine
- Marant
- b+ab
- Hyoma
- Marison Martin Margiela - Dior Homme
- 5cm
- de Rue
- Alexander McQueen
- Moncler
- tout a coup - X-Large
- Jil Sander
- Givenchy
- Mercibeaucoup
- Valentino
- Venilla
-suite
A Bathing
- YSL
- Thom Browne
-Ape
KATIE
JUDITH
- Tsumori Chisato
- A.P.C
- Fingercroxx
- Lanvin
- LOVE GIRLS
MARKETS
Style description
double-park Tailored for
Japanese and US street/hipcustomers from
hop wear with strong
teenagers onwards, urban/street style
generally low ASP
Brand
examples
Carhartt, Bathing
Ape, Levi, XLarge
Figure 21 IT's brand mix
100%
4.6%
3.4%
3.8%
3.5%
3.3%
3.4%
47.7%
47.0%
43.2%
38.6%
40.8%
40.0%
47.7%
49.6%
53.0%
57.9%
55.9%
56.6%
FY09
FY10
FY11
FY12
1H12
1H13
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
In-house
International
Licensed
14
IT Ltd (999 HK)
15 Apr 2013
Figure 22 Description of major I.T in-house brands
Name
Description
Approx. ASP
(HKD)
Izzue
- Established in 1999 and is currently in the forefront of HK's original creation and local design.
300-10,000
- The brand has strong Japanese and European aesthetics.
b+ab
- Launched in 1995, offering quality ladies fashion with a mass market approach.
300-7,000
- The brand is inspired by Japanese young women's chic and trendy styles
5cm
- Launched in 1998, 5cm is a unisex fashionable label that offers high-end men and ladies' collection.
300-8,000
- Designs focus on simplicity and minimalism with its signiture cuts.
:CHOCOLATE
- Launched in 2006, it is a brand that provides everyday's wear with good fit and great looks.
200-1,000
- Popular with its contant cross-overs and collaborations with various hip non-apparel brands
tout a coup
- Established in 2007, the brand offers a cheerful wardrobe for young ladies.
300-3,000
- Strong French stile with two main collections: Fancy Line and Casual Line
Venilla suite
- Ladies' footwear
700-4,000
Bathing Ape brands - Acquired Nowhere Group in 2011, IT now holds the Bathing Ape brand lines which include:
300- >10,000
A Bathing Ape, Bape, baby milo, BAPE STA, URSUS BAPE, Mr. BATHING APE and Aape
- Luxury designer brand focusing on unique casual/urban
KATIE JUDITH
- Founded in 2009 targeting hard-edged glamourus rock.
400-5,000
fingercroxx
- urban street styles targeting younger and urban generation
200-3,000
Figure 23: I.T flagship store (Hong Kong)
Figure 24: A normal I.T store
Source: RHB
Source: RHB
Figure 25: A normal i.t store
Source: RHB
Figure 26: An izzue store
Figure 27: A :CHOCOOLATE store
Source: RHB
Source: RHB
15
IT Ltd (999 HK)
15 Apr 2013
Figure 28: A b+ab store
Figure 29: An Aape store (new Bathing Ape brand line)
Source: RHB
Source: RHB
Figure 30: Attractive advertising/promotional campaigns
Source: RHBRI
Figure 31: I.T’s shareholding structure
I.T Ltd. (999 HK)
Sham brothers
(60.56%)
Templeton Asset
Management
Ltd. (10.06%)
JPMorgan Chase
& Co. (6.96%)
Public
Shareholders
(22.42%)
Source: HKEx, RHB
16
IT Ltd (999 HK)
15 Apr 2013
Industry Outlook
Anticipating an Upcoming Cyclical Upswing
A tough 2012, a better 2013. 2012 was very challenging for most HK/China retailers
as they faced a sharp slowdown in same store sales growth (SSSG), a high base in
2011 as well as rental and labour cost pressures. However, we expect retailers’
SSSG to start rebounding in 2Q 2013, underpinned by: i) the improving Chinese
economy, ii) the extended interval between Chinese New Year (CNY) and Christmas
and iii) a low base from this year. In January, Hong Kong clothing/footwear/related
products recorded poor sales growth of -1.8% y-o-y, as CNY in 2013 fell on
February, compared to January in 2012. CNY is a traditional festive season, for the
Chinese and consumers go on shopping sprees during the month and apparel is one
of the products most sensitive to the CNY effect. We are currently witnessing the first
signs of recovery with Hong Kong’s Jan-Feb cumulative total retail sales increasing
15.8% y-o-y, a new high since March 2012. Hong Kong’s total clothing, footwear and
related products is also seeing signs of recovery with Jan-Feb cumulative sales
increasing 9.2% y-o-y, a new high since June 2012.
Apparel industry to grow in tandem with disposable income. We expect
spending on apparel to continue to rise in tandem with growth in disposable income
per capita, which in turn, has grown faster than GDP. Between 2007 and 2011,
China’s disposable income per capita and GDP recorded CAGRs of 12.2% and
10.5% respectively. From FY12-FY14, we forecast apparel spending to grow by 14%
each year on average, above the 13% and 8% growth rates forecasted for disposable
income and GDP respectively. Note that the Chinese have maintained 7%-8% of
their disposable income on clothing purchases.
