COMPANY UPDATE. May 16, ROE (%) Dividend yield (%)

Transcription

1 Summary. Man Wah s relatively weak FY2018 results were somewhat anticipated, given rising commodity prices and RMB appreciation. On the positive side, the China business performed well and will be the most important driver for the Company. Even though the US and Europe segments may continue to remain flat for FY2019E, the growth in China may still be sufficient to help earnings resume growth, as long as there is no drastic increase in production costs or FX movement. The market was also concerned about the CFO change in March and a potential China-US trade war, but we believe the share price correction is overdone. We may see some selling pressure triggered by the downward earnings revision by analysts, but we believe that will offer an opportunity to revisit the stock, as it was trading at <15x forward PER. MAN WAH HOLDINGS [1999.HK, NOT RATED] (HK$) (HK$ million) The Company. Established in 1992, Man Wah Holdings is a producer of sofas, mattresses, panel furniture and furniture accessories. It distributes domestically in China and exports to customers in overseas markets, such as North America and Europe. Its Chairman, Dr. Wong Man Li, holds a 64% stake in the Company. FY18 Margin Deterioration Worse Than Expected. Man Wah reported relatively weak FY2018 results (year ended 31 March 2018), as net profit dropped 12.4% YoY to HK$1,536m during the period, extending the weakness of 1HFY18. Reported EPS was HK$0.40, 7% lower than market consensus of HK$0.43. The main reason for the weak results was across-the-board margin deterioration. GPM dropped by 4.55 ppt to 37.33%, while NPM dropped by 7.21 ppt in FY2018. This could be attributed to factors such as (1) the significant rise in the cost of raw materials because of the rebound in commodity prices. For example, metals and chemicals, which we estimate to account for ~30% of COGS, had close to a 30% YoY increase in average unit cost in FY18; (2) an increase in transportation costs due to higher oil prices, which affected both COGS and SG&A; (3) FX issues. FY18 recorded an FX loss of HK$22m versus an FX gain of HK$171m in FY17; and (4) a higher effective tax rate due to the higher contribution from China. Top-line Doesn t Look Bad. Although the results were weak, overall revenue in FY18 reached HK$10,027m, up 28.9% YoY and was stronger than expected. This was attributed mainly to: (1) robust performance in China, as its revenue grew by 43.7% YoY to HK$4,831m; and (2) a full-year contribution from Home Group (+330% YoY to HK$871m). Home Group, acquired by Man Wah in Dec 2016, is a European sofa producer and supplier to retailers such as Ikea. If the contribution from Home Group is excluded, sales in the Europe and US markets were flat due to keen competition. Fast-growing China Business the Most Important Driver. As China has become the largest revenue contributor of the Company, Man Wah will continue to expand its domestic business through franchisees. Its target is to open not less than 300 shops in China to facilitate growth. The tightening of the property market in 2018 is expected to drag down same-store sales growth, but the Company sees replacement demand for sofas remaining rigid. Also, motion recliners, a key product of Man Wah, are expected to gain more market share in China, according to Euromonitor. Turnover (RHS) Market Cap: US$3,178m; Free Float: 36.0% Source: Bloomberg (Y/E March) **Before earnings revision by the market Measures Taken to Stabilize Margins in FY19E. Rising material and transportation costs, as well as RMB appreciation, dragged down the GPM of Man Wah. Going forward, the impact of RMB movement may have a relatively lower impact on Man Wah, as the contribution from the domestic market continues to increase. The Company is also taking measures to mitigate the impact of rising costs, such as introducing new products with higher margins and raise the selling cost slightly. Management was more conservative on raising the ASP, as this may trim its market share. Plans to Mitigate Potential Trade War: Vietnam Expansion. While Man Wah is currently not affected by the proposed tariffs imposed by the Trump administration, the Company is considering investing in Vietnam to mitigate the potential threat from a rising trade conflict. With a budget of US$50m-80m, it may either acquire existing factories or set up a new factory there. This may be sufficient to replace 70-80% of its export capacity when fully set up. (continued on next page) Price (LHS) HKD FY17 FY18 FY19E FY20E Revenue (m) 7,779 10,027 11,605 13,110 COGS (m) (4,521) (6,284) (7,068) (7,945) Gross profit (m) 3,258 3,743 4,537 5,166 Gross margin (%) Net profit (m) 1,752 1,536 1,985 2,237 Net margin (%) EPS ROE (%) Dividend yield (%) PER (x) PBR (x)

