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					INITIATE COVERAGE                                      ETERNITE INTERNATIONAL (8351 HK)
                                                       Building a jewelry retail chain platform
                                                               Acquisition of Larry Jewelry: favourable deal structure – Eternite
Date: 7 June 2011                                              announced the acquisition of Larry with HK$400m, of which HK$250m for
HSI: 22,949.56                                                 Larry’s existing jewelry at cost, and HK$150m for Larry’s brand name and
                                                               established infrastructure. Valuing jewelry at cost favours Eternite, as diamond
                                                               prices have gained ~27% year to date.
Share Price: HK$1.83
                                                               Ambitious expansion plans on Larry – Established in 1967, Larry is
                                                               renowned for its unsurpassed mastery in jewelry design and gem setting
                                                               technique. It is also well known as a leader in quality diamonds. However,
RETAIL                                                         Larry’s business strategy has been conservative. After the acquisition, Larry’s
                                                               new management plans to open 4 new stores in Hong Kong, 2 new stores in
                                                               Singapore and 7 new stores in China, Taiwan and Macau by the end of 2012,
SHARE INFORMATION                                              compared with the existing 3 stores in Hong Kong and 2 stores in Singapore. In
                                                               addition to opening new stores, the new management also see plenty of room
                                                               to revamp Larry’s operation through, for example, improving inventory
Ticker:                             8351 HK                    turnover.
Market cap                      HK$1,274m
Issued shares                        695.95m                   Other growth drivers – In addition to its main growth driver Larry, Eternite
Enterprise value                  HK$1,214m                    plans to launch a new mass-market jewelry brand called “Vera” and open 40
                                                               stores in the Greater China by 2013. The company is also seeking horizontal
Net cash/share                      HK$0.086
                                                               expansion (acquisitions of other luxurious retail chains) and vertical integration
BVPS                                HK$0.128                   (upstream diamond operations) to pursue its mission of becoming the first
Price/BVPS                              14.3x                  vertically integrated jeweller in Asia.
Avg. daily turnover                HK$7.05m
Estimated free float                   38.9%                   Management in place – An ex-Group CEO of “Just Gold”, who launched
                                                               “Just Diamond” in 1994 and steered “Just Gold” into China in 2002, is the
12-mth high/low                HK$1.95/0.25                    Business Adviser for the company’s retail and marketing operations.
Major shareholder       Galaxy Asset Mgt and
                  other co-investors – 58.9%                   Initiate coverage – We find the new direction and business model of
                                                               Eternite very interesting and shall continue to follow its future business
                                                               development, thus initiate coverage on the company. However, as we cannot
SHARE PRICE CHART                                              establish concrete earnings forecasts at this stage of development, we have
 HK$
                                                               not yet assigned a rating on Eternite.
 2.0        Eternite
 1.8        HSI (rebased)                              COMPANY BACKGROUND: Eternite was principally engaged in the design and
 1.6                                                   wholesale of a broad range of fine jewellery products to jewellery wholesalers and
 1.4
 1.2
                                                       retailers in various countries around the globe. In April 2011, the company
 1.0                                                   announced the acquisition of Larry Jewelry, a well-known fine jewellery retailer in
 0.8                                                   Hong Kong and Singapore. After the completion of this acquisition, Eternite’s
 0.6                                                   direction will switch to jewellery retail in Asia. Leveraging on its high-end “Larry”
 0.4
 0.2                                                   brand, together with a new mid-tier brand called “Vera”, the company plans a rapid
 0.0                                                   store network expansion in China.
 m shares
 60
 40
                                                       EARNINGS DATA
 20                                                    Year to 31 March                                             2009A                2010A
  0
                                                       Net profit                            HK$’000                 9,678                7,942
   Jun      Aug      Oct    Dec   Feb   Apr   Jun
                                                       Change                                    YoY%                  +9.3                -17.9
Source: Bloomberg, South China Research                EPS                                   HK cents                  3.02                2.00
                                                       Change                                    YoY%                   N/A                -33.8
                  1mth   3mths   6mths  12mths         DPS                                    HK cents                    –                   –
Share price chg +13.0% +173.1% +266.0% +471.9%         PER                                          X                  60.6                91.5
Relative to HSI +16.3% +175.2% +271.9% +393.1%         Yield                                        %                     –                   –
                                                       INCOME STATEMENT
                                                       Year to 31 March                        2009A                2010A              2011A*
                                                                                             HK$’000              HK$’000             HK$’000
                                                       Turnover                               44,575               47,237               43,019
                                                                                              =====                =====               =====
                                                       EBITDA                                   11,559               10,095             (1,165)
                                                       Depreciation & Amortization                 (14)                 (69)              (192)
                                                                                              ----------           ----------          ----------
                                                       EBIT                                     11,545               10,026               (973)
                                                       Finance income/(cost)                          3                    2                 (3)
Analyst : Michael Tam, CFA                                                                    ----------           ----------          ----------
                                                       Profit before tax                        11,548               10,028               (976)
        : (852) 2820 6322
                                                       Tax                                     (1,870)              (2,086)             (1,083)
        : michael.tam@sctrade.com                                                             ----------            ---------           ---------
                                                       Net profit                               9,678                7,942             (2,059)
Important: please refer to our disclosures and                                                =====                =====               =====
disclaimers at the end of this report                  * For the nine months ended 31 December 2010




