Shanghai Jahwa Alert:1Q16-challenging market continues
Sales/NP saw decline in 1Q16
Jahwa’s NPAT in 1Q16 was down 32.87% to RMB127.4m on sales down 3.4%to RMB1.5bn. Excluding the absence of investment income ofJiangyintianjiang which has been disposed in 2015, NP declined 19.81% toRMB127.43m. The drop of sales is mainly attributed to 1) challenging marketenvironment; 2) department stores and hypermarkets continued its weaknesstrend. 1Q16 gross sales and NP accounted for 27.8%/21.2% of our 2016sales/core NP forecast. For reference, in 2014/2015, 1Q sales accounted for25.2%/27.3% of annual sales. 1Q net profit accounted for 18.2% and 25.8% oftotal NP in 2014 and 2015 respectively.
GPM margin eroded to 59% from 60% in 1Q15 affected by the product mixchange. S&D cost as of % sales slightly down 0.86ppt to 41% while G&A costratio was up 1.8ppt to 9.2% mainly due to the company adjusted salariesupwards since March 2015, which fully factored in the whole quarter this year.Inventories increased by 16.5% with inventory days 16 days longer than 1Q15to 107. AR was up 27.5% with AR days also increased 15 days to 60 days.
Channel restructuring is ongoing
During Jan/Feb 2016, skin care and colour cosmetics sold in department storesfell 3.8% vs 2% up in 2015. The shopping mall channel saw double digitgrowth, according to management who quoted from China Market Monitor.This is in line with the company’s strategy immigrating from traditionalchannels, e.g. department stores, to shopping malls, CS and online channels.
Connected transaction with Ping An (601318.SS, Buy)
The company disclosed connected transactions with Ping An, which including1) bank deposit of RMB500m (2016 estimate) in Ping An Bank (000001.SZ Buy); 2) Jahwa directly sells products to Ping An with estimated sales ofRMB88.6m in 2016; 3) Ping An employees will cross-sell Jahwa’s products toPing An’s existing clients who can buy Jahwa’s products from an designatedAPP of Ping An. Jahwa, in return, will pay a commission fee to Ping An’semployees with estimated value of RMB104m in 2016. Jahwa believes thatmore than 200m Ping An’s clients who are mainly high-net-asset customerswill largely help Jahwa to extend its customer base in the future; 4) Jahwa is toinvest RMB500m into the Ping An Consumer and tech fund (preparatory),accounting for 10% of the entity’s interest. This fund will help Jahwa to betterrealize its M&A goal.
Management commented that the target for achieving double digit salesgrowth in 2016 remains intact, though 1Q is tough. Major growth driversinclude: 1) new product launch; 2) brand equity enhancement; 3) channelcapability improvements, e.g. CS; 4) organizational structure optimization.The company will host an investor meeting on 9:30 am on 27 April 2016.