11 March, 2003
Esprit
Buy
An Unfading Legend
CASH
Research
Price: $14.75
Earnings Estimates
Yr-end
Dec
Net Profit
HK$m
Change
(%)
EPS
HK$
Change
(%)
PER
(X)
DPS
HK$
Yield
(%)
P/B
(X)
ROE
(%)
EV/EBITDA
(X)
2001A
2002A
2003F
2004F
2005F
575
927
1,130
1,312
1,557
25.1
61.2
21.9
16.1
18.7
0.51
0.80
0.96
1.11
1.32
23.9
57.2
19.2
16.1
18.7
31.3
19.9
16.7
14.4
12.1
0.17
0.28
0.35
0.45
0.56
1.1
1.8
2.2
2.8
3.5
8.2
5.8
4.6
3.7
3.0
26.4
28.9
27.4
25.5
24.8
13.8
11.7
8.7
7.3
6.0
Investment Highlights
►
►
►
►
Persistently strong growth in Europe
European sales for Esprit have remained buoyant despite a sluggish German economy.
Its strong brand-building strategy has been met with a more than favorable response
from customers and the company is enjoying a higher market share, weeding out
lower-end rivals. In addition, markets such as France and the Benelux countries are
seeing good sales growth boosted by both expansion and a rising yield per store.
Resilient euro a bonus
The strength of the euro bodes well for the group’s earnings picture as more than 75%
of its sales are in euros and most of its sourcing is in USD-linked currencies. This will
ultimately enhance the profit margin. Given plausible 13% appreciation in the euro
against the USD, Esprit’s bottom-line is estimated to benefit by 11% for this fiscal
year.
Bright prospects in the US
Acquiring the US business unifies the Esprit brand around the word and should serve as
a sweetener for its earnings picture in the long run. The assimilation of the US
wholesale business into the original European infrastructure will enable Esprit to enjoy
higher economies of scale and profit, while reducing the level of risk.
Solid fundamentals warrant valuation premium
Albeit trading at a higher PER to its domestic rivals, Esprit’s share price has yet to
reflect its proliferating brand status, potential contributions from the US market,
quality management and unrivaled ROE. In particular, the shares are expected to see a
re-rating once the US business becomes more mature. Therefore, the recent weakness
in its price provides a buying opportunity. Target price is set at $19, representing 20x
03F PER.
Key Data
Chart
Felix Ho
(852) 2287-8843
Stock Code
12-month High/Low ($)
: 16.60/10.38
felix.ho@cash.com.hk
Hang Seng Index
: 8,859.93
Issued Shares (m)
: 1,179
: 0330
Market Capitalization ($m)
: 17,384
Average Daily Turnover (K)
: 2,582
Major shareholders
Rel. Performance
: Michael Ying (42.7%)
- 1 month (%)
: +0.91
- 3 months (%)
: +27.88
- 12 months (%)
: +27.20
Company Profile
Esprit Holdings’ subsidiaries are principally engaged in: (I) wholesale; (II) retail
and: (III) the licensing and sourcing of adult and children’s clothing, accessories
and footwear under the brand name of Esprit together with the sale of cosmetic
and skin-care products under the brand name Red Earth. Its distribution network
covers 500-plus directly managed stores and 2,000-plus franchised stores across
more than 40 countries mainly in Europe and Asia. On top of its mainline products,
other revenue is derived from the provision of sourcing services, and licensed
products ranging from eye-wear and time-wear to home products.
The year 2002 was a milestone for Esprit, in which the group acquired the Esprit
trademark in the US and the Caribbean, and also the residual US-owned 37% stake
of Esprit International, which held the global trademark (ex-Germany and the US).
At the same year, Esprit was made a constituent of the Hang Seng Index.
Organisation Chart
The Company
100% (indirectly)
37%
Esprit Capital
100%
U.S. and Caribbean
Islands intellectual
property rights
Source: Esprit
2
Esprit
100% (indirectly)
33% (indirectly)
30%
Esprit International
100%
Worldw ide intellectual
property rights
(excluding U.S., Caribbean
Islands and Germany )
Esprit Holdings GmbH
100%
Intellectual property
rights in Germany
Business Overview
■
Lingering growth across
markets and product lines
Brisk European business
The European market, the group’s largest revenue contributor (74% of FY02 sales),
has been providing a very positive sales performance over the years. In fact, its
strengths in this market are broad based whether by product line, geographical
presence or division. For example, in FY02 European sales increased by 21%, in
which Germany and Benelux were up 14% and 38% respectively, with smaller
markets such as France and Scandinavia growing at an even more extraordinary
pace. For product lines, both sales of ladies and men’s wear increased by
approximately 20% per annum. The impressive sales picture is not a one-off event.
