20150119-杰富瑞-Balancing_Pains_and_Gains_on_Transition_Maintain_Hold_14页_699kb

Goodbaby International (1086 HK) Summary: Balancing Pains and Gains on Transition

Core Content

Goodbaby International (1086 HK) is undergoing a strategic transformation from an Original Product Manufacturer (OPM) to a global branded infant products company. The company has made significant changes in its business model, acquiring Cybex and Evenflo, and shifting towards direct retail and brand ownership. This transition, however, comes with several challenges and uncertainties, particularly in the performance of Evenflo and the order pullback from Dorel.

Key Highlights

• China Sales Growth:

  • Sales in China grew by over 10% YoY in 2H14, compared to 5.6% in 1H14, partly due to a low base.
  • Online sales continued to grow strongly at over 50% YoY, while sales in hypermarket and specialty stores declined.
  • Management targets low teen growth in China for 2015.

• Dorel Order Pullback:

  • Dorel (31% of 2013 sales) is expected to pull back orders by USD15-20m in 2014 and USD70m in 2015.
  • Orders are expected to be completely cut in 2016.

• New Customers and Direct Distribution:

  • New bluechip customers (Maclaren, Uppababy, Chicco) are expected to contribute cUSD39m in 2014 and cUSD50m in 2015.
  • Direct distribution in the US is projected to reach over USD32m in 2014 and USD55m in 2015.

• Cybex Performance:

  • Cybex is expected to deliver sales of over USD95m in 2014 and aims for 50% YoY growth in 2015.
  • Management guides for a high single-digit net margin in 2014-2015.

• Evenflo Turnaround:

  • Evenflo (22% of sales in 2015) is expected to have a high single-digit sales growth in 2014-2015, but it recorded a deteriorating net loss in 2014.
  • Management aims for breakeven in 2015.

Key Takeaways

• The recent management appointments, including the appointment of Martin Pos and Tim Maule, are seen as positive steps in the transition to a branded business.
• Near-term uncertainties remain in the turnaround of Evenflo, which is a significant portion of sales.
• The order pullback from Dorel is occurring faster than initially expected, posing a challenge to revenue growth.
• The company's core net profit for 2014 is revised down to HKD175m (from HKD180m), with a 3% decrease, which is 4% below consensus.
• The price target is revised down to HKD2.6 from HKD3.3, based on a 12.5x 2015 earnings multiple, slightly below the average for HK-listed exporters (13x).

Valuation and Risks

• Current Valuation: The stock trades at 11.5x 2015 earnings, below its historical median of 20x.

• Upside Risks:

  • Faster-than-expected turnaround of Evenflo.
  • Stronger-than-expected profit from Cybex.
  • Better-than-expected performance in China.
  • Strong growth from new bluechip customers and direct distribution.

• Downside Risks:

  • Execution risks from integrating acquired companies.
  • Quicker-than-expected order pullback from Dorel.
  • Slow progress in new customer acquisition and direct distribution.
  • Fast rising operating expenses indicating lack of cost discipline.
  • Potential safety issues and competition from e-commerce.

Earnings and Financial Performance

• Core Net Margin: 2.9% for 2014, 3.0% for 2015.
• Operating Expenses: Revised down to reflect better cost control.
• EPS: Core EPS for 2014 is HKD0.16, and for 2015, it is HKD0.20.
• Dividend Yield: 1.6% for 2014, increasing to 2.98% for 2015.
• Book Value/Share: HKD1.99 for 2013, rising to HKD2.15 for 2014 and HKD2.32 for 2015.
• P/B Ratio: 1.2x in 2013, dropping to 1.1x in 2014, 1.0x in 2015, and 0.9x in 2016.

Strategic Transition

• Goodbaby aims to become a global branded, durable infant products company.
• The transition is supported by acquisitions of Cybex and Evenflo.
• The company is focusing on direct distribution and brand building, with key roles assigned to new management.

Analyst Views

• Management Appointments: Seen as a positive move to support the transition to a branded business.
• Evenflo Challenges: Near-term uncertainties and risks in turning around the loss-making division.
• Dorel Order Pullback: Quicker than expected, requiring strong execution to replace lost revenue.
• Cost Discipline: Investors are looking for clear signs of improved cost control and organic SG&A/sales ratio.

Investment Thesis

• Target Price: HKD2.6, based on a 12.5x 2015 earnings multiple.

• Catalysts for Upside:

  • Faster turnaround of Evenflo.
  • Stronger profit from Cybex.
  • Better performance in China.
  • Growth from new bluechip customers and direct distribution.

• Catalysts for Downside:

  • Slow turnaround of Evenflo.
  • Quick order pullback from Dorel.
  • Slow progress in new customer acquisition.
  • Rising operating expenses.

Financial Model Drivers

Market Data

Analysts

• Kevin Chee, CFA
• Jessie Guo, PhD
• Edwin Fan, CFA
• Jeffrey Zeng

Conclusion

Despite the strategic shift to a branded business model, Goodbaby faces significant challenges in the transition, particularly with Evenflo's performance and the order pullback from Dorel. The management changes are seen as positive, but execution remains key. The stock is currently undervalued based on its earnings and book value, but the outlook is mixed with both upside and downside risks. The recommendation remains to Maintain Hold, with a revised price target of HKD2.6.