United Tractors New look, New Capabilities, Enlarged Group Positioned for Growth

Trinity announced its FY12 results yesterday
Earnings increased 5.3% y-o-y to HKD540m, below market consensus by 6.3% and 2.0% respectively. If we exclude the one-off gain from the disposal of the Ferragamo JV, its net profit would have dipped by about 0.5% y-o-y to HKD511m. The miss was mainly due to a lower-than-expected revenue increase of 7.4% to HKD2,801m (7.8%/5.5%).

We have cut our TP to HKD4.37 (from HKD5.24), pegged to a lower target PE of 13.0x from 15.0x as we now forecast even slower growth relative to the past. As its current share price is close to our revised TP, we keep our NEUTRAL rating, supported by a 5.5% FY13F dividend yield.
Worst may be over but still no turnaround in sight. The Group saw 2H12 overall SSSG declining to -5.0%, compared with a 6.5% overall SSSG in 1H12. In FY12, China/Hong Kong/Taiwan reported SSSG of -1.6%/+6.6%/-11.9%. Management guided that although it does not see the situation to worsen in Jan-Feb 2013, it expects sales growth to remain weak with no signs of turnaround as of yet. In FY13, we forecast that the company’s SSSG in China/HK to rebound slightly to 4%/5%.

Store expansion to remain conservative
The Group will focus on consolidation and store expansion for the time being, while remaining conservative in its point of sales (POS) network growth. Currently, the Group plans to open airport shops but expects the higher sales to be offset by higher rental and staff costs. Overseas licensing business, which accounts for <5% of sales, has outperformed but management guided that it will take another two years before the segment could reap any significant growths.

Greater China region drags down revenue growth
The subdued 1.5% y-o-y revenue growth in the overall Greater China market weighed on the Group’s total revenue, which climbed only 7.4% y-o-y to HKD2,801m. Management noted that the pressure on gross margin generally came from two areas: i) lengthened promotion periods, and ii) promotional periods during periods that historically were not promotional periods (i.e. golden week holidays), amid increasing competition from shopping malls. However, management guided that it is comfortable with the current gross margin. Going forward, we expect gross margin to improve with a pickup in sales growth.

Inventory days for FY12 reached 377 days due to slower-than-expected retail sales growth. On the bright side, management has guided that inventory days are currently in control and should drop to 330 over time. However, based on our estimates, we do not expect this target to materialise until FY15F.

Future plans for D’urban unveil soon
In the face of increased competition, management has reassured that the Group is making great efforts in maintaining its competitiveness. However, it does not see its market positioning in the Greater China Region being compromised despite an influx of international brands in the region. Currently, its new POS is mainly Kent & Curwen, Ceruti and Gieves & Hawkes. Management also added that it has scaled back brands such as D’urban in preparation for a new brand strategy. However, no details have been disclosed so far.

The Group’s brands are gaining popularity overseas with Kent & Curwen opening two flagship stores – one in the US this coming fall and the other in no.2 Savile Row, London. Meanwhile, the group has also helped Cerruti regain attention in Paris. Going forward, Trinity will focus on overseas market mainly through wholesale and licensing, as it aims to achieve strong growth in the new high-margin business by 2015.

2013 Outlook
We expect SSSG to remain weak in 1H13 but slowly pick up in 2H13 given a relatively lower base. The Group’s operating margins should improve slightly going forward as revenue picks up despite rising operating costs. Management guided that net POS additions in the China market for FY13F will be at a similar level of FY12’s.