REGINA MIRACLE(02199.HK)：PLANNED ACQUISITION OF 49% EQUITY INTEREST IN VSCO HOLDINGS TO BE ENGAGED IN PRC BUSINESS OF VS-格隆汇

机构：中金公司
研究员：Haiyan GUO/Lingyi ZENG/Wenhui SONG

What's new
Regina Miracle (RM) has announced its intent to acquire a 49% equity interest in VSCO Holdings for total consideration of US$45mn to be engaged in the PRC business of Victoria’s Secret (VS). The firm announced that RM Fung Ying (RM’s indirect wholly-owned subsidiary) entered into a joint venture (JV) agreement with ASLA US Holdings (an indirect wholly owned subsidiary of VS). RM Fung Ying agreed to acquire 49% of the equity interest in VSCO Holdings for US$45mn. Upon completion of the acquisition, VSCO Holdings will operate the PRC business of VS as a JV. As of FY2020 and FY2021, VSCO's net loss after tax totaled HK$669mn and HK$109mn.
Comments
Chinese lingerie market is promising with stable demand and a fragmented competitive landscape. We believe that female consumers have steady demand for intimate apparel. Euromonitor expects the size of the Chinese lingerie market to exceed Rmb320bn in 2026, growing solidly at a CAGR of 7% over 2010-2026. However, the CR5 (i.e. combined market share of the top five firms) in the domestic lingerie market in 2021 was only 7%, much lower than 13% of the global market. We think the Chinese lingerie market is highly fragmented without industry leaders. We expect the JV to grasp growth opportunities in the Chinese market, leveraging advantages of both RM and VS.
Adhering to manufacturing business plan; strong partnership to open up the market. VS is the world's largest lingerie retailer, and is also RM’s biggest client; the two firms have worked in close cooperation for more than 20 years. VS boasts a wealth of retail experience and strong brand influence. RM, as the global innovation design manufacturing (IDM) lingerie manufacturing leader, enjoys competitive edges including cutting-edge design, innovation and production capacity. Under the cooperative agreement, RM will be engaged in the R&D and design of VS’ products for the Chinese market as well as the manufacturing of most domestic products. We expect RM to help VS grow in China thanks to its keen insights into the Chinese market, while boosting its own earnings. In addition, the firm stated that the manufacturing business will not be affected by this JV and will proceed steadily in accordance with its five-year plan announced earlier.
Focusing on domestic consumers; strengthening online and offline sales. VS entered the Chinese market in 2016. As of 3Q21, the number of stores in China reached 63 ─ including 27 full-category stores and 36 cosmetics stores (selling cosmetics and body care products) ─ covering more than 10 provinces. The firm’s management stated in its announcement that it plans to expand VS’ stores in tier-1 to tier-3 Chinese cities, and strengthen online and offline sales of VS’ products. The firm plans to design and produce products suitable for Chinese consumers while keeping the characteristics of VS, focusing on the design and technology of the products. The firm expects to launch new products in the summer of 2022.
Valuation and recommendation
We maintain our FY22 net profit forecast at HK$ 521mn, as the firm’s manufacturing business keeps improving; we raise our FY23 net profit forecast 3.6% to HK$ 660mn, and introduce our FY24 forecast at HK$ 853mn. The stock is trading at 12x and 9x FY23e and FY24e P/E. We maintain an OUTPERFORM rating, given the firm’s technical advantages in product design, R&D and manufacturing as a global leader in the lingerie manufacturing industry, as well as its growth potential due to cooperation with VS. We lift TP 5.5% to HK$8.08, implying 15x and 12x FY2023e and FY2024e P/E with 30.3% upside.
Risks
COVID-19 conditions affect output; disappointing growth in orders from core clients and/or JV’s operation; fluctuating FX rate.