Shop rent cuts cannot save Sa Sa

November 14, 2015 08:01
Sa Sa said profit for the first half is expected to decline by over 50 percent from a year ago. Photo: HKEJ

Cosmetic retailer Sa Sa International Holdings Ltd. (00178.HK) released its first profit warning in 13 years in October, saying profit for the first half is expected to decline by over 50 percent from a year ago. 

The profit drop is worse than expected. Even bargain hunters are cautious to react because cuts in shop rents, increasingly seen in Hong Kong, are not likely to help a lot.

The company also said revenue from retail and wholesale business decreased 12.4 percent from a year ago, with Hong Kong and Macau down 13.2 percent.

Data for single store sales, transaction volume and average sale per transaction all fell.

The same situation was seen in other regions and in its online business.

Media reports said Sa Sa plans to close stores in core shopping areas over the next two months, with the one in Mong Kok set to be shut down in the first half of next year.

Many institutions lowered the rating or target price for Sa Sa after the profit warning.

HSBC Securities Brokers (Asia) Ltd. noted that Sa Sa’s sales and profit margin showed no signs of improvement, while sales in Hong Kong and Macau were down 8.7 percent during the Golden Week.

It lowered its profit forecasts to HK$532 million in 2016 and US$545 million in 2017.

HSBC Securities said Sa Sa’s operation costs cannot be further reduced. Although the retailer has closed several stores in Causeway Bay and Tsim Sha Tsui, rents in shopping malls continue to increase. Rents may even rise by 11.2 percent next year, it said.

The brokerage maintained its "underweight" rating for Sa Sa, but cut its target price for December to HK$2.1 from HK$3.2. The target price was based on 11 times price-to-equity (p/e) ratio in 2016, which means the price is below the seven-year average.

Sa Sa’s price has dropped 46 percent since the beginning of the year to a short-term resistance level. It still has 4.1 percent dividend yield after the cut in profit projection, marking an average level.

However the 2016 projected p/e is 15.3 times, still higher than the industry average of 11 times.

In its report, Credit Suisse said shop rent cuts expected in 2016 will have limited impact on Sa Sa.

It expects revenue for the fiscal year to fall 10 percent, net profit by 44 percent to HK$467 million, and gross profit margin by 2.5 percentage points to 42.4 percent.

The bank cut its earnings per share forecast by 31 to 38 percent and the target price to HK$1.8 from HK$2.8. It maintained an “underperform” rating for Sa Sa.

This article appeared in the Hong Kong Economic Journal on Nov. 13.

Translation by Myssie You

[Chinese version中文版]

-- Contact us at [email protected]


HKEJ columnist