股
票
研 [Table_Title] 宋涛 Company Report: Morris Holdings (01575 HK) Andrew Song
究 (852) 2509 5313 EquityResearch 公司报告： 慕容控股 (01575 HK) [email protected]. hk 30 August 2018 [Table_Summary] Tapping into Retail Market with Own Brand, Initiate with "Buy" 以自有品牌打入零售市场，首次给予“买入”评级
Morris Holdings is a fast growing sofa manufacturer which has [Table_Rank] 公 successfully transformed from an OEM to an OBM. The Company has Rating: Buy Initial become the second largest upholstered sofa manufacturer in China in terms 司 of export value to the U.S. The Company is further tapping into the retail 评级： 买入 (首次覆盖) 报 market with its own brand "MorriSofa". In 1H18, Morris’s revenue reached 告 RMB656 million, up 27.4% YoY. Shareholders’ profit surged 40.2% YoY to [Table_Price] RMB79 million. 6-18m TP 目标价: HK$2.40 CompanyReport Investment highlights: 1) Products are well received by the U.S. market. The Company has established solid partnerships with leading retailers in the U.S., Share price 股价: HK$1.390
including Costco and Sam’s Club selling its OBM products. 2) Entrance into
mainland China and Hong Kong’s retail markets with its own brand through offline flagship stores and online platforms, building brand reputation and Stock performance 股价表现 achieving higher profitability. 3) The Company is strong in design and produces functional sofas following fashion trends and targeting the young [Table_QuotePic] 30.0 % of return generation and middle class, with good value products. 4) No impact from 25.0
China-US trade disputes so far. 20.0 证 We forecast 2018-2020 EPS to increase to RMB0.216, RMB0.282 and 15.0 告 RMB0.368, respectively, representing a CAGR of 31.7% during 2017-2020.
券 Report We believe that the Company’s current valuation is attractive compared with 10.0 研 报
its peers considering its rapid growth and solid fundamentals. Initiate with 5.0
究 究 "Buy" and a TP of HK$2.40. Our TP represents 9.6x, 7.3x and 5.6x 2018, 0.0
2019 and 2020 PER, respectively.
报 研 (5.0) Risks: 1) Intense competition in China’s sofa retail market. 2) A rise in 告 (10.0)
券 raw material prices. 3) Property sales slowdown. Aug-17 Nov-17 Feb-18 May-18 Aug-18
EquityResearch HSI Index Morris Holdings 证 慕容控股是一家快速发展的沙发制造商，成功从原设备生产转型为原品牌生产。公司已经 成为（按对美国出口额计）中国第二大软体沙发生产商。公司现在正进一步以自有品牌“慕
[Tab 容沙发”打入零售市场。2018 年上半年公司收入达到 656 百万元人民币，同比上升 27.4%。
Change[Table_PriceChange] in Share Price 1 M 3 M 1 Y
股东净利同比跃升 40.2%至 79 百万元人民币。 le_I 股价变动 1 个月 3 个月 1 年 投资亮点：1）产品受到美国市场的广泛接受。公司与美国领先零售商如好市多和山姆会 消 Abs. % (24.0) (15.2) (8.9) nfo1 绝对变动 % 员店建立了牢固的合作关系以销售公司原品牌产品。2）以自有品牌通过线下旗舰店和线
费 Retailing ] - Rel. % to HS Index (22.7) (8.5) (11.2) 行 上平台打入中国内地和香港市场，以此建立品牌声誉并提升盈利能力。3）公司长于设计 相对恒指变动 % 和生产跟随时尚的功能沙发，以高性价比产品瞄准年轻群体和中产阶层。4) 目前不会受到 Avg. Share price(HK$) 1.6 1.6 1.6 业 平均股价（港元） - 中美贸易争端的影响。 Source: Bloomberg, Guotai Junan International. 零 我们预测 2018 年-2020 年每股盈利将分别上升至 0.216 人民币、0.282 人民币和 0.368 人 售 民币，相当于 2017 年-2020 年复合增长率 31.7%。考虑到公司快速的发展和稳定的基本
面，我们认为其目前估值相对于同业较为吸引。首次给予“买入”评级以及目标价 2.40
ConsumerSector 港元。目标价分别相当于 9.6 倍、7.3 倍和 5.6 倍 2018 年-2020 年市盈率。 风险：1）中国沙发零售市场竞争激烈。2）原材料价格上升。3）地产销售减速。 Y[Table_ear End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE Profit] [Tab 年结 收入 股东净利 每股净利 每股净利变动 市盈率 每股净资产 市净率 每股股息 股息率 净资产收益率 12/31 (RMB m) (RMB m) (RMB) (△ %) (x) (RMB) (x) (RMB) (%) (%) le_I
2016A 942 81 0.108 (2.7) 11.5 0.212 5.9 0.124 10.0 69.3 nfo2 2017A 1,200 160 0.161 49.1 7.2 0.386 3.0 0.083 7.1 59.1 中] 2018F 1,543 216 0.216 34.2 5.5 0.545 2.2 0.054 4.5 46.6 2019F 1,951 282 0.282 30.6 4.2 0.757 1.6 0.071 5.9 43.3 外 慕 2020F 2,453 368 0.368 30.5 3.2 1.032 1.2 0.092 7.7 41.1
容运 [Table_BaseData]Shares in issue (m) 总股数 (m) 1,000.0 Major shareholder 大股东 Zou Gebing 75.0% 控 输 Market cap. (HK$ m) 市值 (HK$ m) 1,390.0 Free float (%) 自由流通比率(%) 25 股 3 month average vol. 3 个月平均成交股数(‘000) 2,031.4 FY18 Net gearing (%) FY18 净负债/股东资金 (%) 29.5%
52 Weeks high/low (HK$) 52 周高/低 (HK$) 2.210 / 1.270 FY18 Est. NAV (HK$) FY18 每股估值（港元） 4.3
Source: the Company, Guotai Junan International. MorrisHK) Holdings (01575
See the last page for disclaimer Page 1 of 22
[Table_PageHeader]Morris Holdings (01575 HK)
TABLE OF CONTENTS
] 1 r a M t h g i R _ e l b a T [
INDUSTRY ANALYSIS ...... 3 August2018
Sofa Industry in China ...... 3 30 Sofa Industry in the United States...... 4
COMPANY ANALYSIS ...... 7
Corporate Profile ...... 7 Business Model ...... 7 Expansion Strategy ...... 9
FINANCIAL ANALYSIS ...... 12
] 2 r a M t h g i R _ e l b a T [
1H18 Results Review ...... 12 Revenue ...... 12 Gross Profit and Gross Margin ...... 14 Operating Profit & Operating Margin ...... 16 Shareholders’ Profit & Net Margin ...... 16 EPS & Dividend...... 17
