DBS: Samsonite International – Buy Target Price HK$22.11

Meeting takeaways: Samsonite 1H22 earnings slightly above expectations; outlook stays positive

• Samsonite scored 75% y-o-y sales growth for 1H22, or a 20% sales dip as compared to pre-pandemic 1H19, in line. 
• Adjusted EBITDA margin accelerated to 17.6% in 2Q22 (1H22: 15.4%; 1H19: 12.2%), exceeded expectations, prompting management to lift guidance to nearly 16% for 2022F, vs. original projection of c.15%. 
• Outlook for 2023F also stands encouraging, given the low base in China and sustainable growth from other key regions as travel channels continue to expand. Maintain BUY

Key Takeaways from Results Briefing:

• On constant currencies, 1H22 sales rose by 75.3% y-o-y, and down 20.4% versus 1H19, in line. In its latest performance, Samsonite has not seen any slowdown at all on m-o-m basis, with sales momentum of Jul 2022 accelerating, and Aug 2022 to likely show a similar trend m-o-m.
• In view of potential improvement in Asia (2Q22: -34.5% vs. 2Q19), to be driven by China (2Q22: -62.3% vs. 2Q19) given its narrowed sales decline of -38.3% in Jul 2022 vs. Jul 2019, together with continued improvement in N. America (2Q22: -17% vs. 2Q19), Europe (2Q22: +9.9% vs. 2Q19), and Latin America (2Q22: +34.6% vs. 2Q19), Samsonite now looks at a sales dip of 10-13% for full-year 2022F vs. 2019, as compared to earlier guidance of c.15-20% decline this year.
• Management also stays positive on the outlook for 2023F: aside from a sound revival in Asia, especially in China, other core regions including the US and Europe should keep growing, as travel channels continue to build out to reach a further recovery while “revenge travel” continues to surge. More business travelling is also expected for next year.
• Both gross margin and adjusted EBITDA margin accelerated in 2Q22 to score sound levels of 56.5% and 17.6%, respectively. For the full year of 2022F, Samsonite prudently expects its gross margin to sustain at >55%, and revised up its target of adjusted EBITDA margin slightly to 15.5% to 16% (vs. original projection at 15%).
• As Asia typically has a higher margin versus other key regions in normal times, while China is well-poised to see sound rebound from a low base by 2023F, the overall prospect for next year should be promising.
• Advertising expenses reached 4.5% of sales in 1H22 (1H21: 3.6%). As sales continue to recover, the company aims to do more advertising investments to further strengthen its brands, targeting at 6% to 6.5% of sales on ad spend in 2H22F to 2023F.
• Capex could increase and gradually normalize, to be spent on very disciplined store openings, store renovation, R&D as well as IT software.
• Management has no intention for a dual listing in the near future, and will continue to monitor various market conditions and look at its debt structures ahead of any upcoming loan maturity.

2022 Interim Results:

• 1H22 sales up 58.9% y-o-y to US$1,270m (+66.9% on constant currencies), or down 27.7% (-23.5% constant rates) comparing to pre-pandemic 1H19. Stripping away Russia (ceased operations in 2Q22) and Speck (disposed in 2021), sales increased by 66.8% y-o-y (+75.3% constant rates), or down 24.7% (-20.4% constant rates) versus 1H19, in line.
• Should China be further excluded, given its underperformance, 1H22 sales rose by 76.7% y-o-y (+85.8% constant rates), or down 23% (-18.4% constant rates) versus 1H19.
• Gross margin up 4.9ppt y-o-y to 55.7% in 1H22 (1Q22: 54.7%; 2Q22: 56.5%), attributable to higher sales, an increase in average selling prices over the past 12 months to mitigate rising costs, and lower promotional discounts.
• Marketing expenses increased by 0.9ppt to 4.5% of sales during 1H22 as Samsonite selectively increased its ad spend in markets with faster recovery in travel demand. Marketing expense ratio is expected to increase further in 2H22 to drive sales growth and capitalize on the continued recovery in travel.
• 1H22 operating profit reached US$160m, versus an operating loss of US$86m a year ago. Core operating profit* reached US$173m, versus core operating loss* of US$50m in 1H21 (* excluding impairment & restructuring charges)
• Adjusted EBITDA improved to US$196m in 1H22, with adjusted EBITDA margin of 15.4% (1Q22: 12.8%); 2Q22: 17.6%), along with gradual sales recovery, better gross margins and management cost restructuring actions, compared to an EBITDA loss of US$17m in 1H21 at a -2.1% margin.
• 1H22 attributable profit was US$56m, compared to US$143m attributable loss in 1H21. Core attributable profit^ reached US$68m in 1H22, versus US$115m core attributable loss^ in 1H21, above expectations. (^ excluding impairment & restructuring charges and US$26m tax benefit from intragroup realignment of certain intellectual property rights)
• Operating cash inflow was US$62m in 1H22, against US$1.5m outflow a year ago. As of June 2022, the net debt stayed flat at US$1,478m vs. Dec 2021, and down US$339m y-o-y.