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Sa Sa International Holdings

HongKong/ChinaEquity

CompanyReport

Member of Haitong Securities


Source: Bloomberg

Investment Summary

Thanks to its efforts to cut costs of sales and operating expenses, Sa Sa'sFY10 (Y/E: 31/3) net profit increased 21% yoy to $381m, though revenueincreased a more moderate 14% yoy to $4,111m. Gross margin edged up0.4 ppt from 43.7% in FY09 to 44.1% in FY10 due to the decrease in theprovision for slow-moving inventory. At the end of the period, Sa Sa had150 Sasa multi-brand stores plus 23 beauty counters for a net increase of23 compared to end-FY09.

By region, Hong Kong and Macau continued to contribute the majority ofthe revenue and accounted for 80% of the total in FY10. Turnover rose 11%yoy to $3,288m, with same-store-sales growth of 7% yoy. Affected by theoutbreak of swine flu, tourist arrivals in Hong Kong posted a decline fromMay to July that also caused Sa Sa to register lower yoy SSS growth of3% in 1H FY10. However, as tourist arrivals recovered, business in Hong

Kong and Macau began to pick up with a yoy growth in average sales pertransaction in 2H FY10. During the period, Sa Sa recorded improved yoyretail sales growth (16%), SSS growth (11%), ASPT ($302) and totalnumber of transactions (6.2m) compared to 1H FY10's 5%, 3%, $243and 5.6m. In FY10, Sa Sa had 5 factory outlets in Hong Kong and Macaudesigned to help clear slow-moving inventory, as well as 70 multi-brandSasa stores and 3 beauty counters, for a net increase of 9 compared toend-FY09.

Performance in mainland China continued to improve, with the lossnarrowing to $14m from FY09's $27m. Turnover, which accounted for 2% ofthe total, swelled 61% yoy to $97m with SSS growth up 13%. During theperiod, the company put more effort into driving SSS growth byrationalizing the number of counters and building sales point clusters. It

added a net 7 Sasa stores yoy and registered a net decrease of 5 beautycounters for a total of 17 Sasa outlets and 18 beauty counters in 11mainland cities. The company is planning to accelerate the expansion ofthe network and is targeting a total of 67 stores by the end of FY11. Toaccelerate a breakeven in its mainland operations, Sa Sa is increasingproduct offerings, broadening marketing efforts and focusing on Sasastores.

Elsewhere, Malaysia, Singapore and Taiwan each accounted for 4% ofturnover, and recorded yoy growth of 24%, 16% and 12%, respectively, to$176m, $162m and $147m. Singapore recorded -2% yoy SSS growth, butMalaysia and Taiwan posted 10% and 9%, respectively. At the end ofFY10, the company had 30 stores in Malaysia, 18 in Singapore and 15 inTaiwan.

12M target price $6.29 (+7%)

HOLD

30 Jun 2010

Analyst:Winnie Fong (852) 3723 2911

[email protected]

Price Chart

Fairly attractive

Company Background

Established in 1978, Sa Sa International Holdings is

a leading cosmetics retailer and wholesaler in Asia. At

end-1Q FY10, the company had 156 stores and

counters in Hong Kong, China, Taiwan, Singapore and

Malaysia. Sa Sa sells more than 400 brands of

skincare, make-up, fragrance and hair care products.

The company listed on the Hong Kong stock

exchange in 1997.

Last price: $5.89 Stock code: 0178.HK

Sector: Consumer

# shares:1,393.8m

Mkt cap: $8,209m Free float: 35.5%

Major shareholder: The major shh: Sunrise Height

(50%), Green Ravine (14.5%)

Price change: 1M: +6% 3M:-3% 12M: +112%

12M H/L: $6.74/$2.76

12M daily turnover: 2.9m shares

Stock Data

Price PerformanceIBES consensus EPS estimates - FY10: $0.32; FY11: $0.38

Earnings SummaryYear-end 31 MarTurnover ($m)Net profit ($m)Change (%)EPS ($)Change (%)DPS ($)P/E (x)Yield (%)

2009 2010 2011F 2012F 2013F3,609 4,111 4,934 6,019 7,524

316 381 461 563 695+14 +21 +21 +22 +230.23 0.28 0.33 0.40 0.50+14 +20 +22 +21 +250.23 0.28 0.31 0.34 0.4225.7 21.8 17.8 14.7 11.83.9 4.8 5.3 5.8 7.2


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Thanks to the increased product offerings, marketing activities and animproved online experience, Sasa.com realized significant 57% yoygrowth in turnover to $241m to contribute 6% of revenue. Theimprovements and targeted marketing upped orders from repeatcustomers by 20% and boosted the number of transactions from newcustomers by 29%.

In 1Q FY11, overall group turnover achieved 20% yoy growth. HongKong and Macau achieved yoy sales growth of 19%, similar to 4QFY10, with China chalking up lower growth compared to 4Q FY10's61.5% and Malaysia coming at 15%, while Singapore and Taiwanposting 20% and 9%.

