20140515-高盛-Fundamentals_to_face_a_colder_and_longer_winter__down_to_Sell_13页_299kb

Bosideng International Holdings (3998.HK) Summary

Core Content

Bosideng International Holdings (3998.HK) is a down jacket manufacturer in China facing significant structural and operational challenges that have led to a downgrade from Neutral to Sell. The analysis highlights that the company's long-term growth and margin potential are constrained by a combination of factors, including the impact of e-commerce, rising competition, and its reliance on a wholesale model.

Main Points

• Downgrade to Sell: The company's fundamentals are deteriorating due to long-term structural issues, including e-commerce threats and unfavorable weather conditions.
• Return Potential: The current return potential is estimated at 16%, but this is based on a reduced outlook for the company's performance.
• Market Share and Pricing: Bosideng's market share in the down jacket category is under threat due to the availability of cheaper alternatives on platforms like Taobao and Tmall, which are priced at or below Bosideng's factory prices.
• Earnings and Growth Outlook:
  • Topline growth is expected to be muted at 3%-4% in 2014-15, far below the double-digit growth of previous years.
  • EPS is projected to decline by 38%-43% for 2014-16, indicating two consecutive years of earnings contraction.
• Valuation:
  • The 2014E P/E is at 11X, which is considered mid-cycle, while the P/B is at 1X, far from asset-based support.
  • The 12-month target price is cut to HK$1.00 from HK$1.80, implying a 16% downside potential.
• Competitive Pressures:
  • Fierce competition from brands like Uniqlo is reducing Bosideng's market share.
  • Bosideng's pricing is significantly higher than other down jacket brands, making it less competitive.
• Structural Challenges:
  • Wholesale Model: 68% of Bosideng's stores are operated by third-party distributors, which makes it difficult to manage demand and inventory.
  • Past Growth Patterns: Similar to sportswear brands like Li Ning, Bosideng's rapid growth in previous years may have led to overstocking.
  • Less Differentiated Category: The down jacket market is less differentiated, leading to price competition and lower profit margins.
• Financial Performance:
  • Revenue is expected to decline by 14% in FY14 and grow only marginally in FY15-16.
  • Operating income and net income are projected to decline significantly, with operating margins expected to fall from 9.9% in FY14 to 7.9% in FY16.
• Dividend Yield and ROE:
  • The dividend yield is at 6.4% in 2014E, but it is at the lower end of the historical range.
  • ROE is forecasted to drop from 15.2% in 2013 to 8.3% in 2016.

Key Risks

• Market Share Loss: Due to online competition and lower pricing from other brands.
• Inventory Pressure: The company's wholesale model and past growth may lead to excess inventory in its distribution channels.
• Margin Compression: SG&A expenses are expected to grow at 7%-8%, outpacing gross profit growth and leading to declining margins.

Financial Highlights

• Current Price: HK$1.19
• 12-Month Target Price: HK$1.00
• Market Cap: HK$9,528.7 million / US$1,229.3 million
• EPS (2014E): HK$0.11
• EPS Growth (2014E): -33.9%
• EBITDA (2014E): Rmb 935.2 million
• EBITDA Margin (2014E): 11.6%
• Net Income (2014E): Rmb 717.1 million
• Net Margin (2014E): 8.9%
• Free Cash Flow Yield (2014E): 2.0%

Conclusion

The analysis suggests that Bosideng's growth and margin potential are significantly constrained by structural challenges in the market, including the rise of e-commerce and intense competition. These factors, combined with a weaker-than-expected earnings outlook, justify the downgrade to Sell. The company's valuation is considered reasonable based on its current earnings, but the outlook for future performance remains bleak.