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1、,Hiba Ali*,Associate,Bangalore,Company report,Consumer&RetailSpecialty RetailEquity SpainInditex(ITX SM),abcGlobal Research,Overweight,OW:Priced for perfection,or primed for growth?,Targetprice(EUR)Share price(EUR),115.0099.96,We see potential to near triple the existing global store basevia a diver
2、sified and low risk brand strategy,Potential return(%)15.0Note:Potential return equals the percentagedifference between the current share price andthe target priceJan 2012 a 2013 e 2014 e,Expansion via EM,and superior demand pullretail/sourcing model,underpin+ive short-and long-termupgrade momentum,
3、HSBC EPS,3.10,3.99,4.45,HSBC PEPerformanceAbsolute(%)Relative(%),32.01M9.45.4,24.93M23.410.5,22.312M59.172.9,Raise FY13-15e PBT by 7-4%;increase long-term sales andmargin assumptions;raise TP to EUR115(from EUR100);OW,Note:(V)=volatile(please see disclosure appendix)Global growth story:Inditex is on
4、e of few retailers to have achieved global,mass-marketcross-border appeal,in turn facilitating rapid expansion into International Developed andhigher growth EM markets,the latter now accounting for 52%of sales.We forecast thiswill rise to 63%by FY15e,with Asia and China key to that expansion.With le
5、ss than 1%share in the 85 markets in which it operates except Spain(c12%across all brands),we seepotential,even under our cautious analysis,to near triple the existing global store base.,8 October 2012Paul Rossington*AnalystConsumer and Retail ResearchHSBC Bank plc+44 207 991 View HSBC Global Resear
6、ch at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulationsIssuer of report:HSBC Bank plcDisclaimer&DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Discl
7、aimer,which forms part of it,Best practice operator:Inditex operates a highly sophisticated demand pull retailmodel based on superior market awareness,a superior sourcing model(includingintegrated manufacturing),and centralised inventory management.Lower product risk andimproved speed of response to
8、 changing market conditions,an enhanced ability tomaximise local market potential via dynamic pricing and increased stock utilisation,results in a structurally higher ratio of full price sales(or reduced markdowns)relative tothe peer group,and sustainably higher EBIT margins,on a par with luxury goo
9、ds retailers.Short-term catalyst:Given a strong start to Q3,weak comps for the rest of the quarter,gross margin support via lower input cost prices and superior execution,we see risk to theupside for HSBC/consensus FY13-15e EPS/FCF estimates.Sustainably higher long-term cash generation:We increase l
10、ong-term revenue andgross margin assumptions on rising exposure to EM,the development of online sales,andthe increasing structural benefit to group revenues/gross margins of dynamic pricing.Valuation:Our new TP of EUR115(up from EUR100)is based on APV analysis.Ournew TP implies a potential return of
11、 15.0%and places the group on a CY2013e PE of26.1,a justifiable premium to the wider sector given that we expect it to deliver earningsgrowth commensurate with that of the global peer group,but with lower risk and potentialfor upside surprise.Risks:A major de-rating of European consumer stocks;renew
12、edSouthern European sovereign default risk;a protracted slowdown in global growth.Index MADRID SE Enterprise value(EURm)57482Index level 787 Free float(%)35RIC ITX.MC Market cap(USDm)80,426Bloomberg ITX SM Market cap(EURm)61,834,Source:HSBC,Source:HSBC,Inditex(ITX SM)Specialty Retail8 October 2012Fi
13、nancials&valuationFinancial statements,Valuation data,abc,Year to,01/2012a,01/2013e,01/2014e,01/2015e,Year to,01/2012a,01/2013e,01/2014e,01/2015e,Profit&loss summary(EURm),EV/sales,4.2,3.6,3.2,2.8,RevenueEBITDADepreciation&amortisationOperating profit/EBITNet interestPBT,13,7933,258-7362,522372,559,
