Stelux seeks help from Boyu to boost loss-making China operations

Considerable improvements on the way.

OSK notes that during a non-deal road show on Dec5, Stelux revealed how its new partner, Boyu Capital (Boyu), will help to significantly improve its loss-making China operations.

Specifically Boyu, it said, will: i) improve the group’s operational efficiency, ii) launch alternative sales channels, such as e-commerce through Taobao (Boyu has an investment in Alibaba) and home TV shopping and iv) expand into China's lower tier cities. Stelux is confident that its China business will breakeven by FY3/15F.

Here's more from OSK:

Considerable improvements on the way. With Boyu’s help (Boyu has considerable expertise in China’s low-mid end retail sector), Stelux aims to achieve breakeven at its China business by FY3/15F. Together with Boyu, Stelux has formed a new China business plan that includes: i) rationalising its existing stores, ii) implement cost cutting initiatives iii) launching new sales channels in e-commerce (on Taobao) and home TV shopping iv) expanding into lower tier cities, v) enhancing information system to closely monitor sales and inventory levels. As the first step of this new business plan, Stelux is assessing its 140 stores in first tier cities, namely Guangdong, Beijing and Shanghai and plans to close the poorly performing stores. Meanwhile, the group is signing new leases at popular shopping malls in lower tier cities such as Hangzhou and Chongqing. To recall, Stelux’s China operations have never been profitable and in 1H FY3/13, they suffered a net loss of HKD40m. Management said they do not expect much improvement in 2H, as the impact of the new initiatives are only expected to kick in from FY3/14F onwards.

“Profit guarantee” shows Stelux’s confidence. Management disclosed that one of the terms of the CB agreement with Boyu states that Stelux must achieve an annual net profit of not less than HKD400m in two of the three financial year years from FY3/15F-FY3/17F. Otherwise, the group will have to redeem the CBs at 130% of their principal value. We believe these terms shows Stelux’s confidence that its new business plans will be effective.

TP raised to HKD3.40; valuations still attractive. As we have factored in the “Boyu effect” for the first time from FY3/14F onwards, we upgrade our earnings estimates by 10% in FY3/14F and 7% in FY3/15F. Our TP rises by a larger 22% to HKD3.40 since we now use the watch and jewellery sector mean’s 10x FY3/14F PE as our target PE. This is above the 9x FY3/14F PE we used previously, as we feel more confident that Stelux’s China business will achieve significant improvement.