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Investor Notes - Phillip Securities (HK) Ltd
Past Investor Notes  
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8 Dec, 2020 (Tuesday)

Joy Spreader Interactive Technology (6988) has provided investors with the latest situation and progress of the Group`s business and certain unaudited financial data. The Group`s game and mini-program business is fully accessing the Douyin platform port, providing mini-program developers, game developers, and Douyin we-media publishers with distribution and joint operation services based on data and algorithms. As for financial updates, the gross profit of the Group for the ten months ended 31 October 2020 is approximately RMB175.30 million, a significant increase to the gross profit for the year ended 2019 and the six months ended 30 June 2020, which are RMB116.95 million and RMB94.51 million respectively. (I do not hold the above stock)
Buy-in Price: $3.70, Target Price: $4.20, Cut Loss Price: $3.50

In 1H21, the company`s revenue recorded RMB 15.77 billion, a YoY decrease of 7.0%. The adjusted net profit attributable to the parent was approximately RMB 1.31 billion, comparing to the adjusted net profit of the same period last year, a decrease of about 14.6%. During the epidemic, the company continued to expand its online membership. As of August 31, 2020, the company`s cumulative registered members increased by 2.9 million quarterly to 33.1 million. In the future, the company will focus on online and offline integration to achieve seamless interaction with consumers in the physical and the virtual realm, including increasing the coverage of store-based social programs and mobile payment. Based on offline stores, the company allows employees to conduct live broadcasts in stores, and continues to expand its reach with consumers.
Buy-in Price: $10.80, Target Price: $11.90, Cut Loss Price: $10.20

Bosideng (3998.HK) - Actively expand self-operating channel off-season performance beat expectations

Investment Summary

The company announced its interim results for the six months ended September 30. During the period, the company's revenue rose 5.1% YoY to RMB 4.66 billion, and revenue from branded down jackets rose 18% from the same period last year to RMB 2.99 billion; gross profit also increased by 15.4% YoY. Net profit attributable to the parent increased by 41.8% YoY to RMB 486 million. Earnings per share were RMB 4.54 cents, a YoY increase of 40.6%. The interim dividend per share is RMB 3.5 cents.

The company's brand down apparel income increased, and other business income decreased

The increase in revenue during the period was mainly due to the company's branded down apparel business. Its development in brand, product, channel and information digital management has brought positive growth to the company's revenue. In terms of business segments, the company's branded down apparel revenue for the six months ended September 30 increased by 18.0% YoY to RMB 2.99 billion, accounting for 64.1% of the revenue in 1H21, an increase of 7.0 ppts from the same period last year. However, for OEM, women's clothing and diversified business, the revenue decreased by 8.9%/18.5%/35.6% respectively, and the proportion of revenue in 1H21 decreased by 4.0 ppts/2.6 ppts/0.4 ppts respectively.

Active expansion during the epidemic, the proportion of direct sales increased

With a closer look to the sale channel, the company's branded down business's revenue from direct operations increased during the period. Direct revenue (including online and offline) increased by approximately 144.3% from the same period last year to RMB 1.11 billion. The revenue structure changed during the period. The proportion of direct sales revenue increased by 19.2 ppts. Mainly because the company adjusted its strategy during the epidemic, maintaining revenue growth under prudent risk management was the company's main development strategy in the first half of the year. During this period, the company continued to optimize and upgrade its channels and upgrade its store image. Most of the new stores are large and located in large commercial districts, new stores are mainly directly operated by the company. As of September 30, the sales points of the company's brand down jackets decreased by 202 HoH to 4,664, but the number of self-operated sales points increased by 19 HoH to 1,880, and the proportion of self-operated sales channels rose to approximately 40.3%.

The cash conversion cycle day has been improved, and the strategic cooperation and destocking has a significant effect

In terms of operating, the company's inventory level has eased. The average inventory turnover days during the period was 200 days, an increase of 28 days compared to the same period last year. This was mainly due to the company's high initial inventory level. The company's de-stocking action have a significant effect during the period. The level fell to RMB 2.60 billion HoH, a decrease of 4.4%, of which the inventory of finished products decreased by approximately RMB 340 million. The company's accounts receivable turnover days during the period increased by 12 days to 98 days YoY, mainly due to the company's support for third-party distributers` payment collection during the epidemic and the appropriate extension of the payment cycle. During the period, the company also introduced supply chain finance solution and reduced the use of cash payments. The accounts payable turnover days were 188 days, an increase of 78 days YoY. The cash conversion cycle decreased by 38 days YoY to 110 days.

