Embry: Diverging Trends

Last Thursday Embry Holdings gave investors a positive profit alert. Market responded by raising its share price by over 15% in the next two trading days. The management explained that the net profit will increase significantly because of

  1. exchange gain
  2. operating profit

On the first point, the majority of revenue (96.1% in 2016) of Embry is from China (RMB) and its reporting currency is in Hong Kong dollars (HKD); RMB appreciated significantly in 2017. It should not be the reason to be cheerful. For operating profit, Embry did not give detail why it increased significantly. Was it because of higher revenue or lower operating cost? We could not know.

In the same announcement, it also updated about its sales outlets. I complied its outlet numbers in the past 11 years and the chart clearly shows us the diverging trends s.

The number of concessionary counters (left axis) peaked in 2014 and is still declining. By contrast, the number of retail shops (right axis) remained stable since 2012 and started to pick up again last year. According to Embry annual report 2016, concessionary counters contributed 75.8% of revenue while retail shops contributed merely 8.2%. For the first time since it was listed in HKEx, revenue declined from HKD 2.53b to 2.22b, representing over 12% decrease. Therefore, it is unlikely that the operating profit increase was driven by higher revenue in 2017. The last hope is its online channel. Embry started its internet sales in 2011 and, after five years, it merely contributed 5.1% of revenue in 2016.

With current market cap just below HKD 1.2b, valuation looks cheap, considering its production capacity expansion plan in 2018. Positive profit alert is always a welcome message; however, investors should be wary of its declining sales.

 

 

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