Working Capital Management ...... 17
VALUATION ...... 19 (01575 HK) Financial Statements and Ratios ...... 21
慕容控股
Morris Holdings
Report
Company
See the last page for disclaimer Page 2 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
INDUSTRY ANALYSIS
] 1 r a M t h g i R _ e l b a T [
Sofa Industry in China
The furniture market is steadily growing in China. According to the National Bureau of Statistics of China, total sales of furniture manufacturing enterprises increased 10.1% YoY to RMB905.6 billion in 2017, while total profits reached RMB56.5
billion, up 9.3% YoY. In terms of total retail sales of consumer goods, retail sales of furniture above designated size increased by August2018
12.8% YoY to RMB280.9 billion, up 12.8% YoY, outperforming growth of total retail sales. On the other hand, household related 30 consumption expenditure per capita has been increasing faster than total consumption expenditure, reaching RMB4,107 in 2017 and accounting for 22.4% of total expenditure. As an industry post the property cycle, the furniture market recorded decent growth over the past years alongside a prosperous property market and recorded decent performance.
Figure-1: Growth of Total Retail Sales above Figure-2: Expenditure of Household Related per Designated Size in China Capita in China
RMB % 5,000 12% 20 4,000 10%
] 2 r a M t h g i R _ e l b a T [ 8% 15 3,000 6% 10 2,000 4% 1,000 5 2%
0 0% 0 2013 2014 2015 2016 2017 2016/04 2016/10 2017/04 2017/10 2018/04 Expenditure per capita: Housing YoY Total retail sales Furniture
Source: National Bureau of Statiatics of China, Guotai Junan International. Source: National Bureau of Statiatics of China, Guotai Junan International.
(01575 HK) Demand for upholstered sofas continues to grow in China. Compared with hard furniture, soft furniture has a higher replacement rate due to a shorter life time and faster product update pace. In the context of a slowdown in new residential
property sales, renovation and decoration of existing properties has become an important driver of soft furniture demand. 慕容控股 According to Intelligence Research, the proportion of renovations of existing properties to total reached 31.5% in 2016, an increase from 25.5% in 2013, and the proportion is expected to continue increasing in the future. According to Euromonitor, YoY growth of retail sales of sofas ranged from 7% to 10% in recent years. In our estimation, there were approximately 421 million
units of households in China in 2017, and on average each household renovates and replaces sofas every 8-10 years, while the Morris Holdings ASP for sofas is around RMB1,000. Therefore renovation demand for sofas will be around RMB46.7 billion in 2018. In addition, urbanization rate reached 58.5% in 2017, increasing by approximately 1 ppt every year. These new drivers for furniture are further drivers for industry growth. Thus we believe that soft furniture may be negatively impacted by the slowdown of property sales but the market still has sufficient expansion room.
Report
Company
See the last page for disclaimer Page 3 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-3: Production of Soft Furniture in China Figure-4: Proportion of Decoration from New
Houses and Existing Houses] 1 r a M t h g i R _ e l b a T [
Units mn 100% 80 30% 80% 24.3% 25% 69.8% 67.7% 68.5%
60 60% 74.5% August2018 20%
40% 30 40 15% 20% 9.2% 10% 25.5% 30.2% 32.3% 31.5% 20 5% 0% 1.1% 1.1% 2.1% 3.0% 2013 2014 2015 2016 0 0% 2013 2014 2015 2016 2017 1H18 %Existing houses renovation %New houses decoration Production (LHS) YoY (RHS) Source: ASKCI Consulting, Guotai Junan International. Source: Intelligence Research, Guotai Junan International.
The sofa industry is relatively dispersed in China with a large number of small and mid-sized participants. Brands with
strong influence in the China market are few as a result of low concentration. According to data] fro2 mr Chinaa M t Industryh g i R Information_ e l b ,a T [
the top three brands contributed only around 11% in terms of sales volume in 2015 while the number was approximately 42% in the U.S. at the same time. Thus brand building, including design, quality, price, is key for industry players to win and grow among rival competition. On the other hand, there is sufficient room for outstanding brands to develop. Industry consolidation is expected to accelerate and huge opportunities yield to industry leaders through organic growth as well as M&As.
