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Analyst Research Report Snapshot


The QARP Review: Belle (1880.HK), China Mobile (941.HK) and Tingyi (322.HK)




Sun Hung Kai Financial


29 Oct 2013





Companies referenced:

1880.HK 0322.HK 0941.HK

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* Belle (1880.HK): The deteriorating sportswear and footwear markets have hampered Belle’s growth. Slower SSSG has resulted in excess inventory and intensifying price competition. Productivity per store is declining and the glut of new stores added in the past couple of years has increased the company’s cost base, resulting in lower EBIT margins. Competition from smaller players and online retailers could reduce Belle’s market share and further hurt margins, particularly in the mid-range market. While the company has slowed new store openings to curb costs, we expect the margin downtrend to continue amid no significant improvement in sales growth year-to-date. Summer sell-through was weak and the company recorded disappointing SSSG of 1.4% y/y in 3Q13. Upcoming winter sales will be the key item to monitor for a consumer-sentiment recovery. Belle’s shares have enjoyed a premium against their Hong Kong-listed peers owing to the company’s greater operating scale, but the worsening earnings outlook has increased the PEG ratio and the stock looks expensive. Further declines in profitability would make it hard to justify such high valuations. * China Mobile (941.HK): China Mobile's outlook remains gloomy amid stagnant revenue growth, falling margins and worsening ROE. China Mobile still has the highest exposure in the sector to the traditional mobile segment, which is losing revenues to free products such as Weixin. Although the carrier is posting strong 3G net adds, these subs are not adding value (i.e. not lifting blended ARPU) since they are mainly using low-price WLAN data tariffs (69% of data traffic). As a result, ARPU only stabilized in 9M13 despite encouraging 3G net adds since end-2012, while China Unicom (762.HK) and China Telecom (728.HK) are both benefiting from 3G uptake and posting ARPU improvements. Meanwhile, cost pressures persist owing to China Mobile’s strategy of (1) increasing handset subsidies to encourage 2G users to upgrade and (2) continued investment in its 3G and 4G network. The net result is stagnant revenues and rising costs, which are squeezing margins and ROE. We believe the 4G rollout out has come too early to trigger a growth recovery given rising 4G depreciation and opex. Securing a fixed-line license could be positive in the long run since the company would be able to provide bundled services to subscribers and reduce its churn rate. But there may be more short-term pain before long-term gains given the additional investments needed to construct a fixed-line network. * Tingyi (322.HK): The expected recovery in ROE and the current valuation indicate that the consensus is expecting the price war between Tingyi and Uni-President to end shortly. The benefit of any reduction in promotional spending should flow directly to the bottom and with only four players in each of their markets the pricing should be stable. However, the slowing growth in instant noodles is forcing companies to go for market share and the changing tastes of Chinese consumers towards healthier drinks is narrowing the market opportunity and forcing increased competition. This price war may continue longer than the market is expecting, as the market share between the two players is still heavily skewed to Tingyi with 55% and Uni-President with 18%. On top of this labor costs continue to rise – a further 15% wage increase could reduce EBIT by 10% – and raw material costs are starting to pick up. Any further delay in earnings recover...

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