Belle International

Belle International is the largest retailer of ladies’ footwear in China and largest distributor of Nike and Adidas in China. It manages 20,873 retail outlets in China and 144 retail outlets in HK and Macau. Here are the brands that it owns or distributes:

Belle - Brand Portfolio.PNG

Source: Belle’s Annual Report 2016 Presentation

Business Model


Belle - Business model.PNG

Belle employs vertically integrated business model for its footwear business. It designs the shoes, procures the materials, manufactures and sells them in retail stores. This captures the margins in the whole supply chains. That’s why its gross margin is high at around 65-68%.

For Sportswear and Apparel business, Belle is just a distributor and retailer, but for strong global brands, such as Nike and Adidas. The gross margin is much lower than its own footwear business.

Belle - Gross Margins.PNG

Number of Retail Outlets

Belle manages 13,762 ladies’ footwear outlets and 7,111 sportwear and apparel outlets.

Belle Number of outlets detail - 2016.PNG

If you wonder whether total of 20k retail outlets is considered big or small, just look at the chart below.

Belle Number of outlets comparison chart

You can add the number of retail outlets from Zara, H&M, Gap and Uniqlo, and total is still fewer than Belle’s. However, part of the total outlets are consignment counters in the department stores, which are much smaller and generate lower sales than free-standing stores. That’s why even though its number of outlets is more than 5x of Gap’s, its annual sales is less than half of Gap’s.

Consignment counters typically charges a certain percentage of sales. I don’t know what percentage that Belle is paying for department stores in China, but in Singapore, those department stores like Takashimaya, Robinson’s, are charging 35 – 40%. You can see this rate as part rent or part selling cost. For Belle, it’s classified together with the operating lease rentals. That’s part of the reason why Belle’s rental expense as a percentage of Sales is so high compared to other retailers.

Belle - Rental percentage comparison chart.PNG

Historical Financial Performance

Belle went IPO in May 2007. In  2007, it managed 6k outlets and achieved revenue of RMB 11.7bn and operating profit of 1.7bn. In FY16 (it changed its financial year end from Dec to Feb in 2014), it managed 21k outlets and achieved revenue of 40.8bn and operating profit of 5.5bn. Look at the table below for its past 10 years financial results.

Belle - Financials 10Y - 2016.PNG

Belle - Profitability 10Y - 2016.PNG


In FY16, it had 1.35bn impairment charge to intangible assets. That’s why the FY16 operating profit of 5.5bn was stated as 4.2bn in the table above.

Over 8 years from 2017 – 2016 (Feb), the revenue grew 3.5x while operating profit 3.2x. The CAGR for revenue and operating profit was 16.9% and 15.5% respectively. The number of outlets grew from 6k to 21k. That’s outstanding performance!

Historical Share Performance

So, naturally, we will expect to see similarly outstanding performance in its share price. But, the price chart below tells a different story. Since its IPO, the share price has fallen by 32%!

Belle - Share Price since IPO - 2016-07-28.PNG

What have gone wrong with the share price given that both the revenue and operating profit have more than tripled over the past 8 years??

The answer is high price.

When it went IPO in mid 2007, it’s valued at 60-70bn. At end of 2007, the market cap had risen to 96bn. Its FY07 net profit was 1.98bn, giving it P/E of 48x.

At end of 2008, during the bottom of GFC, Belle’s share price fell to the bottom too and it was the best opportunity to buy as revenue and profit was still growing. When the economy and stock market recovered in 2009, Belle’s share price, again, rallied sharply to high level. Look at the valuation multiples below.

Belle - Valuation Multiples - 2015


From 2009 to 2012, while the revenue and profit were growing strongly, the market expectation was very high, valuing Belle at P/E of 24x to 31x.

In 2013, revenue grew by 10% but net profit grew by just 2.5%. The share price fell from $16 at the start of 2013 to $9 by the end of 2013. A 45% fall! P/E dropped to 13.8x. Everyone was talking about China’s hardlanding. Many retail companies were also facing similar low growth problem. Some were experiencing negative growth.

In 2014, both Belle’s revenue and net profit were relatively flat, and so was the share price.

In 2015, Belle’s revenue was flat but its operating margin in footwear business fell substantially. Same store sales growth (SSSG) for footwear fell to negative 10% in late 2015. Market lost confidence in its share, and the share price plunged from $8.90 at the start of 2015 to $5.5 at the end of 2015.

In 2016, the outlook remained weak. In March, it issued warning that profit could decline by 35 – 45% for FY16 results. There was an impairment charge of 1.35bn to its intangible assets.  The share price fell further to near $4.

Belle - SSSG quarterly


Valuation (Sum of Parts)

It caught my attention in April when the share price was around HKD 4.30. Based on FY15’s EPS of RMB 0.57 (or HKD 0.68), the P/E was 6-7x, which I found attractive. I was waiting for FY16 results, which should be released in 1-2 months.

