Stella International Holdings:4Q16sales decline narrower vs 3Q but still 10%below GSe

Stella’s 4Q16sales (US$356mn) fell by a narrower amount at -10% yoy (better vs -16% yoy in 3Q16), but were still 10% below GSe because of lower OEM sales. Keyhighlights:

> OEM segment sales (95% of group) were US$342mn, -12% yoy (better vs -18%yoy in 3Q16, but 11% below GSe). Volume was weak at -13% but we sawimprovement for ASP at 1.5% growth. Management commented that poor casualfootwear demand was the major driver of the volume decline, while ASP improveddue to better product mix.

> Retail segment sales (5% of group) were US$20mn, +16% yoy (vs +5% yoy in3Q16). SSSG came in at 12% yoy, significantly better than the -2% yoy rate in 3Q16.

Looking ahead, the company expects demand for footwear to stabilize in 1H17in theUS but it maintained flat yoy shipment/sales targets for 2017. Cost cuts remain thenear-term focus and management is still rationalizing its workforce and productionbase allocation. The company will host a conference call at 9:30am HKT, Jan 16th -when we will have more details on its sales trend. 2016annual results will beannounced on March 16. We currently estimate OP/NI decline of 9%/12% yoy in2H16, improving from 46%/44% yoy decline in 1H16due to aggressive cost control.

Our 12-month target price of HK$13.7is based on 14X 2018E P/E (derived from ourglobal peer earnings/CROCI framework). Last closing price: HK$12.48.

Key risks: Faster/slower growth in dress/casual shoes, better/worse efficiency innew capacity, better/worse efficiency from geographical/product shifts, FX.