In fact, Esprit’s European sales have managed growth at a CAGR of 36.6% for the
past five years.
Both comp-stores sales and expansion in footage are major factors fuelling the
growth momentum. In its wholesales division, the number of stores-in-shops was
up rapidly to 1,300 by the end of FY02, from only 477 in 1998, representing a
CAGR of 29%. In retail, the sales area of its self-managed stores also increased by
20% CAGR over the past five years, mostly in Europe.
Injection program pays off
In addition to geographic expansion, it is also worth noting that the comp-stores
sales in Europe have achieved approx mid-to-high single digit annual growth. Its
‘injection’ program - introduced in FY01 to bolster comp-store-sales performance,
shortening the product replacement cycle at the shop level leading to more fullprices sales - has proven very successful.
European Wholesales Business
8000
1,800
No. of franchised store (RHS)
7000
1,600
Sales (HK$ m) (LHS)
1,400
6000
1,200
5000
1,000
4000
800
3000
600
2000
400
1000
200
0
0
1998A
1999A
2000A
2001A
2002A
2003F
2004F
2005F
Source: Esprit, CASH Research estimates
European Retailing Business
1999
2000
2001
2002
2003F
2004F
2005F
Footage ('000 sq. ft.)
yoy%
301
364
20.9
542
49.0
698
28.8
859
23.1
1020
18.7
1170
14.7
Retail Sales (HK$m)
yoy%
1,222
1,310
7.2
1,432
9.3
2,012
40.5
2,996
48.9
3,695
23.3
4,374
18.4
Retail Sales / Average Footage (HK$)
yoy%
4,270
3,944
-7.6
3,164
-19.8
3,246
2.6
3,849
18.6
3,934
2.2
3,996
1.6
Source: Esprit, CASH Research estimates
Esprit
3
Outstanding performance
continues into FY03
Looking at FY03, Esprit’s European operation continues to witness outstanding
performance. During 1H, the wholesale business saw a 34% increase in sales, of
which 25% is estimated to be derived from organic growth in euro terms, given
the 10%+ appreciation of the euro during the year. Despite poor sentiment in
Germany sales still managed to rise 20%, while other smaller markets conveyed
even more exciting growth: Benelux and France (50%+), Scandinavia (45%),
Austria (33%). During the period, 319 new shop-in-stores and freestanding
franchisee stores were added, leading to an 18% increase in sales-floor area.
Current order book looks encouraging, booking through May of this year with
double-digit growth.
Aggressive expansion in
Europe
In retail, the group’s 1H sales revenue rose 28%, fueled by unrivaled European
sales, in which double-digit growth in comp-store-sales (in HKD terms) and 52%
growth of sales value were achieved. German sales jumped 60%, outpacing other
markets, after 15,000 sq m of sales area was added in the past twelve months
coupled with strong comp-store-sales. Going forward, the group plans to invest
HK$200mn in 2H to open more stores in various European markets.
EBITDA margin higherthan-expected
The group’s profit margin was also boosted by increasing economies of scale on its
rapid sales growth and lower sourcing costs which offset deflationary pressures.
1H gross margin was therefore up 200 bps to 49.9%. EBITDA margin was up to
17.9%, exceeding the group’s target level of 15-17%.
The management is dedicated to maintaining its aggressive plans for both the
wholesale and retail divisions. The number of franchised stores is expected to
expand beyond 1,400 with sales-floor area increased by 200K sq ft this calendar
year-end.
Ramping operational
efficiency offsets price
pressure
Despite facing deflation at the retail level, the group should continue to benefit
from increasing economies of scale, the lingering decline in sourcing costs and
more exposure to its injection program. Combined with the strong euro this should
aggregately help offset the price pressure, bolstering the margin at a relatively
stable level.
Strong euro brings huge
benefits
As mentioned, translating gains from a strong euro bodes well for the group
earnings pictures given highly skewed sales in the European markets. In 1H03, the
average exchange rate of the euro against USD was 1.0, compared with 0.89 in the
whole of FY02. Given an even stronger euro exchange rate from the beginning of
CY03, we anticipate the translation gain for 2H will be more apparent than in 1H,
and will further benefit the group’s earnings picture for the whole of FY03. In our
projection, we presume the average rate of euro against the USD at 1.02,
translating into $1,130mn net profit. Our sensitivity model suggests that a 10%
increase in the euro will lead to 8.3% earnings accretion for FY03.
