20130819-Maybank_KERPL-Bolina_An_Urbanisation_Play_Not_To_Be_Missed_30页_1mb

Bolina Summary

Core Content

Bolina is a leading ceramic sanitary ware producer in China, currently the second-largest mid-to-high end brand in the PRC ceramic sanitary ware industry. It was established in 2002 and listed on the HKEX in July 2012. The company is poised for growth, with a BUY recommendation and a target price of HKD5.12, representing a 60% upside from the current share price of HKD3.21. The valuation is based on a 12X FY14F PER, and a three-stage DCF model suggests a fair value of HKD10.91, implying 25.6X FY14F PER.

Key Financial Metrics

• Share Price: HKD3.21
• Target Price: HKD5.12
• Market Cap (USDm): 417.6
• 3-mth Avg Daily Turnover (USDm): 2.4
• Free Float (%): 30.6
• Major Shareholders:
  • Mr Xiao Zhiyong: 59.13%
  • Ms Xiao Xiu Yu: 10.27%
• ROE (annualised, %): 29.63
• Net Cash (HKDm): 812
• NTA/shr (HKD): 1.28
• Interest Cover (x): 31.7

Market Position and Growth

• Market Share: 4% in the domestic market, aiming to reach 10% in the next 3-5 years.
• Sales Growth: Projected 21% net profit CAGR over FY13F-15F, driven by 16% sales CAGR.
• Domestic Sales: Expected to increase from 450 POS in FY12 to 600/800/1000 in FY13/14/15F.
• Own-Brand Sales: To increase from 62% in FY12 to 71% in FY15F.
• Export Sales: Around 40% of total sales, with a 32-37% margin, compared to 56% for own-brand products.

Profitability Analysis

• Gross Margins: Blended gross margin is projected to improve from 46.34% in FY11A to 50.95% in FY15F.
• Own-Branded Margins: 56% (FY15F), significantly higher than ODM (32-33%) and OEM (29.10-32.00%).
• One-Piece Toilets: Contribute ~70% of own-branded sales, with a gross margin of ~67% vs ~32-33% for two-piece toilets.
• Effective Tax Rate: Expected to rise to 21.5% in FY13F-15F, but may decrease if the company's application for New and High Technology Enterprise accreditation is approved.

Valuation and Comparison

• Valuation Multiples:
  • FY13/14F PER: 9.3X/7.5X
  • EV/EBITDA: 6.60/5.01/3.78/2.94
  • P/BV: 2.72/2.50/2.00/1.60
• Peer Comparison:
  • Domestic Peers: Man Wah, Royale Furniture, China Flooring, Samson
  • International Peers: Toto, Joyou, HSIL, Villeroy & Boch, HSIL, Globe Union, Geberit, GWA, Hanssem, Hocheng Corp.
  • Bolina's projected 21% NPAT CAGR is higher than its peers, which have mid-teens growth.

Strategic Initiatives

• Capacity Expansion: Plans to add a sixth production line in late 2013/early 2014, increasing annual capacity from 4.9m to 5.9m units. A seventh production line is also under consideration.
• Sales Network Expansion: Expected to expand domestic POS to 600/800/1000 in FY13/14/15F.
• Strategic Alliances: Collaborations with national home decoration malls, real estate developers, and department store chains.
• Brand Recognition: Enhancing brand visibility through artist ambassadors and showrooms in key markets.

Risks and Catalysts

Key Catalysts:

1. On-track capacity expansion
2. Satisfactory sales channel development
3. Potential M&A in the non-ceramic sanitary ware market
4. More strategic alliances with property developers and decoration malls
5. Stringent water conservation standards prompting sales upgrades
6. Potential buyout target

Key Risks:

1. Short own-brand history and listing record
2. Adoption of a third-party wholesale model exposing to inventory and overexpansion risk
3. Tied to volatile PRC property market
4. Intense competition
5. Dramatic deterioration in US housing recovery (30% of sales and 15-20% of net profit)

Financial Strength

• Net Cash: Expected to remain positive over the next few years, with projections of CNY619m/CNY660m/CNY773m/CNY862m for FY12A/FY13F/FY14F/FY15F.
• ROE and ROA: Expected to decrease slightly over the forecast period, from 44.75% (FY12A) to 28.94% (FY15F), and from 28.44% (FY12A) to 24.17% (FY15F).

Cash Flow and Working Capital

• Capex Projections: CNY150m/CNY200m/CNY250m for FY13F/FY14F/FY15F.
• Free Cash Flow (FCF): Projected at CNY128m/CNY201m/CNY196m for FY13F/FY14F/FY15F.
• Dividend Policy: No formal payout policy, but expected to maintain a 30% payout ratio, with dividends of CNY85m/CNY106m/CNY129m.
• Cash Conversion Cycle:
  • AR days: 26.0 (FY12A) to 23.0 (FY15F)
  • AP days: 24.0 (FY12A) to 21.0 (FY15F)
  • Inventory days: 63.0 (FY12A) to 56.0 (FY15F)

Investment Thesis

• Growth Prospects: Bolina is well-positioned to benefit from the urbanisation theme, with a growing domestic market and expanding sales network.
• Profitability: Strong profitability due to higher output yield and sales mix.
• Valuation: The current valuation is considered undervalued relative to its growth potential.
• Strategic Positioning: Bolina is leveraging its ODM/OEM experience to build its own brand and expand its market share.

Conclusion

Bolina presents a compelling investment opportunity with strong growth prospects, solid profitability, and a strategic approach to market expansion. Despite some risks, its growth potential and market position justify the BUY recommendation.