At the end of FY10, Sa Sa continued to maintain a sound net cashposition of $646m, an upsurge of 26% yoy while the cash generatedfrom operating activities increased 80% yoy to $415m, which will allowthe company to maintain a high dividend payout ratio. Looking forward,Sa Sa expects to have 231 stores by March 2011, an increase of 34%yoy. As the economy in Hong Kong continues to recover and touristarrivals pick up, this will undoubtedly underpin overall turnover inFY11, as mainland visitors accounted for about 54% of retail sales inHong Kong and Macau during FY10. The favourable macro outlookcoupled with the company's product diversification strategy will furtherbroaden its customer base. We derive a target price of $6.29,representing a forward FY11 P/E of 19x or a PEG of 0.9x, given ourprojected EPS CAGR of 22% for FY10-FY12.

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DisclaimerIssued by Tai Fook Research Limited (TFRL) licensed corporation to carry on Type 4 (advising on securities) regulated activity for the purpose of the Securities and Futures Ordinance (Cap. 571),approved for distribution by: Tai Fook Securities Company Limited (TFSCL) and/or Tai Fook Investment Services Limited (TFIS) (both are licensed corporations to carry on Type 1 (dealing insecurities) regulated activity) in Hong Kong. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable and in good faith but norepresentation or warranty, express or implied, is made by TFRL, TFSCL, TFIS or any other members of the Tai Fook Securities Group (TFSG) from which this document may be received, as to

their accuracy, completeness or correctness. All opinions expressed herein are subject to change without notice. This document is for information purpose only. Descriptions of any companies ortheir securities mentioned herein are not intended to be complete and this document is not, and should not be construed expressly or impliedly as, an offer to buy or sell securities. TFRL, TFSCL,TFIS and/or TFSG, their directors and/or employees and/or their associates may have a long or short position in any of the securities mentioned in this document at any time. TFSG may alsoprovide financial and business advisory, corporate financing or other related services to the companies mentioned in the documents and may make a purchase and/or sale, or offer to make apurchase and/or sale, of any of the said securities from time to time in the open market or otherwise, in each case either as principal or agent. This document may not be reproduced, distributed orpublished for any purpose without prior consent of TFRL.

Notes: (1) "$" refers to HK dollars throughout this report unless

otherwise stated.(2) Share prices and indices are as of 24 Jun 2010 (HSI:

20,733)

Recommendation PolicyBUY if current price is more than 10% below AFV.HOLD if current price within +/-10% from AFV.SELL if current price is more than 10% above AFV.

AFV (Assessed Fair Value) is arrived at based on variousappropriate valuations, including P/E, Yield, NAV, DCF, EV/EBITDA,and management quality, etc, with regard to prevailing interestrates and comparative valuations.

P/L Summary

Year-end 2009 2010 2011F 2012F 2013F31-Mar $m $m $m $m $m

Revenue 3,609 4,111 4,934 6,019 7,524Cost of sales (2,032) (2,296) (2,718) (3,286) (4,003)Gross profit 1,577 1,815 2,215 2,733 3,521Operating expenses (1,235) (1,381) (1,685) (2,080) (2,709)Other income, gains/losses 41 31 32 34 35Profit before tax 383 465 563 687 848Income tax expenses (67) (84) (101) (124) (153)Profit attributable to equity holders 316 381 461 563 695

Financial Summary

Financial Year 2006 2007 2008 2009 2010

Key financial data:Non-current assets ($m) 250 249 222 219 268Current assets ($m) 1,122 1,173 1,221 1,196 1,314Current liabilities ($m) 430 445 325 278 368Net current assets/(liabilities) ($m) 692 728 896 918 946Long term liabilities ($m) 28 27 10 15 19Shareholders funds ($m) 914 950 1,108 1,123 1,196Net cash/(debt) ($m) 696 696 652 621 646Book value per share ($) 0.69 0.70 0.81 0.81 0.86Net cash/(debt) per share ($) 0.52 0.51 0.47 0.45 0.47EPS ($) 0.14 0.16 0.20 0.23 0.28

DPS ($) 0.17 0.17 0.21 0.23 0.28Key ratios :Current ratio (x) 2.6 2.6 3.8 4.3 3.6Return on equity (%) 20.3 23.2 24.9 28.1 31.9Operating margin (%) 8.0 9.2 10.0 10.3 11.2Net margin (%) 7.1 8.2 8.6 8.8 9.3Effective tax rate (%) 16.8 18.5 20.5 17.5 18.0Dividend payout (%) 122.3 104.3 104.5 100.4 102.2Net profit growth (%) (8.4) 18.8 25.5 14.5 20.6EPS growth (%) (10.2) 17.3 23.3 13.9 20.1

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