American Apparel: A New Fast Growing Period Since 2011

The company's sales in the fourth quarter were good, and the full year performance in 2010 is expected to be in line with the exercise conditions.

The rapid growth of flat efficiency is one of the most important factors to drive the company's revenue growth in 2010. Future Ltd's Ping efficiency still has great potential for growth.

We think that the most important factor for the rapid growth of the company's sales revenue in 2010 is the super expected growth of flat efficiency. We roughly predict that the MB brand's direct sales will grow by 30% in 2010, and the growth of the franchisees will be about 20%.

The MC brand is estimated to exceed the MB brand due to its low base.

We believe that the increase in efficiency mainly comes from the increase of product prices, the enhancement of product richness, the enhancement of brand influence and the improvement of store operation efficiency.

Taking into account the gradual improvement of MB brand operation and the gradual maturity of MC brand, as well as the comparable indicators of the international comparable fast selling brand, we believe that the two brands of the company will have more room for improvement in the future (at least 60%). From the brand positioning, the MC brand efficiency will finally surpass the MB brand.

In 2010, the rapid expansion of the channel expansion and expansion of the channel was expected. The company's expansion in the next 3 years will still maintain a growth rate of around 20%, which will become one of the important factors to drive the growth of sales revenue.

Due to the impact of international financial crisis and terminal inventory, the number of new stores opened in 2009 was relatively small. However, with the recovery of economy and consumption, the company's expansion in 2010 was faster than that in 2009. We expect that the expansion rate of company stores in 2010 will be between 25%--30%, most of which are newly opened stores for MB brand, and there are a few new outlets in MC, most of which are MC-kids shops.

The new store opened in 2010 will become an important driving force for the company's sales growth in 2011.

According to the current number of stores (estimated to be around 3600--3700 at the end of 2010) and the strategic layout of future channel expansion (1 / two / three / four / five line cities full blossom, appropriately increasing the layout of shopping malls and shoppingmall), we expect that the company will still maintain the growth rate of channel expansion of 20% per year in the next 3 years, and the extension will become one of the important factors to promote sales revenue growth.

The potential of production cost reduction brought by future centralized procurement and global resource allocation deserves attention.

Compared with the company, one of the advantages of other popular fast selling clothing brands (ZARA, H&M, etc.) is the cost savings brought by global resource allocation and the faster market reaction of products.

Under the current sales volume, the company already has the basis and ability to integrate upstream procurement resources. In the future, this will also be a key consideration in the company's strategic development. We expect that the decline in production cost caused by centralized procurement and global resource allocation will appear in the autumn and winter products in 2011, which will fully reflect and bring about a rise in gross margin in 2012.

We maintain the basic view of the company's three businesses in the early stage: the development of MB brand is getting better and better, and will continue to grow rapidly in the future.

The integration of MC brand in 2010 has achieved initial success. The volume of revenue is very fast. In 2011, it is expected to break even. In 2012, it will contribute to profitability and start the pace of expansion.

The future potential of Bang-go e-commerce is worth paying attention to (formally launched in December 18, 2010).

According to the tracking analysis of the company, we think that the growth of the company's future efficiency will exceed our original expectations, while the extension of the channel will still maintain a relatively fast pace. At the same time, the cost savings caused by the global resource allocation will also gradually enhance the profitability of the company in the beginning of 2011. Therefore, we increase the company's 2011 and 2012 performance forecasts. The company's earnings per share in 2010--2012 are 0.75 yuan, 1.17 yuan and 1.73 yuan respectively, and the profit growth is 25%, 56% and 47% respectively, giving the company 40 times the valuation level in 2011, corresponding to the target price of 46.8 yuan.

Maintain "buy" rating.

Our view:

The company's sales in the fourth quarter were good, and the full year performance in 2010 is expected to be in line with the exercise conditions.

Despite the impact of temperature, the company's sales figures fluctuated in November, but there was a good growth in the month to month ratio, and sales continued to maintain a good trend in December compared with the same period last year.