Sensitivity Analysis on Change of Euro
Average exchange rate (US$/euro)
0.92
0.94
0.96
0.98
1.00
1.02
(Base case)
1.04
1.06
1.08
1.10
1.12
FY03 earnings (HK$m)
Relative to base case (%)
1,039
-8.1
1,057
-6.5
1,076
-4.8
1,094
-3.2
1,112
-1.6
1,130
0.0
1,148
1.6
1,166
3.2
1,184
4.8
1,202
6.4
1,220
8.0
FY04 earnings (HK$m)
Relative to base case (%)
1,217
-8.9
1,241
-7.1
1,265
-5.3
1,288
-3.6
1,312
-1.8
1,336
0.0
1,360
1.8
1,384
3.6
1,408
5.4
1,432
7.2
1,456
9.0
Source: CASH Research estimates
4
Esprit
■
Weak Asian sales should
linger in this year
Asian business remains challenging
Asian markets still face pressure amid stiff competition and aggressive price cuts.
In the last fiscal year sales were down approx. 5% to $2.2bn, while the compstore-sales performance was even worse. Two major markets, Hong Kong and
Taiwan, look rather dismal on a slowdown in sales-area expansion, in addition to
price cuts. Management said that in the last fiscal year, the Asian market on
aggregate was only marginally profitable at the retail level, excluding the sourcing
operation, while the Hong Kong retailing business made a loss.
1H03 operations met heavy pressure on more aggressive discounting. The Hong
Kong, Malaysia and Singapore markets were marginally profitable, while the
Australian business was in the red. Overall sales of its retailing business were flat
during the year despite comp-store sales managing to reverse their downtrend.
New strategies for beating
difficulties
However, management is still confident it can turn the Asian business around in
the upcoming years via a series of reshuffles in its business strategy, mainly
shifting focus from gaining market share to increasing profitability. Looking ahead,
the group will refine its global brand identity, offer consistent style, and restore
brand image by improving price value and product quality. However, we believe
the daylight is not in sight with such stiff competition and severe deflation. Near
term, as the group has pushed back most of its footage expansion as the way to
spur sales volume, we expect Asian retail sales to drop a further 5% this year,
with convalescence taking place in FY05 at the earliest.
Vigorous China operation
The only bright spot in the Asian market is China, in which its 49%-owned JV
registered growth in earnings of 70% y-o-y and 17% y-o-y growth in sales, after
adding 27 self-managed stores and 131 franchise stores in the past six months.
The JV has now over 140 directly managed stores and 560 franchised stores in
150-plus cities in China.
Asian Retailing Business
1999
2000
2001
2002
2003F
2004F
2005F
Footage ('000 sq. ft.)
yoy%
567
712
25.6
823
15.6
890
8.1
920
3.4
953
3.6
984
3.2
Retail Sales (HK$m)
yoy%
1,880
2,110
12.3
1,989
-5.7
1,829
-8.0
1,697
-7.2
1,654
-2.5
1,679
1.5
Retail Sales / Average Footage (HK$)
yoy%
3,725
3,301
-11.4
2,592
-21.5
2,136
-17.6
1,876
-12.2
1,767
-5.8
1,734
-1.8
Source: Esprit, CASH Research estimates
Esprit
5
■
US expansion full steam ahead
US acquisition in early 2002
Esprit acquired the US trademark in Feb 02 and the 37% minority stake of Esprit
International, which holds the trademarks outside the US and Germany. Total
consideration for the acquisitions was US$150mn, of which US$100mn was
financed by bank borrowings and the balance by internal resources.
Instant benefits from the
acquisition
We reckon there are several positive impacts from this acquisition. The imminent
benefit is the saving in royalty fees paid. Prior to wholly owning the trademark,
Esprit International was entitled to 37% of royalty income generated from the
global operations except in Germany and the US. In other words, Esprit (Hong
Kong listed) previously had to pay US$10mn royalty income to EI, which had been
charged against Esprit’s P&L as a minority interest item. From FY03 onwards, no
more royalty fees will be charged and thus the minority interest in the P&L will be
zero.
Despite netting out the goodwill amortization charge of US$7.5mn and increment
of interest expenses of an estimated US$5mn, there will be a marginal cost burden
of US$2.5mn. In our view, as the goodwill amortization charge is a non-cash item
we see genuine benefit in the decrease in cash outflow of US$2.5mn p.a.