14、16,0314,117-8193,298503,348,17,8434,599-9243,675593,734,19,8215,141-1,0164,125694,194,EV/EBITDAEV/ICPE*P/Book valueFCF yield(%)Dividend yield(%),17.914.832.08.32.11.8,14.013.524.97.23.92.4,12.213.122.36.34.42.6,10.712.919.95.55.13.0,HSBC PBTTaxationNet profitHSBC net profit,2,559-6141,9321,932,3,348
15、-8462,4842,484,3,734-9442,7712,771,4,194-1,0603,1123,112,Note:*=Based on HSBC EPS(fully diluted)Price relative,Cash flow summary(EURm),166,166,Cash flow from operationsCapex,2,506-1,204,3,381-1,000,3,766-1,040,4,207-1,082,146126,146126,Cash flow from investmentDividendsChange in net debtFCF equity,-
16、1,349-1,004-381,274,-1,192-1,288-9262,406,-1,040-1,539-1,2112,750,-1,082-1,744-1,4063,149,1068666,1068666,InditexRel to MADRID SE,Balance sheet summary(EURm),4626,4626,Intangible fixed assets,832,868,900,926,2010,2011,2012,2013,Tangible fixed assets,4,063,4,400,4,484,4,524,Current assetsCash&othersT
17、otal assetsOperating liabilitiesGross debtNet debtShareholders fundsInvested capital,5,4473,46710,9593,1722-3,4657,4153,958,6,6414,39312,5263,5252-4,3908,6114,246,8,0775,60414,0783,8252-5,6029,8444,286,9,7277,01015,7944,1502-7,00711,2124,271,Source:HSBCNote:price at close of 05 Oct 2012,Ratio,growth
18、 and per share analysis,Year to,01/2012a,01/2013e,01/2014e,01/2015e,Y-o-y%change,RevenueEBITDAOperating profitPBTHSBC EPS,10.19.810.110.211.5,16.226.430.730.828.6,11.311.711.511.511.5,11.111.812.212.312.3,Ratios(%),Revenue/IC(x)ROICROEROAEBITDA marginOperating profit margin,3.954.828.018.923.618.3,3
19、.960.131.021.325.720.6,4.264.430.021.025.820.6,4.672.029.621.025.920.8,EBITDA/net interest(x),Net debt/equityNet debt/EBITDA(x),-46.5-1.1,-50.6-1.1,-56.5-1.2,-62.0-1.4,CF from operations/net debtPer share data(EUR),EPS reported(fully diluted)HSBC EPS(fully diluted)DPSBook value,3.103.101.8011.90,3.9
20、93.992.3313.82,4.454.452.6215.79,5.005.002.9717.99,2,Inditex(ITX SM)Specialty Retail8 October 2012Investment Summary Exposure to high growth Emerging Markets(now over 50%of sales)should outweigh any further deterioration in the domestic economy Diversified and low risk multi-brand,multi-channel grow
21、thpotential supported by structurally advantaged sourcing andlogistics platforms Maximisation of local market revenue opportunity via demand pullbusiness model and best practice,to the benefit of cash generation,abc,Accessing global growthInditex/H&M:Best in classThe bulk of our Pan-euro/UK General
22、Retail sectorcoverage consists of ultimately structurallychallenged,largely UK-centric,companies withlimited success in overseas markets.The exceptionsto this rule are Inditex and H&M,both of whichhave demonstrated successful cross-borderexpansion,superior business execution and,bydefault,sector lea
23、ding rates of growth and returns.We have an Overweight rating on Inditex and aNeutral rating on H&M(HMB SS,TP SEK250).We expect both to deliver above-sector-averagerates of space/top-line growth.However,whilelower input costs will in theory benefit the widerapparel sector in the short term,ongoing m
24、argininvestment in price and product at H&M bothlimits the beneficial impact on earnings whilereducing visibility on the longer-term margins(see our recent note:Hennes&Mauritz(HMBSS):Downgrade to N:Not the visibility we werelooking for,8 October 2012).,Inditex is our preferred long-term playIf we fo
25、cus on the long term,and the potential fordelivery of lower risk,sustainable,consistentgrowth in all of revenues,earnings and cash-generation then Inditex is our preferred play.Investment caseLow risk sustainable growthOut investment case is predicated on thefollowing factors,against a back drop of
