中国动向：这是最好的时代,也是最坏的时代

Please see important notice on the last page. Company ReportCHINA DONGXIANG(03818.HK) “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.” -Charles Dickens China Dongxiang (“China DX” or the “Company”) announced FY2012 results, which was just in-line with our expectation. Revenue was down 35.4%YoY to RMB1.8bn. China segment recorded RMB1.2bn, accounting for 65.7% of total revenue. The decrease was due to 1) closure of low efficiency stores to better optimize retail channel and to improve stores profitability; 2) In order to shift wholesale model to retail, the Company had to manage wholesale orders to build up quick reaction capability; 3) reduced wholesale orders on the Company’s own initiative, to ensure distributors profitability. Japan segment has recorded a steady growth in sales, but a sale in RMB upon currency conversion has declined as affected by the depreciation of Japanese Yen against RMB. GP margin drop 7.4pct to 47.5%, due to inventory clearance activities. Though sales declined substantially in 2012, NP was boosted by 73.5% to RMB176.7mn, which benefited from the reversal of inventory impairment of RMB55.2mn. Basic EPS was RMB0.03. The board proposed final dividend and special dividend of RMB0.01 per share, as result of 70% dividend payout ratio in 2012. Increase % of retail business, enhance stores profitability The Company started to run retail business in 2012, and expect to gradually increase retail business in the following year. The Company recorded the revenue of RMB70.9mn from retail business, accounting for 6.3% of the total revenue, of which 90% sales was from on-line including the sales from Vipshop, Taobao & Non-Taobao. Looking forward, the Company will continue on-line shopping while expand the No. of self-operating stores through district branches. Discontinue Belle business might reduce a 5% sales in 2013 The Company is still in talk with Belle following the latter’s decision to discontinue the distribution of Kappa brand in China. Sub-distributors for about 50% of the 400-plus stores under Belle have and will continue to work BUY (prior：BUY) TP：HK$ 1.55 Current price：HK$1.29 China Merchants Securities (HK) Ivy Zhao +86-755-25310166 zhaox@cmschina.com.cn 24 Mar 2013 Key data HSI Index 22225.88HSCEI Index 10944.35S/O（mn） 5606.40S/O (HK)（mn） 5536.40Mkt cap (HK) (mn) 6367BVPS（HKD） 1.24Major share holder Holding (％)Chen Yihong 49Free float 46Industry ApparelShare performance %1m 6m12mAbsolute return 5 5-18Relative return 7 2-23 Source：Bloomberg Related research -60-40-20020M ar/12Jul/12No v/12(%)03818.HKHSI Ind exIt was the best of times, it was the worst of times Please see important notice on the last page. Company Reportwith the Company while about 20% stores directly operated by Belle may not be operated directly by the Company. The loss of those retail stores might cost the Company 5% in short-term sales Reiterate “Buy” The Company generated a positive operating cash flow of RMB273mn through effective internal management. At the end of 2012, the Company had a net cash of RMB2.7bn, together with financial product in total of approximately RMB5.0bn, which derived a net cash of RMB0.9 per share. We reiterate our previous view on the Company, the worst has been passed, the business continued to improve. However, since the industry has yet to turnaround, we recommend investors pay attention to risks. Risks: 1) Industry improvement is worse-than-expected; 2) the development of the retail business is lower-than-expected; 3) the talk with Belle hasn’t ended up with good result, maximum impact to the Company will be about 20% sales reduction in 2013. Financials RMB mn 2011 2012 2013E2014E2015ERevenue 2,742 1,772 1,7461,8772,058Growth (%) -35.7% -35.4% -1.4%7.5%9.6%Gross profit 1,291 897 8609321,028Net profit 106 193.8 211222235Growth (%) -92.8% 83.4% 9.0%5.3%5.5%EPS (RMB) 0.02 0.03 0.04 0.04 0.04 DPS (RMB) 0.03 0.02 0.03 0.03 0.03 P/E (X) 56.79 32.34 27.07 25.70 24.36