Net profit slashed 90.5% in FY12

Royale Furniture (the Group) reported a significant decline in net profit in FY12, as a result of the slowdown of China economic growth and rising A&P costs. Revenue dropped 31.3% to HK$ 1063.7 mn during the period, mainly due to the -32% SSSG in franchisees’ stores. GP margin contracted 2.3ppt to 29.2% as the Group provided heavy discounts to boost sales. SG&A rose 16.2%, bringing EBIT and net profit to reduce sharply to HK$ 47.7mn and HK$ 21.6mn respectively, representing an 81.5% and 90.5% decline YoY.

Management’s commentary

The management commented that the sluggish China property market was the culprit of their weak furniture sales. 40% of the franchisees’ stores were not profit making and 150 stores were closed in FY12. The situation was a bit better for self-operated stores, of which 30 stores were closed and -3% SSSG was recorded during the year. With a low teen decline in sales during 1Q FY13, the management expressed a conservative view for the performance in 1H FY13. The Group will continue to consolidate sales network by closing non-performing stores, but net increase in the No. of POS is expected by the end of FY13.

On the costs side, the management indicated that raw material prices were stable. However, in order to promote brand name of the group and support sales, the management decided not to cut marketing budget under the current poor environment and hence A&P ratio is expected to remain at a relatively high level in the future.

Looking forward, the group will focus on upgrading product mix and penetrating lower tier cities. In FY12, the Group acquired 65% of equity interest of Bokaimai, a furniture company that engaged in designing and manufacturing European style high-end solid wood furniture and got the distribution right of Duresta, a luxury sofa brand originated in UK.

Our view

We believe FY13 would still be a tough year for Royale furniture. The recent sales data showed no sign of recovery and further consolidation of sales network is expected. High-end product series will boost sales and improve margins in the long run, but their contributions are immaterial in the near future.