Asos closes lossmaking China operations, boosting analyst forecasts

Asos has pulled its local China operation, a decision that is likely to cost the online fashion retailer roughly £10m, but will continue to supply customers in the People's Republic from its UK base.

The AIM-listed company, which has a market capitalisation of more than £2.5bn, said the majority of costs would be non-cash and that operating losses relating to this closure of £4m would be recognised the current financial year.

Both of these amounts are pre-tax and so will be presented in the year-end accounts as discontinued operations.

The Chinese operation, a small office and some rented warehouse space, had struggled since being opened in 2013, recording a loss of roughly £5m in 2015.

Nick Beighton, who was promoted to chief executive last September, assured that the e-tailer will continue to do business in China and was "simply serving our growing customer base there in a more efficient, less costly manner".

Asos, which will report interim results for the six months to 29 February on 12 April, said it would offer its China customer base the full asos.com product range of 80,000 items, rather than the 6,000 or so currently on offer on the Chinese site.

House broker JP Morgan Cazenove said the closure was strongly positive as it would provide a re-investment opportunity into the customer offer to drive top-line growth.

This was felt by JPM's analysts as likely to represent £2m in the current year, namely the expected loss of £6m less than the realized loss of £4m, followed by £6m of investment opportunity in 2017.

"Assuming that China is circa 2-3% of sales - and also stripping this out - would therefore imply a FY16 margin of circa 4.6% versus Asos guidance for circa 4%."

Having forecast PBT of £58m, stripping out the expected China loss of £6m and assuming that Asos reinvests the £2m of the savings this year, would imply current year PBT from continued operations of £62m.

Analysts at Exane said the decision shouldn't come as a big surprise given recent management commentary and suggested two main drivers behind the decision.

"Firstly, ASOS are looking to focus their growth on the more established European and US markets. Secondly, local operations were launched in China in order to improve customer delivery times, given difficulties at customs. The Chinese government has announced plans to increase the speed of order processing."

Exane felt Asos was now making a better allocation of capital towards better established opportunities and it was a positive update, "particularly considering the speed at which new management have made this decision".