Pou Sheng International:Attracting more investors’attention

In-line 1H16 result; GPM a surprise on lower retail discounts andhealthy channel inventoryPou Sheng’s (PS) 1H16 results was in-line with our estimates with bothrevenue and net profit accounted for 50% and 53.5% of our FY16E estimates.

The group’s GPM soared 290bps Yoy /140bps QoQ to 36.3%, which is higherthan our FY16E estimate (35% GPM). The GPM hike was mainly driven byhealthy channel inventory (~4-5 months) and hence a better retail discount( ~20% off in 1H16 vs. mid 20’s in FY15) and. The SG&A ratio stood at 29.7%of sales in 1H16 (vs.29.4% in 1Q16), which was driven by new store openingsin 1H16 (net adds: 386 in 1H16). We still expect PS’s SG&A ratio to remain at29-30% of sales in FY16E/17E driven by international brands’ expansion planin China. Management targets 600-800 net openings by end-2016, in whichwill be Adidas and Nike driven.

Nike and Adidas products’ demand still strong; New brandpartnership continue to drive growthNike and Adidas continue to account for ~80% of Pou Sheng’s revenue, andwe expect both companies would continue deliver at least mid-teens growth inrevenue in the medium term which will be driven by i) new store openings ; ii)revamp plan with distributors to enhance store operating efficiency, iii)well-received response of leisure sportswear as well as functional sportswear.

Meanwhile, we continue to believe new brand partnerships with Sketchers,Under Armour (UA US) and GEOX etc would also help through theirincreasing presence in China.

First ever interim dividend declared, attracting more investors’attention expectedPou Sheng declared an interim dividend of HK$0.02 per share (24% payoutratio), it is the first ever interim dividend proposed by the company. Given itsexpected strengthened financial position (lower AR & inventory turnover days)and stable CAPEX which leads to improving free operating cash flow, webelieve the 24% dividend payout ratio will be sustained, hence attracting moreinvestors’ attention.

Raise earnings estimates, Maintain Buy to ride on internationalbrands’ expansion in China and improving operating efficiencyWe raised PS’s FY16E/17E EPS by 8.2% and 2.9% respectively, led by GPMexpansion through lower retail discount and new product sales. The rise inGPM will more than compensate the high SG&A ratio during this period(29-30% of sales). We believe the higher SG&A ratio reflects internationalbrands’ confidence in China sports market, which would facilitate futuregrowth in the long run. With EPS expected to grow at 50.0% CAGR inFY15-17E, its FY17E 11.8x P/E (~18.6% discount to international peers) stilllooks undemanding. We maintain Pou Sheng’s rating at BUY and raise PS’sTP from HK$2.50 to HK$3.10 based on 14.5x forward PE (par to internationalpeers’ average) and FY17E EPS.