Half Year 2020 Sa Sa International Holdings Ltd Earnings Call
Chai Wan Dec 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Sa Sa International Holdings Ltd earnings conference call or presentation Thursday, November 21, 2019 at 8:15:00am GMT
TEXT version of Transcript
* Guy Look
Sa Sa International Holdings Limited - CFO & Executive Director
* Siu Ming Kwok
Sa Sa International Holdings Limited - Executive Chairman & CEO
Siu Ming Kwok, Sa Sa International Holdings Limited - Executive Chairman & CEO 
[Interpreted] Good afternoon, ladies and gentlemen. Welcome to Sa Sa's presentation of its interim results for the 6 months ended 30th September 2019.
The Sino-U. S. trade war, depreciation of the renminbi and the drastic decline in the number of visitors to Hong Kong seriously affected the city's retail markets. The group's revenue in the first half of the year decreased by approximately 16% to around HKD 3,490 million. The group recorded a loss of around HKD 36 million mainly because of our core markets of Hong Kong and Macau incurring a small loss and have not made the profit contribution to the group.
In our core markets of Hong Kong and Macau, the number of Mainland tourists to Hong Kong declined sharply in the second quarter. As a result, the number of transactions with Mainland tourists in the Hong Kong market dropped by more than 50% year-on-year, resulting in a decrease of 35% in the group's retail sales in Hong Kong in the second quarter.
Although the performance in the Macau market was satisfactory, it was insufficient to offset the decline in the group's business in Hong Kong. As a result, the group recorded a year-on-year decrease of about 26% in retail sales in Hong Kong and Macau in the second quarter. This, together with the year-on-year decrease of 13% in the first quarter, resulted in a decrease of 19% in the group's overall retail sales in Hong Kong and Macau in the first half of the year.
At our request, some landlords have agreed to cut rents in the short term. However, the amount of rental reductions obtained to date is still far from sufficient, therefore, without much impact on the group's results.
In view of the extremely difficult operating environment in Hong Kong, we strived to reduce rental expenses as a matter of self-preservation, including cutting down the number of stores and persisting in asking landlords for rental reductions to restore store profit contribution promptly. We have also implemented a number of cost-cutting measures, including reductions in expenditure on manpower, marketing and administration as well as other expenses. This improved cost structure is expected to benefit Sa Sa's development in the long term.
We are also optimizing the product mix by removing low-productivity products and reducing the excessive level of stocks of other products. These measures will help reduce both the overall inventory and holding costs as well as preserve cash. The retained cash resources will allow the group to introduce products with high sales volume into the portfolio with the aim of driving sales growth.
We placed more emphasis on premium brands in the first half of the year to cater to customer preferences. The resulting linked sales of house brands brought about improvements in their sales performance. As a result, the proportion of house brand mix bottomed out in May and started to recover thereafter. This partly offset the downward pressure on gross profit margin arising from aggressive store promotions and wholesale activities, which ended at 37% for the period. With both revenue and gross profit margin declining and the time lag in cost reduction, including rental and other expenses, Hong Kong and Macau markets recorded a slight loss of HKD 3.3 million during the period under review.
In the Mainland China market, the group achieved a narrowed loss as we delivered almost 10% same-store sales in the growth in the first half year, while store contribution rose by 40%.
Business performance has improved mainly due to the restructuring of the local product sourcing team, which introduced more trendy products to boost foot traffic. The launch of a new VIP program also helped increase sales through member-centric promotional campaigns.
As for e-commerce, third-party platforms were the main sources of our revenue, with a year-on-year growth of 15% in the first half. We continue to improve our logistics through speeding up product delivery and cutting the logistic cost to sales ratio, thereby enhancing overall operational efficiency. The loss from this business narrowed marginally.
In our overseas markets, the number of the group's stores in Malaysia increased year-on-year by 3, while sales grew by 8%. We continue to penetrate into the local Malays markets. The VIP system was successful in attracting new customers, boosting the average ticket size of VIP by 10%.
In Singapore, the retail sales index decreased for 8 consecutive months, reflecting weak consumer sentiment. This adversely affected the group's sales performance.
Looking ahead to the second half of the year, the market appears extremely challenging. The Sino-U. S. trade war still affects consumer sentiment in many markets, and our core market of Hong Kong is not expected to return to its original levels in the near term despite the government's efforts to stimulate the economy and tourism.
In the face of these challenges, the group's primary mission is to improve profitability in the Hong Kong and Macau markets. Hong Kong will continue to work hard to control costs. We will strive for corresponding reductions in rentals according to the sales and profitability of each store. Where necessary, we will consider reducing store size, relocating or closing stores. The group will also continue to optimize the store network and reduce the number of stores in tourist areas.
