Hosa (2200 HK) Previous TP: N/A Core Pacific - Yamaichi 26 April 2013 Last Price: HK$3.05
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Target price: HK$3.51 Hosa (2200 HK) Previous TP: N/A Core Pacific - Yamaichi 26 April 2013 Last price: HK$3.05 China / Sportswear / Initiation Report Potential Return: +15% Beneficiary of sportswear professionalization Swimwear fashion driving not only volume but also price Initiate with BUY ‘‘Water Cube’’ enhancing consumer coverage to bring 26 April 2013 long-term benefits Felix Kwok 郭亮 The rise of chained fitness and yoga centers speeds up the Tel: 852 2826 0006 progress of sportswear professionalization [email protected] The rise of chained fitness and yoga centers Catalyst Forecast revision (%) Swimwear fashion driving not only volume but also price. Beach Year to 31 Dec 13F 14F 15F culture and water sports are sweeping across China, leading Revenue change NA NA NA swimwear to become a fashion product rather than just for Net profit change NA NA NA functionality. This drives the demand for branded swimwear. Besides, EPS change NA NA NA Spas and hot springs spawn a new demand for swimwear in winter. Key Share Data ‘‘Water Cube’’ enhancing consumer coverage to bring long-term 52-week High / Low HK$3.06/1.60 benefits. A new swimwear brand ‘‘Water Cube’’ will be launched in 2H13, targeting the young generation and mass market. It is expected 30D avg volume 3.06m to drive swimwear revenue up with 21.9% CAGR (FY12-FY15F). Issued share 1,602m Beneficiary of sportswear professionalization. With increasing Market cap 4,887m living standard in China, there is a rising demand of consumers for Major Shareholder Shi Hongliu & Asso. (61.49%) products portraying professionalism. This lifts the demand for fitness Share Price Performance wear and sports underwear. The rise of chained fitness and yoga centers speeds up the progress of sportswear professionalization. 195 Stock HSI INDEX 175 Valuation 155 TP HK$3.51, initiate with BUY . Hosa is currently trading at FY13F 135 PER of 11.8x with 1.10x two-year PEG (FY12 to FY14F), excluding 115 the impact of the one-off government grants in FY12. Considering the 95 swimwear and indoor sportswear being in the up-cycle, we set our 75 target FY13F PER at 13.5x based on three-year sportswear sector 55 average forward PER for the up-cycle period of 2009 to 2011. We, therefore, devise the target price to HK$3.51, implying 1.27x two-year 04/12 05/12 06/12 07/12 08/12 09/12 10/12 11/12 12/12 01/13 02/13 03/13 PEG (FY12 to FY14F). We initiate with BUY recommendation on the counter with 15% upside potential. Key Financials Our View Year to 31 Dec FY12 FY13F FY14F FY15F Moderate competition in the market. We like Hosa as the indoor Revenue (RMB mn) 848 1,004 1,198 1,375 sportswear market is still at its early stage in China. It has the leading Growth (%) 22 18 19 15 market position and does not need to face significant competition from Net profit (RMB mn) 331 330 390 445 international players. Along with the growth of swimwear and fitness Growth (%) 21 0 18 14 wear markets, we expect the revenue to growth with 17.5% CAGR in EPS (RMB) 0.21 0.21 0.24 0.28 revenue to RMB1,375mn in FY15F, mainly driven by the sales Growth (%) -8 0 18 14 volume. GPM is expected to fall due to the new brand, but we P/E (x) 11.7 11.8 9.9 8.7 anticipate it to be stay above 59.0%. Due to the tightening controls on P/B (x) 3.7 3.3 2.7 2.4 OPEX, bottom-line is expected to achieve 12.2% CAGR EV/ EBITDA (x) 8.7 7.5 6.3 5.5 (FY12-FY15F), excluding the one-off government grants in FY12. Yield (%) 3.4 3.4 4.0 4.6 Source: Company data and Core Pacific-Yamaichi Disclaimer: This report is for information only and is not to be construed as an offer to buy or sell securities. While the report is compiled using sources believed to be reliable, Core Pacific - Yamaichi International (H.K.) Limited (“CPYI”) does not guarantee its accuracy or completeness. CPYI may update or change any information contained in this report without any notice. Neither CPYI nor any of the companies of Core Pacific Group nor any individuals connected with the Group shall accept any legal responsibility arising from the use of or reliance upon the report. The copyright of this report belongs to CPYI and no person may reproduce or publish any part of this report for any purpose without CPYI’s written consent. The authors of this report are Licensed Representative of Securities and Futures Commission and they guarantee that all the views expressed in this report accurately reflect their personal views. CPYI, any of the companies of Core Pacific Group, its directors and/or its employees may have positions in, and may effect transactions in securities mentioned