Earnings momentum from China

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The author is an analyst of Shinhan Securities. She can be reached at hpark@shinhan.com — Ed.

Demand for MLB brand on a fast recovery in China

F&F is expected to have recorded consolidated sales of KRW499.4bn (+14% YoY) and operating profit of KRW149.8bn (+11% YoY) in 1Q23, picking up pace of growth from the previous quarter. Sales from Discovery likely fell by 6% YoY due to the high base of 1Q22 and slowing domestic consumption of clothing. The MLB brand, which has high China exposure, should have achieved top-line growth of 18% YoY on rising demand in the country.

Offline stores in China had difficulty selling their inventories under COVID-19 lockdowns last year. With strict pandemic rules easing from end-November, local demand has been recovering at an accelerating pace since the beginning of the year. Retail point-of-sale (POS) revenue is estimated to have increased in the 30% YoY range in March, vs. a single-digit percentage growth seen in the first two months combined. F&F’s store count in China stands at 889, up by 50 from 4Q22, and average sales per store are returning to the levels of a year earlier. Consolidated subsidiaries Sergio Tacchini (acquired in August 2022) and Victory Contents (April 2022) have made contributions to sales, but may eat into overall profitability with their operating margins being lower than those of the mainstay business.

Overseas market expansion continues

MLB’s offline retail sales in China are seemingly growing at a fast pace on strong brand power and clearing out inventory. We believe earnings momentum will increase further toward 2H23 on the back of heavy orders received in February for the 2023 fall/winter season.

F&F will launch this year’s fall/winter collection of Duvetica in China. Related sales are expected to flow in from July-August. No decision has been made on overseas market expansion of the Discovery brand, but the company may seek to repeat its success with MLB in China.

Too cheap considering robust capabilities

Shares have been stuck in a narrow trading range since 2H22, as investors started to worry about earnings due to the weakening effects of new store openings in China. However, the recovery of China’s demand is stronger than expected. We find F&F shares attractive at current price levels, compared to other China consumption plays. With China’s reopening in full swing, investors are expected to pay renewed attention to the company.

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