Fierce competition dragged Sa Sa's group sales by 12.4% to HKD2b

HK sales dropped 13.2%.

It has been noted that Sa Sa faced SSS decline with severe margin contraction due to product mix change, fierce competition, firm rental costs and operating de-leverage.

According to a research note from Jefferies, it expects fundamentals to remain challenging.

However, it does not expect margins to further contract meaningfully in FY17e and see the high free cash flow yield to limit valuation downside.

Here's more from Jefferies:

Business and management updates. Group sales declined 12.4% yoy to HKD2.0bn in 2QFY16 (end Sep.15), mainly driven by 13.2% sales decline in HK/Macau and 8.9% sales decline in other regions.

It delivered -10.1% SSS decline in Hong Kong, worsened from -6.8% in 1QFY16 (Apr-Jun15) and +0.9% in 4QFY15 (Jan-Mar15). Notably number of transactions from mainland China tourist decreased 4.1% yoy (vs. +3.7% in 1QFY16), and average sales per transaction dropped 12.5% yoy.

GP margin contracted further in 2QFY16, vs. 1.3ppt contraction in 1Q, mainly due to product mix change and aggressive promotion in response to competition.

Rental cost continued to increase at c20% upon lease renewal. It issued a profit warning that net profit would decline >50% yoy in 1HFY16. 

Our views. We expect the operating environment to remain challenging due to: 1) The tightening of Shenzhen multi-entry visas to HK since Apr.2015 impacts FY16e; 2) Continuing slowdown in tourist arrivals and lowered purchasing power of tourists; 3) Price competition (online and offline) in both Hong Kong and mainland China; 4) Operating de-leverage.

However we do not expect margins to further contract meaningfully in FY17e from the historical low level as management could focus more on profitability.