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Belle’s share price has rebounded almost 40% from its recent low. We believe
corporate earnings may be negatively affected by inflationary pressure, so we revise
down our valuation as the risk premium increases. Target price is HK$ 10.60.
Shoes business: targeting high-end market The company’s current brand portfolio
targets middle-end market, with average selling price(ASP) of US$60-200. Belle intends
to enter the high-end market with ASP of US$200-300. We expect Belle may buy new
brands through M&A or establishing strategic relations with other brands after
re-structure its existing brands and integrate its newly acquired brands.
Strong brand equity helps to release cost pressure Although cost pressure is an
incremental negative for Belle, we note that the company can pass on the cost to the
consumers by enhancing brand equity and adding extra value on the products, so the cost
concern won’t be a major threat to net earnings.
Gross margin further deterioration Belle’s gross margin dropped from 56.1% in
2006 to 50.6% in 2007, and the decline was mainly due to the acquisition and expansion
of the sportswear business, which generated lower margins than Belle’s footwear business.
Belle believes sales growth of its 2nd tier sports brands should accelerate due to rapidly
expanding 2nd tier sport market. The company plans to launch more sports complex to
capitalize the potential growth. Sport business expansion may further erode overall gross
Swing factors: brand portfolio restriction risk We know the larger the number of
brands in the company's portfolio, the greater the overlap of brands on target segments,
positioning, price, distribution channels, and product lines. The overlapping results in
cannibalization of sales and duplication of effort. If managed poorly, many of the brands
in the portfolio may end up competing with each other rather than with the brands of
competitors. Our big conc