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Summary of International Housewares Retail (1373 HK)

Core Content

International Housewares Retail (IHR) is a Hong Kong-based housewares retail company that has been identified as a long-term investment opportunity with a BUY rating and a target price of HKD4.00, representing a 29% upside from the current share price of HKD3.09. The company is positioned to benefit from its growth and value combination, with a focus on steady domestic demand and low cyclical risk due to its non-discretionary product offerings.

Main Points

• Growth Drivers:

  • Singapore Expansion: IHR is expanding into Singapore, which is seen as a key growth driver. The market is less mature compared to Hong Kong, and the company's experience in Macau and Singapore allows it to replicate its business model effectively.
  • Stable Growth in Hong Kong: IHR continues to enjoy steady growth in its home market, with a conservative expansion strategy in other regions like China and West Malaysia.
  • Consolidation Opportunities: IHR is well-positioned to become a market consolidator in Singapore, where the retail landscape is still dominated by small mom-and-pop stores.

• Business Model:

  • IHR leverages a sourcing network spanning 13 countries, including South Korea, Japan, Taiwan, Thailand, and European nations.
  • It utilizes direct sourcing to improve margins, with plans to increase this to 70% of total sales over the next 3-5 years.
  • The company is also expanding its logistics network to reduce costs and enhance efficiency.

• Market Characteristics:

  • IHR's products are non-discretionary, which means they are less sensitive to economic cycles and enjoy resilient local demand.
  • It operates in markets with similar social structures to Hong Kong, such as Singapore, which helps in replicating its business model effectively.
  • The company has a strong track record of successful expansion through organic growth and M&A, particularly in Macau and Singapore.

• Financial Performance:

  • IHR reported a core net profit of HKD106.3m in FY13A and is expected to grow to HKD207.6m in FY17E.
  • The core net profit CAGR is projected at 22% from FY14 to FY17, significantly outperforming the 11% average growth of its peers.
  • The company is currently trading at 13.9x 12-month forward PER, which is 17% below its historical average and 51% / 26% discount to regional and international peers, respectively.

• Valuation and Risk-Reward:

  • IHR's target price of HKD4.00 is based on a target PER of 19x, which is considered fair and attractive.
  • The stock's recent pullback is attributed to non-structural issues, such as logistics problems in Singapore and one-off store manager wage hikes.
  • IHR offers a better risk-reward profile compared to other Hong Kong retailers, which are more sensitive to mainland tourist spending and economic cycles.

• Strategic Expansion:

  • IHR plans to add six stores per year in China and West Malaysia over the next two years.
  • It will slow down expansion in Macau due to the volatile retail rental market.
  • The company is exploring M&A opportunities and is focused on low-risk expansion in new markets.

Key Information

• Share Price: HKD3.09
• Target Price: HKD4.00 (+29% upside)
• Market Cap (USD): $288M
• Average Daily Trading Volume (USD): $0.5M
• Key Catalysts:
  • Singapore sales and margin improvement after resolving logistics issues.
  • Potential M&A opportunities.
• Valuation Metrics:
  • Core FD P/E (x): 13.9x (12-month forward)
  • Implied P/B (x): 3.3x
  • ROE (%): 18.4%
  • EV/EBITDA (x): 9.2x
  • Net Dividend Yield (%): 2.0%
• Store Growth:
  • Hong Kong: From 241 stores in FY14 to 286 in FY17F (CAGR of 5.9%)
  • Singapore: From 52 stores in FY14 to 144 in FY17F (CAGR of 40.4%)
  • West Malaysia: From 15 to 24 stores (CAGR of 17.0%)
  • China: From 9 to 18 stores (CAGR of 26.0%)
  • Macau: From 6 to 21 stores (CAGR of 51.8%)

Conclusion

IHR is a value-driven growth stock with a strong business model, resilient demand, and strategic expansion plans. Its attractive valuation and low cyclical risk make it a compelling investment opportunity, especially given the recent pullback in share price. The company's target price of HKD4.00 is based on fair valuation multiples and is expected to deliver strong earnings growth and margin improvements.