The sale of the company's products is even more popular in festivals. Only MC brand sells more than 10 million yuan on Christmas day.

With the rapid growth of sales revenue in the second half of the year, the rapid recovery of gross profit margin and the sharp decrease in the ratio of sales expenses brought about by revenue growth, the company began to reverse the unfavorable situation in the first half of the year from the three quarter. We maintained the previous judgement that the company's performance in 2010 basically accorded with the exercise conditions of equity incentive - an increase of about 25% over the same period last year.

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The rapid growth of flat efficiency is one of the most important factors to drive the company's revenue growth in 2010. Future Ltd's Ping efficiency still has great potential for growth.

We think that the most important factor for the rapid growth of the company's sales revenue in 2010 is the super expected growth of flat efficiency. We roughly predict that the MB brand's direct sales will grow by 30% in 2010, and the growth of the franchisees will be about 20%.

The MC brand is estimated to exceed the MB brand due to its low base.

We believe that the increase in efficiency mainly comes from the increase of product prices, the enhancement of product richness, the enhancement of brand influence and the improvement of store operation efficiency.

Taking into account the gradual improvement of MB brand operation and the gradual maturity of MC brand, as well as the comparable indicators of the international comparable fast selling brand, we believe that the two brands of the company will have more room for improvement in the future (at least 60%). From the brand positioning, the MC brand efficiency will finally surpass the MB brand.

In 2010, the rapid expansion of the channel expansion and expansion of the channel was expected. The company's expansion in the next 3 years will still maintain a growth rate of around 20%, which will become one of the important factors to drive the growth of sales revenue.

Due to the impact of international financial crisis and terminal inventory, the number of new stores opened in 2009 was relatively small. However, with the recovery of economy and consumption, the company's expansion in 2010 was faster than that in 2009. We expect that the expansion rate of company stores in 2010 will be between 25%--30%, most of which are newly opened stores for MB brand, and there are a few new outlets in MC, most of which are MC-kids shops.

The new store opened in 2010 will become an important driving force for the company's sales growth in 2011.

According to the current number of stores (estimated to be around 3600--3700 at the end of 2010) and the strategic layout of future channel expansion (1 / two / three / four / five line cities full blossom, appropriately increasing the layout of shopping malls and shoppingmall), we expect that the company will still maintain the growth rate of channel expansion of 20% per year in the next 3 years, and the extension will become one of the important factors to promote sales revenue growth.

The potential of production cost reduction brought by future centralized procurement and global resource allocation deserves attention.

Compared with the company, one of the advantages of other popular fast selling clothing brands (ZARA, H&M, etc.) is the cost savings brought by global resource allocation and the faster market reaction of products.

Under the current sales volume, the company already has the basis and ability to integrate upstream procurement resources. In the future, this will also be a key consideration in the company's strategic development. We expect that the decline in production cost caused by centralized procurement and global resource allocation will appear in the autumn and winter products in 2011, which will fully reflect and bring about a rise in gross margin in 2012.

We maintain the basic view of the company's three businesses in the early stage: the development of MB brand is getting better and better, and will continue to grow rapidly in the future.

MC brand integration in 2010 has begun to be effective, revenue is very rapid, in 2011 is expected to balance the profit and loss, in 2012 will start to contribute to profit and start to join the pace of expansion.

The future potential of Bang-go e-commerce is worth paying attention to (formally launched in December 18, 2010).

According to the tracking analysis of the company, we think that the growth of the company's future efficiency will exceed our original expectations, while the extension of the channel will still maintain a relatively fast pace. At the same time, the cost savings caused by the global resource allocation will also gradually enhance the profitability of the company in the beginning of 2011. Therefore, we increase the company's 2011 and 2012 performance forecasts. The company's earnings per share in 2010--2012 are 0.75 yuan, 1.17 yuan and 1.73 yuan respectively, and the profit growth is 25%, 56% and 47% respectively, giving the company 40 times the valuation level in 2011, corresponding to the target price of 46.8 yuan.

Maintain "buy" rating.