Belle FY17 H1 result

For FY17 H1, Belle’s revenue is largely flat yoy at RMB 19.5bn, but operating profit drops nearly 20% yoy to RMB 2.28bn as operating margin drops from 14.7% to 11.6%. It generated free cash flow of 1.48bn. The operating profit and FCF are largely inline with my expectation. But the share price is down 7.5% at the moment and seems to continue falling. My valuation of the Company remains at around HKD 5.2 – 5.4 per share.

Belle - Financials - FY17H1.png

Source: Belle’s Interim Report FY17 H1

Belle paid off the remaining debt of 861m. Net cash increased from 6.9bn to 7.63bn in 6 months. It’s still a solid cash generator, which is what I’m concerned about.

Belle - Segment Revenue - FY17H1.PNG

Source: Belle’s Interim Report FY17 H1

Footwear Business

Revenue declined by 12.7% yoy from 9.84bn to 8.59bn. Operating margin dropped from 19.3% to 16.6% and is likely to continue falling. This is the business that is more worrying. Gross margin of its high-end casual brands is declining.

The management dedicates 2 pages of the interim report to discussing how they will tackle the challenges in this business. We will not discuss whether the strategy will work. We just need to bear in mind that this business will need a lot of hard work to turnaround and will take time. Whether or not the management can turnaround this business is also a question mark, not a certainty. But what I like about the management is their candor in sharing the action that they are taking and the acknowledgment of their slow and passive action in dealing with the challenges.

I am assuming a normalized operating margin of 15% for this business. At current rate of 16.6%, I still have some margin of error.

Sportswear and Apparel Business

Revenue grew by 14.9% yoy from 9.52bn to 10.94bn. Operating margin dropped from 10.5% to 8.4% due to unusually high margin and tight inventory last year. Belle’s management has been upfront with the high margin for last year and expects the margin to drop this year and they are right.

I am assuming a normalized operating margin of 7% for this business.

Belle - Segment Financials - FY17H1.PNG

Baroque Japan

Positive surprise comes from its investment in a joint venture. I’ve largely ignored Belle’s investment in joint venture. As stated in latest balance sheet, its investment in associate and joint venture is worth RMB 1.05bn. Around RMB 583m of it was invested in Baroque Japan, which Belle holds 31.96% stake.

Baroque Japan, Belle’s joint venture, is a retailer of young women’s fashion apparel and accessories in Japan. It has 479 stores, out of which 336 in Japan, 136 in China and 7 in Hong Kong. Baroque is preparing for IPO in Tokyo Stock Exchange in November this year. Belle intends to sell some of its stake and will still hold 18.6% of Baroque after its listing. Baroque’s market capitalization is estimated to be JPY 79.5 bn (or RMB 5.33bn or HKD 6.13 bn).

Belle is expected to recognize a gain of RMB 236.8m to 276m after selling some stake. The remaining stake of 18.6% will be worth RMB 1.0bn or HKD 1.14bn, which is around 2.3% of Belle’s total value. This is still small, but validates that Belle’s investment in associates and joint venture does create value for the shareholders.

I’m holding the position for now. My entry price in July was HKD 4.72. My estimated valuation of Belle is HKD 5.2 – 5.4 (bull case at around 6.0). Current share price is still within my valuation range, but leaving no margin of safety for me.

Belle - Share Price - 2016-10-25.PNG

I went to Shanghai in August. Surely, I took the opportunities to visit some of Belle’s outlets. Here are few pictures. The outlets were mostly empty when I visited. Well, the shopping mall was mostly empty. The price of the shoes are considered high to me. The quality and design don’t really impress me. But somehow, they still made RMB 20bn sales last year.




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