User 8390611's  Instablog

User 8390611
Send Message
  • Looking For Short Ideas On Hong Kong Listed Consumer Discretionary? – Try 210.HK Daphne 0 comments
    May 27, 2013 5:39 AM

    This is the first article of my series intending to cover the gap in coverage on equities listed on the Hong Kong Stock Exchange, as I have noticed the primary focus of Seeking Alpha articles on equities are focused on the US and the UK markets.

    Daphne International (210.HK)

    My focus in this article is on Daphne International (210.HK), a significant market player in the footware and apparels industry of the consumer discretionary sector. The footware and apparels industry are dominated by a couple of players according to market capitalization, namely Belle International (1880.HK), Stella Holdings (1836.HK), Daphne International (210.HK) and C.Banner (1028.HK). Together these companies comprise over 96% of the listed footwear and apparels industry. Below is a snapshot of the key numbers of these stocks as of 23 April 2013.

    Daphne (210.HK) - Historically a growth stock

    Daphne International has, since its inception in 2000 on the HK stock exchange, a growth stock and over the past ten years has maintained consistent growth in gross profit (though volatile) at around 25% for the past ten years. Breaking the growth of gross profit by its components, one would naturally expect the growth of total turnover would be in line with COGS. But this has been proven to be not the case according to the latest results announced in Daphne's 2012 annual report, where the growth of COGS is greater than growth of Total turnover by 6.9%, as shown in Chart 1 below.

    Daphne's costs of high growth strategy - High inventory levels, low inventory turn

    According to Daphne's AR in 2011/2012, Daphne has greatly expanded its retail outlets across the whole of the China, focusing on direct-managed stores, anticipating a market upturn in 2012, evidenced by the increase of retail outlets from 4,547 stores at end of 2011 to 5,427 stores at the end of 2012. Also, it can be seen that the actual inventories were double up from 1,084 M as at 2010 to 2,058 M in 2011. From an interview with Daphne's staff, 20 production lines were added into shoes manufacturing in late 2011. The actual demand, however for Daphne's products are grossly over estimated. As a result, inventory levels amounted to 2,369 million as of end of 2012, a record high level for the company. One would argue that a higher number of retail outlets naturally will increase inventory levels, but on an average inventory per retail outlet basis, average inventory per store has increase by approximately 75% since the 2nd half of 2010. Clearly the expansion strategy and production of footwear in anticipation of more market demand did not eventuate, and in the end become accumulation of stock (possibly obsolete), at the various retail outlets.


    Heavy discounting policy - not a populist tactic

    From my research at various Daphne stores, Daphne has a history of using aggressive discounting strategies at end of season to promote sales and getting rid of old stock. However, it is generally known in the industry that the aggressive discounting strategy is actually not popular in fashion. If a shoes brand was ever sold at deep discount, customers would treat the deep discounts as the "norm", and it will be very difficult for Daphne's shoes to be sold at normal prices, given the average consumer will wait for the deep discounts at the end of each season.

    According to annual result presentation, 2013 Strategy would not resolve above problems. Another bad year is expected.

    Daphne would continue to expand numbers of stores and cut cost. It will strengthen sale operation management to frontline to invite bigger sales. However, it did not address the core problem directly i.e. excess inventory piled up. Daphne's management would like fixing the inventory problem through more stores and turnovers by integrated the synergy from frontline operation management. Simply speaking, this is actually has no different to Daphne usual strategy at all but just integrating the enhancement of sales person productivity into the overall strategy. The effort should work in longer run with high operating cost persist. There is more direct method to reboot operational efficiency: the Daphne should cutting of production, laying off staff, closing out non-profitable point-of-sales and written-off non-sellable inventory.

    Recommendation

    Short the stock until the Daphne successfully reduces its inventory pile-up and revitalizes the Company's operations.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Back To User 8390611's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.