2014-03 Bossini Sunwah Kingway

Initiation
24 Mar 2014

Bossini BUY
592.HK / 592 HK

Initiation

Hong Kong/China Consumer

Kingsway Financial Services Group Limited
Please see the important disclaimer and disclosures (if any) at the end of this report

A great comeback
HK$0.64
Target price: HK$1.40

Initiate BUY with TP HK$1.40; Almost 8-fold earnings growth in FY14-15 Bossini
has suffered from depressed profitability in recent years but we believe the worse is
over. We expect its net profit to increase by almost 8-fold to HKD175m in FY15 from
just HKD22m in FY13. Our TP implies about 13x FY6/15 PE, as we believe Bossinis
turnaround story should lead to re-rating towards the sector 11-18x PE.

China/Taiwan on track to profit making Thanks to store closure and cost cutting,
China operation is now close to break-even vs. HKD100-150m losses per years.
Inventory levels have overall restored to healthy level. SSSG also rose to double digit
in recent months as management devoting more time to improve productivity. We
expect China operation to achieve profit in FY15. Taiwans losses have also narrowed
to HKD9m in 1HFY14 vs. HKD20m last year and we expect Taiwan to break-even in
FY15.

Exports growth driven by re-stocking Exports orders are also recovering with
double digit growth in recent months thanks to re-stocking demand from Middle East
after inventory clearance over past 1-2 years.

Unleashing children wear potential We believe Bossinis strategy to cross-over
with various characters including Angry Birds, Winnie the Pooh, Disney, etc can help
to differentiate with peers. Currently, children accounts for about 20% of sales in Hong
Kong but only 10% in China, which implies further growth opportunities there.

Incentivized management Bossinis managements collectively hold about 113m
share option with weighted average exercise price of about HK$0.55. About half of
these are exercisable after late-2016, which could prompt them to adopt a long-term
growth strategy instead of a short-term one.

8-9% yield limits downside - On the downside, its net cash position of about
HK$0.22 per share and potential 8-9% forward dividend yield should provide decent
support to its current share price, which translate to about 6.8x FY15 PE.

Earnings Forecasts & Valuation Summary
Year ended June FY13 FY14E FY15E FY16E
Sales (HKD m) 2,517 2,432 2,632 2,741
EBIT (HKD m) 46 152 213 243
Net profit (HKD m) 22 125 175 200
Fully diluated EPS (HKD) 0.01 0.07 0.10 0.12
YoY change (%) 38.5% 465.0% 40.3% 14.3%
PER (x) 53.2 9.4 6.7 5.9
DPS (HKD) 0.03 0.04 0.06 0.07
Yield (%) 4.1% 5.5% 9.2% 10.5%
ROE (%) 2% 11% 16% 16%
Source: Company data, Sunwah Kingsway Research estimates

Upside: 108%

Share Data
52week Hi/Lo (HK$) 0.65-0.37
Avg. daily t/o (US$m) 0.05m
Market cap. (US$m) 112
Total issued shares (m) 1,624
Public float (%) 32.7%
Major shareholder(s):
Ma Kuen Tsin 67.32%

Source: HKEx & Bloomberg

Company Profile
Bossini retails mass-market causal
apparels through about 1,000 stores in
Greater China, Southeast Asia, and
Middle East.

Share Price Chart

Source: Bloomberg

Steve Chow, CFA
(852) 2283 7306
Steve.chow@sunwahkingsway.com

Bossini A great comeback | 24 Mar 2014 2
Initiation with BUY with TP HK$1.40

We initiate Bossini with BUY with TP of HKD$1.40, which implies about 108% upside from current
level.

Bossinis depressed financial performance over past 1-2 years has led to a low valuation of
single-digit PE. However, we believe the worse is over and Bossinis turnaround story should
leading to re-rating towards low-teens PE of other consumer stocks. We conservatively value the
counter at 13x FY6/15 PE, towards the low end of the industry valuation range of 11-18x PE.

