The performance in first half year was significantly better than peers. EEKA Fashion (03709.HK) enters into the Hong Kong Stock Connect, accelerating to restore the valuation.

In the first half of 2022, the clothing business was obviously affected by the epidemic. Data indicate that the total retail sales of consumption goods was RMB 21,043.2 billion from January to June this year, with a year-on-year decrease of 0.7%, among which clothing, footwear and textiles fell by 6.5% year-on-year. Under the market pressure, the performance of most listed clothing companies declined or even suffered losses, but on the whole, the companies with middle and high-end brands suffered less effects, among which EEKA Fashion operated stably overall.

On August 26, EEKA Fashion, a leading middle and high-end company for women's clothing, released interim results in 2021, showing a revenue of RMB 2.896 billion and a net profit of RMB 258 million in the first half year, which slightly year-on-year declined but still maintained better performance and stronger operational stabilities compared with peers.

It is noticed that in the first half of this year, the net operational cash flow of EEKA Fashion reached RMB 981 million with a year-on-year increase of 27%, meaning that the company has more abilities to against risk in volatility to guarantee a long-term growth.

I. The advantages of multi-brand operation are fully demonstrated, online sales have increased by 15% against trend.

"Gold can only be seen when the waves wash away the sand", the real quality of each clothing company can be seen at a glance under the test of the epidemic. As to the EEKA Fashion keeping stabilities, the essence is that the company is developing multi-brands as well as continuously propelling digitalization to fully energize the platform-based and systematic management strategies.

As an established middle and high-end brand for women's clothing, EEKA Fashion is one of the best brand diversification companies in the industry, of which eight sub-brands form a solid pyramid-shaped matrix to complement each other's advantages, covering domestic female consumers of different ages and providing sufficient support for the stability of the company's performance. Besides, the ability of continuously incubating strong brands repeatedly verified has also become the company's core competitiveness.

The performance of each brand in the first half year verified the abovementioned conclusion. During the performance period, the revenue of the three main brands Koradior, NAERSI, and NEXY.CO reached RMB 1.041 billion, RMB 647 million, and RMB 385 million respectively, keeping their glory; the revenue of the brands Koradior Elsewhere and NAERSILING reached RMB 234 million and RMB 205 million respectively, continuing to be solid backbone force; the growth rate of the brands CADIDL, La Koradior and FUUNNY FEELLN achieved 12.88%, 9.66% and 0.49% respectively, maintaining increase inaccessibly despite the adversity. Compared with most rival firms with a single main brand, the outstanding stability and superiority of the multi-brand structure of EEKA Fashion make it hard to catch up.

Digitization, highly mentioned since the epidemic outbreaking, varies obviously in companies on its actual implementation, while EEKA Fashion make a progress in high efficiency. Digital reconstruction strengthens the contact and interlinkage between company and consumers, becoming a focus of omni-channel layout. Meanwhile, EEKA Fashion applies digitization to deep-level links such as middle platform and supply chain management, effectively improving the company's management efficiency and amplifying the advantages of organizational structure.

Judging from the performance in the first half of this year, the third stage of omni-channel development goes well with 1,552 directly-operated stores, ranking first in the industry. Affected by the epidemic, the number of distributors declined slightly but remained within a controllable range.

E-commerce sales grew fast in the first half year, with a revenue of RMB 443 million, a year-on-year increase of 14.88% and a proportion of the total revenue of 15%. Thereinto, the private domain mall and Douyin e-commerce performed the most outstanding and verified the continuous growth capability, achieving revenue growth rates of 48.41% and 121% respectively.

Online sales changed from out-of-season products to incremental ones, which had realized in only about two years, fully affirming the company's strategic determination and execution.

At present, all the major capability modules of the digital system in EEKA Fashion have come into service, which completes the migration of the member's middle platform, and greatly improves the customer and commodity smart management capabilities in the private domain mall. Digital tools also release greater potential from highly direct terminal management capabilities to better control cost, which will make EEKA Fashion continuously maintain the leading shares and status in the middle and high-end women’s clothing industry with overall improved competitiveness.

II. Having sufficient potential for local middle and high-end women’s clothing, EEKA Fashion (03709.HK) enters into the Hong Kong Stock Connect, accelerating to restore the valuation.

High-end consumption tends to be stronger compared to mass consumption, which is more obvious in foreign high-end and luxury brands. Public data shows that up to the end of June this year, top brands such as LVMH, Prada, and Moncler have fully demonstrated the defensiveness and achieved a growth rate of 11%, 21%, and 62% respectively after the epidemic begins, which is an important reason for the government to support the development of Chinese high-end brands.

Clear policy support and advocating domestic products have provided opportunities for the rise of local brands of middle and high-end women's clothing. "The Outline of the 14th Five-Year Plan for Economic and Social Development and Long-Range Objectives Through the Year 2035 of The People's Republic of China" clearly proposes to enhance the influence and competitiveness of independent brands, take the lead in cultivating a number of high-end brands in the field of consumer goods such as clothing, and give strong policy supports for the development of domestic high-end women’s clothing.

At the same time, anti-globalization has also brought more opportunities for local brands. A series of events represented by the Xinjiang cotton incident have shown the consumption tendency of Chinese consumers, and domestic local brands gain more advantages when competing with overseas brands under more and more non-commercial variables, implying the huge potential of local brands. Local brands need to seize the opportunity and precipitate own brand, better elevating market share and valuation premium with the help of continuous internal improvement and external integration.

According to Euromonitor data, the retail sales of middle and high-end women’s clothing will account for 23.4% in the women’s clothing market in 2023. The retail sales of middle and high-end women’s clothing stringendo increase in lower-tier cities under the action of increasing terminal consumption demand driven by consumption upgrade and the increase of high-net-worth individuals as well as promoted urbanization, bringing more incremental space to companies.

As a leading company in the field of middle and high-end women's clothing, EEKA Fashion has significant brand advantages and multi-brand operation capability, which has been demonstrated by the past performance and will make it confident for a long-term solid growth. As a rare company of high-end women’s clothing, it has been underestimated severely on its valuation due to factors such as the liquidity of Hong Kong stocks. Up to now, the company's price-to-earnings ratio is only 12.26 times, and the price-to-sales ratio 1.11 times, far lower than the average valuation of comparable A-share listed companies of middle and high-end women's clothing.

However, joyfully, this problem will be solved. On September 5, EEKA Fashion was officially included in the Hong Kong Stock Connect, which allows mainland investors optimistic about its value to buy directly, making a positive effect on the company's stock price and trading volume. With reference to the strong upside of the stock price of high-quality listed companies such as Meituan and Xiaomi after being included in the Hong Kong Stock Connect, it is expected that the EEKA Fashion with high-quality fundamentals will also be favored by funds going north, accelerating stock price to return to intrinsic value.

Figure 1 Meituan, Figure 2 Xiaomi

Summary

Under the complicated external environment in the first half year, EEKA Fashion demonstrated the brand advantages and strong operation defensiveness with steady interim results.

The domestic textile and garment industry was undervalued in past five years, while EEKA Fashion is valued far lower than peers as well as its true market value. Entering into Hong Kong Stock Connect may be a key turning point, which will generate an Alpha opportunity, the investors who realize earlier and seize better will make a greater profit.