Meanwhile, the group has begun a comprehensive review of its cost structure to implement cost-saving measures in all respects. We also plan to utilize information technology to streamline work processes and increase overall productivity, beginning with changes in our POS system in the second half. The group will continue to clear inventory and preserve cash in the second half of the year to conserve strength and resources. We continue to endeavor to drive revenue growth while controlling costs, in particular, by optimizing our product portfolio with the introduction of new products to meet customer preferences and increase sales.
The group has just pilot-launched a WeChat mini-programme that connects Sa Sa's frontline staff with our customers. Through the use of this mini-programme, our customers can shop online without visiting our physical stores. This initiative will increase the outcome of both the group and our frontline employees, thereby protecting the livelihood of our staff. This O2O operation will also serve as a foundation for development of the group's new retail model.
Although it is uncertain when the recovery of tourist arrivals in Hong Kong will take place, the group will speed up the expansion of its store network in Mainland China, especially in Southern China. As for other markets, we will closely monitor the market conditions and adjust our strategies accordingly. We will focus our resources on the development of businesses with greater potential with ultimate aim of enhancing profitability of the group.
The future will be challenging. However, with a sound financial position, healthy cash reserves and a readiness to adapt, Sa Sa is confident that it can maintain its competitiveness, overcome difficulties and develop sustainably into the future.
Now I pass the floor to Guy, who will explain Sa Sa's financial and operational performance in detail for the first half of the year. Thank you.
Guy Look, Sa Sa International Holdings Limited - CFO & Executive Director 
Welcome, ladies and gentlemen. Good afternoon. Our agenda today covers our financial performance, business review and outlook and future plans.
First of all, our financial performance. Our turnover decreased by 15.7% to HKD 3,494.1 million. Gross profit declined by 20.4% to HKD 1,328.6 million. Gross profit margin declined by 2.2% to 38%. We incurred a loss for the period of HKD 36.5 million. This compares to last year's profit of HKD 202.9 million. We made a basic loss per share of HKD 0.012, whereas last year, we made a profit of HKD 0.067 per share. As at the end of September, we were running a total of 265 retail outlets, a reduction of 8 compared to last year.
The group's sales is substantially made up of sales in Hong Kong and Macau, accounting for 82.7% of our group turnover. E-commerce contributed 4.9%, while Malaysia contributed 5.8%. Mainland China contributed 3.8%, and Singapore contributed 2.8%.
The group's in a good and sound financial position. We have HKD 788.7 million of cash on hand as at 30th September, which is lower than last year by HKD 370.5 million. This is after paying HKD 93 million of tax, HKD 442 million of dividend and after paying down HKD 329.6 million of accounts payable.
The negative cash flow of HKD 289.6 million also reflects the paydown of the accounts payable by HKD 329.6 million mentioned earlier. This is financed partially by inventory reduction of HKD 221.9 million, representing a reduction of 6 days of turnover. CapEx reduced marginally by HKD 1.8 million after investing less in new stores but more in technology.
Then we move on to business review. In the first half, Hong Kong and Macau market retail sales and same-store sales declined by 19.4% and 22%, respectively. Both transaction volume and average selling price dipped. They were affected by the Sino-U. S. trade war and depreciation of renminbi, both affecting consumption sentiment. There was also a high base effect.
In the second quarter, transaction volume decreased, but average selling price of Mainland and local consumers rebounded despite a very difficult operating environment. This is the result of our product strategy starting to take effect.
In the Hong Kong market alone, sales declined by 35.4%. The transaction volume of Mainland customers fell by 51.2% and early store closures all affected the Hong Kong market performance.
The Macau market on its own has seen sales increasing by 11.3%. The transaction volume increased across the board, including those from Mainland, Hong Kong and local Macau customers.
In Mainland China, we achieved a healthy growth recovery. Retail sales slightly increased by 0.2% and would have been more if not due to the closure of 8 stores. The average number of stores has fallen by 4 to a total of 50. Meanwhile, same-store sales has increased by 9.4% due to our new product sourcing team introducing more trendy products to attract traffic and to boost spending. Our new VIP program with lower entrance fee and member-centric promotions are improving our VIP conversion rates.
In Mainland China, we achieved a growth in store level contribution of 39.8% to HKD 10.4 million, and our recurring loss has fallen by HKD 3.1 million to HKD 10.5 million, while our total loss has fallen by HKD 2 million to HKD 11.5 million.
