20170217-元大证券_香港_-敏华控股-01999.HK-Strong_free_cash_flow_and_undervalued_19页_1mb

Summary of Hong Kong: Household Durables - Man Wah Holdings

Core Content

This report provides an analysis of Man Wah Holdings, a leading manufacturer and seller of recliner sofas in China and a significant player in the US market. The report initiates a BUY rating for the company with a target price (TP) of HK$6.85, implying a 27.5% upside from the current price of HK$5.37 as of February 16, 2017.

Main Points

• Company Overview:

  • Founded in 1992, Man Wah is the largest recliner sofa manufacturer in China and the eighth largest in the US.
  • It markets its products under the Cheers brand, focusing on recliner sofas with features like extendable footrests and swivel functions.
  • The company has a twin-pronged regional strategy, with strong retail and franchise presence in China and Hong Kong, and reliance on overseas retailers like American Signature Inc. and Steinhoff International Holdings for US and European markets.

• Market Position:

  • Man Wah's revenue mix from the US has historically been over 50%, but this dropped to 45% in FY1H17 due to a 17.7% YoY decline in US sales and a 42.6% YoY increase in China sales.
  • In the US motion recliner market, the Cheers brand held a 10.9% market share in 2015, ranking third.
  • In China, the brand held 29.5% market share in the retail sales value of motion recliners in 2015.

• Financial Performance (FY1H17):

  • Net profit increased by 43.9% YoY to HK$884 million, despite a 2.5% YoY decline in revenue.
  • Gross margin (GM) expanded to 42.7%, up from 37% in FY1H16, driven by lower raw material costs, improved sales mix, and cost efficiency.
  • The company's free cash flow exceeded HK$1.3 billion annually, supporting dividend payouts and potential M&A activities.

• Financial Outlook (2017–2019):

  • Projected FY2018 earnings will be based on an average P/E of 13.7x, leading to a TP of HK$6.85.
  • Sales growth is expected across all segments, with the wholesale segment showing the highest growth in FY1H17 at 42.1% YoY.
  • Retail and internet business is forecasted to grow at 10.7% in FY2017 and 1.1% in FY2018, with the internet division expected to grow at 30% annually.

• Strategic Moves:

  • The acquisition of Home Group (likely completed in Q1 2017) is expected to significantly boost European sales by ~75%, adding value through synergy.
  • The acquisition is structured with an initial payment of HK$100 million, and the remaining consideration to be paid in three tranches based on future earnings.
  • The P/B ratio of the acquisition is 5.6x, and the P/E ratio is expected to be around 10x.

• US Market Concerns:

  • Despite Trump's administration being a concern, the report argues that the furniture industry is unlikely to be targeted due to lack of dumping evidence.
  • The strong dollar is seen as a benefit to Man Wah, given its 40% exposure to the US market.
  • The report also highlights that Man Wah has contingency plans, including relocating production to the US or utilizing Home Group's facilities in Europe if needed.

• China Market Growth:

  • Man Wah is expanding its franchise network, with 1,653 distributor stores as of FY1H17.
  • The wholesale segment is expected to grow at 36.7% / 28.1% / 11.6% in FY2017–19, driven by brand awareness, store expansion, and product mix adjustments.
  • The internet business has shown strong growth, with revenue almost doubling from FY2014 to FY2016.

• Dividend Yield and Valuation:

  • The dividend yield is expected to rise to 6.9% in FY2018F, indicating attractive shareholder returns.
  • The company is undervalued at 10.5x P/E for FY2018F, compared to the historical average of 13.7x P/E.

Key Information

• Market Cap: US$2,651.4 million
• 6M Avg. Daily Turnover: US$5.4 million
• Outstanding Shares: 3,831.2 million
• Free Float: 35.9%
• Major Shareholder: Wong Man Li (64.1%)
• Net Debt/Equity: (25.2%)
• BVPS (2017F): HK$1.46
• P/B (2017F): 3.69x
• EPS Growth (2017F): 37.6%
• Dividend Yield (2017F): 5.3%
• ROE (2017F): 32.0%

Financial Outlook (HK$ million)

Conclusion

Man Wah is viewed as a BUY opportunity due to its strong free cash flow, growth potential in China, and potential recovery in the US market. The acquisition of Home Group is expected to significantly enhance European sales and diversify its revenue base. Despite challenges in the US and Europe, the company's dividend yield, market share, and strategic flexibility support its positive outlook.