1Q13 earnings of S$0.3m were down 92% yoy - below ours and consensus expectations. The disappointing set of results were due to: 1) Softer retail sales growth across Hong Kong and Malaysia with a surprise decline in Singapore. Both Malaysia and Singapore also registered a decline in same-store-sales growth of 6% and 18% respectively with Hong Kong flat offset by stronger wholesale sales; 2) Opex costs rose significantly as the Group digested HealthyLife in Australia and from rapid new store openings in China. We expect weaker sales from all geographies and hence trim our topline estimates by 5% for FY13/14F. We also raise our opex assumptions resulting in a decline in PATMI margins from 5.7% in FY12 to 3.9% in FY13 and subsequently 5.4% in FY14, as sales gradually ramp up in new stores and in Australia. This results in our FY13/FY14F earnings being slashed by 41%/21% respectively. We derive a new lower TP of S$0.57 pegged to 13x FY14F P/E. Downgrade to SELL.

Expect higher opex as sales slowly ramp up in Australia and China. Opex has increased significantly due to: 1) Rising rentals in Hong Kong and Singapore. In Hong Kong, the Group has closed and relocated four major stores to neighbouring areas with cheaper rents where sales have yet to ramp up. 2) Newly acquired HealthyLife stores in Australia have reported strong improvement in sales and contributed A$6.6m for the quarter but it is still in early stages and have yet to reach its optimal. 3) Group added two new stores in China during the quarter and intends to add 13 more for the year.

Shift in strategy in Australia: from franchisee to owned stores. We highlight that management appears to have changed its gameplan for Australia.
Previously, the plan was to shut down owned stores and focus on the franchisee model but in the results briefing, we were told the Group has opened its first new store in Melbourne and is looking to buy out well-performing franchisee stores in prime locations.

Still aggressively targeting to add 15 stores in China. Group added two new stores in 1Q13 and still intends on having 15 new stores by end-FY13 and another 15 by FY14.

 

Source: OSK