Pou Sheng &Yue Yuen:2Q17review,PS margin stabilization and YY steady improvements
PS (Pou Sheng) management continued to highlight its target to stabilizeprofitability in 2H17 (after non-recurring adjustments in 1H17). We havegrowing confidence in 2H17 margin stabilization thanks to cleaner channelinventory, a new franchisee policy by Nike, and the revamp of outlet stores. ForYY (Yue Yuen), we believe investors will be encouraged by its commitment tounlocking value. We believe YY may have land assets previously used asproduction plants in China. We reiterate Buy on both names.
Clean channel inventory: We believe PS not only cleared obsoleteinventory on its book (retail stores) but also helped its franchisee clearinventory during 1H17. Optimized inventory conditions, plus controlledprocurement from brands, should give PS significant flexibility to optimizeits retail discount in 2H17, in our view.
Recruiting franchisee for Nike: We believe Nike has gradually allowed theuse of franchisees by its key wholesalers in China (PS being one). Thisshould boost PS’s wholesale revenue (which carries a higher EBIT marginthan retail, in our view).
Revamping outlets: Nike and Adidas will likely allow PS to redecorate itsoutlets in 2H17. This should not only help increase the turnover of offseasonproducts but also enhance a lucrative earnings stream for PS. Nikeand Adidas may even launch products specifically designed for outlets.
This should further boost PS’s gross margin, in our view.
In addition to a solid recovery in production efficiency, management’scommitment to creating shareholder value should encourage long-terminvestors. We believe YY likely holds land assets (old factories that have shutdown production) in China. How YY management is going to unlock the valueof its land may drive more share price upside.
For more details of our positive thesis, please refer to the preview reportbelow: Yue Yuen on page 39 and Pou Sheng on page 43.