Omni-channel sales model is expected to be a main trend for sofa manufacturers. In general, main sales channels of
furniture products can be divided into nationwide chain specialized stores and marketplaces, local non-chain furniture stores,
e-commerce and other channels like traditional channels and counters in department stores. Offline channels have dominated for the past years, however, as the young generation is becoming the main consumer group, their online shopping habits and
demands are expected to stimulate online sales growth. Through e-commerce, sofa manufacturers are able to face end (01575 HK) consumers directly and understand customer demands more clearly, which can help to improve their products in return. On the other hand, the experience is still the most important factor in choosing a sofa and offline stores remain as an important
scenario in purchasing. Therefore, a combination of online and offline sales and service channels is the developing trend for 慕容控股 sofa sales, in our opinion.
Sofa Industry in the United States
Morris Holdings Economy recovery supports consumption in the U.S. We saw that the macro economy in the U.S. has been picking up with GDP growth and decreasing unemployment. Personal disposable income and consumer spending per household grew as a result of an improving macro economy in recent years. According to the U.S. Bureau of Economic Analysis, disposable personal income per capita increased at a CAGR of 3.5% from 2013-2017. Looking at the property market in the U.S., new private houses sold and housing starts kept growing in recent years, providing solid support for the furniture industry. On the other hand, according to surveys of consumers conducted by the University of Michigan, index of consumer expectations and consumer sentiment remained at high levels of 87.7 and 96.8 in August, 2018, respectively, showing a healthy consumer market environment.
Report
Company
See the last page for disclaimer Page 4 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-5: Disposable Personal Income per Capita in Figure-6: New Private Houses sold and Housing
the U.S. Starts in the U.S. ] 1 r a M t h g i R _ e l b a T [
US$ Units ('000) 1,250 30% 60,000 6% 25% 1,000
50,000 4% 20% August2018
750
15% 30 40,000 2% 500 10%
30,000 0% 250 5%
20,000 -2% 0 0% 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Disposable Personal Income per Capita (LHS) New private houses sold (LHS) New private houses start (LHS) YoY (RHS) Houses sold YoY (RHS) Houses start YoY (RHS)
Source: U.S. Bureau of Economic Analysis, Guotai Junan International. Source: U.S. Department of Housing and Urban Development, Guotai Junan International.
Figure-7: Unemployment Rate in the U.S. Figure-8: Surveys of Consumers in the U.S.
] 2 r a M t h g i R _ e l b a T [
6.0% 140
5.5% 120
5.0% 100 4.5% 80 4.0%
60 3.5%
3.0% Index of Consumer Expectations
Index of Consumer Sentiment (01575 HK)
US unemployment rate (%) Current Economic Conditions
Source:U.S. Bureau of Labor Statistics, Guotai Junan International. Source:University of Michigan, Guotai Junan International. 慕容控股
The sofa market is mature in the U.S., with steady growth in the recent years. According to the U.S. Census Bureau, monthly YoY growth of furniture store sales in the U.S. turned positive in Jan. 2017 and outperformed that of total retail and food
service since Dec. 2017, showing a positive growth trend. According to Euromonitor, the retail upholstered sofa market in the Morris Holdings U.S. is expected to reach approximately US$19.3 billion in 2020, growing at a CAGR of 4.9% during 2017-2020.
Figure-9: Retail and Food Services Sales: Retail Sales Figure-10: Retail and Food Services Sales: Furniture in the U.S. Stores in the U.S.
US$ bn US$ mn 600 8% 6,000 12% 500 5,000 6% 8% 400 4,000 300 4% 3,000 4% 200 2,000 2% 0% 100 1,000
0 0% 0 -4%
Report Retail Sales YoY Furniture Stores YoY
Source:U.S. Census Bureau, Guotai Junan International. Source:U.S. Census Bureau, Guotai Junan International. Company
The U.S. was the largest importer of sofas in the world in 2017. Due to the fact that sofa manufacturing is labor intensive See the last page for disclaimer Page 5 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
and lacks automation, cost of production is relatively high in the U.S. and products made in the U.S. have no competitive
advantage due to its high costs. Thus the U.S. is highly dependent on sofa imports. According] 1 r a toM thet h UNg Comi R modity_ e l Tradeb a T [
Statistics Database, total value of sofas imported by the U.S., including wooden frames and metal frames, reached US$7,760
million in 2017, growing at a CAGR of 10.6% YoY during 2013-2017. Meanwhile, China is the largest trading partner of the U.S. in terms of import value of upholstered sofas. Import value from China reached US$5,321 million in 2017, up 10.5% YoY and accounted for 68.6% of total import value.
August2018
Figure-11: Total Upholstered Seats Import Value in the Figure-12: Total Upholstered Seats Import Value 30 U.S. from China in the U.S.
US$ mn US$ mn 8,000 20% 6,000 20%
15.1% 14.9% 16% 5,000 16% 6,000 8.8% 13.0% 4,000 6.5% 12% 12% 10.5% 4,000 3,000 8% 8% 5.6% 2,000 2,000 3.0% 4% 1,000 4%
] 2 r a M t h g i R _ e l b a T [
0 0% 0 0% 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Trade value (LHS) YoY (RHS) Trade value (LHS) YoY (RHS) Source: UN Commodity Trade Statistics Database, Guotai Junan International. Source:UN CommodityTrade Statistics Database, Guotai Junan International Note: Upholstered seats include seats with wooden frames and metal frames. Note:Upholstered seats include seats with wooden frames and metal frames.
