Sa Sa International Financial Research

Sa Sa International Holdings (178.HK)

Slowing growth momentum

Bloomberg │ Reuters │ POEMS 178.HK│178.HK │178.HK │

Industry: HK Retailer

Phillip Securities (Hong Kong) Ltd

Phillip Securities Research

25 March 2014

SA SA INTL HLDGS Rating - Previous Rating Target Price (HKD) 2.00 2.00 7.3 8.12 6.80 7.4% 4.3% 11.6% 19,333 18,736 7.1 6.58 - 9.264 Accum ulate Accumulate

Rating: Accumulate, CP: HKD6.80, TP: HKD7.30

Company Profile

Sa Sa International Holdings is principally engaged in the retailing and wholesaling of a wide range of brand name cosmetic products. The Group has over 270 retail stores and counters in Asia selling over 600 brands of skincare, fragrance, make-up, hair care, body care products, own-brands and exclusive products, etc.

- Previous Target Price (HKD) Closing Price (HKD) Expected Capital Gains (%) Expected Dividend Yield (%) Expected Total Return (%) Market Cap. (HKD mn) Enterprise Value (HKD mn) 3M Average Daily T/O (mn) 52 w eek range (HKD)

Investment rationales

Price correction from peak: Sa Sa’s share price has declined nearly 25% YTD (vs. HSI lost 6.3% during the same period), we attribute the weak performance on 1.) The promotion and discount activities triggered concern about slowing earnings growth of Sa Sa while it was traded at high valuation. 2.) The growth of the number of mainland visitor is slowing down. Gross margin remains high on strong bargaining power: Sa Sa’s gross margin stayed at high level of 47.0% in the 1HFY14 (vs. 45.7% in 1HFY13), we believe the promotion activities in 2HFY14 will have minimal effect on overall margin in FY14 as Sa Sa’s management indicated fine-tune of marketing strategy would reverse the downtrend of gross margin in the 4QFY14 and we believe Sa Sa is capable to do so as it is still the market leader with strong bargaining power. We forecast the gross margin in FY14 will expand 1.2 ppts to 46.4%. Slowing earnings growth on declining growth of mainland visitors: From the visitor...