26、positiveearnings momentum and diminishing downsiderisk thereto.1.Greater exposure to higher growth EmergingMarketsAt 52%of total sales(FY12a),Inditex has greaterexposure to structurally higher EM growth inEurope,Asia,LATAM and the RoW whencompared to the majority of the peer group.Wecalculate revenu
27、e-weighted GDP growth in the 85countries in which Inditex operates of 1.7%inCY12e and 2.1%in CY13e(based on acombination of HSBC and OECD estimates),thehighest such growth rates among the large capnames in our pan-European coverage list.Weexpect EM to account for 63%of Inditex revenuesby FY15e.,3,In
28、ditex(ITX SM)Specialty Retail8 October 2012Inditex Revenues:Developed vs Emerging Markets(2012a)Asia(ex,Inditex Revenue:Developed vs Emerging Markets(2015e)Asia(ex,abc,Latin America10%,(Japan8%,(Japan18%,/Mid EastAfrica8%EM Europe22%,Dev eloped52%,Latin America12%/Mid EastAfrica8%,Dev eloped37%EM Eu
29、rope25%,Source:Company data,HSBC estimates2.Superior long-term store/online growthpotential from a diversified brand portfolioThe demonstrable cross-border appeal andsuccess,coupled with the ability to expand via adiversified multi-brand strategy,materiallyincreases the number of potential new store
30、openings over that of a less international,mono-brand operator.We calculate 8-10%pa new spacegrowth for the foreseeable future,driven byaccelerated growth across all brands in non-European Emerging Markets(e.g.Asia,LATAM),and brand proliferation in DevelopedMarkets where availability of prime real e
31、state isa potential barrier to physical expansion for thegroups leading brand Zara(c67%of sales).Our cautious analysis suggests potential for up to15,100 stores globally vs the current 5,693,a 2.7fold increase,with risk to the upside.At thecurrent rate of new store openings(c480-520 p.a.)this equate
32、s to 19 years of consecutive expansion.Albeit not quantified,we expect the global onlinerevenue opportunity to be largely incremental tothat derived from the expansion of retailsquare footage.3.Structurally superior demand pull retail andsourcing model,incl.integrated productionInditex operates a de
33、mand pull retail modelbased on a superior internal flow of informationand shared awareness of changing consumertrends as compared to its peer group.This,4,Source:HSBC estimatescombined with an enhanced speed of response viaa vertically integrated capability unique to Inditex(i.e.1/3rd of sales are o
34、f goods produced in house),affords the group a structural advantage inminimising product/fashion risk,and maximisingthe proportion of full price sell-through.Thisresults in a lower markdown ratio of c15%(thelowest that we know of)and thus higher achievedgross margins relative to the peer group.These
35、 advantages are complemented by arelatively high level of close proximity sourcing(accounting for 1/3rd of sales),which in turnlimits the extent of Far East sourcing exposure(to1/3rd of sales),thus minimising exposure to FarEast manufacturing wage inflation and FX risk.4.Maximisation of local market
36、 revenueopportunity via/dynamic pricingThe benefits of the demand pull retail model andintegrated/close proximity are maximised at thelocal market level via centralised inventorymanagement,the use of dynamic pricing(i.e.theability to charge different prices for the sameproduct in different markets w
37、ithoutcompromising brand integrity),and strongexecution.This allows Inditex to maximise thelocal market revenue opportunity via improvedstock utilisation at the group level and the higherASPs charged in international markets(thoseoutside Spain).Hence,in addition to the demandpull retail model delive
38、ring structurally higher,Inditex(ITX SM)Specialty Retail,abc,8 October 2012full price sell-through via reduced fashion risk,dynamic pricing serves to maximise averageselling prices(ASPs),also to the benefit achievedgross margins.5.Superior cash generative qualitiesIf we extrapolate the revised FY13e
