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Bolina Holding (1190 HK) Summary

Core Content

Bolina Holding (1190 HK) is a Hong Kong-listed company in the construction sector, with a current share price of HKD3.56 and a target price of HKD4.58, representing a -28.9% discount. The company's market capitalization is approximately USD456 million, and its average daily trading volume (ADTV) is USD2 million. The firm maintains a "BUY" rating with no change in recommendation.

Bolina is positioned to benefit from the urbanisation theme in China, as the market for sanitary ware is expected to grow due to rising urbanisation rates and increased demand from both new home purchases and replacements. The company's strategy focuses on expanding its presence in tier-2 and tier-3 cities, where competition is less intense and well-known brands are not yet established.

Main Points

• Company Strategy: Bolina aims for balanced growth between market share and profitability, with a focus on tier-2 and tier-3 cities. It is also expanding its overseas presence and building relationships with major property developers.
• Production and Capacity: The company is set to launch its 6th production line this summer, increasing annual capacity to 5.9 million units by 1Q15F. However, it faces production bottlenecks and may outsource some production to alleviate capacity constraints.
• Earnings Outlook: The company has revised down its FY13-15F earnings growth from 21% to 14.1%. Earnings growth for FY14F and FY15F are expected at 19.9% and 16.1%, respectively.
• Market Position: Bolina has a competitive advantage due to its low-cost production (90% output yield vs. industry average of 70%) and advanced R&D capabilities. It also has a competitive pricing strategy, offering products 20-30% cheaper than MNC equivalents.
• Sales and Market Breakdown: The company's sales are diversified across channels and products, with branded products accounting for around 62% of sales in FY14F and ODM contributing approximately 22%. Sales are primarily volume-driven, with a slight increase in ASP and gross margin in overseas markets.
• Financial Metrics:
  • P/E: Core P/E is expected to decline from 11.2 in FY13F to 8.0 in FY15F.
  • P/BV: Drops from 8.8 to 1.8 over the same period.
  • Net Dividend Yield: Expected to rise from 0.0% to 4.0% by FY15F.
  • ROAE: Declines from 44.7% in FY12A to 25.9% in FY15E.
  • EV/EBITDA: Drops from 4.9 to 4.7 over the forecast period.
• Key Risks:
  • Supply shortages of raw materials and non-ceramic fittings.
  • Production bottlenecks.
  • Policy risks in the property market.
  • Market volatility in tier-3 cities.
  • Negative margin risk due to product mix changes.
  • Intensified market competition.

Key Information

• Share Price Performance:
  • 1-month: 4.8%
  • 3-month: 4.8%
  • 12-month: 37.9%
• Major Shareholders:
  • Xiao Zhi Yong: 59%
  • Xiao Xiu Yu: 10%
  • Neuberger Berman LLC: 5%
• Market Cap: HKD3.5 billion.
• Free Float: 30.7%.
• Issued Shares: 1,015 million.
• Dividend Policy: The company maintains an ex-factory price policy with a 60% discount to suggested retail price. It has a target to achieve 10% market share and reach 1,000 POS in the next 3-5 years.
• Gross Margin:
  • Blended: Expected to increase from 46.34% in FY11A to 50.29% in FY15F.
  • Own branded: Expected to decline from 57.00% to 59.48%.
  • ODM: Expected to increase from 33.40% to 37.40%.
  • OEM: Expected to decrease from 29.10% to 30.15%.
• Key Catalysts:
  • Lower tax rate if the accreditation of New and High Technology Enterprise is approved.
  • Application of stringent water-preservation standards, which Bolina already meets.

Financial Projections

Peer Valuation Comparison

Conclusion

Bolina Holding is well-positioned to benefit from the urbanisation theme in China, with a focus on tier-2 and tier-3 cities and a strategy to expand its market share and sales. Despite challenges such as production bottlenecks and supply constraints, the company's strong financials, competitive pricing, and R&D capabilities offer a solid foundation for growth. However, it faces risks related to market volatility, policy changes, and potential margin compression due to product mix shifts. The company's share price performance has been positive, and it has a relatively low market cap, indicating potential for growth.