When the results were released in late May, I tried to estimate the value of the company quickly and thought it should be worth in mid 40bn or HKD 5.3 per share. The share price was 4.75 at that time and fell back to 4.2 in mid June. At 4.20, I thought there was 20% margin of safety.

But, my procrastination to start looking at the company more seriously and do proper valuation cost me some money. I started to read the reports and do valuation in mid July. By that time, the share price rose to 4.60.

Here’s roughly how I estimated the value of the Company:

Sportswear and Apparel business:

RMB 20bn revenue with 7% operating profit margin (vs FY16’s operating margin of 8.8%). That’s 1.4bn operating profit. After 28% effective tax, the net profit is 1bn. Depreciation + Amortization (D&A) is ~360m and the maintain capex could be around 100m more than D&A, so Free Cash Flow (FCF) is 900m.

80% of the outlets are Nike and Adidas, strong brands that demand premium pricing. 17% of the outlets are 2nd-tier brands, such as Converse and Puma. While the demand for sportswear can be cyclical in China, the brands that Belle distributes are global brands that spend a lot on advertising to maintain market shares.

Belle’s FY16’s revenue growth was 16% and operating profit growth was 43%. FY16 had higher than usual margin due to strong demand and low stock availability. So, the higher than usual margin is not likely to be sustainable. FY17 Q1 SSSG was 5.5%, continuing its growth trend. To be conservative, I assume slow growth rate of 3-4% and estimate this sportswear business to be worth 13-14bn.

Net Cash:

Belle has net cash of RMB 6.9bn. So, the sportswear business + net cash is worth RMB 20-21bn.

Footwear business:

This is the difficult part of the  valuation as SSSG has been negative for the last few quarters. Both revenue and operating margin are declining. In FY16, revenue declined by 8.5% and operating profit declined by 22%. FY17 Q1 SSSG was bad -16%.

The footwear brands that Belle owns are either created by itself or bought through acquisition. Belle has a market share of 8% in the footwear industry in China in 2014. It also owns six of China’s top 10 women’s footwear brands in 2013. This business must be under attacked from the rising e-commerce in China, in which many cheaper footwear brands are competing aggressively.

I assume FY17 revenue decline by 16% (following FY17 Q1 -16% SSSG) to 17.6bn, and operating margin fell from 18.7% to 15%. The operating margin was very high at 21-25% in 2008-2014. Footwear’s margin is higher than sportswear’s because the former has a vertically integrated business model, which captures the margins along the supply chain.

With 15% margin, the operating profit is  2.64bn. At effective tax rate of 28%, the net profit is 1.9bn. Depreciation & Amortization is 659m, much higher than Sportswear because it owns factory. I assume the maintenance capex to be 150-200m higher than D&A. So, the FCF is 1.7bn.

With discount rate of 11.5% for footwear and assuming slow long-term growth of 2-3%, I estimate the footwear business to be worth around 18-19bn.

Sum of Parts

Total estimated value of the Company is RMB 38-39bn. At current RMB-HKD exchange rate of 1.16, the estimated value is HKD 44-45bn or HKD 5.2 – 5.4 per share. 

I bought it at 4.72 on 27 July with around 10% margin of safety. I was asking myself why I didn’t buy it when I started paying attention to it with 20% margin of safety one month ago?? Yesterday (28 July), the price rose 11% to 5.32, giving me 12% return in 1 day. It’s pure luck I bought it one day before such sharp rise. However, in May, the price also rose by 10% in a day and fell back several days afterwards. So, I won’t be surprised if Belle’s share price falls 10-20% from this current level.

Belle’s share price steadily fell from its peak of 17.8 to 4.2 over the past 3.5 years. That wiped out 75% of the market value. Most of the value eliminated was from the change in expectation. P/E declined from 26x in 2012 to 11x now. That contributed 58% dropped in price.

The net cash contributed HKD 0.95 per share. Excluding the net cash, the trailing P/E is just 8.1x. The market has turned from bullish to bearish and priced in negative growth for Belle. But Belle remains reasonably profitable with operating margin above 10% and ROE in high teens. The margins and ROIC can deteriorate further, but the share price has priced in this negative to a certain degree. The question is has it fully priced in all the negative correctly? Nobody has the right answer.

China has among the highest e-commerce spending, thanks to Alibaba, and many other online shopping websites. I think this is posing structural change to the retail business. This is not happening just in China, but worldwide. Brands without competitive advantage are likely to lose the market shares to tons of new small competitors that sell online at cheaper price. I can’t see when the downtrend is reaching the bottom of the cycle, but I think we have not passed the bottom yet.

I valued Belle with more conservative assumptions because of the risks that downtrend in footwear can last longer than I expected. After pricing in the negatives, I estimate that Belle can still generate FCF of RMB 2.6-2.8bn and the whole company is worth HKD 43-47bn or HKD 5.2-5.6 per share. With less conservative assumptions, my estimated value is HKD 6.0 – 7.0 per share, which is substantially higher than curren price. Therefore, I will hold for now even though the share price has risen to my conservative estimate of HKD 5.3 per share.

Will revisit every quarter or so after it releases its quarterly operational data.



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