39、 capex spend ofEUR1bn excluding freehold property acquisitions(vs previous guidance of EUR850m),and theexpected FY13e dividend payout ratio(with theFY13e yield of 2.4%,nearly twice covered by theFCF yield of 3.9%),we expect year-end net cash todouble from an FY12a closing balance ofEUR3.5bn to EUR7b
40、n at end FY15e.This is supported by a near-unique(among peers)negative operating working capital cycle,aconsequence of the business model which resultsin relatively low inventory and accountsreceivable.This is largely explained by the fasterproduction and design cycle.Shorter lead timesreduce the wo
41、rking capital intensity,facilitate thecontinuous manufacturing process,and allowInditex to commit to the bulk of its product linesmuch more effectively than its competitors,thusstructurally reducing the required level ofoperating working capital to the benefit of groupFCF generation.5,No,No,No,No,Ye
42、s,Yes,Yes,Yes,Inditex(ITX SM)Specialty Retail8 October 2012Superior short-term earnings growthWe forecast Inditex will deliver prospective 3 yearaverage EPS growth of 17.5%,with risk to theupside due to the growing presence in highergrowth EM,coupled with the ongoing structuralbenefit to both sales
43、growth and EBIT margins ofthe more sophisticated demand pull model thecompany employs and its ability to leverage itsheavily centralised operating platform.This compares to H&M,Inditexs nearest pan-European peer,with a projected 11.3%equivalentEPS growth rate.H&Ms earnings growthexpectations have be
44、en impacted by the recent FX-driven downgrades and the shortfall in gross marginexpansion relative to consensus expectations whereincreased margin investment in the underlyingproduct offer has offset the positive impact of lower,For example,we now believe the impact offurther economic slowdown in th
45、e key territory ofSpain(at c22%of sales)would have minimalimpact at the group level,being offset byincreased exposure to higher growth EM.We now conclude that the key driver ofoutperformance is more than ever the groups owncommercial policy(i.e.what to sell where,when andhow),and its execution there
46、of.The strong trackrecord of success in this regard also gives us comfortthat the risks are less than we had once feared.Of the original downside risks that we consideredin 2010,we believe only half remain applicable,with the others having been mitigated viadiversification.Diminishing risk,abc,raw m
47、aterial costs(e.g.cotton).Inditexs growth rate is also ahead of that of the vastmajority of the global peer group.Diminishing earnings riskWhen we first initiated on Inditex and H&M in2010 we considered a number of downside risks to,CY 2010-Fashion risk-Unseasonal weather patterns-Youth unemployment
48、 in Europe-Low brand acceptance in new mkts-Adverse shift in the USD/Euro-Rising input cost pressures-Ability to deliver new space targets-De-rating of Euro consumer stocksSource:HSBC analysis,CY 2012,both business models.Two years on,we now havea better understanding of Inditexs business model,and
49、believe that macro/FX/weather-relatedtrading risks have been substantially mitigatedthrough brand and geographic diversification.Inditex vs H&M:key revenue,earnings,margin and income growth assumptions,2012e-2015e,_ Inditex _2013e 2014e 2015e,_ H&M _2012e 2013e 2014e,LFL sales growthSpace driven sal
50、es growthCurrency translationTotal revenue growthEPS growthGross margin+/-Group operating margin+/-FCF yieldDPS yield,6.8%8.5%1.1%16.2%28.6%68bps228bps3.9%2.4%,3.0%8.5%0.1%11.3%11.5%24bps3bps4.4%2.6%,3.0%8.1%0.0%11.1%12.3%25bps21bps5.1%3.0%,1.3%9.8%-0.7%10.5%7.6%-49bps-17bps3.6%4.1%,2.0%9.4%-0.8%10.