(01575 HK)
慕容控股 Morris Holdings
Report
Company
See the last page for disclaimer Page 6 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
COMPANY ANALYSIS
] 1 r a M t h g i R _ e l b a T [
Corporate Profile
Morris Holdings Limited ("Morris" or the "Company") is mainly engaged in the manufacturing of sofas and sofa covers. The Company’s main products are fashionable and smart sofas at good value for price, targeting the middle class and
young generation. The Company has transformed from an original equipment manufacturing ("OEM") factory to an enterprise August2018
integrating a self-owned brand design, production and sales business. The Company's history can be dated back to 2002 when 30 the Company first set up its OEM business in Haining, producing sofa covers only. In 2005, the Company established an R&D center and expanded its business to original design manufacturing ("ODM") of sofas in 2010. In 2013, the Company further expanded its business to original brand manufacturing ("OBM") and launched the "Morris Holdings Limited" brand for sofas exported to U.S. customers. Between 2014 and 2015, Morris launched the "Morris Zou" brand for sofas and other furniture products sold in China and set up two direct sales stores in Haining City and Jiaxing City. Morris went public on the main board of the Hong Kong Stock Exchange in January 2017, and the Company commenced its retail business though flagship stores with the "MorriSofa" brand in Hong Kong and Shanghai, as well as through online platforms since late 2017.
Figure-13: Morris’s Milestones
] 2 r a M t h g i R _ e l b a T [
(01575 HK)
Source: the Company, Guotai Junan International. 慕容控股
Business Model
Morris has successfully transformed its business focus from OEM to OBM with its own brand. By business model, the Morris Holdings Company’s business can be categorized into OEM, ODM and OBM. OEM business is based on designs and specifications provided by customers; this business line only needs to manufacture. All of Morris’s OEM business is sofa cover manufacturing provided to La-Z-Boy, a leading American sofa brand. The Company is actively reducing the number of orders of sofa covers to save capacity in order to focus on OBM business. Revenue from OEM business declined from RMB379 million in 2013 to RMB192.8 million in 2017, and contribution of total revenue dropped from 38.5% to 16.1% during the same period.
ODM is the Company’s second business, having commenced in 2010. Different from OEM, ODM customers give a general concept for the type of sofa they want or requirement for production instead of providing a specific design. Based on Morris’s Research and Development Center in Haining City, the Company makes design and custom-made prototypes for its customers’ selections. Under ODM business, The Company produces sofas under the customers’ chosen brand, which means it cannot build its brand reputation in these markets and profitability is limited by the brand owners. However, ODM business helps the
Company accumulate experience in sofa manufacturing, including in design, supply chain management and production, which
promotes OBM business development. After launching its OBM business, the Company has been gradually contracting ODM
business by reducing customer numbers, due to capacity limitations and avoidance of competition from peers. In 2017, only
Report
one large ODM customer was left and segment revenue dropped 46.7% YoY to RMB77.5 million, accounting for only 6.5% of
total revenue.
Company OBM has become the largest business of the Company. Morris commenced OBM business in 2013 based on its OEM and
See the last page for disclaimer Page 7 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
ODM experience. The Company designs, researches and develops sofas and furniture under its own brands, namely "Morris
Holdings Limited", "Morris Zou" and "MorriSofa". The Company updates its products at a] relatively1 r a M hight frequencyh g i R to_ followe l b thea T [
market trend. Samples of new products are shown to its customers and potential customers in the Company’s office in Haining
City and furniture exhibitions, such as High Point Market in the U.S. and Shenzhen International Furniture Exhibition in China. The Company manufactures sofas upon receipt of orders and therefore inventory days of finished goods are short for the Company. Normally it takes 45-60 days to complete an order depending on the type of sofa. Revenue of OBM business
reached RMB929.5 million in 2017, up 46.0% YoY, a CAGR of 17.3% in 2013-2017. Contribution of revenue increased to 77.5% August2018
in 2017 from 49.9% in 2013. 30
Table-1: Morris’s Brands Brand Morris Holdings Limited MorriSofa Morris Zou
Product Functional and non-functional sofa Fashionable and functional sofa Wooden furniture Retail markets in mainland China Market Overseas market Retail market in mainland China and Hong Kong Leading furniture stores and chain Middle class and higher-end Customer Yong generation and middle class stores in the U.S. customers Source: the Company, Guotai Junan International.
] 2 r a M t h g i R _ e l b a T [
Figure-14: Morris’s Business Operations
(01575 HK)
慕容控股
Morris Holdings Source: the Company, Guotai Junan International.
The Company’s sofas can be generally categorized into stationary sofas and motion sofas. Stationary sofas can be further divided into leather, artificial leather and fabric upholstered materials. Sofa products are manufactured in a variety of configurations ranging from one to three seaters or in different modules or sections for flexible arrangement and combination. Motion sofa feature functions include extending footrests, swivel, rocking, gliding vibration and sectional reclining mechanisms. Motion sofas account for a relatively small market share in China currently. However, due to consumers’ consumption demands for multi-function products increasing and a growing aging population, the motion sofa category has a large market and is expected to record faster growth rate. In addition, some of the Company’s stationary and motion products are equipped with certain smart home features, such as audio, massage, beverage cooling and wireless charging functions, in response to different consumer preferences.
Report
Company
See the last page for disclaimer Page 8 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-15: Leather Functional Sofa Figure-16: Fabric Stationary Sofa
] 1 r a M t h g i R _ e l b a T [
August2018
30
Source: the Company. Source: the Company.
