Wednesday, January 03, 2007
End of Era of Chinese Tourists in HK? Part II
In my search for beneficiaries of the growing China luxury retailing market, one company I think worth keeping an eye on is Dickson (113).
Dickson is an experienced and established player with a long history in luxury retail. It operated two Seibu and one Havey Nichols department stores in HK. It also runs smaller shops under licensed brands like Rauph Lauren, Tod's, Brook Brothers, S.T. Dupont, and separately Dickson Watch & Jewellery. There are 490 shops in total with 225 in China, 171 in Taiwan, 60 in HK, and the rest in Singapore, Malaysia, and the Philippines.
This level of experience and size should give one confidence of Dickson's China expansion, where it will have two Seibu stores open in Shenyang and Chengdu by end of first quarter of 2007. Seibu also opened its TST store just before the last Christmas season and 48 brand shops throughout Asia. First half results suffered a 15% drop as a result of the associated pre-operating expenses. FY2007 is a year in transition for Dickson and hence profit is likely to be down or flat at best.
Going forward in FY2008 though, earnings should increase by some HK$60-70m* with all the new stores and shops. Starting from last year's number of HK$210m, potential earnings can be HK$270-280m or as much as HK$300m if one factors in the improved local retail market and contribution from the recently acquired Tommy Hilfiger business. This would give a prospective FY2008 p/e as low as 7-8x p/e, very reasonable for pan Asian retail play with China concept.
I'm neutral on the TH acquisition. Although the consideration is acceptable and the business will partially fill the earnings gap left by the closure of Seibu CWB, the brand license will expire at 2014. There's no certainty an extension can be obtained and Dickson Poon the vendor did not provide any idemnity on this. I roughly calculated Dickson would need 6 years (out of 7.6 years of the remaining license) to get back its net investment of HK$360m, if the TH business performance at least maintains at the same level. The operating cashflow of TH however can be applied to continuing China expansions and will strengthen the already solid financial position of Dickson (zero net gearing).
The share price has dropped quite a bit since the flat results last year failed to excite the market. A drop in interim figures didn't help the price either. So further downside is limited and any earnings surprise in China could lead to a re-rating. Take Lifestyle (SOGO) as a benchmark and we're talking very pleasant surprise here (trading over 30x p/e). However it takes time for new stores to become profitable and opportunity cost is a concern in this hot market right now. So bear this in mind and keep an eye on the progress in the coming results announcements.
* The latest 2 Kunming stores injected into Parkson earned about RMB14m each. Take into account Parkson mostly does concession sales which have a lower margin and that Dickson's stores are in bigger cities, I expect each Seibu to earn RMB20m profit. I also expect Seibu TST to earn about HK$15m, taking SOGO TST numbers as a reference and applying a 10% net margin. The rest is contribution from new brand shops.
p.s. financial performance of a small cap is by definition less predictable and reliable, so one should always diversify and vary his bet accordingly.
DISCLOSURE: I don't hold 113 at time of writing.
Dickson is an experienced and established player with a long history in luxury retail. It operated two Seibu and one Havey Nichols department stores in HK. It also runs smaller shops under licensed brands like Rauph Lauren, Tod's, Brook Brothers, S.T. Dupont, and separately Dickson Watch & Jewellery. There are 490 shops in total with 225 in China, 171 in Taiwan, 60 in HK, and the rest in Singapore, Malaysia, and the Philippines.
This level of experience and size should give one confidence of Dickson's China expansion, where it will have two Seibu stores open in Shenyang and Chengdu by end of first quarter of 2007. Seibu also opened its TST store just before the last Christmas season and 48 brand shops throughout Asia. First half results suffered a 15% drop as a result of the associated pre-operating expenses. FY2007 is a year in transition for Dickson and hence profit is likely to be down or flat at best.
Going forward in FY2008 though, earnings should increase by some HK$60-70m* with all the new stores and shops. Starting from last year's number of HK$210m, potential earnings can be HK$270-280m or as much as HK$300m if one factors in the improved local retail market and contribution from the recently acquired Tommy Hilfiger business. This would give a prospective FY2008 p/e as low as 7-8x p/e, very reasonable for pan Asian retail play with China concept.
I'm neutral on the TH acquisition. Although the consideration is acceptable and the business will partially fill the earnings gap left by the closure of Seibu CWB, the brand license will expire at 2014. There's no certainty an extension can be obtained and Dickson Poon the vendor did not provide any idemnity on this. I roughly calculated Dickson would need 6 years (out of 7.6 years of the remaining license) to get back its net investment of HK$360m, if the TH business performance at least maintains at the same level. The operating cashflow of TH however can be applied to continuing China expansions and will strengthen the already solid financial position of Dickson (zero net gearing).
