|
|
Home  Story Archive 2008 CHINA ZAINO: What 7 analysts say after plant trip
|
CHINA ZAINO: What 7 analysts say after plant trip |
|
|
|
Written by NextInsight team
|
|
Wednesday, 30 July 2008
|
 Analysts and investors checking out Zaino's showroom in Fujian recently.
FOLLOWING A recent visit to China Zaino’s production plants in Fujian, a number of analysts have issued reports. Here are excerpts:
 Zaino is trading at 5.6x FY08 PE
UOB Kayhian, July 25, initiate coverage with a buy rating:
Favourable industry outlook. In the last few years, bag production in China has been seeing double-digit growth in terms of value, bringing in US$11.1b in 2006. With rising disposable income and a low penetration rate, retail sales in terms of revenue from double-strapped backpacks and luggage are expected to grow at a CAGR of 19.5% and 20.3% in 2008-10 to US$462.1m and US$554.9m respectively.
Market leader. Dapai is the top brand in the backpack industry with a 35.8% market share. To tap the opportunities in the fragmented luggage industry, Zaino started its luggage business in Sep 07. After listing in Apr 08, Zaino is equipped with technical expertise, marketing experience and ample capital for its ambitious expansion plans.
Zaino’s strategies include the following:
a) improve same store sales growth,
b) enhance brand equity, and
c) double production capacity to 52m in FY10.
 TV advert featuring Olympic diving gold medalist Tian Liang and China Zaino's backpacks.
As a top backpack player that enjoys economies of scale, we expect Zaino to establish itself as a leading luggage player by leveraging on its strong design capability and extensive distribution network. Zaino also plans to distribute 20% of net profit in FY08-10 to shareholders.
Key risks:
a) Given volatile raw material prices, should cost of goods sold (COGS) rise faster than the average selling prices (ASP) of its products, Zaino may face diminishing margins and smaller bottom line accretions despite its aggressive advertising and expansion campaign, and
b) If backpack exporters in China continue to shift their focus to the domestic market, competition in the industry is likely to intensify.
Initiate coverage with BUY. Zaino is trading at 5.6x FY08 PE and 4.1x FY09 PE. Based on the discounted cash flow model, our 12-month price is S$0.725, implying 8.7x FY08 PE and 6.3x FY09 PE.
 China Zaino has attracted Arisaig Partners, OZ Management and PrimePartners Asia as cornerstone investors.
Lim & Tan Securities, non-rated report:
The plant tour has brought about renewed interest in the company, but valuations still look reasonable. Since its listing at 60 cents a share in April’08, the stock has been on a consistent decline having hit a low of 39 cents on 18 July’08 (this is despite having attracted Arisaig Partners, OZ Management and PrimePartners Asia as cornerstone investors).
However, the latest plant tour where management updated the investment community of the latest positive developments and robust near to medium term outlook likely have resulted in the strong recovery of the stock to 48 cents yesterday. Based on the company’s capacity expansion plans, order books on hand and management’s guidance on operating expenses and margins, we are expecting 2008 net profit to increase 35% to RMB410mln, putting its forward PE at 5.5x.
While there is no direct listed comparable, consumer related China stocks such as China Sports is currently trading at 7x forward PE and its profit is only half the size of China Zaino. Hence, even if China Zaino can trade up to a similar valuation, it could potentially return to its IPO price.
 China Zaino is 8 times the size of its next largest competitor for its backpack segment.
Westcomb Securities: non-rated report
China. Zaino is the largest backpack company in China by 2006 revenue, and is approximately 8 times the size of the second largest company, Jinhou.
Valuation appears attractive at approximately 5.5x FY08E consensus EPS for a backpack market leader.Zaino is currently trading around 5.0~5.5x FY08E consensus EPS. At this price level, we find Zaino attractive for the following reasons:
1) Market leader in China: 8 times the size of its next largest competitor for its backpack segment;
2) Backpack & luggage industry estimated to grow at CAGR of 20% between 2007-09E;
3) Management targets to payout 20% of FY08~09’s net profit, translating to potential dividend per share of 1.7 Singapore cents with a dividend yield of 3.6% based on net profit of RMB 400m; and
4) We believe China Sports, FY08E consensus net profit half the size of Zaino trading at PER of 7x, would be a good comparable for Zaino.
 Earnings growth this year will be driven by luggage sales.
DMG Research: non-rated report
China Zaino’s DAPAI brand bagged the “Top 500 Asia Valuable Brand Award” in 2007 and the “Top 12 Bag Brands in China” in 2006.
Earnings growth for this year and next will mainly be propelled by luggage bags sales, which the Group is focusing on expanding its domestic market share. The target to hit for its luggage segment is 2.5m units in sales this year, and this ambition seems well on-course with 1Q08 (weakest seasonal quarter) already registering 782k units.
 Average selling prices of luggages are 2.6X that of backpacks.
SBI E-2 Capital, non-rated report:
Attractive valuation. The growth driver this year will come from its luggage segment (outsourced to third parties). Although this product was only launched in Sept 2007, we believe the company is well on track to sell its targeted 2.5m units of luggage in FY12/08.
As at 1Q FY08, sales volume of luggage has already reached 782,000. Besides, the ASP for luggage was about 2.6 times that of backpacks. Based on our ballpark estimates, the counter is currently trading at an undemanding 5.2x FY12/08 and 4.5x FY12/09 P/E.
 Target price of 61 cents for Zaino
Phillip Securities: initiate coverage of China Zaino with a BUY and a target price of S$.0.61
China Zaino has seen its revenue and net profit growing at a CAGR of 75.7 percent and 77.4 percent since 2004. Moreover, it has strong operating cash flows, low gearing and high returns on equity. Furthermore, it intends to recommend and distribute dividends of not less than 20 percent of its FY2008 and FY2009 net profits attributable to shareholders. As it is an attractive stock, we initiate coverage with a BUY recommendation. Our fair value estimate of S$0.61 is arrived at based on a 20 percent discount to the value obtained from the discounted cash flow to equity model. Based on the current share price of S$0.455, there is possible upside of 34.1 per cent.
 China Zaino is deeply undervalued.
Kim Eng Securities:
We reckon that China Zaino is deeply undervalued given its market leadership and lucrative operating margins. Despite having a huge distribution network as sizable as China Hongxing, China Zaino trades at merely half of Hongxing’s PER valuation. It is even trading below China Sports a much smaller company in terms of network and profitability. In fact, Zaino has deliberately avoided the highly competitive and crowded sports shoes and apparel segment.
We are initiating coverage on China Zaino with a BUY and a 12-month price target of $0.90 (blended PER and DCF valuations). We find Zaino’s sharp discount to peer valuations of 16x FY08 PER hard to ignore, given its market leadership in PRC.
 Attentive and curious analysts on the trip. Photos by Rachel Ho
Watch Olympic diving gold medalist Tian Liang on TV advertisement, here
Recent stories:
CHINA ZAINO: Wooing China's Generation Y
CHINA ZAINO: No.1 China backpack brand moves into luggage space
|
|
|