On the downside, we also believe its current net cash position of about HK$0.22 per share and
potential 8-9% forward dividend yield should provide support to its current share price, which
translate to about 6.8x FY15 PE based on our estimates.

Superior PE/Growth metrics versus peers

The chart below shows that Bossini offers a superior estimated growth outlook of almost 8-fold over
the next two years versus other consumer stocks while our target low-teens PE is only in line with
its peers.

Valuation

Source: Company, Sunwah Kingsway Research
* FY14-15E earnings growth and FY15E PE for Bossini

Decent dividend/growth outlook also

Bossini also provides good dividend/growth trade-off, as shown in the chart below. We estimate
that its forward yield can reach 8-9%, compared with 2-7% for its peers. Note that for many
consumer stocks, its high yield is offset by weak growth outlook. For example, some apparel names
such as Giordano and Trinity are offering 6-7% yield but have weak growth outlook. However,
Bossini is an exception.

Pls refer to our recent report Consumer: From growth to yield for more discussions on sector
yields.

6
4
12
14
16
18
2
0
800 780 740 100 80 60 40 760
8
10
20 0 -20
2
0
1
4
E

P
E
2013-14E earning growth (%)
Bossini
Cosmetics
Watch Department store
Footwear
Apparel
Sportswear
Jewelry
Target PE


PE vs. dividend outlook Dividend/Growth metrics

Source: Bloomberg, Sunwah Kingsway Research
* FY14-15E earnings growth, FY15E PE, FY15E yield for Bossini

6
18
16
14
12
10
9
8
6
4
2
0
7 1 3 2 4 5 0 8
Apparel
Sportswear
2014E dividend yield (%)
Bossini
Cosmetics
Jewelry
Watch
Department store
Footwear
2
0
1
4
E

P
E
0 760 40 60 20
0
8
6
5
4
3
2
780
9
1
7
-20 80 100 740 800
Watch
Jewelry
Cosmetics
Bossini
Footwear
Sportswear
2013-14E earning growth (%)
Apparel
2
0
1
4
E

d
i
v
i
d
e
n
d

y
i
e
l
d

(
%
)
Department store
Target PE

A great comeback

Over the past few years, Bossini has suffered from depressed profitability dragged by China and
Taiwan losses, which have collectively wiped out about 80% of Hong Kong profit. As a result, its net
margin stood at less than 1% in FY6/13, significantly lower than the 12% of its closest peer
Giordano (709 HK).

However, we believe the worse is over as the China and Taiwan businesses are about to
turnaround. In 1HFY14, Bossini experienced 119% profit growth to HKD75m driven by successful
China and Taiwan restructuring which has lifted the overall net margin to a more reasonable 6%
from just 1.5% in FY6/13.

Turnaround in progress


1HFY14 highlights

1HFY13 1HFY14 YoY Remark
Revenue 1,334 1,272 -5%

HK 842 888 5% Steady operation
China 223 154 -31% Revenue down but profitability up
Taiwan 134 109 -19% Revenue down but profitability up
Singapore 134 122 -9%
EBIT

HK 120 106 -11%
China (52) (5) -90%
Close to break-even after closing most
loss-making stores
Taiwan (20) (9) -55%
Loss narrowing by half. We expect further
improvement ahead
Singapore 2 (3) -288%
Group EBIT 49 89 82%

Net profit 34 75 119%

SSSG

Group 0% 7%

HK 5% 11%

Store productivity improvement
China -5% 12%

Store productivity improvement
Taiwan -19% -6%

Singapore 5% -3%


130
16
22
75
4.9%
0.6%
0.9%
5.90%
0
20
40
60
80
100
120
140
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
FY6/11 FY6/12 FY6/13 1HFY6/14
Net prof it
Net margin

Almost 8-fold earnings growth in 2 years

We believe Bossinis turnaround story is far from over. We overall expect net profit to rise
significantly by almost 8-fold to HKD175m in FY6/15 from HKD22m in FY6/13 driven by the
followings:

Closure of non-performing stores in China and Taiwan.

Productivity improvement of remaining stores through focusing on high growth category such
as children wears.

Re-stocking of franchised stores in China and overseas.

After FY15, we conservatively expect the company to post normalized low-teens growth in FY16.

Profitability forecast

FY6/11 FY6/12 FY6/13 FY6/14E FY6/15E FY6/16E
Revenue

HK 1,410 1,605 1,637 1,719 1,891 1,985
China 655 601 392 274 302 317
Taiwan 293 298 247 203 203 203
Sing/Malay 283 256 257 236 236 236
Total 2,641 2,760 2,533 2,432 2,632 2,741

EBIT

HK 223 250 212 191 208 218
China (58) (156) (116) (15) 5 15
Taiwan (5) (28) (50) (18) 0 5
Sing/Malay 5 (12) 0 (6) 0 5
Total 165 54 46 152 213 243

Net profit 130 16 22 125 175 200
YoY

38% 459% 40% 14%

Net margin 4.9% 0.6% 0.9% 5.1% 6.6% 7.3%

China: On-track to profit marking

The company has been restructuring its China operation by closing underperforming stores and
cutting back-end costs in recent years. Its store count has been reduced to about 250 currently
from about 750 at end-2011. Most of the reduction took part in Northern China where Bossini has
weaker market position.

According to the management, industry inventory was a major issue over past few years which led
to aggressive discounting and eroding profitability for many apparel companies. Having said that,
industry inventory level has been more normal now which should bode well for profitability going
forward.

As a result, China losses have narrowed significantly to just HKD5m in 1HFY14 vs. HKD52m last
year thanks to closing underperforming stores and cutting back-end costs. SSSG also improved
significantly to 12% from -5% last year as remaining stores are in Shenzhen and Guangzhou where
Bossini has a stronger market position.


China EBIT China SSSG


Looking forward, the management expects China store count remain stable over next 1-2 years as
most loss-making stores have been cut. The next objective is to raise store productivity which is
illustrated by improving SSSG in recent months. As remaining self-operated stores are more
concentrated in Shenzhen and Guangzhou, managements can spend more time on various
productivity improvement initiatives. ,

On a longer term basis, the management sees some expansion opportunities around Guangzhou
areas as penetration is still low compared with Shenzhen.

For Bossinis franchised store, we believe the general improving inventory situation in the industry
could lead to some re-stocking demand going forwards, where Bossini could enjoy operating
leverage given little overhead for wholesale business.

China store count to stay stable over next 1-2 years after closure


-18
-40
(56)
(101)
(52)
(64)
(5)
-120
-100
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-20
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8%
14%
-1%
-11%
-5%
-3%
12%
-15%
-10%
-5%
0%
5%
10%
15%
20%
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-
100
200
300
400
500
600
700
800
1HFY12 2HFY12 1HFY13 2HFY13 1HFY14
China f ranchised store
China self operated store

We overall expect China operation to turn into a small profit making by FY6/15 driven by ongoing
operational improvement. We overall forecast 10% SSSG in FY14-15 vs. 12% in 1HFY14 to factor
in ongoing operational improvement.

In our view, the current run-rate implies that our FY14-15 forecast is not aggressive as restructuring
continues. For FY6/16, we incorporate a more conservative 5% SSSG for the time being.

China operation forecast (HKD m)

SSSG 11% -6% -4% 10% 10% 5%
Revenue 663 601 392 274 302 317
EBIT -58 -156 -116 (15) 5 15

Store count 771 598 300 253 253 253
Sales per avg store 0.88 0.88 0.87 0.99 1.19 1.25
EBIT margin -9% -26% -30% -6% 2% 5%


Taiwan: Break-even in FY15

Taiwan operation has been difficult in recent years due to soft retail environment in general, posting
an HKD50m operating loss in FY6/13 vs. a loss of HKD28m in FY6/12.

The company has transferred some HK managements to improve the operation, which has
achieved good progress. In 1HFY14, losses narrowed to HKD9m vs. HKD20m last year. SSSG
improved to -6% vs. -19% last year.