Note: All prices in this report are based on the 3 June 2011 close
ETERNITE INTERNATIONAL (8351 HK)



Building a jewelry retail chain platform
Event: Eternite is steering a change in its business direction after the acquisition of Larry Jewelry (“Larry”). The S&P
agreement of Larry was signed on 14 April 2011. The transaction is now pending completion.

Favourable acquisition terms – The deal structure of this acquisition favours Eternite, in our view. The total
consideration is merely HK$400m, which represents 1) cash payment of HK$250m for Larry’s jewellery inventory (mainly
being diamonds) at cost, but diamond prices have surged recently (According to the Rapaport Diamond Trade Index, the
average best price for top-25-quality 1-carat diamonds gained 14.2% to US$8,025 during 2010 before surging another
27.5% to US$10,229 year to date.), and 2) promissory note of HK$150m for Larry’s brand name and long-established
business infrastructure in Hong Kong and Singapore, which is not excessive in our view. In addition to offering this
reasonable consideration, the vendor also provides a profit guarantee of HK$70m for two successive fiscal years. This
profit guarantee refers to the total net profit after taxation but before depreciation, interest, capital expenditure and
extraordinary items.

                                      AVERAGE BEST PRICE FOR TOP QUALITY 1-CARAT DIAMONDS
         11,000



         10,000



          9,000
   US$




          8,000



          7,000



          6,000
             Jan 2009      Apr 2009      Jul 2009      Oct 2009      Jan 2010      Apr 2010     Jul 2010    Oct 2010   Jan 2011    Apr 2011

Source: Bloomberg, Rapaport


Four-pronged business model – Going forward, Eternite will pursue a four-pronged business model, which
comprises:
1.  Jewelry retail (high-end) through the revamp and expansion of the “Larry” brand
2.  Jewelry retail (for mass market) through the creation and expansion of the “Vera” brand
3.  Jewelry wholesale through the existing “Eternity” name in the wholesale market
4.  Future acquisitions to seek horizontal and vertical expansions

                                                               CORPORATE STRUCUTRE

                            Mr. So               Mr.Cheng

                                100%                  100%

                         King Honor             Prime New                   Galaxy & other co-investors                Public
                                1.08%                 1.08%                               58.92%                          38.92%




                                                                Eternite (8351 HK)


                                         Larry Jewelry                   Vera                  Eternity
                                                                                               Jewelry
                                                                                                                    Future
                                            High-End                  Mid-Tier
                                                                                                                  Acquisitions
                                           Fine Jewelry            Fashion Jewelry            Wholesaling
                                          Retail Business          Retail Business             Business

Source: Company, South China Research



Important: please refer to our disclosures and disclaimers at the end of this report.                                                         -2-
ETERNITE INTERNATIONAL (8351 HK)



Larry is a leader in quality diamonds with strong brand heritage – Established in 1967, Larry is an
award-winning household name both in Hong Kong and Singapore, and is renowned for its unsurpassed mastery in
jewelry design and gem setting technique. Larry is also well known as a leader in quality diamonds. For example, Larry
is appointed as a distributor for top-selling Lazare jewelry (note 1) in Singapore, and is one of the three jewellers
recognized by De Beers to sell Forevermark diamonds (note 2) in Hong Kong.

Larry (HK) and Larry (Singapore) – The target group to be acquired by Eternite include Larry (HK) and Larry
(Singapore), which currently operates a total of 3 jewelry retail outlets in Hong Kong and 2 jewelry retail outlets in
Singapore under the brand name of “Larry Jewelry”. In 2010, Larry (HK) and Larry (Singapore) recorded total net profit
of HK$26.2m. By the end of 2010, the net asset value of Larry (HK) and Larry (Singapore) amounted to HK$360.9m.

