What’s new

Fiyta released 1Q12 results: Revenue was Rmb730mn (+20.3% YoY); Netprofit attributable to shareholders was Rmb35.19mn (+4.3% YoY); EPS ofRmb0.09, below expectations.

Comments

Luxury watch sales growth slowed further. 1Q12 revenue was Rmb730mn,up 20.3% YoY; YoY growth slowed further from 4Q11, mainly due to acontinued decline in luxury watch consumption. Demand for luxury watcheswas subdued amid worry about the economic slowdown with growth inSwiss watch imports down to 24.5% YoY in February. Thanks to themoderate pricing, Fiyta watches were less affected and maintained highergrowth.

High expenses dragged down net profit growth. 1Q12’s selling expensesincreased 41% amid continued store expansion; financial expenses rose76.1% YoY due to a large increase in bank loans to fund acquisitions in 2011.

The ratio of selling, administrative and financial expenses expanded 2.5pptYoY, dragging down earnings growth below expectations.

Harmony business recovered slowly; Fiyta watches the key engine offuture growth. Given the tepid consumption amid economic slowdown,demand for luxury watches will likely see a sharp decline from last year’shighs (annual imports of Swiss watches up 68%) if there is no policystimulus to spur purchases. We expect to see a slower pace of Harmony storeexpansion, with most of the new stores to be opened in 2H12. After years ofheavy investment, Fiyta watches could see 45% growth in 2012 andcontribute a higher share of profits.

Investment recommendation

We maintain our 2012/13e EPS forecast at Rmb0.53/0.68. Fiyta-A is tradingat 23.2x/18.1x 2012/13e P/E, with Fiyta-B at 12.8x/10.0x. Given therelatively high valuation compared with the broader market, and the greatgrowth potential of luxury watch demand in China, we maintainACCUMULATE on Fiyta-A and BUY on Fiyta-B. We advise long-terminvestors to buy the stock.