The share price has dropped quite a bit since the flat results last year failed to excite the market. A drop in interim figures didn't help the price either. So further downside is limited and any earnings surprise in China could lead to a re-rating. Take Lifestyle (SOGO) as a benchmark and we're talking very pleasant surprise here (trading over 30x p/e). However it takes time for new stores to become profitable and opportunity cost is a concern in this hot market right now. So bear this in mind and keep an eye on the progress in the coming results announcements.
* The latest 2 Kunming stores injected into Parkson earned about RMB14m each. Take into account Parkson mostly does concession sales which have a lower margin and that Dickson's stores are in bigger cities, I expect each Seibu to earn RMB20m profit. I also expect Seibu TST to earn about HK$15m, taking SOGO TST numbers as a reference and applying a 10% net margin. The rest is contribution from new brand shops.
p.s. financial performance of a small cap is by definition less predictable and reliable, so one should always diversify and vary his bet accordingly.
DISCLOSURE: I don't hold 113 at time of writing.
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a contradicting observation that i would appreciate your input. dickson kept opening stores in the past few years while its turnover only showed a modest increase from hk$2.1b in 2001 to hk$2.6b in 2006 but net profit rose from hk$46m to hk$209m!!! why the company could show a profit that was increased at a much higher rate than its sales while absorbing more shop overheads?
# posted by 
: 5:47 PM, January 11, 2007
: 5:47 PM, January 11, 2007
dearfatb hing you sure have keen eyes, and a tough mind to convince!
i digged a bit deeper and looked at the chairman's statement over the last 5 years. to sum up it's a combination of factors that led to your observation.
1. the period covered post IT bubble, 911 attack, SARS, the coming of the 'freedom travellers', the strong recovery of the retail property market and then the overshoot in rental. so we first saw the profit dropped, then recovered strongly, and then went sideway. i saw similar performance in other HK retailers.
2. the period also coincided with a period of expansion for dickson, during which it took over distributorship of a number of brands (notably benetton in taiwan) and also opened up more shops under existing brands. total shops increased from 230 in 2001 to 490 in 2006. without the expansion, the 'modest' growth would have been zero or even negative!
3. operating leverage is high for retailers as the two biggest cost components, rental and staff cost, are fixed. if it sells more during normal season it'd make a killing, but if it has to rely on the sales season to clear the same stock then you and i can guess what'd happen. it's also for this reason that forecast for retailers are hard to make.
incidently i also found out from the past annual reports that there are already two seibu stores in shenzhen. (what a big over-sight!) the stores got no mentioning in the recent reports and i guess its performance wasn't great. to explain i'd say the 1st store (>10yrs) was for brand building rather than profit and the second store (opened in 2002) quickly became the victim of SARS and the ensuing 'freedom travellers' policy, which effectively killed luxury retailing in SZ.
i am hopeful of the new china seibu stores and the HK retail market which I think has finally fully recovered.
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i digged a bit deeper and looked at the chairman's statement over the last 5 years. to sum up it's a combination of factors that led to your observation.
1. the period covered post IT bubble, 911 attack, SARS, the coming of the 'freedom travellers', the strong recovery of the retail property market and then the overshoot in rental. so we first saw the profit dropped, then recovered strongly, and then went sideway. i saw similar performance in other HK retailers.
2. the period also coincided with a period of expansion for dickson, during which it took over distributorship of a number of brands (notably benetton in taiwan) and also opened up more shops under existing brands. total shops increased from 230 in 2001 to 490 in 2006. without the expansion, the 'modest' growth would have been zero or even negative!
3. operating leverage is high for retailers as the two biggest cost components, rental and staff cost, are fixed. if it sells more during normal season it'd make a killing, but if it has to rely on the sales season to clear the same stock then you and i can guess what'd happen. it's also for this reason that forecast for retailers are hard to make.
incidently i also found out from the past annual reports that there are already two seibu stores in shenzhen. (what a big over-sight!) the stores got no mentioning in the recent reports and i guess its performance wasn't great. to explain i'd say the 1st store (>10yrs) was for brand building rather than profit and the second store (opened in 2002) quickly became the victim of SARS and the ensuing 'freedom travellers' policy, which effectively killed luxury retailing in SZ.
i am hopeful of the new china seibu stores and the HK retail market which I think has finally fully recovered.
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