Fighting to stay fashionable

ONLINE shopping and eCommerce platforms are all the rage now. While many have been around for years, new platforms seem to be garnering even more popularity such as discount shopping website Temu, whose owner recently became one of China’s richest businessmen.

Then there’s Singapore-based but China-owned eCommerce fashion platform Shein, which has also burst into the scene.

Many Malaysians are actively buying their clothes on Shein, which also has pop-up stores in some malls to support their platform’s branding. The big question is, how do all these platforms affect local fashion players, especially those listed on Bursa Malaysia?

The two larger fashion-related stocks are Padini Holdings Bhd and Bonia Corp Bhd, both homegrown companies that went public in the 1990s. These companies were riding high until the late 2010s before the competition from the online platforms. The likes of Temu and Shein, coupled with high operating costs, have exerted pressure on these companies’ margins.

The two eCommerce giants have taken the global fashion world by storm with their incredibly low prices, causing profits of the two local companies to hit a downward trend.

In their latest fourth quarter (ended June 30, 2024), Padini’s bottomline halved while Bonia’s was down by about two-fifths from a year ago. Both companies expect the outlook to remain challenging.

However, there is some reason to be positive. Rakuten Trade Head of Equity Sales Vincent Lau says the on-line platforms may have less of an impact on Bonia given its positioning as an “affordable” luxury brand that competes in the mid to upmarket segments.

Lau says that with cost of living an issue due to inflation, consumers tend to spend less on discretionary items like fashion and accessories.

Looking ahead, he says the stronger ringgit is likely to benefit these companies.

Consumer spending power may improve after the year-end pay hikes for civil servants, which would augur well for retailers like Padini which has value-for-money offerings.

Padini sources the bulk of its merchandise from China, and from countries like Thailand, India and Bangladesh.

Assuming all goods are sourced from China, RHB Research estimates it could lead to some 5% increase in the bottomline of Padini, whose flagship brands include Vincci, Padini, SEED and Padini Authentics.

However, given the cautious consumer sentiment and heightened competition, Padini may need to reinvest the bulk of its profits into more aggressive promotion or marketing initiatives to attract footfalls, it says.

Based on these, and the stronger ringgit, RHB has raised Padini’s financial years 2025 (FY25) to FY27 earnings estimates, in single-digits of 5%, 8%, and 9% respectively.

The brokerage says staff costs are expected to remain high.

“Staff costs have risen significantly in FY24, with salary expenses up 29% year-on-year. With the soft sales growth, FY24 profit took a beating and dipped 34%, with net margin shrinking 4.6 percentage points to 7.6%.”

Post the earnings adjustment, the brokerage raised the stock’s target price to RM3.50, from RM3.31, but kept its “neutral” rating as current price-to-earnings (PE) of 15 times is close to its average.

At the time of writing, Padini’s shares traded at RM3.51 – the level it was at the start of the year, giving the stock a market cap of RM2.3bil. Its stock price had risen to RM3.83 on May 27.

An analyst notes that Padini has healthy net cash of RM791mil in FY24.

For FY25, he projects the strong net cash position to be retained and support a dividend payout of 11.50 sen per share, which is consistent with FY24.

Of the 10 research firms covering Padini, six have a “hold” on it, while there are four “buy” calls.

If one were to follow the “smart money”, the Employees Provident Fund has acquired slightly more than half a million Padini shares between Sept 9 and Oct 9, 2024, bringing the fund’s shareholding to 7.59% from 7.53% in early September.

The Retirement Fund Inc (KWAP) holds 10.15% and is the second largest shareholder, while Lembaga Tabung Haji holds 3.21%, according to Bloomberg.

Padini’s major shareholder is founder and managing director Yong Pang Chaun with a 44% stake.

Meanwhile, Bonia’s valuation is lower at 8.9 times PE based on the share price of RM1.51 following a 16% fall year-to-date. Its market cap now stood at RM318.5mil.

Only two research firms cover the company, which has its namesake brand as well as Braun Buffel and Sembonia, among others.

One is CIMB Securities with a “hold” rating and thinks the stock is “fairly valued at current valuations”. On a more positive note, it says FY25 is likely to see demand bottom out.

Despite stronger sales in Malaysia, Bonia’s FY24 profitability was hit by weaker sales in Singapore and Indonesia.

“Core net profit is anticipated to grow more significantly (compound annual growth rate of 9.9% for FY24 to FY27) driven by a stronger margin from a strengthening ringgit and reduced advertising and promotion expenses after its ambassador contract ends in December 2024,” CIMB notes in a recent report.

As for its share price, the brokerage says this should be supported by a decent dividend yield of 4% to 5% for FY25 to FY27. It had lowered the stock’s target price to RM1.65, from RM1.85 previously.

Affin Hwang Investment Bank, meanwhile, downgraded the stock to a “sell” and lowered its 12-month target price to RM1.45, from RM1.64.

This comes as the brokerage cut its FY25 to FY26 earnings per share by 11% to 13% after lowering sales assumption and raising forecasts for operational costs.

Bonia is a more tightly-held stock, being 55.8% owned by the family of founder Chiang Sang Sem. There are funds like banks and insurance companies that own the stock, but these are below 5%, Bloomberg data shows.

Both companies are also countering the ongoing challenges.

Bonia, for one, is strengthening its brand equity and connecting with younger customers and believes it can deliver a commendable performance for FY25.

As for Padini, it is optimistic of performing satisfactorily for FY25 and will continue to provide value for money products and implement cost control measures, preserve cash and streamline operations.

TA Research, in a recent, report notes that in FY24, Padini opened 10 new stores, most of which were Padini Concept Stores. Concurrently, it closed five non-performing stores, bringing the number of non-profitable stores to less than five.