Good afternoon, ladies and gentlemen. Welcome to Sa Sa Investor Presentation announcing its interim results for the six months ended September 30th, 2016. Before the presentation, let me introduce the company representative on stage, Dr. Simon Kwok, BBS, JP, Chairman, and CEO.
Hello.
Dr. Guy Look, CFO and Executive Director.
Hi, good afternoon.
The agenda today will begin with Dr. Kwok going through the interim results highlights and followed by Dr. Look walking us through the financial performance, business review, as well as the outlook in detail. There will be a Q&A forum afterwards. May we now invite Dr. Kwok to go through the interim results highlights first. Dr. Kwok, please.
Good afternoon, ladies and gentlemen. Welcome to the investors' presentation of Sa Sa's interim results for the fiscal period of the first six months ended 30th September 2016. During the past six months, the retail market in Hong Kong has not yet recovered and has led to the decline in the general retail performance in Hong Kong. However, the decline in the number of visitors in Hong Kong have shown signs of slowing down, which I hope may mean that the most challenging time has passed. In addition, markets outside Hong Kong also recorded weaker performance. All these factors affected the group's results for the first half, with turnover decreasing by 4% year-on-year to HKD 3,628 million and profit falling by 37.3% year-on-year to about HKD 96 million.
The retail markets in Hong Kong and Macau have evolved enormously in recent times. The growing popularity of internet shopping has led to rapid changes in product trends and consumer behavior. Consumers now expect a seamless shopping experience and higher standards of service than ever before. We have therefore made strenuous efforts to adapt to these changes by broadening our product offerings and bringing more competitive and popular products to our customers. Such measures have successfully boosted our store traffic, and the number of transactions rose during the period. However, since the purchasing power of customers has yet to recover, the average sales value per transaction continued to decrease, leading to weaker sales.
Meanwhile, due to the adjustment in our product offerings, our house brand sales mix declined, and this in turn exerted a larger impact on our gross profit. Nevertheless, we have implemented stringent controls over other costs, which showed positive results in the first half.
In the mainland China market, our recurrent losses have been brought under control. We expect that our shops' productivity and profitability can be further improved by accelerating and developing the O2O business model. In the overseas markets, the group's performance in Malaysia remained stable. In Singapore and Taiwan, the group was still restructuring its operations following changes to both management teams. Therefore, our business strategies in these markets were focused on stabilizing its operations and narrowing losses.
In regard to our online business, we focused on strengthening our logistics service in the first half in order to enhance our scalability. However, certain problems arose when we changed the supplier of the logistics service. This affected our customers' consumption experience, impacted sales and profitability, and resulted in a greater loss for the first half. The operations of our warehouse has now been stabilized. We will continue to improve the distribution process, including fully utilizing the warehouse in Zhengzhou Free Trade Zone to shorten delivery times and reduce costs. We expect these measures to strengthen our competitiveness and provide an enhanced experience to our customers.
Overall, we will continue to develop the O2O business model to make both our physical and online stores closely complement each other, thereby offering consumers a seamless O2O shopping experience. Meanwhile, we will expand our business on other e-shopping platforms to boost sales growth.
Looking ahead, we will continue to strive for increasing our market share. We expect our retail sales in Hong Kong will be gradually stabilized and our cost control measures to yield more noticeable returns. However, the key factor affecting the group's overall performance in the second half will be stabilizing the performance of our operations in other markets, including mainland China, overseas, and at sasa.com.
I am now going to give the floor to Guy, who will explain in detail Sa Sa's financial and operational performance for the first half of the year. Thank you.
Good afternoon, everyone. Welcome to Sa Sa International Holdings Limited's investors presentation for the six months ended 30th September 2016. Our agenda today covers financial performance, business review by market, and outlook and way forward.
First of all, the financial performance. Turnover decreased by 4% to HKD 3.628 billion. Gross profit declined by 7.9% to HKD 1.49 billion, and profit for the period declined by 37.3% to HKD 96 million. Earnings per share was HKD 3.30 a share, a decline of 38.9%. Gross profit margin declined by 1.7%- 41.2%, and net margin by 1.5%- 2.6%. We are declaring an interim dividend comprising of HKD 0.05 of basic dividend and HKD 0.05 of special dividend, making up HKD 0.09 in total, and a payout ratio of 278%. We would provide a scrip option with a 5% discount.
In terms of geographical sales mix, the Hong Kong and Macau market contributed HKD 2.937 billion, or 81% of group turnover. Mainland China contributed 3.7%, Singapore 2.8%, Malaysia 4.5%, Taiwan 2.7%, and our online business 5.3%. The group is in a sound financial position. Our net cash and bank balance stood at HKD 1,276 million, an increase of HKD 492.7 million from last year. This is a very healthy increase even if we put aside the fact that we have to pay out HKD 220 million of cash dividend from this HKD 1,276 million because this balance has not yet paid out dividend. Whereas last year's HKD 783.5 million was already net of dividend paid.
We move on to business review by markets. In the Hong Kong and Macau market, transactions are starting to increase. The black line denotes PRC tourist arrivals, which are still falling, but there are signs of the decline tapering off. The pink line denotes changes in the number of transactions for Sa Sa. Transactions in terms of numbers are picking up due to improving product offerings and display. Lastly, the blue line is the change in basket size, which is lower as compared to last year and reflects product offerings adapting to changing market situation and visitor demographics as well as consumption behavior. You would note that although this is still in decline, it is a little bit better off than the previous period.
In Hong Kong and Macau, the sales decline is narrowing. The improvement in the second quarter are apparent and is due to increasing transactions with both mainland and local customers. The sales decline is purely due to lower ticket size, and that reflects changes in consumption pattern and weaker spending power, as well as the effect of the strength of Hong Kong dollar and depreciating RMB.
In the China market, sales declined, but our store contribution has continued to improve. Total sales declined by 3.9%. In other markets, we have had inconsistent performance because of the effect of management changes. Malaysia has been a major beneficiary of management changes, resulting in first-half top-line growth of 19.3%. Singapore and Taiwan have gone through management changes later on and are still going through changes at this stage. Singapore top line decreased by 11%, Taiwan top line decreased by 22.8%.
For e-commerce, our sales was flat due to logistic issues. In the first half, we have been driving flash sales and increasing our marketing capability to drive sales. During this time, we also moved our warehouse to support a higher growth. Of course, during this time, the gross profit margin and the advertising and promotion cost have been a negative factor in our cost structure because of increased spending in A&P and also because of flash sales driving down GP. As I mentioned, when we were trying to move the warehouse, this actually didn't work out as planned and the fulfillment was seriously affected by changing logistic providers. This affected sales and also incurred us a one-off cost of 5.6%.
As a result, the China sales hardly moved at all at HKD 193 million. We have taken some initiatives that have worked out, including commencing our Zhengzhou Free Trade Zone warehouse deliveries in August 2016, and also launching a new app and started cooperating with Kaola of NetEase in September 2016.
In the area of brand management, we have made adaptation to markets. This adaptation of product offering has improved our sales performance. At the same time, our gross profit margin was affected and our house brand mix declined to 38.8% from 41.3%.
Looking ahead, there are challenges, but opportunities are abound. Challenges would include cyclical economic weaknesses and currency weaknesses of RMB as well as strength of Hong Kong dollar, changes in tourist flow, increasing local and global competition, and evolution of shopping behavior. There are opportunities too. Operating costs are reducing downwards, including rental and others, and there are rooms for further improvements. Consumption behavior adaptation would offer us a vast potential to acquire new customers, retain existing ones, and drive new sales. We would continuously improve our product offerings, particularly house brands.
We have taken note of the fast-changing market situation, which requires focus and fast adaptation. As a result, our market focus will be on Hong Kong, Macau, and mainland China, both online and offline. We will embrace O2O, including digital media engagements, in-store interactivity, and logistic upgrade. At the back end, we will need to upgrade our order management system, CRM, and content.
In Hong Kong and Macau, our network strategy would be to target aggressive rental cut in tourist locations, targeting a minimum cut of 40% - 50%. We would, at the same time, look for improvements in store locations to enhance brand image in tourist locations when opportunities arise. Add stores in residential areas to capture market share of local consumers and also stores near the mainland border. We would close down big stores that are unproductive to enhance our overall profitability.
In Hong Kong and Macau, the new store formats and products would attract new customers, enhance productivity, and cost efficiency. They would offer new concept and diverse product range from Korea, Japan, and Taiwan, and we would increase our mid to high-price product offerings to improve ticket size and improve our house brand offerings to improve margin.
Consumer behavior adaptation, we believe, would provide opportunities for growth. This would allow us to match the changes in customer journey. We would increase our online exposure and interactivity, improve in-store activity and O2O integration, improve visual merchandising with new store formats and streamline SKUs, improve CRM to retain customers, build customer loyalty, and facilitate targeted marketing. We would also have fast new product launches to satisfy the latest demand trend.
In China, we would improve management and operations. We have already made some enhancement to management team and structure. We would introduce fast-moving and trendy products to boost sales. We would accelerate O2O business development, including introducing O2O experience zone in mainland physical stores to broaden product selections through online offerings.
In the Singapore, Malaysia, and Taiwan markets. In Malaysia market, in particular, we have achieved better market performance amid weak local demand in recent years. As it is, we are the leading beauty specialty store in the market, but competition is heating up. We will strengthen our makeup offerings to broaden customer base, in particular, the Malay segment, and strengthen marketing resources, including digital media. In Singapore, Taiwan markets, these markets are not attractive and conditions are not favorable, and we are in consolidation mode. We would rebuild our team, stabilize operations, and reduce losses, and aim for smaller presence but with more effective operations.
We now consider online operations very much part of our O2O strategy. O2O will be our main focus for future development. Our online operations would require major improvements in system development and fulfillment capabilities. This will allow us to drive scalability and cost-effectiveness to support growth. We would increase the usage of our Zhengzhou Free Trade Zone warehouse. This would also increase our scalability. We would increase the number of PRC stores with O2O zone. We would coordinate online and offline operations for O2O shopping experience. We will explore strategic alliances with external parties to improve capabilities, increase exposure, and distribution channels.
In the area of category management and product development, we would use business and market intelligence to improve product offerings, and we have been doing so successfully. The next step is to improve house brand offerings to enhance margin. We would streamline our product offerings, and this is already underway. This is the summary of our movements of stores in the year, with Hong Kong and Macau increasing by one to 112, mainland China reducing by four to 53, Singapore with 23, Malaysia 67, Taiwan 26, making up 281 in total.
This actually concludes my presentation. We will be happy to take Q&A. Thanks.