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Equity Research Summary: Kingdom Holdings (528 HK)

Core Content

Kingdom Holdings (528 HK), a leading manufacturer of linen yarns in China, is highlighted in this equity research report as a strong investment opportunity. The report initiates coverage with a BUY rating and a target price of HK$2.3, representing a 55% upside from the current close price of HK$1.48. The analysis is grounded in the company's leadership in the linen industry, the growing demand for environmentally friendly fabrics, and the strategic development under the One Belt, One Road (OBOR) policy in Ethiopia.

Key Points

Market Position and Industry Leadership

• Kingdom is the largest linen yarn exporter in China for 12 consecutive years.
• It holds 30% market share in 2014, demonstrating strong industry dominance.
• The company's efficient production lines and strategic partnership with Siemens have driven technological advancements and cost efficiency.

Linen Industry Growth

• Linen is environmentally friendly, using 80% less energy and water than cotton.
• It is naturally antibacterial, making it a preferred fabric for health-conscious consumers.
• New spinning technology allows linen to be used in knitted fabrics and dope-dyed fibre, broadening its application in the fashion industry.
• Major retailers such as H&M, Uniqlo, and Muji have expanded their linen product lines, boosting demand.

Financial Performance and Valuation

• Revenue and net profit are projected to grow at 14.2% and 15.7% in FY15E, respectively.
• EPS growth is expected at 16.0% for FY15E, with a dividend yield of 6.0%.
• The company is trading at a forward FY15E PE of 5.8x, which is 48% below the peer average.
• The target price of HK$2.3 is based on a 9x FY15E PE, suggesting undervaluation and a decent margin of safety.

OBOR Policy and Ethiopia Development

• Kingdom has secured 300,000 sqm of land in Adama, Ethiopia, as part of the OBOR initiative.
• The first phase of the Ethiopian production base is expected to be completed by the end of FY16E, with an annual capacity of 5,000 tonnes.
• This expansion is expected to lower production costs and enhance profitability due to lower land, labor, and energy costs.
• Ethiopia's duty-free and quota-free export policies to the US and EU will improve price competitiveness and market access.

Growth Prospects

• With full year contribution from the Haiyan Plant (2nd phase) and Ethiopian development, the company is projected to achieve a 24% 3-year CAGR in earnings.
• This growth rate is 98% higher than the peer average, indicating strong long-term growth potential.

Main Views

• BUY Rating: The report recommends a BUY rating due to solid fundamentals, environmental benefits, and strategic expansion.
• Undemanding Valuation: Kingdom is considered undervalued compared to its peers, with a discount of 48% in valuation.
• High Dividend Yield: The company offers a decent dividend yield of 6.0%, which is attractive for income-focused investors.
• Robust Earnings Growth: The 23.7% CAGR in net profit from FY14 to FY17E is expected to drive value appreciation.
• Low Risk Profile: Kingdom's stable profitability and lower exposure to policy fluctuations compared to cotton manufacturers make it a low-risk investment.

Key Information

• Close Price: HK$1.48
• Target Price: HK$2.3 (55% upside)
• Fiscal Year: 12/2014
• Market Cap: HK$931.92 million
• Issue Share: 629.68 million shares
• Major Shareholder: Ren Weiming (46.3%)
• 3M Avg Daily Vol.: 1.50 million shares
• 12 Months High: HK$1.90
• 12 Months Low: HK$1.12
• Dividend Yield (FY15E): 6.0%
• DPS (FY15E): HK$0.089
• ROE (FY15E): 12.7%
• P/E (FY15E): 5.8x
• P/B (FY15E): 0.7x

Investment Risks

• Market Competition: The linen industry is niche, and competition could increase.
• Policy Uncertainty: Although the OBOR policy is supportive, political and regulatory changes in Ethiopia may affect project timelines.
• Production Risks: New production bases in Ethiopia may face challenges in scaling up efficiently.
• Economic Conditions: Global demand for linen may be affected by economic downturns or shifts in fashion trends.

Management Profile

• The CEO and management team have a solid track record in textile manufacturing and technology integration.
• Strategic partnerships, such as with Siemens, have been pivotal in technology upgrades and cost reductions.
• The team is focused on sustainable growth and international expansion, particularly in Africa under OBOR.

Shareholding Structure

• Ren Weiming holds 46.3% of the shares, indicating strong control over the company.
• The majority of the ownership is concentrated, which can be seen as both an advantage and a risk in terms of decision-making and diversification.

Appendix Highlights

• Linen Production: Linen accounts for only 1% of global cotton output, but its environmental benefits are significant.
• Cost Structure: Labour, energy, and land costs in Ethiopia are significantly lower than in China, offering long-term cost savings.
• Export Preferences: Ethiopia enjoys duty-free and quota-free export privileges to the US and EU, enhancing profitability and market access.

Financial Summary

Conclusion

Kingdom Holdings is well-positioned to benefit from the growing demand for sustainable and premium textiles, supported by technological innovation and strategic expansion in Africa. The company's low valuation, high dividend yield, and solid financials make it an attractive investment, with a BUY rating and target price of HK$2.3 reflecting the 55% upside potential.