Stella International hurt by aggressive discounts by foreign peers

Foreign competition used to be 2-3x more expensive.

Here's fron Nomura:

We recently met with the management of Stella International (1836 HK – HK$20.0), which is largely focused in manufacturing and selling high-end footwear in China. Its OEM business, which producing for luxury brand names such as Prada, Miu Miu and Cole Haan, contribute over 90% of its total revenue while the remainder goes to retail under the their own brands ‘Stella Luna’, ‘What For’ and ‘JKJY’ with 445 shops spanning across China, Southeast Asia and Middle East.
Leveraging their expertise in manufacturing for such premium brands, shoes from Stella’s self- owned brands are of high-quality and carry an ASP of RMB 800-6,000 in the China market, comparing to RMB 800-1,500 of Staccato, the premium brand in Belle’s (1880 HK – HK$13.9) camp.

We believe Stella Luna’s main competition comes from foreign brands but since they’re often 2-3x of the price, they’re in a sweet spot. However, with aggressive discounting from peers amid the global slowdown, Stella’s retail segment has also been negatively impacted.

According to management, the dip in 1H12 shipment volume was due to a temporary restraint to capacity. 2H12 volume should see an increase due to resilient manufacturing orders but will not likely to offset the decrease in the previous half. For FY13, it expects their ASP to see a slight increase, implying overall FY13 manufacturing revenue should be flat. GP margin may also face slight pressure.

As for the retail segment, 3Q SSSG was worse than 2Q. Management believes their retail network is too large in China right now, which may lead to cannibalization of their own brands. They would like to streamline its network, with an ideal mix of 150 Stella Luna stores (203currently) and 150-200 What For stores (186 currently).