Belle – Sold Out

First Purchase

Sold out my position in Belle at 4.81 yesterday. I bought it at 4.72 in late July 2016 (see this post). Return: capital gain of 1.9%, dividend of 4.3% (for HKD 0.205 per share), and forex HKD-SGD gain of ~3.5%. After adjusting for fees, the net return is 9% in 6 months.

Second Purchase, Second Chance

In my first post, I did mention that I should’ve bought it earlier at 4.30s instead of 4.72. The dip in December gave me a second chance, and I took it.

On 12 Dec 2016, the share price dropped to 4.41, and I bought extra shares. This second purchase had capital gain of 9% and forex loss of 1.7% for a net gain of  6.3% after fees in 1 month.

Forex gain/loss

If Trump didn’t comment USD “too strong” two days ago, I should have gotten 1 extra percent from forex gain. Over the past 6 months, HKD actually strengthened by 5% against SGD, but when you exchanged your money to foreign currency and back, you lost some in the bid-ask spread. That’s why my forex gain was just 3.5%.

Timing

When I started buying Belle, I estimated its fair value at HKD 5.2 – 5.4. One day after I bought it, the price rose to 5.3 and fluctuated between 5.0 and 5.5 until late October. When first half result was released in October, the price dived to 4.60s, then 4.40s, then 4.20s.  I held my position throughout.

One certainly wished to sell at the peak, but I can’t time the market, so I don’t regret missing out. Few minutes after I sold it at 4.81, it rose by 1% to 4.87. See how a few minutes can make a difference to your return. Again, I can’t time it.

belle-share-price-2017-01-19

Source: Google Finance

Reasons to Sell

Given that my estimated value is 5-2 – 5.4, why did I sell out?

1. My gain of 9% is close to my expectation of 10-14%.

My capital gain was tiny, but I got unexpected forex gain of 3.5%. The net return of 9% in 6 months is satisfactory. The points below suggest me to take profit.

2. CNY weakened.

CNY-HKD was 1.16 when I did my valuation. It’s now at 1.13, weakened by 2.5%. If I re-do my valuation now, my estimate in CNY will stay the same, but when adjusted to HKD, it’ll drop by 2.5% to 5.07-5.26. So, my margin of safety get narrowed. I didn’t expect CNY to drop so much, and it seems to get worsened further.

3. Belle’s Q3 result worsened.

SSSG for footwear worsen from Q2’s -10% to -14.6% yoy. SSSG for sportswear slowed down from 5-6% to 4.6%. While this may be seasonal, it makes me think more about point #4 and #5 below.

The good thing is that Belle closed 239 footwear outlets in Q3. While revenue will be lower, the margin should improved in the long run. The short term effect is that it might report higher one time write-off charges for the closures, lowering second half profit. Investors looking for short term profit are likely to be disappointed with the reported figures.

Another upside is that Belle opened 269 sportswear outlets in Q3. With more consumers shifting to athleisure style, this should still have room to grow. But see the point #5 below.

4. E-Commerce continues to grow rapidly.

Alibaba has record sales and broke 11.11 day sales again. When e-commerce is doing so well, it canibalizes the brick-and-mortar business. The continued sales growth of e-commerce makes me think depper:

– Has the brick-and-mortar business reached the bottom or near bottom to stabilize?

– Have the share prices of retailers reflected this or will they continue to fall?

– Is my estimated long-term operating margin of 15% reasonable for Belle’s footwear business? (Belle’s footwear operating margin used to be 21-25%, and dropped to 18.7% in FY16). If I use lower margin as assumption, my current estimated margin of safety will all disappear.

5. Nike is pushing its own E-Commerce platform

Nike started its e-commerce website in China in 2014. As it pushes for its e-commerce growth, eventually, it will eat into the business of its brick-and-mortar distributors like Belle. Nike even renovated its US physical stores to integrate online purchase and plans to roll out this strategy to international stores.

I thought deeper about Nike because of its recent announcement in Singapore that it would stop supplying to small retailers in Singapore shortly after it launched its own e-commerce platform in Singapore. It won’t do the same to Belle as Belle is the largest sportswear retailer in China.

But as you can see, Nike, the brand owner, wants to drive growth to its own e-commerce. It wants a large pie. Belle’s SSSG for sportswear is likely to slow down in near future as it gets more competition from its own supplier, Nike’s online stores.

6. China continues to build more shopping malls

There is recent article about Chongqing, a city in China with population over 30 millions. There is a glut of shopping malls. This will reduce the sales per stores, hurting Belle if it does not locate its stores strategically.

7. Many retailers are reporting disappointing numbers and closing stores.

Gaps, Macy’s, Mark & Spencer, Nordstrom, Abercrombie, Wolverine World Wide, etc are closing 100 stores or mores. Have we reached the bottom?

8. 10% or more drop in sales for Belle’s competitors in Q3

Stella, Daphne, Fuguiniao, are all reporting lower numbers.

9. Baroque Japan’s share price fell by 25% since its IPO

Belle should report gains from its holdings in Baroque Japan after the latter’s IPO. But, the gains get lower after Baroque’s 25% price fall. The impact to Belle’s bottomline is quite small though.

All the reasons above are negative. Am I listing all the reasons to support me to sell or I sell because of these reasons? It’s the latter.

Margin of Safety

Now, despite all the negatives, you can still make profit in investing if you have bought at a large margin of safety. That means, for Belle’s situation, the value estimate has factored in the bad case, and the price has fallen to so much lower than that. Therefore, you have to detect that the market is over-bearish and you have to be right. That’s my basis when I started investing in Belle in July 2016.

My earlier valuation has factored in a reasonably bad case (I hope), but I did not buy with a large margin of safety. The retail environment also seems to get worse than I expected. With all this thought, I decided to take profit before the price reached my value estimate.

Belle is showing sign of restructuring its footwear business by closing 200+ stores in Q3. Will it succeed? Let’s see.

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