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1H11 revenue was Rmb123mn, up 51.9% YoY. Net earnings attributable to shareholders were Rmb85.99mn, up 102.8% YoY. Net profits excluding non-recurring items rose 137.0% YoY, or an EPS of Rmb0.22, slightly better than expected.

Comments

Better-than-expected results thanks to booming demand for luxury watch: Demand for high-end consumer goods maintained strong growth, and imports of Swiss watch rose by 71% YoY in 1H11 and strong expectations of possible price hikes of some luxury watch. The company maintained the pace to expand sales network, and increased the proportion of high value-added products. As a result, Harmony and Fiyta sales surged 50.6%YoY and 73.9%YoY respectively. Composite GPM increased 3.1ppt YoY on price hikes of high-end watches.

Expansion of online sales network to boost earnings: The company raised Rmb500mn through a private placement at the end of last year and used the proceeds to Harmony store expansion, 84% of which has been completed thus far. Going forward, it will try to improve the profitability of new stores, with Harmony stores expected to record a 45% CAGR. In addition, it has established its own sales company to take charge of Fiyta brand building and sales management and expand domestic retail sales channel. As such, we expect the Fiyta business to record >60% growth this year.

We revise our 2011/2012 earnings forecasts up by 23.1% and 21.2%, respectively. We revise up our Fiyta revenue growth forecast and made slight revisions to gross profit forecast. According to our latest forecasts, fully-diluted 2011/2012 EPS was Rmb0.47 and Rmb0.64, respectively. Investment recommendation Based on revised earnings forecasts, Fiyta A-shares are currently trading at 38.7x and 28.2x 2011/2012P/E, while B-shares trade at 21.6x/15.7x2011/2012P/E. We maintain ACCUMULATE on Fiyta-A and a BUY rating on Fiyta-B given the great growth potential of luxury watch consumption in China. We suggest long-term investors buy the stock.

Risks Double-dip economy; luxury watch consumption losing steam once again; lower valuation due to the fall of the broader market.