Author

章晶小姐 (Zhang Jing)
高級分析師

本科畢業於同濟大學工科，碩士畢業於華東師範大學金融貿系。現為輝立証券持牌高級分析師，主要負責汽車及航空板塊的研究，曾獲得《華爾街日報》亞洲區2012年度汽車及零部件最佳分析師第二名，擅長將行業前景與上市公司結合分析。

Bachelor Degree in Tongji University of Engineering; Master Degree in East China Normal University of finance. Currently cover automobile and air sectors. Having worked in research for years and is good at combining analysis for the companies with industry prospects.

Phone:	86 21 51699400-103	Email:	zhangjing@phillip.com.cn
For Research Report and Business enquiry

PCD Stores (Group) Limited（0331.HK）－Luxuries` season

Thursday, December 3, 2009

6603

PCD Stores (Group) Limited(331)

Recommendation on 3 December 2009
Recommendation	Neutral
Target Price	$2.060

Weekly Special - 9618 JD.com

Summary

PCD Stores is a luxury department store chain with 16 department stores in China. Due to aggressive expanding, the Company recorded strong CAGR of 104.8% and 94.3% on revenue and net profit respectively. Experience gained in developing the PORTS brand of PCD Store's Shareholders –the Chan Brothers, provides PCD with expertise in the China retail market.

We expect its EPS to be HK$ 0.079 and HK$ 0.083 in 2009 and 2010 respectively Considering professional management and the developing-room for domestic luxury market, we give it 25X P/E. Based on 2010 EPS, the 12-M TP will reach HK$2.06, 3% higher than the upper issue price , Neutral rating.

A luxury department store with rapid growth

In 1998, the first store of PCD Stores in China Mainland was established in Xiamen. With rapid development in the past two years, its department stores have increased from 4 in 2006 to 16 in 2009

plus the Scitech outlet mall in Beijing covering more than 40,000m2, among which 9 are self-owned. It has three brands of PCD, Scitech and Laiya.

The Company focuses on high-end and luxurious merchandise retails including fashion, accessories, jewelry, cosmetics and household goods. More than 1600 brands are supplied in its self-owned stores including Armani Collezioni, Burberry, Cartier，Ermernegildo Zegna，HugoBoss，RalphLauren and Ports 1961.

Due to aggressive expanding, the Company recorded revenue and net profit of HK$717millin and HK$174million in 2008 from the HK$171million and HK$46million in 2006 respectively, posting a CAGR of 104.8% and 94.3% respectively.

Its revenue mainly comes from concessionaire sales and direct sales, with the former amounting to a bigger part of 69.8% in 2008and 64.8% in 1H09. And Scitech outlet mall in Beijing contributes the most among the stores, amounting to 51.7% of the total in 1H09.

Financial analysis

Commission rate of concessionaire sales increased stably to 20.8% in 1H09 from the 19% in 2006 with some new stores opening or contracts renewal. Meanwhile, average gross profit margin of direct sales improved obviously except the cosmetics destocking in PCD Qingdao dragged the average gross profit margin in 1H09.

The Company obtained good scores in operating expenses control, with the shares of operating lease rental expense and other operating expenses in the total revenue decline from the 14.7% and 24.9% in 2006 respectively to 13.3% and 17% in 1H09.

The goods changing in Qingdao store in 1H09 resulted direct sales goods reduced versus proprietary goods, which then increased stock turnover days to 95 from 83. However, up to October 31, 73% stock had been sold out. Therefore, we expect it will recover to normal before the end of 2009.

Peers Comparison

The Company′s controlling interest are held by Alfred Chan and Edward Tan together, who are also major shareholders of Ports International Enterprises Limited, which owns the famous costume brand and prolific experience and advantage in domestic high-end ornament, especially for suit-dress. Those will benefit PCD′s operation. Among its revenues in 1H09, the lady′s fashion accounted for a quarter, the highest share in all kinds, followed by household goods (18%) and mans′ fashion (15%). As one of the most lucrative brands globally, the Ports Brand has kept 40% growth since its entering China in 1994.

As far as the sales per m2 is concerned, the PCD is ranking middle, but with a better ROE.

Department stores sector is facing booming cycle in China

Spurred by per capita disposable income, Urbanization and increasing population, the level of household consumption goes on increasing, and China begins to step into a booming consumption cycle. With the change of demographic structure, the rising middle class is breeding up mature consumption habit, and the dilated gap between rich and poor will drive high-income group capable of buying more high-end luxuries. Plus the huge population foundation, there is roomy space for the development of luxury markets.

Risks

Macro-economy is weaker than expected;

Risk in the market expansion;

Increased competition in the industry;

Accidental forces, like fire hazards.

Valuation

Currently the Company plans to expand the business to many cities including Beijing, Shanghai, Xi′an and Shenyang. After our estimation, we expect its EPS to be HK$ 0.079 and HK$ 0.083 in 2009 and 2010 respectively. And the P/E for domestic department stores listed in HKSE average at 27X presently. Considering professional management and the developing-room for domestic luxury market, we think it is reasonable to give it 25X P/E. Based on 2010 EPS, the 12-months target price will reach HK$2.06, 3% higher than the upper issue price between HK$ 1.65 and HK$2. We give it Neutral rating.

Financial Forecast

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