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Sinomax (1418 HK) Summary

Core Content

This report provides an analysis of Sinomax (1418 HK), a Hong Kong-listed company in the retail and manufacturing sector, focusing on its financial performance, business outlook, and valuation. The report highlights the company's challenges in the near term and its potential for recovery in the second half of 2016.

Main Points

1. Financial Performance and Outlook

• Earnings Forecast: Sinomax is expected to report an 8% YoY decline in FY15E recurring earnings due to a 5% YoY decline in export revenue, driven by a loss of market share to "made in US" products.
• Recurring EPS: The recurring EPS is expected to be HK$0.11 for FY15E, down from HK$0.12 in FY14E.
• Valuation: The current valuation is considered undemanding, with a 7x/6x P/E ratio for FY15E/FY16E. The target price has been revised to HK$0.92, reflecting a 24% potential upside from the current price.
• Share Price Pressure: Near-term share price weakness is expected due to uncertainties and a bearish market sentiment, but the long-term outlook is positive.

2. US Business Turnaround

• US Factory Expansion: The first phase of the US factory is expected to be operational in 2H16E, which could lead to a turnaround in export revenue.
• Investment: The total investment required is HK$217 million, with an annual capacity of 33,000 tonnes.
• Funding: The investment will be funded through internal resources.

3. Retail and Corporate Sales

• Revenue Growth: The retail business is expected to see positive revenue growth from store openings and strong corporate sales, despite a -2% SSSG for FY15E.
• Store Development: The number of stores is expected to increase from 19 in FY15E to 21 in FY16E and 22 in FY17E.
• SSSG: The SSSG for the retail business is projected to be -2% for FY15E and 0% for FY16E, with an improvement to 3% in FY17E.

4. Key Financial Metrics (FY15E–FY17E)

• Revenue: Expected to grow from HK$2,825 million in FY15E to HK$3,672 million in FY17E.
• Gross Profit: Projected to increase from HK$803 million in FY15E to HK$1,007 million in FY17E.
• Gross Margin: Expected to decrease slightly from 28.4% in FY15E to 27.4% in FY17E.
• Operating Profit: Projected to decline from HK$254 million in FY15E to HK$285 million in FY16E, with a slight increase to HK$335 million in FY17E.
• Recurring Net Profit: Expected to decrease from HK$181 million in FY15E to HK$239 million in FY17E.
• Recurring Net Margin: Projected to decrease from 6.4% in FY15E to 6.5% in FY17E.

5. Export Business Analysis

• Export Revenue: Expected to decline by 5% YoY in FY15E, with a 30% decline in self-owned brand sales and 20% growth in licensed brand sales.
• GPM: The gross margin for the export business is expected to decrease from 29.2% in FY14E to 28.4% in FY15E, and further to 27.8% in FY16E, due to increased ODM product sales with lower margins.
• Segmental Profit: Projected to decrease from HK$323 million in FY15E to HK$372 million in FY16E, and increase to HK$445 million in FY17E.

6. Polyurethane Foam Sales

• Revenue: Expected to grow from HK$1,065 million in FY15E to HK$1,252 million in FY17E.
• Production Volume: Increased by 20% in FY15E due to the acquisition of the Shanghai Luen Tai plant.
• Gross Margin: Expected to increase from 15.0% in FY15E to 15.0% in FY16E and 14.0% in FY17E.

7. Valuation Comparison

• Peer Comparison: Sinomax's valuation is based on a 30% discount to Man Wah's 12x P/E and a 50% discount to overseas peers trading at 16x P/E.
• Target P/E: The target P/E for FY16E is 8x, reflecting a more conservative outlook.

8. Shareholding and Market Data

• Shareholding Structure: Lam Chi Fan holds 61.51%, and Kong Xian Xing holds 7.67%.
• Market Cap: Current market cap is HK$1,221 million.
• Average Daily Volume: Approximately 2.86 million shares.
• BVPS: HK$0.55.

9. Related Research and Ratings

• The company has received "BUY" ratings in multiple reports, including:
  • "Valuation attractive despite US uncertainties" (October 7, 2015)
  • "1H15 earnings missed but stock undervalued" (August 27, 2015)
  • "US growth story still under the radar" (March 18, 2015)
  • "Acquiring polyurethane foam business for expansion" (January 27, 2015)

Key Information

• Valuation: Current P/E ratio is 7x/6x for FY15E/FY16E.
• Target Price: Revised to HK$0.92, reflecting a 24% potential upside.
• US Expansion: First phase of US factory expected to be operational in 2H16E.
• Market Share: Loss of market share due to increased preference for "made in US" products.
• Financial Performance: Revenue and profit are expected to grow in the long term, but face headwinds in the near term.
• Uncertainties: Weak consumer sentiment in HK and economic uncertainty in China may affect the near-term outlook.

Conclusion

Sinomax faces short-term challenges in its export business due to market share loss and economic uncertainties, but has long-term growth potential with the completion of its US factory and expansion in retail and corporate sales. The current valuation is considered undemanding, and the company is expected to show improvement in FY16E and FY17E. Despite the short-term share price pressure, the long-term outlook is positive.