I.T is a fashion and investment conglomerate founded by two brothers Sham Kar Wai and Sham Kin Wai in Hong Kong in 1988. They started off in a 200 square foot shop selling hard to find labels in Hong Kong and has grown to a prominent multi label player on a global scale.
It is one of only a handful of multi label players in the Greater China market along side fellow Hong Kong players Joyce(HK code:647) and Lane Crawford. It has substantial footprint in Hong Kong and China with 209 self managed stores in Hong Kong, 598 in China and a growing presence in USA and Japan.
What's special about I.T is that it has a three prong strategy primarily focusing on Street wear brands. They license/franchise from international brands, self develop their own brands and acquire controlling or passive stake in prominent brands(BAPE, Acne Studios).
Street brands like OFF WHITE and STONE ISLAND are seeing increased brand heat in 3Q 2019 Lyst ranking(https://www.lyst.com/data/the-lyst-index/q319/) beating high luxury brand conglomerates. This is evident of a disruption to high fashion and an elevation of Street wear. Street wear has become the new exclusivity for millennials (https://www.strategyand.pwc.com/gx/en/insights/2019/streetwear/streetwear-the-new-exclusivity.pdf) this is undeniable and continued growth will be base on this premise.
I.T top line has been growing at an annualized rate of 11.81% with an avg ROTE rate of 15.43% since Feb 2011 to Feb 2019. In that period, its FCF per share of 1.64 hkd cumulatively is more than its current share price of 1.28 hkd. Not only that, it has paid out a total of 1.122 hkd per share during that period. This proves that their model is very cash generative and they are willing to pay the bulk of their fcf out to shareholders.
I.T has also been very profitable with a cumulative EPS of 2.67 hkd since Feb 2011 to Feb 2019 thanks to their cash cow BAPE which I will talk more about later. Its has a PER and Price/EBITDA ratio of 5.9x and 1.29x respectively due to the lack of analyst coverage and the current black swan event.
The company is also very well capitalized, It has a cash hoard of 1.7 bil hkd(cash to market cap of 1.12x) currently and is close to being net cash.
BAPE
BAPE is a growing cash cow for I.T and should be the core reason for investing in this company. In February 1 2011, due to financial strain, Nigo, the founder of BAPE sold a 90.27% controlling stake to I.T for a mere 2.8 million US dollars. I.T turned it around immediately to a growing and profitable brand. Here is the breakdown of its Turnover, EBITDA and PBIT since being acquired in 2011 till now in HKD. Do note that in 2018 they expanded into the USA.
2011 Rev: 43.5mil EBITDA: -4.09mil PBIT: -7.54mil
2012 Rev: 560mil EBITDA: 82mil PBIT: 30.8mil
2013 Rev: 514mil EBITDA: 86.5mil PBIT: 54.2mil
2014 Rev: 445mil EBITDA: 117mil PBIT: 99.6mil
2015 Rev: 460mil EBITDA: 167mil PBIT: 146mil
2016 Rev: 559mil EBITDA: 222mil PBIT: 213mil
2017 Rev: 788mil EBITDA: 326mil PBIT: 315mil
2018 Rev: 1,006mil EBITDA: 436mil PBIT: 344mil
2019 Rev: 1,153mil EBITDA: 495mil PBIT: 475mil
Basing on 2019 data alone their BAPE brand has by itself, contributed an EV/EBITDA of 8.17x and a Price/PBIT of 3.2x to the company. This not only shows the turnaround prowess of the Sham brothers, but also their ability to grow a brand like BAPE without the original founder Nigo.
They are also able to achieve and maintain a gross profit margin of 70.4% , much higher than their Hong Kong and China segments(60% average). As of today, Hypebeast the mecca for Streetwear enthusiast have ranked Bape at top 8 globally in terms of brand heat.(https://hypebeast.com/)
ACNE STUDIOS
On 26th December 2018, I.T took a 10.9% stake in Acne Studios for 423mil HKD. Acne Studios is a fashion house based in Stockholm, Sweden specialized in men's and women's ready to wear fashion, footwear, accessories and denim. I.T has been a long term wholesale partner with Acne Studios. As far back as 2013, Kering Group and other private equity had interest in buying the whole company but Acne founder did not wish to sell, he preferred an associate stake sale to companies which have greater exposure to China, where he feel the growth will be.
This associate stake profit contribution to I.T is small, 4.1mil HKD for 6mth ended Aug 2019 means an annualized share of profit of 8.2mil hkd. But down the road a pick up by high fashion conglomerates like LVMH or Kering is possible.
These two acquisition by I.T shows you that, international Street wear labels and fashion houses acknowledge the ability of I.T to drive sales with their substantial foot print especially in the Greater China region. It also shows you that I.T is not just a run of the mill multi label fashion brand franchisee/licensee, but rather a potential "LVMH of Hong Kong", because they seem to have an interest in buying brands and growing them over time.
Joint Venture with Galeries Lafayette in Shanghai and Beijing
Galeries Lafayette (China) Limited was founded as a 50/50 joint-venture between Galeries Lafayette and I.T Ltd. Its first China store was opened in Beijing in September 2013. It is located at the junction of Xi'dan North Avenue and Lingjing Hutong, and has become the most popular and vibrant shopping area in Beijing.
In 2019 Galeries Lafayette Shanghai opened at L+Mall, 899 Pudong South Road, Pudong New District, Shanghai.
I.T will be able to monetize these assets over time as Galeries Lafayette plan to open up to 10 stores in China by 2025, projecting 1 billion euros from China alone to make China the biggest market after France.(https://www.altavia-group.com/en/non-classe-en/galeries-lafayette-opens-second-china-store-in-shanghai/). This however will be a long term investment for I.T and in the meantime will be excellent points of sale for them.
Hong Kong Riot and Covid19
From 2019 Feb onward, the situation turned for the worse due to the Hong Kong protest and the global pandemic right after. It is a given that I.T will suffer substantial pain from Feb 2019 to Feb 2020 reporting period. The latest profit warning announced for year end Feb 2020 shows losses no less than 300 mil hkd. Sales dropped substantially in January and February of 2020 amidst an incredibly challenging operational environment. In March 2020, over 90% of their stores in Mainland China have re-opened, and sales have gradually started to recover as the situation in the country has improved. Their shops in Hong Kong and Japan are fully open, while those in the USA are temporarily closed.
I believe this will only be a temporary setback and I.T has the cash buffer(Cash 4x short term debt) to pull through this difficult time. In the near term despite US massive stimulus to support small businesses(I.T has one US subsidiary, USApe LLC), I.T will likely continue to be loss making for the whole of 2020 due to this black swan.
On a sum of parts basis, it makes for an interesting play. Their cash plus inventory net off total debt equals to 1.34 hkd per share. This means due to this black swan event, you are currently buying a growing conglomerate pre covid19, with their land, assets, joint ventures, associates, and BAPE free of charge.
Once the dust settles, I.T may be a good proxy for the rising dominance of street fashion and the increase affluence of China's expanding middle class.
Catalyst
1) Flattening of the Curve and the opening of their US and China stores completely.
2) Consumer confidence back once Covid19 is controlled globally
3) Pent up demand by people who are locked at home due to this virus
3) End of the Hong Kong Protest and resurgence of tourist in HK
Risk
1) Continued disruption to brick and mortar retailers by tech giants
2) Hong Kong social unrest persisting after Covid19 is controlled
3) Drop in demand for high end clothing after global spike in unemployment
4) US-China trade war escalating further
Disclosure: At the time of this posting, I own shares in this company.
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