Taiwan EBIT Taiwan SSSG


We overall expect Taiwan to experience a similar turnaround path compared with China. In our
view, the smaller store network in Taiwan vs. China should lead to an easier restructuring than
China. As China operation is getting stabilized, we believe the management is able to devote more
time and effort in Taiwan leading to further progress ahead.

We now forecast a break-even situation in FY15.

-5
0.2
(12)
(16)
(20)
(30)
(9)
-35
-30
-25
-20
-15
-10
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5%
1%
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-12%
-19%
-15%
-6%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
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1
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Taiwan operation forecast (HKD m)

SSSG 3% -7% -17% -5% 0% 0%
Revenue 293 298 247 203 203 203
EBIT -4.8 -28 -50 -18 0 5

Store count 94 102 85 78 78 78
EBIT margin -2% -9% -20% -9% 0% 2%


Hong Kong: Steady as she goes

Overall, HK market generally performed better than China and Taiwan in recent years despite
ongoing rental pressure. It generally achieved HKD200-250m EBIT contribution per year and
10-15% EBIT margin.

In particular, Macau market was strong and the company has recently opened a flagship store there.
Mainland tourists now accounted for about half of the sales in tourist areas.

Hong Kong EBIT Hong Kong SSSG


SSSG has improved to 11% in 1HFY14 vs. 5% in 1HFY13 driven by productivity improvement and
the trend has continued into CY2014 according to the management. This should mitigate ongoing
rental pressure.

Bossini is opening more stores in emerging tourist areas in New Territories to capture mainland
tourist. For example, its Sheung Shui store has achieved good performance. Currently, mainland
tourists accounted for about 50% of revenues for stores located in tourist areas.

We overall expect HK to generate about HKD190-220m of EBIT per year in FY14-16 driven by
about 5-10% SSSG. This implies about 11% EBIT margin vs. 12% in 1HFY14, as we conservatively
incorporated ongoing rental pressure into our model.

117
106
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106
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9%
13%
15%
11%
5%
1%
11%
0%
2%
4%
6%
8%
10%
12%
14%
16%
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Hong Kong operation forecast (HKD m)

SSSG 11% 13% 3% 10% 10% 5%
Revenue 1410 1605 1637 1,719 1,891 1,985
EBIT 223 250 212 191 208 218

Store count 39 41 41 41 41 41
EBIT margin 16% 16% 13% 11% 11% 11%


Exports: Driven by re-stocking from Middle East

Exports, which accounts for about 20% of revenues, are also recovering with teens growth in recent
months mainly driven by Middle East. According to the management, Middle East operations have
undergone a de-stocking over past 1-2 years. Now inventory level has back to normal which led to
re-stocking demand.

Bossini currently has about 590 export franchised stores in Southeast Asia and Middle East,
accounting for about 60% of the groups total store count.

Bossinis global store network (Dec 2013)

Source: Company

Children wear - upcoming focus

The management views children wear as a focus area and believes its strategy to cross-over with
various characters including Angry Birds, Winnie the Pooh, Disney, etc can help to differentiate with
peers like Uniqlo, GAP, and Giordano. Currently, children accounts for about 20% of sales in Hong
Kong but only 10% in China, which implies further growth opportunities there.

Bossini x Sesame Stree

Source: Company

Strong cash position with potential 8-9% yield

On the balance sheet front, Bossini is debt free with net cash position of HKD351m as at Dec 2013,
translating to about HK$0.22 per share or 30% of current share price.

Net cash position throughout recent years (HKD m)


With no significant capex plan over next 1-2 year, the management targets over 50% payout ratio
going forwards compared with 56% in 1HFY14. This implies close to 9% forward dividend yield
(FY15) if assuming 60% payout ratio.

Managements are incentivized

In our view, Bossinis managements are incentivized to execute a successful restructuring plan.
The following table shows senior managements and other staffs collectively hold about 113m share
option with a weighted average exercise price of about HK$0.55.