US already bear fruit on
new debut
The US operation is already profitable despite only a half-year debut. This is
attributable to immediate synergistic benefits, i.e. economies of scale by
assimilating the resources into the group’s current operations in other regions. At
the current initial phase, Esprit plans to re-explore the US market by means of
wholesale business, supplemented by the licensing operation. The rationale behind
wholesale rather than retail business is to minimize the capital outlay and thus
business risks before reshuffling its brand position in the market within the next
two to three years. In that sense, most of the US operating costs will be shared
with the established European wholesale infrastructure, such as product design,
sourcing, brand management and other administrative overheads. Meanwhile,
Esprit will outsource its distribution logistics activities.
Apart from cost savings, the assimilation of sourcing procedures enables the group
to boost its order size and enhance its bargaining power with suppliers, which in
turn nourishes the profit margin. In the light of a minimized cost base and higher
economies of scale, the increase in sales volume will more directly translate into
the group’s future earnings.
Wholesales operation a
stepping-stone
We applaud the group’s prudent strategy to initially target the wholesale business
in the US market. In fact, albeit Esprit is an old brand name in the market, its
image position has dimmed with consumers after a long period of absence from
the US main-street retail scene. The wholesale business enables the group to
monitor customer appetite and step-by-step enact the appropriate marketing
strategy to boost its brand awareness. We also believe the products to be sold in
the US will be synchronized with that in other markets. The group can easily
capitalize on its successful formula in European wholesale to exploit the US market.
Continuous effort in forging
partnerships
To maintain its brand position Esprit will mainly focus on forging alliances with
department stores in the US. In June 2002, it sealed a wholesale agreement with
Macy’s West, with a soft launch of Esprit product lines in Macy’s stores in fall 2002.
At present, there are approximately 30 Esprit shop-in-stores in Macy’s stores,
drawing an encouraging market response, hitting number one in young fashion
sell-through. Recently, Esprit also teamed up with two other department store
chains - Dillard’s and Marshal Fields - as wholesale partners. The group plans to
increase its number of shop-in-stores to 300-350 by the end of 2003.
In our view, the partnership with Macy’s West creates an especially good stepping
stone for Esprit to further penetrate the US market on the back of the very strong
nationwide distribution network of Macy’s parent Federated Department Stores. At
present, Federated is one of the largest department store chains in the US,
operating 468 stores in 34 states with total annual turnover of US$15.7bn. We
envisage Esprit will probably further roll out its product lines, not only in the
Macy’s stores, but also in other chain stores such Bloomingdale's, The Bon Marché,
Burdines, Goldsmith's and Lazarus.
6
Esprit
Reliant on a few powerful
partners
Unlike in the highly fragmented European market, in which Esprit has many
wholesale customers across different nations, the group’s management has
decided to solicit probably three or four wholesale partners with nationwide
networks enabling Esprit to have extensive coverage throughout the market. Given
three existing partners have been unveiled, there should be only one additional
partnership agreement to be sealed in the near further.
Alliances with department
stores to preserve brand
equity
We recognize a change in consumer appetite in the US retail market, in which
customers are now more prone to shopping with better-value retailers amid
sluggish buying sentiment. That said, the value-retail segment should enjoy the
highest growth potential. Esprit’s strategy is to exclusively target the middle-upper
market, and it has decided not to foray into the lower-end value-retail sector for
brand equity reasons. Nevertheless, we believe its partnerships with the largest
department stores should help see sales leap forward.
US$200mn sales goals in
three years look achievable
Given the present fledgling stage of operations, only an intuitive earnings
projection for the group’s US wholesale business is possible. According to the
management, the group’s US wholesale business should see revenue of US$60mn
for FY04, US$120mn for FY05 and US$200mn for FY06. In our view, such an
exponential increase in sales is not impractical. Looking backwards prior to the
acquisition, the Esprit brand name in the US managed to generate US$200mn each
year, even when it was not so popular or visible. As such, we believe the group’s
assertiveness in pursuing its US re-entry - such as brand repositioning and
business restructuring, coupled with an extensive sales network through tie-ups
with high-profile department stores – should enable it to accomplish its goals.
As mentioned earlier, the US business is already profitable and reaffirms our view
that the sharing of operating costs and capex across the group’s other business
segments is the best way to enhance operational efficiency. In this regard, margin
enhancement arises from economies of scale and synergy by centralizing sourcing
and brand management and is likely to continue. We thus envisage wholesale EBIT
margin to increase to 18% after full assimilation by FY05, against 16.2% at
present.