Larry’s potential not fully exploited yet – Before the acquisition, Larry’s business strategy has been conservative,
and Larry can be described as a cash cow, in our view. After the acquisition, the new owners and management team see
a good opportunity to further exploit Larry’s brand heritage and revamp Larry’s business by 1) improving inventory
turnover, 2) implementing the architectural structure (such as MIS system, POS and accounting systems), 3) improving
operating efficiency, 4) enhancing product mix/cross selling activities, and 5) more brand promotion and marketing
activities. In particular, management emphasized that Larry’s current inventory turnover rate is lower than industry
averages, hence they see significant room for improvement on this and expect it to drive Larry’s business performance.

Filling the gap between international prestige jewellers and local mass branded jewellers – In addition to
the revamping and strengthening of its existing business, the new Larry also has ambitious store opening plans.
Immediately after completion of the acquisition, Larry will open a new retail outlet in Causeway Bay in Hong Kong,
according to management. In 2011-15, management has set a target to open an average of 7 new Larry’s stores per year.
By the end of 2012, management aims to open 4 new stores in Hong Kong, 2 new stores in Singapore and 7 new stores
in China, Taiwan and Macau. Such rapid store opening plan would enable the company to capture the fast-growing
high-end jewelry market in Asia by filling the gap between international prestige jewellers (such as BVLGARI, Cartier and
Tiffany) and local mass branded jewellers (such as Chow Sang Sang, Chow Tai Fook and Luk Fook).

To create a jewelry fashion brand called “Vera” – Management plans to create a mass-market jewelry brand called
“Vera” in order to enrich the company’s brand portfolio to capture different customer segments. Target customers of Vera
would be cosmopolitan ladies who are independent and have strong fashion sense. Vera’s jewelry would differentiate by
the brand’s unique fashionable design. It will be positioned as affordable luxury accessories. Management has set a target
to open 40 Vera stores in Greater China by 2013.

Existing jewelry wholesale business insignificant compared with Larry and Vera – Eternite’s existing jewelry
wholesale business (conducted through the brand name of “Eternity”) has a global client base from Europe, Middle East,
the US and other parts of the world. As such, there could be cross-selling opportunities between the company's retail and
wholesale client base. Having said that, Eternity’s contribution should become insignificant compared with the future
Larry and Vera. For the nine months ended 31 December 2010, Eternite recorded a turnover of HK$43.0m and a net loss
of HK$2.1m.

Future acquisitions can be expected – In addition to the potential organic growth as discussed above, Eternite also
has plans to seek growth through both horizontal and vertical M&A. Horizontal expansion could potentially allow the
company to 1) gain market share, 2) expedite the penetration into the luxury retail market via value-added acquisitions,
based on brand heritage, design, complementary product lines, and geographical and network coverage, 3) enrich brand
portfolio to capture different customer segments, and 4) create synergies from retail network and brand portfolio. Vertical
expansion could potentially allow the company to 1) secure supply of quality diamonds at competitive price, and 2)
capture the profit margins along the value chain.

Experienced management team – The company’s management team comprises many industry veterans with over 10
years of experience. In view of the expansion plan in its retail business, the company has also been expanding its
management team. For example, the company recruited Iris Chung, an ex-Group CEO of “Just Gold”, who launched “Just
Diamond” in 1994 and steered “Just Gold” into China in 2002, as the Business Adviser for its retail and marketing
operations.

Note:
1.    Lazare is an international brand with over 100 years of history, and is famous for its premier diamond cutting.
2.    Forevermark diamonds are known for their exceptional qualities, as they are selected from sources which adhere to the UN
      mandated Kimberley Process, and <1% of the world's diamonds are eligible to become Forevermark diamonds.




Important: please refer to our disclosures and disclaimers at the end of this report.                                      -3-
ETERNITE INTERNATIONAL (8351 HK)



Revenue may reach HK$1.9bn in three years – It would be difficult to make precise financial forecasts on the
future Larry and Vera at present, as both business lines are in their initial stages of large-scale expansion plans. However,
assuming conservatively on 80% of management’s targets to add 20 Larry’s stores and 40 Vera’s stores by the end of
2013 ( i.e. to add 16 Larry’s stores and 32 Vera’s stores in Greater China), we estimated that the company may be able
to achieve a turnover of ~HK$1.9bn in 2013, of which Larry would contribute 85%. With operating leverage taking effect,
we estimated the blended net margin of Larry and Vera could reach 7%, or an estimated net profit of ~HK$130m in 2013.

