Outdoor segment sales fell at faster pace amid destocking
Toread has made destocking the focus for its outdoor products segment in 2016,including stepping up inventory clearing, reducing orders for future delivery andincreasing the share of repeat orders. The company estimates outdoor segmentrevenue fell 20% YoY in Q3, dragged down by weak overall retail sales, toughercompetition and increased investment in customer service. We attribute lower netmargins mainly to: 1) falling gross margins caused by destocking; and 2) sharply risingretail expenses resulting from the acquisition of four franchisees.
Business model transition for travel; traditional wholesale business shrinking
The travel service business saw revenue decline c20% YoY in Q1-Q316, as Toreadsubstantially cut lower-margin general travel products and increased R&D forexperience-oriented products as part of its effort to promote the business modeltransition for Easytour. The company has focused on differentiated B2C products, withan average gross margin of c15%. While business optimisation can help improveprofitability, short-term pressure may arise from a shrinking traditional B2B business.The advancement of the lvye China plan, under which the company has reachedinvestment/strategic cooperation agreements with the first batch of selected clubs, willfurther enrich the outdoor activity platform's destination portfolio. We estimate thetravel segment still requires investment, which could start to pay off next year.
Lowering earnings estimates
The company's earnings slipped 32% YoY in Q1-Q316due to falling revenue in theoutdoor segment, Easytour transition and initial investment in the lvye China plan. Weare cutting our revenue estimates for the company given disappointing Q3earningsand the travel segment's accelerated business model transition; we are lowering our2016-18E EPS to Rmb0.31/0.43/0.55to reflect the pressure on margins fromdestocking and higher expenses incurred.
Valuation: Lowering price target to Rmb16.3; maintain Neutral rating
Based on our new EPS estimates, we lower our DCF-based price target to Rmb16.3(WACC 7.8%). We maintain our Neutral rating.
