Sa Sa develops online strategy to convert offline shoppers

Offering the company a chance to diversify.

At a recent analyst briefing, management discussed in detail Sa Sa's future online strategy to convert its offline shoppers into online customers in China.

According to a research note from Barclays, if executed well, Barclays thinks this offers Sa Sa a chance to diversify its business to one that can grow in China, from a purely Hong Kong business that Barclays expects to have structurally slower growth.

Barclays is upgrading Sa Sa to Equal Weight (from UW) on an improved long-term outlook. Barclays lifts its CY16 target P/E multiple to 14x (in line with leading Hong Kong/China retailers) from 11x, leading to Barclays' price target rising 23% to HK$4.33 (from HK$3.52).

While Sa Sa's FY16 outlook remains challenging, the stock offers a solid 5.7% dividend yield. Barclays also lowers its FY16/17E earnings by 3% due to slower Hong Kong sales.

Here's more from Barclays:

Online strategy: 1) Sa Sa plans draw traffic to its website, using its beauty consultants (who are incentivized with commissions) to establish an ongoing relationship with Chinese offline customers in Hong Kong and convert them to online customers once they return to China.

Trials have already begun in a few Hong Kong stores and Sa Sa plans to roll this out on a greater scale, and expand it to its China stores. 2) It plans to set up warehouses in China's free trade zones. This would significantly shorten delivery times and allow a larger range of its products to be sold (including foreign brands).

Why Sa Sa could be successful: We believe Sa Sa has a few advantages in successfully executing an online strategy: 1) It has a substantial base of visiting Chinese customers in Hong Kong to leverage and convert to online.

Sa Sa generates around HK$5bn in revenues from its visiting mainland customers, and we believe there is significant growth potential for Sa Sa's online commerce, which currently only generates HK$416mn in revenues; 2) Customers are likely to have confidence in product authenticity due to Sa Sa's brand name; and 3) Sa Sa already has strong product sourcing capability given its HK$9bn offline business.

We believe pricing will be competitive with leaders such as Jumei. We checked a portfolio of products and find that sasa.com is 16% cheaper than Jumei.

FY 16 core business still challenged: HK/Macau sales were down 7.6% y/y for 1QFY16 to date. We only look for 1% earnings growth this year (helped by a 2H low base). While the online development is a positive, we believe it is too early to judge its potential success.