20160927-东英亚洲证券-优源控股-02268.HK-A_butterfly_emerging_from_a_cocoon_18页_2mb

Equity Research: Youyuan International Holdings Ltd. (2268 HK)

Core Content

Youyuan International Holdings Ltd. is a manufacturer of pulp and paper products, including machine finished single-sided and double-sided tissue wrapping paper and copy paper. The company has been moving downstream by acquiring a majority stake in Xin Wing, a leading manufacturer and distributor of non-woven and PVC wallpaper products under the brand "Senry". This strategic move aims to transform Youyuan from a manufacturer into an owned-brand manufacturer and to capitalize on the growing demand for mid-to-high-end and eco-friendly wallpaper products in China.

Main Points

• Acquisition of Xin Wing:

  • Youyuan acquired 41% of Xin Wing in Feb 2016 and announced plans to acquire the remaining 59% by Jul and Aug 2016.
  • Total acquisition cost is approximately RMB2.05bn, with payments spread over three years.
  • Xin Wing has a profit guarantee of RMB250mn for FY16E and RMB280mn for FY17E, which translates to a FY17E PE of 7.3x.

• Financial Impact:

  • Youyuan's revenue is expected to jump to RMB2,796.7mn in FY17E, with 30.3% from the newly acquired wallpaper business.
  • Net profit is projected to more than double to RMB511mn in FY17E from RMB224mn in FY15.
  • The acquisition is expected to significantly improve gross margin and operating efficiency.

• Market Position:

  • Senry is one of the leading brands in the mid-to-high-end eco-friendly wallpaper market, with a 10% market share expected in 2020E.
  • The company has a diversified product range and is leveraging its distributor network to expand sales and market coverage.

• Valuation and Rating:

  • The target price for Youyuan is HK$3.6, representing a 91% upside from the current close price of HK$1.88.
  • The target price is based on a FY17E 7x PE, which is 26% below the industry average.
  • The company is expected to resume dividend payouts in 2H17E due to improved operating cash flow and low gearing.

Key Information

• Company Profile:

  • Youyuan International Holdings Ltd. produces tissue wrapping paper and copy paper.
  • The acquisition of Xin Wing is expected to enhance its position in the wallpaper industry.

• Wallpaper Market:

  • Domestic sales volume of wallpaper in China is expected to grow at a 5-year CAGR of 6.6% to 245mn rolls by 2020E.
  • PVC wallpaper dominates the market with a 60%-70% share, while non-woven wallpaper is gaining traction due to its eco-friendliness and premium features.

• Production and Utilization:

  • Xin Wing has 13 production lines and an annual capacity of 27mn rolls (143mn sqm).
  • Youyuan's utilization rate of wallpaper backing paper is expected to increase from 52% in FY15 to 75% in FY17E.

• Financial Highlights:

  • In FY15, Youyuan's net profit was RMB224mn, and it is projected to reach RMB511mn in FY17E.
  • The company's EPS is expected to grow at a CAGR of 36%, supporting the BUY rating.

• Investment Risks:

  • Delay in the completion of the acquisition of Xin Wing could affect the consolidation of results.
  • Potential forex losses due to RMB depreciation against USD may impact financial performance.

Summary

Youyuan International Holdings Ltd. is positioned to benefit significantly from its strategic acquisition of Xin Wing, a major player in the Chinese wallpaper market. The acquisition is expected to enhance its market position, improve financial performance, and increase utilization of its existing production lines. With a BUY rating and a target price of HK$3.6, the company is anticipated to deliver strong growth and re-rating in the coming years.