20180104-招银国际-荣威国际-03358.HK-The_innovator_in_the_outdoor_and_water_leisure_space_48页_3mb

Summary of Bestway Global (3358 HK)

Core Content

Bestway Global (3358 HK) is a leading global manufacturer and marketer of outdoor and water leisure products, operating under a vertically integrated business model that includes brand ownership, manufacturing, and sales. The company is known for its innovative and reliable products, such as above-ground pools, portable spas, inflatable recreation products, and camping goods.

Main Products and Market Position

• Major Product Categories:

  1. Above-ground Pools and Portable Spas (47% of sales): Includes brands like "Fast Set", "Steel Pro", "Coleman", and "Lay-Z-Spa".
  2. Recreational Products (21% of sales): Includes inflatable play centers, water slides, and floating islands, with brands like "H2OGO!".
  3. Sporting Goods (13% of sales): Includes stand-up paddle boards and rafting tubes, using proprietary materials like "Tritech™" and "Drop-Stitch™".
  4. Camping Products (19% of sales): Includes air beds and tents, with brands like "Bestway" and "PAVILLO".

• Market Position:

  • Ranked No. 3 in the global water leisure market with 2.3% market share in 2016.
  • Ranked No. 2 in the inflatable outdoor product category with over 30% market share.
  • 75% of sales are from self-owned brands, with the rest from private label and co-branded products.

Key Positives and Growth Drivers

• Penetration into New Industries: Inflatable products are replacing traditional items due to their affordability, mobility, and space efficiency.
• Social Media Demand: Inflatable toys are becoming popular due to their entertainment value and visual appeal on social media platforms.
• Strong R&D and Innovation: The company has a robust R&D department, resulting in innovative products and a portfolio of 84 registered patents and 106 pending applications.
• Vertical Integration: This allows Bestway to maximize growth, profitability, and operational efficiency.
• China Story: Leveraging the rapid growth of e-commerce and increasing sports participation in China.
• Capacity Expansion: The company is expanding its production capacity in Nantong and Yancheng, with 50% growth in manufacturing GFA expected by FY19E.

Key Risks and Concerns

• Currency and Commodity Risk: High exposure to raw materials (76.9% of COGS), with most sales in USD and costs in RMB.
• Ramp-up and Expansion Risk: High capital expenditure may result in underutilization of new capacity if growth doesn't meet expectations.
• Competition Risk: Potential new entrants and increased competition could impact ASP and margins.
• Channel Stuffing Risk: Over-selling to distributors may lead to inventory buildup and financial risks.
• Counterfeit Products Risk: Risks of imitation and damage to brand reputation and consumer confidence.
• Legal Affairs: Involvement in a few legal cases with competitor INTEX, which could impact sales and earnings.

Financial Analysis and Valuation

• Sales CAGR (FY17E-19E): Expected to be 18.5%.

• Net Profit CAGR (FY17E-19E): Expected to be 24.4%.

• Growth Drivers:

  1. North America Expansion: Sales CAGR of 20.3%, as the market is less developed compared to the EU.
  2. China Growth: Sales CAGR of 97.9%, driven by the online channel.
  3. Sporting Goods and Camping Products: Sales CAGR of 26.9% and 22.5%, respectively, supported by hot-selling items and new product launches.
  4. GP Margin Improvements: Expected to increase by 0.3ppt annually from better product mix.
  5. Operating Leverage: Expected from successful ramp-up of new production capacity.

• Valuation:

  • Target Price: HK$4.65, based on a 10x FY18E PE, implying a 38.3% upside.
  • Current Price: HK$3.36, which is 7x FY18E PE, significantly undervalued compared to peers.
  • Peer Comparison: The average PE for other leading Chinese exporters with self-owned brands is 15.5x.
  • DCF Valuation: HK$4.76, using a 12.5% WACC and 1% terminal growth.

Industry Overview

• Global Outdoor Leisure Products Market: Expected to grow at 6% CAGR from 2016 to 2021E, reaching US$241 bn.
• Water Leisure Products Market: Expected to grow at 6.8% CAGR, with US$33.3 bn in retail sales in 2016.
• Inflatable Products Market: Expected to grow at 11.2% CAGR, driven by replacement and entertainment-led demand.
• Market Penetration: Inflatable products are expected to take market share from traditional products due to their affordability and versatility.

Conclusion

Bestway Global is well-positioned for growth in the outdoor and water leisure industry, leveraging its strong R&D, vertical integration, and expansion into new markets. Despite some risks, the company's valuation appears undervalued, making it an attractive investment opportunity.