Lane Crawford Results

We give our initial views on the final results of Lane Crawford, in the context of the proposed privatisation which the investors represented by Webb-site.com continue to oppose on the current terms. The results contain no surprises, but from the fresh figures we find that Wheelock is offering only $11.80 per A-Share for readily saleable assets worth $12.53 per A-Share and gets the retail business and brand for free. The sums just don't add up.

Investors Respond to Lane Crawford's Results
9th June 1999 (updated 10th June 1999)

In yesterday's article, we stated that we expected the results for the year ended 31-Mar-99 to be pretty poor. No surprise then, that the company announced an operating loss of $23.8m, or $0.21 per A-Share. Very few retailers have made money this year.

Exceptional loss

In addition, Lane Crawford made an exceptional provision of $42.5m for "costs relating to cessation of retail operations of a subsidiary". We don't know which store or stores this is - perhaps the Company will disclose this at a later time.

The results contained no mention of the 80%-owned Shanghai Maison Mode Department Store. A year earlier, the Company said that Maison Mode "has progressed beyond the operational breakeven point" and last December, with the interim results for 30-Sep-98, they wrote "the Mainland Business is starting to make profit".

At 31-Mar-98, Maison Mode was the only non-wholly owned principal subsidiary of Lane Crawford. The minority interest in the balance sheet was $7.5m, presumably representing 20% of Maison Mode's net assets and implying $37.5m for the whole. There were no such minorities in this year's balance sheet. So perhaps this is the closure the results refer to. If they have ceased this business, then it is in contradiction of a statement last year that "the Group continues to take a long term view of the market potential in the mainland".

Balance Sheet

Although we don't have all the details at this stage, the Group disclosed a summary balance sheet which shows net assets of HK$2,088m.

This includes a stock portfolio with a book cost of $741.8m at 31-Mar-99, compared with $830.5m a year earlier. So there has been some movement. We will know more when the accounts are published.

While the content of the portfolio was still not disclosed, it was valued at $501m at 4-Jun-99, an increase of about $53m or 12% since the 31-Mar-99 year-end. That adds $0.47 per A-Share to the net asset value, and gives the portfolio a value of $4.43 per A-Share. The company has not disclosed whether any gains or losses have been realised since the year end. The Hang Seng Index has risen another 3.7% since 4-Jun-99.

The Company states that Chesterton Petty has professionally valued its properties at $916m as at 31-May-99. That is actually higher than our estimate yesterday for Lane Crawford House of $800m, but we are not professional valuers, and it may include other small properties, so we'll take their word for it. The value is equivalent to $8.10 per A-Share.

Taking into account the deficit on the portfolio (compared with carrying cost) and the small surplus on the property value since 31-Mar-99, the pro forma net assets are $1,850m, or $16.36 per A-Share.

It is interesting to note that in the original announcement of the Scheme on 25-May-99, the net asset value at 31-Mar-99 was estimated at $16.4 per A-Share.

Without the exceptional provision of $42.5m for closure of a retail business, the portfolio gain of $53m since the year-end would have raised the NAV figure to $16.74 per A-Share, making the offer look even less attractive. Did the Company decide on this provision since the first announcement? Or since we announced our opposition to the Scheme? It also makes the bottom-line loss of $66.6m almost 3 times worse than it would have been.

So the sums are again easy - the value of the portfolio and the property is $12.53 per A-Share, compared with an offer price of only $11.80 per A-Share. So Wheelock is effectively offering to charge us $0.73 per A-Share to take the retail business and its 149 year-old brand away from us. Here's a revised table for shareholders to consider:

	Offer component HK$m	Net assets HK$m	NAV per A-Share
Offer value for 100% of the Company:	1,334	1,850	$16.36
Less: value of share portfolio at 4-Jun-99	(501)	(501)	($4.43)
Less: estimated value of property, 31-Mar-99	(916)	(916)	($8.10)
Price (RECEIVED) for privatising Net Retail Assets and brand:	(83)	433	$3.83

Obviously the same figures apply proportionately to the 25% minority shareholders. If Lane Crawford were to sell its stock portfolio and distribute the proceeds, the dividend would be about $4.43 per A-Share and $0.443 per B-Share. If the privatisation does not proceed, then we urge the Company to do this. In the interim results the Company said that it was "virtually debt-free with net surplus cash" and clearly if the funds were needed then they would not have been playing the stock market.

Other Comments

Lane Crawford states in its results that "Apart from the Central Store at Lane Crawford House which is owned by the Group, all the other three stores are operated at leased premises". This is true. One is at Pacific Place, owned by Swire Pacific, and the other two are at Ocean Terminal and Times Square, owned by Lane Crawford's sister company Wharf.

The company continued that it "faces lease renewal risks for its store operations. Consequently the results... would to a large extent depend on the renewal lease terms secured from landlords upon tenancy expiry". It said "when stores and other retail outlets are set up at new locations, substantial capital expenditures would be required".

Is this some kind of threat? Reading between the lines, are they implying that, if we don't agree to privatisation, then Wharf will be difficult when the leases come up for renewal? We hope not - these are connected transactions between two related companies which must be done on arm's length, at fair and reasonable terms. In any case, since Wheelock owns more of Lane Crawford (75%) than it does of Wharf (48%) it would be against Wheelock's own interests to make life difficult for the retailer.

We don't know when the lease on Pacific Place expires, but the two Wharf leases both expire on 30-Nov-2002 so it will not be an issue for over 3 years. Besides, market rentals have fallen due to the poor retail market demand, so it should be possible to negotiate better terms when leases renew, either at Wharf or by moving elsewhere. On the other hand, if asking rents are picking up then that will only be because retail sales are improving, which will be good for future profits.

Lane Crawford points out that it has spent HK$262m on capital expenditure in the last 5 years. That's no surprise - capital assets are depreciated each year through the income statement. Shareholders should not misunderstand this figure - you don't charge capital expenditure directly to profit and loss account. That's because the money is spent on assets which generate future income. Capital expenditure is a good thing when done well.

Some of the last 5 years' expenditure relates to the failed Singapore store, and some more relates to the Maison Mode store in Shanghai.

Summing up

That's the problem - the sums don't add up. Wheelock is offering $11.80 per A-Share for something worth $16.36, and its getting readily saleable assets in the form of property and shares worth $12.53.

Yes, the retail market is bad, but when the economy recovers people will start shopping. Wheelock has just started shopping early, and we share their optimism.

The Company pours as much doom and gloom as possible into its statement. When a controlling shareholder is trying to privatise a company, it makes sense to make things look as bad as possible, to encourage shareholders to get out. Frankly the only surprise in this announcement is that the figures did not contain more provisions and that the property was not valued lower.

Our intention remains to vote against this transaction, and as we have more than 10% of the public B-Shares, it will not proceed without our support.

Readers will know that the author used to work for Wheelock. We know them to be reasonable people. In 1993, Wharf (Holdings), controlled by Wheelock, increased its offer for Harbour Centre Development from $9.00 to $10.50 per share. Shareholders narrowly voted against the transaction.

This shows that the group is open to reasoned debate, and we hope that when they have had time to consider shareholders' views then they will do the honourable thing and increase their offer to a level which is fair and holds the possibility of success.

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Investors Respond to Lane Crawford's Results 9th June 1999 (updated 10th June 1999)

Exceptional loss

Balance Sheet

Other Comments

Summing up

Investors Respond to Lane Crawford's Results
9th June 1999 (updated 10th June 1999)