Equity Research Consumer Discretionary Goodbaby (1086 HK) Buy (maintained) Target price: HK$4.20 1H16 results miss, but margin expansion continues Maintain Buy Net profit rose 21% YoY to HK$107m in 1H16, representing 38% of consensus for FY16 net profit of HK$278m, implying that 57% YoY net profit growth is required in 2H16 to meet FY16 estimates. Looking forward, management expects revenue to improve HoH in 2H16. Both GM and OP margin should continue to improve in 2H16 and FY17, driven by a better product mix and product upgrades, procurement savings, and improving manufacturing efficiencies. We lower our FY16/17 net profit estimates by 1-3%, and fine tune our TP from HK$4.34 to HK$4.20, still based on 18x FY16E P/E. Downside risks: online competition and sluggish sentiment in China; no proven track record. Albert Yip, CFA SFC CE No. ADT599 albertyip@gfgroup.com.hk +852 3719 1010 GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Aug-15 Nov-15 Feb-16 May-16 Weak top line Revenue disappointed, dropping 13% YoY, led by a 28% drop in sales to blue-chip customers and an 8% revenue decline for its own brands. Revenue in China declined 25%, mainly due to the Happy Dino brand. Margins improved GM increased by 4.8pp to 33.4%, driven by a higher sales mix contribution from its own brands (from 71.8% to 75.3% YoY), product upgrades (introduction of high-margin gb Platinum and Gold categories), cost savings (procurement and manufacturing efficiencies) and Rmb depreciation. OP rose 10% YoY, with OP margin up 1.1pp to 5.3%, driven by GM expansion and cost savings from the integration of its operating platform for all teams in North America. Revenue to improve HoH in 2H16 Cybex growth improved following the SAP roll-out in 1H16. Evenflo revenue dropped 5% YoY in 1H16 due to adjustments to delivery times and a proactive reduction in sales of low-gm ExerSaucer. China market revenue dropped 25% YoY in 1H16, mainly due to the restructuring of its distribution channels. The decline in revenue in 2Q16 narrowed to 19%, from 35% in 1Q16, supported by a new branding and channeling strategy. The low comparable base in 2H15 should also help to drive revenue. The company reported 20%+ YoY order value growth at a trade fair held last week. Forex tailwind to continue in 2H16 In 1H16, revenue breakdown by EUR/US$/Rmb was 14%/59%/23%, while the breakdown for cost of sales and operating expenses was 11%/18%/65% and 24%/27%/45%, respectively. Rmb depreciation against the US$ and EUR during 1H16 led to a ~2pp GM improvement. The Rmb depreciation trend has continued so far in July and Aug, which should be positive for the company s GM. HSI Goodbaby Source: Bloomberg Key data Aug 30 close 3.87 Shares in issue (m) 1114.8 Major shareholder Song Zhenghuan (25.8%) Market cap (HK$ bn) 4.3 3M avg. vol. (m) 3.3 52W high/low 4.90/2.59 Source: Bloomberg Stock valuation Year end Dec Turnover Net profit Core profit Core EPS EPS YoY P/E Yield BPS P/B ROE 2013 4,189 171 171 0.171-6 22.7 1.3 2.0 1.9 9.0 2014 6,116 58 139 0.127-25 30.4 0.0 2.1 1.9 6.5 2015 6,951 197 197 0.179 41 21.6 1.3 2.1 1.8 8.5 2016E 6,530 260 260 0.241 32 16.5 1.8 2.4 1.6 10.4 2017E 6,828 323 323 0.294 24 13.3 2.3 2.6 1.5 11.8 Sources: Company data, GF Securities (HK)
Figure 1: 1H16 results review Year-end Dec 1H16 1H15 % change Revenue 3,215 3,684-13% Cost of sales (2,140) (2,629) -19% Gross profit 1,074 1,055 2% Other income 16 50-67% Selling and distribution expenses (459) (511) -10% Administrative expenses (460) (440) 5% Other expenses (3) (1) 358% Operating profit 169 153 10% Finance income 2 4-39% Finance costs (26) (29) -11% Share of profit/(loss) of JV 0 (0) -267% Profit before tax 145 128 14% Tax expense (35) (36) -3% Profit after tax 110 91 20% Non-controlling interests (3) (3) -3% Net profit 107 88 21% Adjusted net profit 107 88 21% Adjusted EPS 0.096 0.080 20% DPS na na na Margin & Ratio Gross margin 33.4 28.6 4.8 Operating margin 5.3 4.2 1.1 SG&A expense/revenue 28.6 25.8 2.8 Net margin 3.3 2.4 0.9 Adjusted net margin 3.3 2.4 0.9 Effective tax rate 24.3 28.4 (4.2) 1H16 1H15 change Inventory days 100 102 (2) A/C receivables days 59 71 (12) A/C payable days 80 80 0 1H16 FY15 change Net gearing 24% 27% -3pp Figure 2: Revenue by brand in 1H16 Figure 3: Revenue by brand in 1H15 Blue-chip customers 21% Private labels Private labels 3% Cybex 2% Cybex 19% Blue-chip customers 28% Other own brands gb 16% Evenflo 24% Other own brands gb 13% Evenflo 23% Sources: Company data, GF Securities (HK) Page 2
Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Company report Figure 4: Key assumptions Year end Dec FY13 FY14 FY15 FY16E FY17E Total revenue 4,189 6,116 6,951 6,530 6,828 growth % -8.0% 46.0% 13.7% -6.1% 4.6% China market 1,358 1,466 1,348 1,107 1,142 growth % 4.2% 8.0% -8.1% -17.8% 3.1% Gross margin 22.9% 25.1% 29.5% 33.6% 35.1% Selling & distribution expense ratio 10.7% 12.7% 14.8% 15.3% 15.6% Administrative expense ratio 8.6% 11.4% 11.4% 12.8% 12.9% Operating profit margin 4.6% 3.7% 4.6% 6.1% 7.0% Effective tax rate 12.2% 45.1% 23.3% 24.5% 25.5% Net profit margin 4.1% 0.9% 2.8% 4.0% 4.7% Figure 5: P/E band 7 34x 28x 6 22x 5 4 16x 3 10x 2 1 Sources: Bloomberg, GF Securities (HK) estimates Page 3
Figure 6: Financial statements Income Statement Balance Sheet Year-end Dec 31 FY13 FY14 FY15 FY16E FY17E Year-end Dec 31 FY13 FY14 FY15 FY16E FY17E Revenue 4,189 6,116 6,951 6,530 6,828 Fixed assets Cost of sales (3,228) (4,579) (4,901) (4,337) (4,432) PPE 708 921 879 1,050 1,050 Gross profit 961 1,537 2,050 2,192 2,395 Prepaid land lease payments 68 65 60 57 55 Goodwill 0 808 820 820 820 Other income 49 97 95 37 37 Intangible assets 35 712 682 657 625 Selling & distribution expenses (447) (777) (1,030) (996) (1,065) Investment in a JV 1 1 1 1 1 Administration expenses (360) (627) (794) (834) (884) Other LT assets 0 0 4 4 4 Other expenses (11) (3) (3) (3) (3) Deferred tax assets 15 20 43 43 43 Operating profit 191 226 318 397 481 827 2,528 2,488 2,632 2,598 Net finance cost 4 (40) (53) (45) (39) Current assets Share of profit/(loss) of JV (0) (0) (0) (0) (0) Inventories 798 1,535 1,245 1,102 1,126 Other expenses 0 (82) 0 0 0 A/C receivables 738 973 696 653 683 Profit before tax 195 105 264 352 442 Derivative financial instruments 0 27 0 0 0 Income tax expense (24) (48) (62) (86) (113) Due from related parties 236 379 304 273 282 Non-controlling interests (0) 0 5 6 6 Prepayments 129 193 144 135 141 Net profit 171 58 197 260 323 AFS investments 128 206 310 310 310 Core profit 171 139 197 260 323 Pledged deposits 0 166 27 27 27 Core EPS 0.17 0.13 0.18 0.00 0.00 Time deposits 0 51 3 3 3 Cash and cash equivalents 608 435 705 776 940 Growth rates 2,637 3,965 3,434 3,280 3,513 Revenue (8) 46 14 (6) 5 Core profit (6) (19) 42 32 24 Total assets 3,464 6,493 5,922 5,912 6,111 Core EPS (6) (25) 41 31 24 Current liabilities Margin & ratios A/C payables 714 1,131 941 833 851 Gross margin 22.9 25.1 29.5 33.6 35.1 Other payables 242 433 464 436 456 OP margin 4.6 3.7 4.6 6.1 7.0 Bank borrowings 447 1,496 692 642 592 Core margin 4.1 2.3 2.8 4.0 4.7 Tax payables 5 25 68 46 60 Effective tax rate 12.2 45.1 23.3 24.5 25.5 Provision 9 21 37 35 37 Payout ratio 32.2 0.0 28.1 30.0 30.0 Others 0 0 0 0 0 1,417 3,107 2,203 1,992 1,995 Cash Flow Statement Year-end Dec 31 FY13 FY14 FY15 FY16E FY17E Non-current liabilities Profit before tax 195 105 264 352 442 Bank borrowings 0 762 1,006 956 906 Share of (profit)/loss of JV (0) (0) (0) (0) (0) Others 0 76 104 104 104 Depreciation and amortization 111 157 195 242 282 Deferred tax liabilities 19 220 201 201 201 Net finance cost (4) 40 53 45 39 19 1,058 1,311 1,261 1,211 Others 0 21 44 2 (2) Change of working capital (357) (228) 570 88 (31) Equity Tax paid (26) (56) (63) (74) (99) Shareholders' equity 1,997 2,297 2,365 2,611 2,850 Operating cash flow (81) 38 1,064 656 631 Non-controlling interests 31 31 43 49 55 2,027 2,328 2,408 2,660 2,904 Capex (122) (168) (200) (389) (250) Disposals 4 3 11 0 0 Total liabilities & equity 3,464 6,493 5,922 5,912 6,111 Interest received 9 6 7 6 7 Acquisition of subsidiaries 0 (1,397) (33) 0 0 Financial ratios Purchase of AFS financial investments (4) (79) (121) 0 0 Year-end Dec 31 FY13 FY14 FY15 FY16E FY17E Others 0 (51) 48 0 0 Current ratio 1.9 1.3 1.6 1.6 1.8 Investing cash flow (114) (1,685) (287) (383) (243) Quick ratio 1.3 0.8 1.0 1.1 1.2 Change of borrowings 216 1,732 (601) (100) (100) A/C receivable turnover days 81 69 62 54 51 Change of pledged time deposits 0 (166) 139 0 0 A/C payable turnover days 85 74 77 75 69 Interest paid (7) (38) (50) (51) (46) Inventory turnover days 80 93 104 99 92 Dividend paid (50) (55) 0 (55) (78) Share issue 11 0 7 4 0 Asset turnover 1.2 0.9 1.2 1.1 1.1 Financing cash flow 171 1,473 (507) (202) (224) Total assets/total equity 1.7 2.8 2.5 2.2 2.1 Net gearing ratio net cash 60% 27% 18% 7% Net change of cash flow (25) (174) 271 71 164 ROE 9.0 6.5 8.5 10.4 11.8 ROA 5.1 2.8 3.2 4.4 5.4 Page 4
Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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