Licensing business as
supplement
As a complement to the mainstream wholesale business in the US, Esprit has also
entered licensing contracts with Nine West, a ladies shoe and accessories retailer,
and Adjmi, a children’s wear retailer. The terms of the licensing agreement are five
and four years, respectively, subject to renewal upon completion. Although the
licensing income is not the major revenue source for the group it is a very efficient
way to brand build on limited resources, minimizing costs and workforce.
Esprit
7
■
New Global Strategy
Subsequent to its US acquisition, Esprit unveiled a new global management
structure aimed at creating a new operating platform to strengthen its advantages
in brand, image and products.
New Global Management Structure
Heinz Krogner
Group CEO
Retail
Wholesale
Apparel
Non-Apparel
Licensing
Operations
Finance &
Legal
Image
Red Earth
Source: Esprit
Reshuffling reporting
structure
Under the new structure, the group’s operations will be changed from a country
based reporting structure into a functional reporting structure, while the group
operations will be divided into nine functional units. Management intends the
group to achieve brand unification by centralizing each function category in all
geographical markets. Going forward, all business and strategic planning functions,
such as brand positioning, design, sourcing, retailing and wholesale, will be
brought under one roof in Dusseldorf, Germany, while Hong Kong will assume the
role of being the financial headquarters of the group.
More consistent brand
image
In our view, the new structure is crucial for the group to promote a more
consistent brand image with customers. Thus stores in Asia, Europe and the US,
will have similar goods and layout. This unified strategy means the Esprit brand
will not been seen as a value brand in one market and an upscale brand in another.
Group Operation Model
South/East Asia
- Wholesale
- Retail
- License
ANZ
- Wholesale
- Retail
- License
Product Visual
Promotion
Product Visual
Promotion
Feedback
Feedback
Centralized Corporate Functions
Brand Positioning
Image / Visual
Centralized Buying / Selling
Promotion Strategy
Sourcing / Supply chain management
Licensing
Product Visual
Promotion
Europe
- Wholesale
- Retail
- License
Source: Esprit
8
Esprit
Feedback
Product Visual
Promotion
Feedback
North Am erica
- Wholesale
- Retail
- License
New pricing strategy also
rolled out
A brand new pricing strategy was also stipulated, broadening its positioning into
both low and high-end segments, in additional to its original typical mid-end
segments. This should not only enable the group to be more focused onto its
target customers, but also help increase its customer base as well as honing its
pricing advantages. The philosophy of the strategy is as follows:
Future Price Categories
Price Category
Ideal Volume Mix
"Bridge" Prices
Alternative or
Complementary to
Designer brands
10-20%
Mid-Price Points
Typical Esprit
Products
50-60%
"Firewall" Prices
Against Cheaper
Local "Heroes"
- I.e. H&M, Zara,
Giordano
25-30%
Source: Esprit
−
Typical Esprit products – These are expected to generate 50-60% of the
group’s total sales volume, focusing on the existing Esprit customer base.
−
‘Bridge’ price products – Esprit will offer high quality merchandise with higher
pricing than its typical products. This collection is targeted at more affluent
customers complementing other designer-label goods this group already buys.
In other words, Esprit will avoid direct competition with other deluxe brands.
−
Firewall price products – By providing lower-priced products, Esprit aims to
compete with other domestic value brands without lowering the brand’s overall
image. From a management perception, low-end shoppers are as important as
its present customers as they will be the potential purchasers of Esprit’s core
products and bridge price products in the future. As such, the company will
focus on brand awareness education within that group.
Esprit
9
Financials
Esprit’s balance sheet remains very clean even after using debt financing for the
US acquisition. During the past year, the group arranged 5-year loans for the
US$100mn (HK$780mn) required for the acquisition, which reduced net cash to
HK$153 from HK$386 in FY01. Stripping out the fund raising activity, the
operational free cash flow remained very vigorous with more than HK$1bn in FY02.
Looking ahead, we expect the group’s free cash flow position to keep thriving due
to few capex needs. In FY03, capex is estimated at about HK$400mn, mainly for
sales-area expansion in Europe as investment in US wholesale expansion will be
minimal. Longer-term the major swing factor for the group’s investment plan is
when it starts its retail operations in the US. Nonetheless, it seems too early to
build in such a factor in our financial model. As such, we forecast annual capex
over the next three years will increase steadily to $500mn by FY06.
Furthermore, the usually exceptional free cash flow will also be more than
adequate for debt repayment and dividend payouts during the next five years,
leaving the group with a positive net cash flow. Given such an abundant cash pile,
we have modeled the increase in the group’s annual dividend payout ratio from the
present 35% to approx. 45% over the next three years.
Key Financial Ratios
1999A
2000A
2001A
2002A
2003F
2004F
2005F
Profitability (%)
Gross margin
EBITDA margin
EBIT margin
Pretax margin
Net margin
EBIT ROCE
Net ROE
51.4
14.1
10.9
11.7
7.2
30.9
27.7
49.8
14.7
12.1
12.1
6.3
38.7
24.9
49.3
16.5
14.0
14.3
7.1
50.0
26.4
49.1
17.3
14.3
14.8
10.1
32.5
28.9
48.8
17.2
14.0
14.2
9.0
33.5
25.7
48.8
17.0
13.8
14.3
9.0
32.3
24.0
48.8
17.0
13.8
14.5
9.1
31.9
23.0
Solvency
Gross debt/ equity (%)
Net debt (cash) / equity (%)
EBITDA/ Net interest exp (x)
EBIT/Net interest exp (x)
36.6
(0.3)
26.6
20.7
22.4
(17.4)
103.2
85.1
2.7
(17.7)
(180.2)
(152.1)
25.9
(4.8)
(183.1)
(151.1)
19.2
(10.6)
134.3
109.2
13.5
(21.1)
(274.4)
(222.7)
8.6
(29.8)
(64.8)
(52.7)
4.3
1.8
4.5
1.9
5.5
2.4
3.7
1.6
3.8
1.6
3.4
1.4
3.1
1.2
1.52
0.96
82
32
37
1.45
0.95
73
33
42
1.46
0.87
70
32
34
1.63
1.07
74
33
39
1.85
1.21
75
33
39
2.03
1.38
76
34
39
2.18
1.52
77
34
39
Productivity (x)
Capex / sales
Capex / depreciation
Liquidity
Current ratio (x)
Quick ratio (x)
Inventory days
Debtors days
Creditors days
Source: Esprit, CASH Research estimates
10
Esprit
Valuation
Deep discount to global
peers
Despite a higher PER compared with domestic retailers such Giordano (0709),
Esprit warrants valuation premium as it has improved status after successfully
undergoing globalization and its earnings growth potential is also higher than its
domestic peers. On the other hand, Esprit is still trading at an average 20%
discount to global names such as Gap and its closest competitors such as H&M and
Inditex.
DCF value HK$19 per share
Alternatively, we apply the DCF valuation model to calculate Esprit’s fair value. In
calculating WACC, we have assumed the equity beta to be 1.00 for the reason that
the historical beta of 0.83 was distorted by lower liquidity prior to its inclusion into
the HSI. We have also assumed a Hong Kong market basic equity risk premium of
6%. As such, using a resultant WACC of 10% and a terminal growth of 3%, Esprit’s
core business, excluding the China JV, is valued at $18.3 per share. Adding the
appraised value of the China JV and net cash, the group’s revalued NAV per share
is $19.0. In other words, current share price is trading at over 22% to its intrinsic
value.
DCF Valuation Model
(HK$m)
EBIT
Adjusted tax
NOPLAT
Depreciation / Amortization
Net capex
NWC change
Operating FCF
%yoy
Discounted OpFCF
Sum of Discounted OpFCF
2004F
2005F
2006F
2007F
2008F
2009F
2010F
2011F
2012F
1,745
-646
1,099
372
-425
-291
755
1,998
-739
1,258
424
-433
-224
1,024
35.6%
2,339
-866
1,474
479
-442
-257
1,254
22.4%
2,754
-1,019
1,735
538
-450
-291
1,531
22.1%
3,083
-1,141
1,942
601
-461
-252
1,830
19.5%
3,439
-1,272
2,166
669
-469
-276
2,090
14.2%
3,822
-1,414
2,408
741
-478
-301
2,370
13.4%
4,249
-1,572
2,677
818
-487
-338
2,670
12.7%
4,732
-1,751
2,981
900
-495
-383
3,003
12.5%
9,499
-3,514
5,984
989
-357
-3,028
3,588
19.5%
711
853
924
999
1,057
1,069
1,073
1,070
1,065
1,127
9,947
Terminal growth
Terminal value
PV of terminal value
3.0%
37,071
11,638
Value of core business (HK$m)
Shares outstanding (m)
Value of core business per share (HK$)
21,585
1,179
18.3
WACC Calculation
Riskless rate
Equity beta
Equity risk premium
Cost of Equity
Cost of debt
Effective tax rate
Debt-to-capital employed ratio
WACC
2003F
3.97%
1.0
9.00%
12.97%
3.1%
37.0%
0%
12.97%
Source: CASH Research estimates
Sum-of-parts Valuation Model
Core business
China' JV (49%-owned)
Add: net cash
Revalued NAV
Basis
Asset value (HK$m)
Per share (HK$)
DCF @ 12.9% WACC
8x 03 PER
21,585
487
324
22,397
18.3
0.4
0.3
19.0
Source: CASH Research estimates
Esprit
11
Peer Group Comparison
Company
Stock code Price* Yr-end
Esprit
0330.HK
Giordano
0709.HK
GAP
GPS.N
Inditex
IXD MC
Hennes & Mauritz HMb.ST
Benetton
BNG.MI
14.75
2.475
13.25
21.95
179.0
6.05
Jun
Dec
Jan
Jan
Nov
Dec
Hist.
18.3
8.7
24.5
30.5
26.1
8.4
PER (x)
Fwd yr-1 Fwd yr-2 PEG (x) ROE (%)
15.4
8.0
17.7
24.9
22.7
7.9
13.2
7.2
11.0
21.1
19.6
7.4
0.7
1.0
0.4
1.2
0.9
0.6
28.9
22.2
-0.3
22.9
24.7
11.9
Source: Bloomberg I/B/E/S, CASH Research estimate
* in local currency as at 11 March, 2003
Income Statement (HK$m)
Yr-ended Jun
European wholesales
Asian wholesales
European retail
Asian retail
US wholesales
Licensing & others
Sales
Cost of sales
Gross profit
Operating expenses
EBITDA
Depreciation
Amortization
EBIT
Interest income
Interest expense
Operation profit
Exceptional item
JV
PBT
Taxation
Minority interest
Net profit
2001A
2002A
2003F
2004F
2005F
4,231
325
1,432
1,989
0
132
4,854
366
2,012
1,829
0
157
6,438
440
3,044
1,926
78
209
7,248
501
3,777
2,013
468
235
8,127
551
4,591
2,108
936
263
8,109
(4,110)
3,999
(2,658)
1,341
(188)
(20)
1,132
46
(38)
1,139
0
20
1,160
(512)
(72)
575
9,219
(4,690)
4,529
(2,934)
1,595
(222)
(57)
1,316
23
(14)
1,325
0
36
1,361
(375)
(59)
927
12,134
(6,213)
5,921
(3,804)
2,117
(266)
(106)
1,745
24
(36)
1,733
0
61
1,794
(664)
0
1,130
14,242
(7,292)
6,950
(4,529)
2,421
(318)
(106)
1,998
46
(36)
2,007
0
76
2,083
(771)
0
1,312
16,576
(8,487)
8,089
(5,271)
2,818
(373)
(106)
2,339
67
(30)
2,377
0
95
2,472
(915)
0
1,557
Source: Esprit, CASH Research estimates
12
Esprit
Balance Sheet (HK$m)
Yr-ended Jun
2001A
2002A
2003F
2004F
2005F
Trademark & Intangible assets
Fixed assets
Investments in securities.
Associates
Deferred tax assets
Non-current assets
722
779
7
79
6
1,593
1,850
989
8
78
4
2,929
1,744
1,299
8
139
4
3,194
1,638
1,563
8
215
4
3,429
1,532
1,773
8
310
4
3,628
Inventories
Debtors
Amt due
Cash / Bank deposit
Current assets
791
716
10
444
1,961
955
824
18
982
2,779
1,278
1,101
18
1,273
3,670
1,515
1,312
18
1,834
4,678
1,781
1,550
18
2,505
5,854
Creditors
Tax payable
Finance lease
LT bank loan
Secured ST bank loan
Unsecured ST bank loan
Overdraft
Current liabilities
747
542
1
0
0
0
56
1,346
976
682
1
0
0
0
48
1,707
1,285
664
1
0
0
0
48
1,997
1,508
771
1
0
0
0
48
2,328
1,756
915
1
0
0
0
48
2,719
1
0
8
18
27
0
780
17
0
798
0
728
17
0
746
0
624
17
0
642
0
468
17
0
486
Net Asset
2,181
3,204
4,121
5,138
6,277
Share capital
Reserves
Shareholders' Fund
114
2,067
2,181
118
3,086
3,204
118
4,003
4,121
118
5,020
5,138
118
6,159
6,277
Finance lease
LT Bank loan
Deferred taxation
Minority interest
Long-term Liabilities
Source: Esprit, CASH Research estimates
Cashflow Statement (HK$m)
Yr-ended Jun
2001A
2002A
2003F
2004F
2005F
EBIT
Interest income
Interest expense
Depreciation / Amortization
Tax paid
Forex adjustment
Non cash item
Gross cashflow
1,132
46
(38)
209
(374)
(80)
11
904
1,316
19
(13)
279
(298)
88
7
1,398
1,745
24
(36)
372
(682)
0
0
1,424
1,998
46
(36)
424
(664)
0
0
1,767
2,339
67
(30)
479
(771)
0
0
2,085
Net capex
Change in WC
Free cashflow
(445)
(187)
273
(344)
(47)
1,006
(437)
(291)
696
(445)
(224)
1,098
(453)
(257)
1,376
Trademark acquisition
Investment in subsidiary
Other investment
Disposal
Dividend paid
Dividend to minorities
Share issues
Forex adjustment
Repay from related co.