                                STORE NETWORK EXPANSION ASSUMPTIONS (NUMBER OF STORES)
Location                                                    2010A                       2011F    2012F                  2013F

Larry:
- Hong Kong                                                         3                        5         6                      7
- Singapore                                                         2                        3         4                      4
- China, Taiwan and Macau                                           0                        3         6                    10
                                                                 ----                     ----      ----                   ----
Total                                                               5                      11        16                     21
                                                                 ==                       ==        ==                     ==
Vera:
- Greater China                                                     0                       8        16                     32

Source: South China Research


Financial position and fundraising needs – Currently, the combined Eternite and Larry is estimated to have net cash
of HK$60m on a pro-forma basis. Assuming completion of the acquisition in 3Q11, it would cost the company cash
payment of HK$230m in 3Q11 (deposit of HK$20m already paid upfront), HK$50m in 1Q12 and HK$100m in 3Q12 as
consideration for the acquisition. After completion of the acquisition, we estimated the execution of store network
expansion plan till the end of 2013 would require a further ~HK$570m (mainly working capital for the new Larry and Vera
stores), but of which ~HK$320m could be financed by operating cash inflow (before working capital changes). Thus, total
funding gap for the acquisition and the subsequent expansion plans may add up to ~HK$570m.

Initiate coverage – We find the new direction and business model of Eternite very interesting and shall continue to
follow its future business development, thus initiate coverage on the company. However, as we cannot establish concrete
earnings forecasts at this stage of development, we have not yet assigned a rating on Eternite.

Risks:

1.      Completion of transaction – The acquisition of Larry is not yet complete. The circular is scheduled for despatch
        in June. The transaction, being a Very Substantial Acquisition, requires shareholders’ approval. There is no
        guarantee that the conditions precedent to the transaction can be fulfilled and shareholders’ approval can be
        obtained. In case the transaction does not materialize, Eternite’s share price may be adversely affected.

2.      Fundraising needs – The acquisition of Larry and the subsequent expansion plans would be financed by bank
        borrowings, share placement and/or CB issuance. Bank borrowings will raise gearing, while equity financing will
        dilute existing shareholders’ interest. Nevertheless, if the fund raised is spent on value-adding expansion plans, it
        could create value for shareholders and be accretive to share price performance.

3.      Geographical expansion – Larry is well known in Hong Kong and Singapore, but less well known in mainland
        China. To tap into China’s market, Larry may have to put more resources on advertising and promotion, the
        outcome of which remains to be seen. Having said that, there have been many success stories of Hong Kong’s
        jewelry brands expanding into China over the last decade, such as Chow Tai Fook, Luk Fook and Chow Sang Sang.

4.      Finding sites for new stores – Being able to find suitable sites at the right prices is the pre-requisite for the store
        network expansion plans of Larry and Vera. As such, the actual number of Larry’s and Vera’s stores can be higher
        or lower than our and management’s forecasts.

5.      New Vera brand – Vera is a new brand to be created. The success of this brand remains to be seen. However, the
        initial cash outlay of the new Vera stores is not high, which means limited potential downside.

6.      Diamond prices – Larry’s gross margin is correlated to diamond prices. When diamond prices go up, Larry’s gross
        margin widens, and vice versa. Having said that, diamond prices have lagged other precious metals such as gold
        and silver in recent years.



Important: please refer to our disclosures and disclaimers at the end of this report.                                       -4-
ETERNITE INTERNATIONAL (8351 HK)



                                                       DIAMOND, GOLD AND SILVER PRICES

       800%


       700%
                               Top Quality 1-Carat Diamond
                               Gold
       600%
                               Silver

       500%


       400%


       300%


       200%


       100%


           0%
             Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11
Source: Bloomberg, South China Research




Important: please refer to our disclosures and disclaimers at the end of this report.                     -5-
ETERNITE INTERNATIONAL (8351 HK)



Appendix: Retail sales of jewelry in Hong Kong and China

                             HK RETAIL SALES – JEWELLERY, WATCHES & CLOCKS, AND VALUABLE GIFTS
  HK$bn                                                                                                                          YoY
 70                                                                                                                               50%

 60                                                                                                                               40%
 50
                                                                                                                                  30%
 40
                                                                                                                                  20%
 30
                                                                                                                                  10%
 20

 10                                                                                                                               0%

   0                                                                                                                              -10%
         2000       2001      2002      2003       2004      2005      2006       2007   2008   2009   2010    3M10       3M11

                Value of HK retail sales - Jewellery, watches and clocks, and valuable gifts                        YoY
Source: CEIC, South China Research


                                          CHINA RETAIL SALES – GOLD, SILVER AND JEWELLERY

  RMBbn                                                                                                                      YoY
 140                                                                                                                          70%