Figure 32 HK/China total retail sales growth
Figure 33 HK/China garment sales growth
y-o-y
35.0%
y-o-y
45.0%
Title:
Source:
40.0%
30.0%
35.0%
25.0%
30.0%
20.0%
25.0%
Please fill in the values above to have them entered in y
20.0%
15.0%
15.0%
10.0%
10.0%
5.0%
5.0%
0.0%
02-11
0.0%
02-11
05-11
08-11
11-11
02-12
05-12
08-12
11-12
05-11
08-11
11-11
02-12
05-12
08-12
11-12
02-13
02-13
HK clothing/f ootwear/related products
HK total retail sales
China total retail sales
Source: HK Census & Statistics, NBS China, RHB estimates
China f ootwear/garments/hats/knitwear
Source: HK Census & Statistics, NBS China, RHB estimates
17
IT Ltd (999 HK)
15 Apr 2013
I.T’s Management
Starting from Humble Beginnings
I.T was founded in 1988 by brothers Mr. Sham Kar Wai and Mr. Sham Kin Wai. Mr.
Sham Kar Wai is the current CEO and executive director of the Group, while his
brother, Mr. Sham Kin Wai is the Chief Creative Officer and executive director. I.T
was originally a single shop that focused on selling Dr. Martens shoes and boots. The
duo has since built a fashion retail empire and I.T has become one of Hong Kong’s
leading benchmarks in the latest lifestyles and fashion trends. Over the years, the
company introduced leading global brands to Hong Kong and China, while building
up successful and well-recognized in-house brands, under both the helm and
foresight of the Sham brothers who still fully immerse themselves in its daily
operations.
Mr. Sham Kar Wai, 45. Executive Director, Chairman of Board of Directors and
CEO. Co-founder of I.T in 1988, Mr. Sham Kar Wai is now responsible for the overall
management and strategic development of the Group. He has over 20 years
experience in the fashion retail industry and has established an extensive network of
contacts with international design houses.
Mr. Sham Kin Wai, 42. Executive Director, Chief Creative Officer. Co-founder of
I.T in 1988, Mr. Sham Kin Wai’s principal focus has been in merchandising and
product design. He has over 20 years of experience in the fashion retail industry and
is responsible for the creative and aesthetic aspects of the Group’s business. He has
also been instrumental in creating the interior design concepts for the stores.
Miss Ho Suk Han, Sophia, 43. Company Secretary. Miss Ho Suk Han joined the
Group in May 2005. She holds a Masters degree in Business Administration from the
Open University of Hong Kong and has over 15 years of relevant experience and is
an associate member of The Hong Kong institute of Chartered Secretaries and The
Institute of Chartered Secretaries and Administrators.
Key Risks
Inventory turnover days remain high. I.T sells mid- to upscale trendy apparel,
which is highly sensitive to inventory build-up. Our turnaround growth story is also
based on GPM recovery which is underpinned by our expectation that inventory
turnover days will improve by Aug 2013. If its inventory does continue to pile up,
GPM will remain suppressed (given the increasing rental and staff costs) as the
company will have to continue its inventory-clearing strategy.
Venturing into department stores in China. If the current JV with Galeries
Lafayette makes long-term losses or the expected synergies do not play out (i.e. in
securing prime shopping space for I.T’s retail brands), this may be detrimental to the
Group’s earnings.
Currency risk. As of 1H13, about 40% of I.T’s revenue comes from international
brands sourced mainly in Europe and Japan. This makes it sensitive to fluctuations in
the euro and JPY. If these foreign currencies appreciate, this may negatively impact
the Group’s GPM and/or force it to raise ASP in unfavourable retail conditions just to
maintain its margins.
Hong Kong, China retail conditions may further worsen. We currently expect
gradual improvement in SSSG in the overall retail sector in 2013. If retails sales
growth does not pick up and instead, worsens going forward, this will be detrimental
to both sales growth and I.T’s inventory-clearing strategy.
Increasing competition in Hong Kong and China. I.T focuses on mid- to upscale
trendy fashion brands and styles, and thus, is susceptible to the increasing direct
competition from international brands that are entering and/or expanding in Hong
Kong and China.
Still-vacant CFO position may add to doubt. The previous CFO, Mr. George Poon
Yiu Ming, resigned from his position in Oct 2012 to pursue other opportunities. The
Group has begun searching for a new CFO, but has not yet identified a suitable
candidate.
Auditors
PWC, one of the big four global accounting services firms has been I.T’s auditor
since the Group’s listing in 2005.
18
IT Ltd (999 HK)
15 Apr 2013
Recommendation Chart
Price Close
9
8
7
6
5
4
3
2
1
0
Apr-08
Jul-09
Oct-10
Feb-12
Source: RHB Estimates, Bloomberg
Date
Recommendation
2013-02-26
Unrated
Target Price Price
0.00
3.30
Source : RHB Estimates, Bloomberg
19
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Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
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IT Ltd (999 HK)

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