For our online operations, third-party platforms have been our main sales driver, having increased by 15% and contributing 67% of sales, whereas our own website and mobile app have reported weaker sales. As a result, the total sales declined by 8.2%. We integrated our warehouse for both the Hong Kong and Macau retail markets with our e-commerce operations in April. And as a result, our logistic expense has reduced from 12.9% of sales to 9.4% of sales, and our delivery time has shortened from 6 days to 5.6 days.
Total loss has reduced by HKD 400,000, but recurring loss have increased by HKD 2.6 million due to investment in human resources.
In Malaysia, we continue to penetrate into the Malay market, with the average number of stores expanding to 81. Retail sales increased by 8.2%. Same-store sales, however, declined marginally by 0.2%. Our partnerships with shopping malls and third-party platforms extended our reach, and KOL engagement and strengthened makeup category drove Malay market penetration. Our VIP membership base has also increased by 24%.
In Singapore, poor local consumer sentiment has affected sales. This is evidenced by the Singapore retail sales index recording a negative growth in the first half. In addition, new mall openings have affected the traffic of existing malls. On our part, we have upgraded the mobile app with new features and launched more member-centric promotions. As a result, our gross profit margin and transaction volume have both improved.
Then we move on to outlook and future plans. In Hong Kong and Macau, we aim to recover profitability soonest. This involves a three-pronged approach.
First of all, on cost management, we are saving all nonproductive expenses and streamlining work processes to improve operation and cost effectiveness. At the stores, we are trying to improve overall store profit contribution by taking the following actions: first of all, reduce the shop numbers, especially in tourist locations; secondly, working on rental reduction and other cost savings; thirdly, reduce store area, if appropriate; and fourthly, optimizing operating hours and shifts.
We are also working to improve inventory management and our product portfolio as we continue to eliminate low-productivity SKUs and reduce excess inventory of other SKUs, including -- this would save stockholding costs, reduce risk and preserve cash. The above actions would create room for accelerating product launches, introducing products with high sales volume and driving revenue growth.
Online elements and technology are the future for Hong Kong and Macau. We commenced a pilot run of WeChat mini-programme in Hong Kong market in October. This enables our beauty consultants to engage customers and promote products online and contribute to physical store sales and frontline staff income.
We are also exploring partnerships with platforms and payment service providers to develop online/offline businesses.
We have other projects in progress. First of all, we are assessing Phase 2 development of our customer database, and we are about to launch a new POS system designed to increase store capacity to handle higher traffic, shortened checkout and delivery time and enable self-checkout and other Internet offerings experiences.
On the logistics front, where we are embracing technology to improve efficiency, and we will also engage Internet of Things to improve customer experience through multiple touch points.
In Mainland China, we would expedite our store expansion in Southern China as we continuously optimize our store network and open stores in area with high strategic value.
Southern China is one of the key focus areas. We will improve our product offerings by working closely with local suppliers to introduce more popular new products to boost traffic. We would improve store productivity and cost effectiveness, and recruit and train frontline staff. We will stimulate sales and reinforce customer relationship through our WeChat mini-programme. We have a brand-new CRM system to foster repeat purchases, target new members and collect customer data for analysis.
For e-commerce, we would focus on third-party platforms and leverage on the strength of current and new platforms while we explore more cooperation opportunities in this area.
For products, we would use popular brands to drive traffic and focus on developing Sa Sa's own brands and exclusively distributing brands with potential.
In Singapore, the consumer sentiment is weak as GDP growth forecast is downgraded to a range of 0% to 1%. We will focus on improving product portfolio and drive sales growth for house brands and exclusive brands and also organic growth of existing stores.
In Malaysia, there are challenges, including uncertainties in external economies and a weak and -- weak stock market and a weak local currency. Our product strategy is market and trend oriented to attract target customers, which are Malay consumers, and we would engage local Malays as spokespersons or ambassadors and improve our makeup segments in the markets. We have a click-and-collect service, utilizing mobile apps and shopping site to attract customers to our physical stores to drive sales.
We move on to our Q3 performance, which is self-explanatory. In Hong Kong and Macau, retail sales declined by 39.4%, while same-store sales declined by 39.1%. In Mainland China, due to fewer stores, retail sales declined by 0.3%, but same-store sales improved by 13%. In Singapore, performance continued to be weak, with retail sales down by 11.8% and same-store sales down by 11%.
In Malaysia, retail sales improved by 9.5%, and same-store sales by 1.8%. Our online e-commerce sales declined by 12.8%, while our group turnover declined -- decreased by 31.6%.
Ladies and gentlemen, thank you for your attention.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]