 120                                                                                                                             60%
                                                                                                                                 50%
 100
                                                                                                                                 40%
   80
                                                                                                                                 30%
   60
                                                                                                                                 20%
   40
                                                                                                                                 10%
   20                                                                                                                            0%
     0                                                                                                                           -10%
           2000      2001      2002      2003      2004      2005      2006       2007   2008   2009   2010    4M10 4M11

                       Value of China retail sales - Gold, silver and jewellery                               YoY
Source: CEIC, South China Research




Important: please refer to our disclosures and disclaimers at the end of this report.                                                 -6-
ETERNITE INTERNATIONAL (8351 HK)




                                                      South China Financial Holdings Ltd
   Tel: (852) 2820 6333             Fax: (852) 2845 5765              URL: http://www.sctrade.com                 E-mail: research@sctrade.com              Telex: 69208 SCSL

HONG KONG
Head office
                    26/F, Tower 1,                                           28/F, Bank of China Tower,
             Lippo Centre, 89 Queensway,                                           1 Garden Road
                       Admiralty                                                       Central
                 Tel: (852) 3196 6000                                           Tel: (852) 2820 6333
                 Fax: (852) 2536 4608                                          Fax: (852) 2845 5765
Branches
Unit C-D, G/F, Goldfield Tower       Shop 2 G/F, Max Share Centre,        Shop 1&2, G/F, Yue Man Centre,          Shop A1, G/F, Kar Ho Building,       G/F, 108 Chung On Street,
      53-59 Wuhu Street,                   373 King's Road,                300-302 Ngau Tau Kok Road,                27-31 Hong Lok Road,
          Hung Hom                           North Point                           Kwun Tong                            Yuen Long, N.T.                     Tsuen Wan N.T.
     Tel: (852) 2330 5881                Tel: (852) 2570 4422                  Tel: (852) 2191 2822                   Tel: (852) 2442 4398                Tel: (852) 2614 1775
    Fax: (852) 2627 0001                                                       Fax: (852) 2793 3000                   Fax: (852) 2479 4418                Fax: (852) 2615 9427

LONDON
  5-6 Carlos Place, Mayfair,
      London W1K 3AP,
       United Kingdom
   Tel: (4420) 7491 9225
   Fax: (4420) 7355 4423

DISCLOSURES: The Research Analyst(s) who prepared the research report hereby certify the views expressed in this research report accurately reflect the analyst(s)
personal views about the subject companies and their securities. The Research Analyst(s) also certify the Analyst(s) have not been, are not, and will not be receiving direct
or indirect compensation for expressing the specific recommendations(s) or view(s) in this report.

We and our affiliates, officers, directors and employees, excluding Research Analyst(s), will from time to time have long or short positions in, act as principal in, and buy or
sell, the securities or derivatives (including options and warrants) thereof of covered companies referred to in this research report.

IMPORTANT: This report and the information and opinions provided or expressed herein have been prepared by South China Research Limited for itself, its parent, holding,
subsidiary, or other associated companies for the information of its or their respective clients only, and has been compiled with reasonable care using data, information, or
sources believed to be true, reliable, and accurate at the time of publication. No representation or warranty whatsoever, whether express or implied, is made to the accuracy
or completeness or otherwise of this report or any of the contents thereof. South China Research Limited, its parent, holding, subsidiary or, other associated companies and
its or their directors, officers, associates, representatives, or employees accordingly do not accept any responsibility or liability whatsoever for any direct or consequential loss
or damage of whatsoever nature arising from or as a result of the use, publication, or distribution in whole or in part of this report or any of its contents. The information and
opinions contained in this report are or may be subject to change or revision without any notice.

South China Research Limited, its parent, holding, subsidiary, or other associated companies or its or their respective directors, officers, associates, representatives, or
employees may have positions or otherwise be directly or indirectly interested in the securities mentioned in this report or may buy, sell, or deal or offer to buy, sell, or deal
in or with such securities from time to time, whether as principal for its or their own account or as agent or in any other capacity for or on behalf of another person. This report
is not, and is not intended to be, nor constitutes any offer or solicitation for the purchase or sale or other dealing in the securities mentioned herein. Copyright protection and
other rights exist or subsist in this report, which may accordingly not be used for any other purpose, nor sold, distributed, published, or reproduced in any manner without
the express consent of South China Research Limited. This publication is approved for distribution in the UK by South China Securities (UK) Ltd, a firm authorized and
regulated by the FSA.




Important: please refer to our disclosures and disclaimers at the end of this report.                                                                                            -7-

				
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