20170217-元大证券香港-敏华控股-01999.HK-Strong_free_cash_flow_and_undervalued_20页_1mb

Man Wah Holdings Summary

Core Content

Man Wah Holdings is a leading manufacturer and seller of recliner sofas, established in 1992. The company has a strong presence in China and the US, with the Cheers brand being a key player in the motion recliner market. The company's recent performance and strategic moves have been analyzed in this report, highlighting its potential for growth and investment value.

Main Points

• Company Overview: Man Wah is the largest recliner sofa player in China and the eighth largest in the US. It operates through three production plants in China and has a significant retail and franchise presence in the country.
• Market Position: In 2015, Man Wah held a 29.5% market share in the Chinese motion recliner market, ranking first. In the US, the Cheers brand had a 10.9% market share, ranking third.
• Financial Performance: In FY1H17, Man Wah reported a 43.9% YoY increase in net profit to HK$884 million, despite a 2.5% YoY decline in revenue. The company's free cash flow exceeded HK$1.3 billion annually.
• Investment Recommendation: The report initiates coverage with a BUY rating and sets a target price (TP) of HK$6.85, implying a 27.5% upside from the current price of HK$5.37. The TP is based on an average P/E of 13.7x for the last five years on FY2018 earnings.
• Strategic Shifts: Man Wah has adopted a franchise model for its China and HK operations, reducing the number of self-operated stores and increasing the number of distributor stores. This shift has contributed to significant growth in the wholesale segment.
• North American Market: Despite a 17.7% YoY decline in sales, the North American market remains a key revenue contributor. The company has adjusted its pricing strategy and increased its sales force to counteract the decline.
• Home Group Acquisition: Man Wah announced the acquisition of a 50% stake in Home Group, a European furniture company, in November 2016. This acquisition is expected to boost revenue from Europe by ~75% and provide synergies.
• US Market Outlook: The report believes that the US market will recover, and the company's exposure to the US market (over 40%) will benefit from a strong dollar.
• China Market Outlook: The company's China and HK markets are projected to grow significantly, with the wholesale segment expected to grow at 36.7%, 28.1%, and 11.6% for FY2017-19 respectively. The internet business is also expected to grow rapidly.
• Key Financial Metrics:
  • 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

Key Information

• Growth Drivers:
  • Robust growth in the China market
  • Potential recovery in the US market
  • Synergies from the Home Group acquisition in Europe
• Price Strategy: Man Wah adjusted its pricing strategy in the US market to counteract competition and improve margins.
• Market Share:
  • Cheers brand holds 10.9% of the US motion recliner market in 2015
  • Man Wah is the largest recliner sofa player in China
• Geographical Revenue Mix:
  • US: 47.8% in FY1H17
  • China and HK: 42.6% in FY1H17
  • Europe and others: 9.6% in FY1H17
• Product Mix:
  • Focus on motion recliners and other products such as bedding and chairs
  • Internet sales are growing rapidly, with revenue almost doubling from FY2014 to FY2016
• Earnings Projections:
  • 2016-19F earnings CAGR of 15.2%
  • Revenue from China and HK markets is expected to surpass that of the US by 2018F
• Risk Considerations:
  • Trump's administration may impose trade policies affecting the US market
  • However, the report suggests that the furniture market is unlikely to be a target for protectionist policies due to the absence of dumping
  • The company has contingency plans, such as relocating production to the US or utilizing Home Group's European facilities

Conclusion

Man Wah Holdings is positioned for growth in multiple markets, with a strong focus on China and the potential for recovery in the US. The acquisition of Home Group is expected to enhance its European operations and provide additional growth opportunities. The report recommends a BUY rating with a target price of HK$6.85, suggesting the company is undervalued based on historical P/E ratios.