Net cashflow
0
0
0
24
(173)
(71)
69
0
0
122
(1,174)
(15)
(0)
5
(188)
(72)
108
0
25
(306)
0
0
0
12
(364)
0
0
0
0
343
0
0
0
12
(445)
0
0
0
0
664
0
0
0
11
(559)
0
0
0
0
827
Source: Esprit, CASH Research estimates
Esprit
13
Appendix – Group’s Share Option Scheme
Management disposals are nothing to do with the group’s fundamentals. In 1H03,
four directors disposed of 9.68mn shares, equivalently to 0.82% of the total shares
outstanding ended FY02. The group said the disposals were mainly due to personal
reasons, rather than the group’s fundamental issues.
We expect further share disposals by the end of CY03 as 6.5mn units of options
held by directors, with a strike price of $5.14-$6.24, and 7.6mn units of options
held by employees, with a strike price of $2.64-$5.14, expire by Nov 2003.
However, this should not be a major overhang on the share performance going
forward, as we recognize that lingering directors’ disposals over the past few years
have not brought any material impact on the share price uptrend movement.
Moreover, the second single-largest shareholder of the group, Jurgen A Friedrich,
has already reduced his interest to below 10% due to a US tax reporting issue.
This considerable share offload over the years will be unlikely in the future.
Directors' Share Options
Director
Heinz Jurgen KrognerKornalik
Group's Deputy
Chairman
Group's Deputy
Chairman, CEO
John Poon
Group's CFO
Surinder Chhibber
Thomas Johannes Grote
Connie Wong
Executive director,
Esprit Europe
Director, Taiwan
operation
Exercise period
No. of options Strike price
o/s (m)
(HK$)
17/05/03-16/11/03
26/11/03-25/11/08
3.0
1.2
6.264
14.600
26/11/03-25/11/08
4.0
14.600
15/12/02-16/11/03
26/11/03-25/11/08
17/05/02-16/11/03
26/11/03-25/11/08
3.0
2.4
0.5
1.6
6.360
14.600
5.140
14.600
26/11/03-25/11/08
0.4
14.600
Total no. of directors' options
16.1
No. of directors’ options expired by Nov 03
No. of employees' options expired by Nov 03
6.5
7.6
Source: Esprit
14
Position
Esprit
Head Office: 21/F, Low Block, Grand Millennium Plaza, 181 Queen’s Road Central, Hong Kong.
Tel: (852) 2287 8788 Fax: (852) 2287 8000
The above information is provided and distributed by CASH Research Limited (“CRL”), a registered investment advisor
under Securities Ordinance. The document is for information purpose only. Neither the information nor opinion
expressed shall be construed, expressly or impliedly, as an advice, offer, invitation, advertisement, inducement,
recommendation or representation of any kind or form whatsoever. While the information contained herein has been
obtained from sources believed to be reliable, CRL or its affiliates (“CASH”) do not represent that it is accurate or
complete and it should be relied upon. CASH hereby expressly disclaims all liabilities arising out of or incidental to the
accuracy and completeness of the contents and information herein contained. The contents and information in this
document will be subject to change without further notice. CASH may have positions in securities mentioned and may
provide financial and business advisory, corporate financing or other services to the companies herein covered and
may, as principal or agent, buy and sell such securities. An employee, analyst, officer, or a director of CASH may serve
as a director for companies mentioned in this report. Trade in securities covered by this report may be made only in
those jurisdictions where the securities are qualified for trading. This document may not in whole or in part be
reproduced or furnished to any person other than the addressee.