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Fiyta released its 2011 results: Revenue Rmb2.56bn (+43.8% YoY); Netprofit attributable to shareholders Rmb159mn (+69.7% YoY); EPS Rmb0.41,slightly below expectation. The company has proposed distributing a cashdividend of Rmb1 for every ten shares.

Comments

In 4Q11, revenue growth slowed, while gross margin expanded further.

The company’s revenue increased by a slower-than-expected 33% YoY in4Q11 amid worry about the economic slowdown. For 2011, Harmony watchsales slowed over time amid the subdued demand for luxury watches, withrevenue up 40% YoY; while revenue from Fiyta watches increased a rapid66% YoY. Thanks to the larger share of high-margin Fiyta watches and pricehikes, gross margin expanded 3.1ppt YoY in 2011.

High expenses dragged down net profit growth. In 4Q11, selling expenseratio surged 5.1ppt YoY to a historically high level, as the company madeactress Gao Yuanyuan its brand ambassador for women's watches. Financialexpenses also increased 53% due to increased bank loans to finance projectacquisitions. Net profit fell 13% YoY in 4Q11 amid the high expenses,missing the market expectation.

Continued focus on channel expansion and brand building. In 2012, thecompany will focus on improving existing channel networks, with same-storesales expected to rise rapidly. Amid the significant economic uncertainties inthe next few years, the pace of new store openings may slow slightly, with 35stores expected to be opened in 2012 (lower than in the previous two years),and revenue growth from the Harmony brand may also slow to 25%. Weexpect industry growth to pick up over time this year.

Investment recommendation

We revise our 2012e EPS forecast to Rmb0.53. Fiyta-A is trading at31.6x/24.3x 2011/2012e P/E, with Fiyta-B at 18.4x/14.1x. We maintainACCUMULATE on Fiyta-A and a BUY rating on Fiyta-B given the greatgrowth potential of luxury watch consumption in China. We suggestlong-term investors buy the stock.

Risks

Double-dip economic recession; luxury watch consumption loses steamagain; lower valuation due to a fall of the broader market.