In addition, we estimate that about half of these options are only exercisable after late-2015, in
which 45% would only become exercisable by Nov 2016. In our view, this could prompt the
management to adopt a long-term growth strategy instead of a short-term one.

Share option at a glance Vesting schedule
No. of option
(m shares)
Weighted avg
exercise price
(HK$)
Chairman 6.5 0.70
CEO 25.7 0.57
CFO 6.7 0.47
Other employees 74.0 0.54
Total 112.9 0.55
% of outstanding shares 6.9%


400
331
248
338
351
-
50
100
150
200
250
300
350
400
450
FY10 FY11 FY12 FY13 1HFY14
Net cash position
Exercisable
now
47%
Exercisable
by Oct
2015
8%
Exercisable
by Nov
2016
45%


Financial forecast
Income Statement FY12 FY13 FY14E FY15E FY16E

Ratios FY12 FY13 FY14E FY15E FY16E
Turnover 2,744 2,517 2,432 2,632 2,741

Sales growth (%) 4% -8% -3% 8% 4%
COGS 1,450 1,318 1,240 1,342 1,398

EBIT growth (%) -68% -15% 230% 40% 14%
Gross profit 1,294 1,199 1,192 1,289 1,343

Net profit growth (%) -88% 38% 459% 40% 14%
Other income 19 19 19 19 19
SG&A 1,259 1,173 1,059 1,096 1,119

Gross margin (%) 47% 48% 49% 49% 49%
Operating profit
(EBIT)
54 46 152 213 243

EBIT margin (%) 2% 2% 6% 8% 9%
Finance costs (9) 0 0 0 0

Net margin (%) 1% 1% 5% 7% 7%
Pre-tax profit 46 46 152 213 243

Payout ratio (%) 111% 210% 50% 60% 60%
Tax 29 24 27 38 44
Minority interests 0 0 0 0 0

Return on asset (%) 1% 2% 11% 16% 16%
Net profit 16 22 125 175 200

Return on equity (%) 2% 3% 17% 22% 24%
YoY% -88% 38% 459% 40% 14%

Total debt/equity (%) 3% 0% 0% 0% 0%
EPS (HKD) 0.01 0.01 0.08 0.11 0.12

Fully diluted EPS
(HKD)
0.01 0.01 0.07 0.10 0.12

Inventory T/O (days) 98 93 100 100 100

AR T/O (days) 3 6 6 6 6
DPS(HKD) 0.01 0.03 0.04 0.06 0.07

AP T/O (days) 11 12 12 12 12

Cash conversion cycle
(days)
90 88 95 95 95
Cash Flow FY12 FY13 FY14E FY15E FY16E
PAT 16 22 125 175 200

Balance Sheet FY12 FY13 FY14E FY15E FY16E
D&A 83 71 80 80 80

Fixed assets 155 132 122 122 122
Others adjustments 12 12 2 2 2

Intangible asset 0 0 0 0 0
FFO 111 105 207 257 282

Others 81 86 86 86 86
Chg in working cap (39) 53 (32) (11) (6)

Non-current assets 236 219 209 209 209
Net cash from
operations
72 158 175 246 276

Inventories 365 305 340 368 383
Capex (72) (60) (70) (80) (80)

AR 38 48 42 45 47
Investments 5 17 0 0 0

Others 178 174 162 167 170
Others 0 0 0 0 0

Cash 273 338 368 429 505
Investing cash (67) (43) (70) (80) (80)

Current assets 854 866 911 1,009 1,105
FCF 5 115 105 166 196

AP 79 80 77 83 87

Bank loans 24 0 0 0 0
Dividends paid (86) (27) (75) (105) (120)

Others 257 273 262 281 292
Net change in bank
loans
(105) (25) 0 0 0

Current liabilities 360 354 339 364 379
Others 0 3 0 0 0
Financing cash (191) (50) (75) (105) (120)

Non-current liabilities 4 2 2 2 2
Net change in cash (186) 65 30 61 76

Shareholder's equity 729 729 778 848 928


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