herein which may be opposite to the position you take. 1 Core Pacific - Yamaichi 26 April 2013 Swimwear becomes a fashion Swimwear becoming a fashion… With the development of Hainan tourism, the beach culture and water sports are sweeping across China. With growing popularity of beaches and water sports activities in China, people put more emphasis on swimwear’s outlook and design, leading swimwear to become a fashion product rather than just for functionality. According to government data, most of the domestic consumers generally replace their swimsuits every one to two years. Besides, by our observation, the ladies tend to have more sets of swimsuit currently. Both factors lead to a higher demand for swimwear. Based on the industry figures reported by Xinhuanet in Aug2012, approximately 200mn sets of swimwear were sold in the PRC in 2011, about 20% of overall global sales. Based on the report of Frost and Sullivan, the domestic ex-factory revenue of swimwear is expected to grow with 19.4% CAGR for 2010 to 2015F. … driving the demand for branded… As swimwear is becoming a fashion and there is a sustainable growth in per capita income, the demand for branded swimwear is strong. Frost and Sullivan also expects the growth of domestic ex-factory revenue for mid-to-high end swimwear to outperform the market with 25.6% CAGR for 2010 to 2015F. Although some international brands, such as Speedo and Arena, play actively in the PRC market, the domestic brands, including Hosa and Zoke, continue to play a leading role. Another point is that, due to the Chinese culture, domestic female consumers favor non-bikini two pieces swimwear more than bikini, which also restricts the expansion of foreign swimwear fashion brands in the PRC market. … not only being used in summer. Spas and hot springs become more popular in the PRC. Unlike those in Japan, people are required to wear swimwear in hot springs, which spawns a new demand for swimwear in winter. Although some people anticipate this to give birth to a new swimwear segment, which is called hot water bathing suits, we believe the mainstream tends to go to general swimwear rather than that functional swimwear. The hot water culture definitively benefits Hosa and lowers the seasonality risks of its swimwear segment. In addition, the increasing numbers of indoor heated swimming pool also drive the swimwear demand in winter. Therefore, we stay positive to the sustainable growth in China’s swimwear market. Figure 1: Outdoor Hot spring Resort in China Figure 2: Indoor Hot spring Resort in China Source: Fengshan Hotspring Resort Source: Valley View Hotspring Resort 2 Core Pacific - Yamaichi 26 April 2013 Capturing mass swimwear market Launching a new swimwear brand, ‘‘Water Cube’’, in 2H13. Hosa is positioning itself as a mid-to-high end brand. This leaves a loophole on its clienteles for those in the mass market segment. To cater this group of customers, Hosa joins hands with National Aquatics Center to launch Water Cube Brand swimwear and accessories. According to the corporation agreement, Hosa will owned the Water Cube swimwear brand for the next 20 years and it plans to launch new products in 2H13 targeting the teenagers and mid-to-low-end market. Expecting 21.9% CAGR in swimwear revenue for FY12-FY15F. Due to the expectation of lower ASP for the new brand, the pressure on swimwear GPM cannot be avoided. However, we believe it is positive for Hosa to enhance its consumer coverage without direct impact to its original mid-to-high end Hosa brand. Meanwhile, Hosa is looking for acquisitions in high-end international professional swimwear brand to strengthen its high-end market position, especially enhancing the bargaining power with department stores due to more comprehensive product mix. Excluding potential acquisitions, we expect the revenue of swimwear business to growth with 21.9% CAGR to RMB551mn in FY15F with GPM keeping above 59%. Figure 3: Swimwear under Water Cube brand Source: Company data 3 Core Pacific - Yamaichi 26 April 2013 Beneficiary of sportswear professionalization Rapid growth in the indoor sportswear sector. With continuous improvement in living standards, people in China have stronger awareness of both healthcare and fitness. With the construction of more indoor stadiums, urbanites are moving towards the indoors, such as fitness and yoga. Comparing with those outdoors, the amount of exercise for indoor sports is generally more controllable and they are more personalized, especially matching the white-collar professionals’ favors. Meanwhile, fitness and yoga players have a relatively stronger sense of superiority in China, which is also an incentive for white-collar professionals to join those activities.