The U.S. is the Company’s largest market. In 2017, approximately 92% of the Company’s total sales were attributable to the U.S. market, including OEM and OBM business. For OEM business, the Company has established a solid partnership with
La-Z-Boy for years, providing sofa covers. For OBM business, the Company’s main retail customers] 2 r a M includet h g Costco,i R _ e Sam’sl b a T [
Club and Walmart, with over 7 years of cooperation, and are top chain stores in the world. Generally, both manufacturers and retailers attend High Point Market, held twice a year. Business representatives will choose their favored models and make orders. Most of the designs are updated every half year, except for a few best-selling styles. The Company’s products are well received in the U.S. market, with price advantages and good designs. One of their products received orders for three consecutive years. In 2017, the Company’s sales to Sam’s Club reached RMB150 million- RMB200 million, accounting for 60%-70% of Sam’s Club’s total sofa sales. According to orders received by the Company in 1H18, sales are expected to
increase around 20% YoY. In comparison, Costco has a much larger business scale and faster growth rate. The Company is
expected to double its sales to Costco, reaching approximately RMB260 million in 2018.
Expansion Strategy (01575 HK)
Morris is entering into mainland China and Hong Kong retail markets. For mainland China and Hong Kong markets, the
Company launched the "MorriSofa" brand. The products are designed by a famous designer in Milan, focusing on a fashionable, 慕容控股 young and multi-functional product line for middle-class customers. The Company opened its first flagship store in Wan Chai, Hong Kong in September 2017, with an area of 3,600 square feet. In 2018, the Company opened another two flagship stores in Xuhui District, Shanghai and Sha Tin, Hong Kong. Despite the Company’s solid cooperation and brand awareness in the U.S.,
Morris is still new and operates on a small scale in the domestic market. Thus, the Company joined Shenzhen International Morris Holdings Furniture Exhibition in March 2018 and set up a promotion and marketing center in Shanghai to raise popularity. In the future, the Company plans to adopt a concessionaire business model to rapidly penetrate into tier-2 and tier-3 cities. In 2018, the Company intends to tap into 10 provincial key cities with around 10-15 new stores opening, including stores in Easy Home and Red Star Macalline.
Report
Company
See the last page for disclaimer Page 9 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-17: Wan Chai Flagship Store Figure-18: Wan Chai Flagship Store - Indoors
] 1 r a M t h g i R _ e l b a T [
August2018
30
Source: the Company. Source: the Company.
Figure-19: Shanghai Xuhui Flagship Store Figure-20: Sha Tin Flagship Store
] 2 r a M t h g i R _ e l b a T [
(01575 HK) Source: the Company. Source: the Company.
The Company is scaling up the production capacity. As at the end of December 2017, the Company owned 24 production 慕容控股 lines for sofas with around 1.1 million designed annual production capacity of seats and 25 production lines with around 1.6 million designed annual production capacity of seats. In 2017, the Company produced 860,000 units of sofas, representing utilization rate of 80.5%. With rapid growth of orders from the U.S. market, capacity has become Morris’s main bottleneck. The
Company added around 1,000 workers in the first quarter to improve its capacity. Currently the Company’s daily capacity is Morris Holdings around 4,000 sofa seats and the full year capacity is expected to increase to 1.4 million-1.5 million in 2018. In January 2018, Morris and the local government reached an agreement to add 180,000 sq.m. of land to build the Morris Center, adding 1 million sofa seats. The project has commenced and is forecasted to be put into production in 2020. Besides the Morris Center, the Company also started construction of a factory in Cambodia with designed production capacity of 80,000-90,000 sofa seats. The project may not be completed in 2018. However, construction speed will be accelerated and can be used as a backup plan if China-U.S. trade relations further deteriorates.
Morris is developing e-commerce along with its retailing strategy. In the U.S. market, the Company has begun cooperation with famous U.S. online platforms, such as Sam’s Club and Overstock, to sell its "Morris Holdings Limited" brand sofas. The Company operates four warehouses in the U.S. to serve the online platforms and plans to add a new platform in 2018. In the China market, Morris has launched its products under the "MorriSofa" brand in Tmall and JD.com through its online flagship store in Apr. 2018.
Report
Company
See the last page for disclaimer Page 10 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-21: Flagship Store in Tmall App Figure-22: Products on Sam’s Club’s Website
] 1 r a M t h g i R _ e l b a T [
August2018
30
Source: Tmall App. Source: Sam’s Club website.
Morris intends to acquire Jennifer Convertible Incorporation ("JC" or "Jennifer Convertible"). Jennifer Convertible was first established in 1986 and is principally engaged in retail sale of complete lines of furniture products and home furnishings in
the eastern part of the U.S. JC once owned a large retail network containing 50-60 retail stores,] 2 r buta dueM t toh poorg i managementR _ e l b a T [
and cash flow problems, the founder sold the company to Morris’s Chairman Mr. Zou and his spouse. After years of operation, JC’s number of stores contracted to 17 and the loss narrowed. In 2017, JC recorded revenue of US$38 million, down 6.8% YoY, while net loss reduced by 59.8% YoY to US$2.0 million. The Company made an announcement on 4 July, 2018 to acquire all the shares of JC for a total consideration of US$35 million. JC has guaranteed average net profit to reach US$3 million in 2019 and 2020, or the consideration will be reduced on a dollar-for-dollar basis by an amount equivalent to 11.67 multiplied by the shortfall difference between US$3 million and average profit. In addition, if after tax loss (excluding non-operational profits and losses)
shows in 2019 or 2020, Mr. Zou should buy back the shares from the Company. Thus the valuation of JC is approximately
equivalent to 11.67x 2018 PER, which is reasonable for a retail company. The deal still needs to be approved by the minor shareholders of the Company but we believe that the deal is likely to pass, especially with such favorable terms. We are positive
on this purchase case and expect synergies to be made. Upon the acquisition, JC’s retail network will help the Company’s (01575 HK) marketing and promotion activities and build brand reputation. Also, the elimination of connected transactions may facilitate the Company’s operations.