Expense-to-sales ratio increased due to increased direct sales ratio and newly granted share options

On the expense side, the company's distribution expenses and administrative expenses in the first half of fiscal year 20/21 both increased. Sale & distribution costs increased by RMB 90 million to 1.21 billion from the same period last year, accounted for 25.9% of revenue, an increase of 0.7 ppts. Mainly due to the expenses incurred by the company in branding and channel construction of branded down jackets during the period, including rent, store decoration expenses and sales and employee costs. Administrative costs increased by approximately RMB 50 million compared with the same period last year, accounting for a YoY increase of 0.8 ppts to 8.4% of revenue, mainly due to the costs incurred by the newly granted share options during the period.

New retail operation strategy is beginning to shine

In the first half of the 2020/21 fiscal year, the company actively expanded its online business and established a more convenient communication bridge with customers through corporate WeChat. During this period, the number of new corporate WeChat friends reached 8 million, and the company's WeChat public account fans totaled more than 5.5 million, increased by more than 50% HoH, and the number of registered members reached 19.65 million. From the perspective of customer structure, the company's young consumers under 30 have a significant increase compared with last year, accounting for about 20% of the consumption. In terms of new retail digital innovation, the company uses Alibaba data center to establish customer labels, cooperate with high-quality digital content to reach consumers, and sales through mini programs. At the same time, it also establishes a corporate WeChat shopping guide marketing assistant for each shopping guide, and uses the data center to match interactive content templates for terminal shopping guides to assist shopping guides in maintaining good customer relationships.

Acquire logistics business and build logistics park

During the period, the company announced the acquisition of 100% of the shares of Suzhou Bosideng Logistics for RMB 560 million. The purpose of the target company is to hold properties in Changshu, Jiangsu Province. The land area is 221,000 square meters and the total construction area is approximately 192,000 square meters. Meter. After the acquisition, the company can build a logistics park system on these properties, which will help the company integrate logistics resources and establish its own smart central distribution center. We believe that in the future, combined the company's new retail development, the company can allocate resources in logistics more effectively. On the other hand, it can also serve the company's down jacket business and OEM processing management business, providing the company with a more stable operation.

Valuation model update

The sales revenue of branded down beat our expectations. We expected that the company would increase discounts due to inventory pressure. However, 1H21 showed the company's self-operating capabilities and the effectiveness of the brand re-branding strategy. The revenue of other businesses decreased as we expected. Among them, the impact of the OEM business was lighter than we expected. We re-adjusted our valuation model and revised up the company's revenue from branded down apparel business. The expected annual growth rate was 20% year-on-year (previously -5% ), while the OEM business is adjusted to -15% (previously -20%). Administrative expenses during the period were also increased due to the cost incurred by the company's newly granted share options.

Valuation and Investment Recommendation

In 1H, the company developed self-operated channels under the epidemic situation, and this year's branded down sales started earlier. As we expected, the company's revenue will be able to quickly recover after the epidemic. The company's performance in 1H21 has increased significantly YoY. However, with the company past record, the revenue in the first half of the year was only accounted for a low proportion, and as the base of last year is low, the percentage growth is higher. It is expected that the YoY growth in net profit for the year will be difficult to maintain the high level in the first half of the year. In other words, the company's first-half performance was better than our previous expectations. We raised the company's EPS forecast, and expected the company's FY21E/FY22E EPS to be CNY 13.62/17.59 cent. Given a new target price of HKD 4.50, based on 23.00x FY22E P/E (rolled over from 23.36x FY21E P/E), the new target price corresponds to the P/E of FY21E/FY22E 29.74x/23.00x.


-The development of women's clothing business is not as expected

-The company failed to reform effectively and consumers failed to accept the new brand positioning

-Increased industry competition


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Recommendation on 8-12-2020
Price on Recommendation Date$ 3.400
Suggested purchase priceN/A
Target Price$ 4.500
Writer Info
Timothy Chong
(Research Analyst)
Tel: (+ 852 22776515)

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