China shoe retailer set to pay bigger dividends. Share pullback
offers attractive entry for income investors.
By Isabella Zhong
Belle International enjoys an exposure to China's consumers that
other companies would die for. About one in every five pairs of
shoes worn by Chinese women is sold by the Hong Kong-based company,
an impressive factoid that reflects its ownership of the country's
top five selling women's footwear brands.
Selling shoes in the world's most populous country is clearly a
great business to be in judging by the strong earnings growth
posted by Belle International (1880.HK). The rising wealth of
China's emerging middle class consumers has underwritten average
annual earnings growth of 21% a year over the past five years.
Better still, the company founded by billionaire Deng Yao has
amassed RMB12 billion of cash and short term assets, which is equal
to about a quarter of the total assets on the balance sheet.
Having a strong balance sheet is a distinct advantage for
China-based stocks at a time when investors are jittery about the
ability of some over-leveraged companies to service debts that were
rapidly accumulated over recent years. It is Belle's balance sheet
strength that should capture the attention of income focused
investors. Unlike most of Asia's miserly companies, the shoe
retailer has a shareholder friendly dividend policy after having
recently raised its payout ratio to 60% from 33%.
The more generous approach to dividends has caught the eye of
analysts who are not only trumpeting the stock's appeal to yield
hungry investors, but also its cheap valuations in the wake of a
share price pullback. Macquarie analyst Linda Huang reckons the
stock could yield around 8.6% this year, which would not only make
it one of the highest yielding large cap China consumer stocks but
also one of the highest yielders on the Hong Kong Exchange.
The 12% decline in Belle's shares from a recent high in
September has left the stock trading at attractive valuations.
Currently at around HKD9.10 a share, the stock is valued at roughly
13 times forward earnings, which is close to a five-year low of
10.5 times. The stock's current price to book ratio of around 2.4
times is near its five-year low of 1.9 times.
However, the pullback in the share price from its record high of
HKD18 a share in February 2013 reflects the headwinds confronting
Belle as China's growth slows. While the company's longer term
numbers have impressed, the recent newsflow from the company has
underwhelmed. Same store sales for its footwear business have
fallen year-on-year, while sales of its sportswear division grew at
a weaker than expected pace of 5.3%. Footwear accounts for around
two-thirds of Belle's revenues, while sportswear distribution makes
up the rest.
Beijing's focus on engineering a slower yet more sustainable
pace of growth means Belle is unlikely to enjoy a major rebound in
sales in the short term. But this has not deterred bullish
analysts. ICBC International's Mark Yuan argues investors have
priced in the subdued outlook for the company and there is limited
downside for the stock. In fact, Yuan, who has a buy rating on
Belle, sees 32% upside with a target price of HKD12. Macquarie
Bank's Huang is even more bullish and has a target price of
HKD12.80, which implies 41% upside. The analyst notes "industry
fundamentals cannot get worse", while Belle's track record for good
cost control could surprise to the upside.
Indeed, the shoemaker's margins have stood taller than that of
its peers. Belle's 21% operating margin dwarfs Daphne International
Holdings' (210.HK) 5% margin and LeSaunda Retailing's 13% margin.
One of the main contributors to the juicier margins is the
company's factory floor to department store business model, which
allows it to manage costs at every stage of its supply chain.
Guangfa Securities analyst Albert Yip, who initiated coverage of
Belle last month with a buy rating, says control of the supply
chain means the shoemaker is less likely to carry costly unsold
inventory.
Growing demand for sportswear in China is another catalyst that
could lift Belle's share price. Chinese consumers spend on average
only $15 a year on sportswear, which is well below countries with
similar income levels. The low base combined with an increasingly
health conscious population lends plenty of scope for the market to
grow. Barclays analyst Veneet Sharma forecasts annual growth of
around 10% over the next five years and expects Nike (NKE) and
Adidas (ADS.DE) to be the leading beneficiaries, citing the two
brands' expanding market share.
That's certainly good news for Belle, which is China's number
one distributor of Nike and Adidas sportswear. Guangfa Securities'
Yip expects earnings for Belle's sportswear segment increase
between 15% and 16% a year over the next two years. The growth
should be underpinned by sales expanding around 11% annually and
operating profit margins widening by between 0.3 and 0.4 percentage
points.
With yield becoming an increasingly more fashionable focus for
investors, those seeking a well-paying stock that is relatively
defensive and is priced at attractive valuations may well find
Belle to be just the right fit.
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Email: isabella.zhong@barrons.com
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Comments? E-mail us at asiaeditors@barrons.com
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