慕容控股 Morris Holdings
Report
Company
See the last page for disclaimer Page 11 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
FINANCIAL ANALYSIS
] 1 r a M t h g i R _ e l b a T [
1H18 Results Review
Morris achieved rapid YoY revenue growth of 27.4% in 1H18. By business, revenue of OEM, ODM and OBM increased
12.6% YoY, 8.6% YoY and 32.6% YoY to RMB105 million, RMB38 million and RMB 513 million, respectively. Gross profit rose August2018 32.2% to RMB185 million with gross margin up 1.0 ppt to 28.2%. Selling and distribution expenses increased 40.5% and S&D expenses ratio was up 0.7 ppts to 6.9%, mainly due to the increase in marketing and promotion expenses and rental of new 30 retail stores. We believe that expense ratio is expected to decline as retail stores start to contribute sales. Administrative expenses increased 49.2% due to expenses related to the acquisition of Jennifer Convertibles, including legal, professional expenses and others, amounting to approximately RMB10.6 million. Shareholders’ profit surged 40.2% YoY to RMB79 million. During the period, the Company recorded approximately RMB8.4 million on the fair value gain on the convertible loan, RMB9.2 million on net income of selling unused raw materials and RMB8.0 million on exchange gain. Adjusted shareholders’ profit rose 22.5% YoY excluding one-off gains and one-off professional expenses. According to the Company’s historical record, operating margin in the first half is normally lower than that in the second half due to inefficiency during the Spring Festival period and more orders received in the second half related to the selling season in the U.S. In 1H17, revenue and shareholders’ profit only accounted for 42.9% and 35.4% of the full year results, respectively.
] 2 r a M t h g i R _ e l b a T [
Table-2: Morris’s 1H18 Interim Results Review RMB mn 1H17 1H18 YoY Comments: Revenue 515 656 27.4% Driven by OBM business Cost of sales (375) (471) 25.5%
Gross profit 140 185 32.2%
Other income and gains 4 28 679.8% Fair value gain on CB, raw material disposal, exchange gain
S&D expenses (32) (45) 40.5% Rental costs and marketing Administrative expenses (37) (55) 49.2% One-off acquisition related expenses Other expenses (0) (0) 314.8%
(01575 HK)
Operating profit 75 113 51.6%
Finance costs (6) (12) 98.9%
Profit before tax 69 101 47.4% 慕容控股
Income tax (12) (22) 81.7%
Shareholders' profit 57 79 40.2%
Adjusted shareholders' profit 54 66 22.5%
Morris Holdings
Gross margin 27.2% 28.2% 1.0 ppt Raw material costs decreased Operating margin 14.5% 17.2% 2.8 ppts
Net margin 11.0% 12.1% 1.1 ppts
Source: the Company, Guotai Junan International.
Revenue
Revenue grew at a CAGR of 13.3% during 2014-2017. Morris has been developing fast during the past years with its well-received products in the U.S. market. The Company’s main business can be broken down by OEM, OEM and OBM by segment. OEM is the Company’s first business and currently all of the Company’s OEM revenue comes from sofa covers provided to La-Z-Boy. In recent years, Morris actively reduced orders and only kept high margin orders. In 2014-2017, CAGR of OEM business was -8.7% and the contribution to total revenue declined to 16.1% in 2017. ODM is kind of a transition business which helped the Company to accumulate industry experience while providing limited profitability. Currently, only Li & Fung
(00494 HK) is the only remaining ODM customer since the Company cut other ODM business to avoid competition and save
Report
capacity. Revenue of ODM business contracted at a CAGR of 4.4% during 2014-2017 and the proportion of revenue dropped to
6.5% in 2017. OBM business has become the Company’s focus and recorded rapid growth; CAGR was 24.4% in 2014-2017
and revenue contribution reached 77.5% in 2017. Company
See the last page for disclaimer Page 12 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-23: Morris’s Revenue and YoY Growth Figure-24: Morris’s Revenue - by Business Model
] 1 r a M t h g i R _ e l b a T [
RMB mn YoY RMB mn 1,000 1,500 30% 27.4% 800 1,200 20% 12.3% 10% 600
900 August2018 1.6% 0% 400 600 30 -10% 200 300 -16.2% -20%
0 -30% 0 2013A 2014A 2015A 2016A 2017A 2013A 2014A 2015A 2016A 2017A
Total Revenue (LHS) YoY (RHS) OEM ODM OBM
Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.
Figure-25: Morris’s Sofa Sales Volume Figure-26: Morris’s Sofa ASP
Volume ('000)
RMB ] 2 r a M t h g i R _ e l b a T [ 23.7% 750 25% 1,500 30%
600 20% 1,200 24%
450 15% 900 18%
300 10% 600 9.3% 12% 3.9% 150 6.5% 5% 300 6%
0 0% 0 0% 2015A 2016A 2017A 2015A 2016A 2017A Sofa sales volume (LHS) YoY (RHS) Sofa ASP (LHS) YoY (RHS)
(01575 HK) Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.
Overall revenue surged by 27.4% YoY to RMB1,200 million in 2017. By business model, OEM, ODM and OBM revenue was 慕容控股 up 20.8% YoY, down 46.7% YoY and up 46.0% YoY to RMB193 million, RMB78 million and RMB930 million, respectively. By segment, revenue from sofas, sofa covers and other furniture products was up 28.5% YoY, up 20.8% YoY and up 58.9% YoY, reaching RMB997 million, RMB193 million and RMB10 million, respectively. Looking at the sofa business, the Company
produced around 699,000 sofas in 2017, up 23.7% YoY. Also, ASP of sofas sold per seat reached approximately RMB1,426, up Morris Holdings 3.9% YoY, lifted by the higher proportion of OBM products. Supported by strong OBM orders from the U.S. market, the Company recorded a decent growth in 2017.