2 Valuation and Our Take. Man Wah s share price has retreated 11.4% YTD. In addition to the anticipated weak results, the correction was caused by worries over the CFO change in Mar 2018 and a potential Sino-US trade war. However, we believe these worries have been overdone, as we understand these two factors have had no material impact on the Company s operations. Before the earnings revision by the street, the Bloomberg consensus FY2019E net profit is HK$1,985m. We expect there to be a cut in the earnings estimate, given the weaker-than-expected margins in FY2018. Still, our preliminary FY19E EPS forecast of HK$0.48 implies 18.8% growth and translates into a valuation of 13.7x 2019E PER, which is not demanding from the angle of PEG ratio. We believe any near-term share price weakness may offer a good entry point. Currently, all of its major A-share peers are trading at >20x forward PER. Risks: (1) Weaker-than expected growth in mainland China; (2) higher-than-expected rise in raw material and transportation costs; (3) worse-thanexpected RMB appreciation; and (4) deterioration in the China-US relationship, leading to further trade disputes. Figure 1: FY2018 Results Review (Year ended 31 March) YoY HK$'000 FY2017 1H H 2018 FY2018 FY18 vs FY17 Revenues 7,779,015 4,626,881 5,399,692 10,026, % COGS (4,520,832) (2,854,174) (3,429,459) (6,283,633) 39.0% Gross Profit 3,258,183 1,772,707 1,970,233 3,742, % Selling & Distribution Expenses (1,173,878) (740,562) (952,661) (1,693,223) 44.2% Administrative Expenses (365,441) (206,010) (236,042) (442,052) 21.0% Other Income 159, , , , % Other Gain/loss 184,001 (34,721) 8,553 (26,168) N/A Net Finance Expenses (10,271) (9,678) (13,864) (23,542) 129.2% Earnings before Taxes 2,052, , ,663 1,922, % Income Tax Expenses (293,222) (176,029) (192,610) (368,639) 25.7% Net Profit after Tax 1,759, , ,053 1,553, % Net Income Attributable to Shareholders 1,752, , ,862 1,535, % Minority Interest (Profit) 6,754 6,847 11,191 18, % EPS - Basic (HK$) % EPS - Diluted (HK$) % GPM 41.88% 38.31% 36.49% 37.33% ppt OPM 26.52% 21.30% 17.79% 19.41% ppt EBT Margin 26.38% 21.09% 17.53% 19.17% ppt NPM 22.53% 17.14% 13.76% 15.32% ppt Figure 2: Revenue Breakdown HK$'000 FY2017 FY2018 YoY By Segment Sofa and ancillary products 6,981,725 8,075, % Other products 594, , % Home Group business 202, , % Jiangsu Yulong business - 154,060 N/A Total 7,779,015 10,026, % By Geography PRC (including Hong Kong) 3,362,407 4,831, % North America 3,498,762 3,590, % Others (including Europe) 917,846 1,605, % Total 7,779,015 10,026, % 2

3 Figure 3: Branded Retail Stores in China 3,000 2,500 2,399 2,000 1,500 1,182 1,441 1,645 1,975 1, FY2014 FY2015 FY2016 FY2017 FY2018 Figure 4: Gross Profit Distribution by Segment and GPM Sofa and ancillary products - GPM:40.1% Other products - GPM: 28.1% 3,238 Home Group business - GPM: 24.6% Jiangsu Yulong business - GPM: 20.3% estimates 3

4 20/9/ /11/ /1/ /3/ /5/ /7/ /9/ /11/ /1/ /3/ /5/ /7/ /9/ /11/ /1/ /3/ /5/ /7/ /9/ /11/ /1/ /3/ /5/ /7/ /9/ /11/ /1/ /3/2018 COMPANY UPDATE Figure 5: Peers Comparison Company Ticker Trading Price Mkt Cap PER(x) PBR(x) ROE(%) Div YIeld(%) Currency US$m FY0 FY1 FY2 FY0 FY1 FY2 FY0 FY1 FY2 FY0 FY1 FY2 Peers Listed in Hong Kong Man Wah Holdings Ltd 1999 HK HKD , Morris Holdings Ltd 1575 HK HKD Samson Holding Ltd 531 HK HKD Simple Average Peers Listed in A-share Suofeiya Home Collection C-A CH RMB , Jason Furniture Hangzhou C-A CH RMB , Markor Intl Home Furnishin-A CH RMB , Yotrio Group Co Ltd-A CH RMB , Guangzhou Holike Creative -A CH RMB , Qumei Home Furnishings Grp-A CH RMB , Simple Average Sources: Bloomberg, CGIS Research *Year end for Man Wah is 31 March **Before earnings revision by the market Figure 6: Forward PER (before market earnings revision) Sources: Bloomberg, CGIS Research BEst P/E Ratio (Curr Ann) 5-year average 4

5 Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. Disclosure of Interests China Galaxy Securities Co., Ltd. (6881.HK; CH) is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies) market capitalization. One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies). Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 20/F, Wing On Centre, 111 Connaught Road Central, Sheung Wan, Hong Kong. General line: