Sa Sa reports sluggish 1HFY16 results with 10.6% yoy decline

Management remains cautious on fundamentals.

It has been noted that Sa Sa’s fundamentals remained weak with SSS decline, aggressive promotion, product mix deterioration and operating de-leverage.

According to a research note from Jefferies, Sa Sa recorded poor 1HFY16 results. First, sales declined by 10.6% yoy to HKD3.8bn in 1HFY16 (Apr.-Sep. 2015), mainly driven by an 8.5% SSS decline in HK/Macau region and 9.8% SSS decline in mainland China.

Second, GP margin contracted 1.7ppt yoy to 42.9% mainly due to aggressive promotion, discounting, and product mix deterioration. House-brands accounted for 41.3% of sales in 1HFY16, vs. 43.3% in 1HFY15. Then, OP margin contracted 4.6ppt yoy to 5.0%, mainly due to GP margin contraction, higher staff costs/sales and rental expenses/sales ratios.

Also, net profit dropped 55% yoy to HKD153m; net margin contracted 4.0ppt yoy to 4.1% in 1HFY16 mainly due to OP margin contraction partly offset by lower taxation/sales ratio. Note that Sasa released a profit warning on Oct. 22, 2015, and expected net profit for 1HFY16 to drop over 50% yoy. Further, it declared a 1HFY16 dividend of HK 9 cents/share, same as 1HFY15.

Here's more from Jefferies:

Management remains cautious on the fundamentals and does not expect SSSG to improve meaningfully in NT. SSSG in HK/Macau remained lacklustre at -10% in Oct. 1-Nov. 22. Most of the sales decline (HD370m out of HKD382m) in HK/Macau were due to poor performance in tourist areas (Causeway Bay, Tsim Sha Tsui and Mongkok). Management plans to increase the proportion of stores in residential areas.

Its ecommerce business in China grew 24% in 1H and 28% in the recent two months. Management expects ecommerce and O2O to help overall business. Sasa plans to restructure its house brand amid the trend on low-mid priced Asian products. The 24 lease renewals in 1HFY15 recorded an average 5.1% increment in rental cost. Despite meaningful rental reduction for street stores, rental for shopping malls remained firm. Management expects rental cost to ease starting FY17e.

We expect the operating environment to remain challenging due to: The tightening of Shenzhen multi-entry visas to HK since Apr. 2015 impacts FY16e. Continuing slowdown in tourist arrivals and lowered purchasing power of tourists. Also, price competition (online and offline) in both Hong Kong and mainland China. And operating de-leverage. However we do not expect margins to further contract meaningfully in FY17e from the historical low level due to easing rental cost and low base.