Figure-27: Morris’s Revenue - by Business Figure-28: Morris’s Revenue - by Segment
Outer: 2017 Inner: 2016 Outer: 2017 Inner: 2016
16.1% 0.8% Sofa OEM 16.1% 16.9% 6.5% 0.7% 16.9% Sofa cover 15.4% ODM 67.6%
Other furniture OBM products
77.5% 82.4% Report 83.1%
Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International. Company
See the last page for disclaimer Page 13 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
We forecast revenue to grow at a CAGR of 26.9% during 2017-2020, with a boost in overseas orders and domestic
retail market. According to the Company, orders received from its main partners showed] dramatic1 r a growthM t h YTD,g i ofR which_ e l ordersb a T [
from Costco are expected to double and orders from Sam’s Club are expected to increase 20%-30% YoY. Retail markets in
mainland China and Hong Kong are the Company’s next focus. 2018 YTD, the Company has opened 2 flagship stores in Hong Kong and 1 in Shanghai. Based on the current sales performance of these stores, we believe that each store can achieve sales value of around RMB5 million-RMB6 million in 2018 and sales are expected to keep growing in the coming years as brand
reputation spreads. Besides self-operating flagship stores in tier-1 cities, the Company’s concessionaire business model in August2018
tier-2 and tier-3 cities is expected to further boost domestic sales. In the respect to capacity, the Company has expanded its 30 production line and added staff to improve its capacity by 40%-45% in early 2018. In addition, the Cambodia factory and Morris Center are expected to contribute capacity starting in 2019 and 2020, respectively. We believe that total capacity can be satisfied with the Company’s growth despite a high utilization rate currently. Supported by both overseas and domestic sales growth, we forecast OBM revenue to rise 32.0% YoY in 2018 and grow at a CAGR of 31.8% during 2017-2020. On the other hand, OEM and ODM businesses are expected to achieve organic growth and contribute less revenue contribution as the Company’s transformation goes on. Thus we expect CAGRs of OEM and ODM revenue to be 9.0% and -0.3% during 2017-2020 and the total proportion of these two businesses to decline to less than 15% in 2020. Total revenue is expected to reach RMB1,543 million, RMB1,951 million, RMB2,453 million in 2018-2020, up 28.6% YoY, 26.4% YoY and 25.8% YoY, respectively.
] 2 r a M t h g i R _ e l b a T [
Figure-29: Morris’s Revenue and YoY Growth Figure-30: Morris’s Revenue Breakdown by Segment
RMB mn 2,500 40% 100% 0.7% 0.8% 1.0% 1.1% 1.3% 16.9% 16.1% 13.7% 11.8% 10.2% 2,000 27.4% 28.6% 80% 26.4% 25.8% 30% 1,500 60% 20%
88.6% 1,000 40% 82.4% 83.1% 85.3% 87.0% 10% 500 20% 1.6%
0 0% 0% (01575 HK) 2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F OEM ODM OBM YoY (RHS) Sofa Sofa cover Other furniture products
慕容控股
Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.
We do not think that the China-US trade war is the Company’s main risk. According to the tariff list previously released by
the U.S. government, sofas are not included and will not be affected by extra tariffs. Actually, sofa manufacturing business is Morris Holdings labor intensive and automation is low. Thus, sofas made in the U.S. lack competiveness and account for a small portion of market share. Under the worst situation that sofas exported to the U.S. are added with extra tariffs, the Company may negotiate with its retail partners to split the extra expenses and the retail price should still remain competitive. For functional products, the Company can also cut some functions and maintain retail prices to digest the negative impact internally. In addition, construction of the Cambodia plant may accelerate under the situation and expanded capacity would also help reduce the negative impact.
Gross Profit and Gross Margin
Gross profit grew at a CAGR of 29.4% during 2014-2017. Gross profit rose rapidly over the past years with increasing revenue and improving gross margin. During the period of 2013 to 2017, the Company’s gross margin has been gradually improving as products are being recognized by customers. In particular, gross margin of ODM business improved from 20.5% in
2013 to 28.3% in 2017, and gross margin of OBM jumped from 13.7% in 2013 to 31.8% in 2017. Benefiting from the rapid
growth of OBM business and improving margin, OBM was attributable to 79.1% of total gross profit, becoming the main gross Report profit contributor. Looking at the costs of goods sold breakdown in 2017, raw materials occupied the majority, accounting for
76.3% of total costs. In detail, leather, cloth and artificial leather accounted for 40%-45% of raw material costs, respectively, and
wood and iron accounted for 15%-20% each, based on the Company’s current product mix. Overall gross margin reached Company 31.1% in 2017, up 2.4 ppts YoY, improving steadily over the past five years.
See the last page for disclaimer Page 14 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-31: Morris’s Gross Profit by Business Figure-32: Morris’s Gross Margin by Business
] 1 r a M t h g i R _ e l b a T [
RMB mn 40%
320 32.8% 30.9% 31.8% 29.8% 240 30% 28.0% 27.4% 29.1% 29.3%
23.2% 28.3% August2018
160 20.5% 19.7% 23.9% 30 20% 15.9% 80 13.7%
0 10% 2013A 2014A 2015A 2016A 2017A 2013A 2014A 2015A 2016A 2017A OEM ODM OBM OEM ODM OBM
Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.
Figure-33: Morris’s Gross Profit and Gross Margin Figure-34: Morris’s COGS Breakdown
RMB mn
] 2 r a M t h g i R _ e l b a T [
Outer: 2017 Inner: 2016 1,000 40% 3.3% Raw material 800 7.0% 35% 4.3% 31.1% 600 31.5% 32.0%32.6% 5.8% 13.4% Labor 28.7% 30% 14.0% 400 23.7% 25% 200 Transportaion 20.9% 75.9% and packing 0 20% 76.3% 2014A2015A2016A2017A2018F2019F2020F Others
Total GP (LHS) Overall GPM (RHS) (01575 HK) Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.
We forecast overall GPM to continue to increase in 2018-2020 with increasing proportion of OBM business and retail 慕容控股 development. Considering the Company’s developing strategy in the future, OBM business with higher gross margin will be the focus. In addition, the Company is tapping into mainland China and Hong Kong retail markets by expanding offline stores and through e-commerce platforms. Basically, retail business enjoys a much higher gross margin reaching 40%-50%. Considering
the Company’s competitor Man Wah (01999 HK) and Kuka Home Furniture (603816 CH) who have developed mature retail Morris Holdings businesses, their gross margins for sofa businesses reached 40.1% and 36.5% in 2017, respectively. Thus we believe that there is much room for the Company’s gross margin to further improve in the coming years. Looking at the price trend of main raw materials of sofas, the price of textiles and wood stays stable. Leather price has been falling while steel price has been hiking. Overall, we believe that costs of sales are largely stable and have limited impact on the Company’s gross margin. We expect gross profit to rise to RMB486 million, RMB625 million and RMB799 million, with gross margin of 31.5%, 32.0% and 32.6% in 2018-2020, respectively.
Report
Company
See the last page for disclaimer Page 15 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-35: Price Index of Leather and Textiles Figure-36: Price Index of Steel and Wood
] 1 r a M t h g i R _ e l b a T [
160
135
125 140
115 120
105 August2018
100
95 30 85 80
75 60
Leather Textile Steel Wood
Source: Haining City Leather Industry Association, Keiqiao Index. Source: Lange Steel, China Timber Index.
Operating Profit & Operating Margin
We forecast 2018-2020 operating profit to be RMB265 million, RMB347 million and RMB] 452 0 millionr a M t , respectively.h g i R _ e Duel b toa T [
the nature of the Company’s business, S&D to revenue ratio was at a relatively low level, staying at 8.5% in 2017. However, with the Company’s strategy to enter the retail market, higher rental costs and marketing expenses may lead to a higher S&D expenses. Nevertheless, rising gross margin is expected to offset the impact and we forecast operating margin to be 17.2% in 2018 and 17.8% in 2019, representing YoY growth of 26.4% and 31.0% in operating profit during the same period, respectively.
Figure-37: Morris’s Operating Profit and YoY Growth Figure-38: Morris’s Operating Margin
RMB mn
500 66.0% 75% 25%
400
(01575 HK)
50% 20% 300 18.3% 31.0% 29.5% 17.8% 26.4% 17.5% 17.2% 200 慕容控股 25% 15% 100 13.4% 3.9%
0 0% 10% 2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F Operating profit (LHS) YoY (RHS) Operating margin Morris Holdings
Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.
Shareholders’ Profit & Net Margin
We forecast 2018-2020 shareholders’ profit to grow YoY by 35.1%, 30.8% and 30.2% to RMB216 million, RMB282 million and RMB368 million, respectively. Morris recorded net profit of RMB160 million in 2017, up 98.1%. Adjusted net profit went up by 48.5% excluding one-off listing expenses incurred in 2016 and 2017. The Company’s Recognition as a hi-tech enterprise is expected to be approved in 2018 and therefore the Company can enjoy a preferential tax rate of 15% in China, accordingly. Thus, we now forecast that the Company’s effective tax rate can be reduced to 15.5% in 2018 from 19.3% in 2017.
Report
Company
See the last page for disclaimer Page 16 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Figure-39: Morris’s Net Profit & YoY Growth Figure-40: Morris’s Net Margin
] 1 r a M t h g i R _ e l b a T [
RMB mn
400 100% 20% 98.1% 320 80% 15% 14.5% 15.0% 60% 13.3% 14.0%
240 August2018
40% 10% 30 160 8.6% 35.1% 30.8% 30.2% 20% 5% 80 0%
0 -2.9% -20% 0% 2016A 2017A 2018F 2019F 2020F 2016A 2017A 2018F 2019F 2020F Shareholders' profit (LHS) YoY (RHS) Net margin
Source: the Company, Guotai Junan International. Source: the Company, Guotai Junan International.
Financial assumptions by adding JC. The Company has announced to acquire JC’s total share rights, however, we have not integrated this part into our model yet since the deal still needs to be approved by the minority shareholders. Nevertheless, we
will make some basic assumptions of JC’s growth in the future. We forecast JC’s revenue to] grow2 r a at M a t CAGRh g i ofR 10%_ e duringl b a T [
2017-2020, supported by furniture market growth in the U.S. market and synergies created with the Company. JC is expected to turn losses into profits in 2018 with net profit of US$1 million. In 2019 and 2020, we believe that net profit can increase to US$2.5 million and US$3.5 million, reaching the guaranteed target, with net margin of 5.8% and 6.8%, which is reasonable for a retailing company. Overall, we forecast that the acquisition of JC will increase net profit of the Company by 0.8%, 6.1% and 6.1% in 2018-2020, respectively.
Table-3: Brief Financial Forecasts including JC
Excluding JC Including JC Change RMB mn 2018 2019 2020 2018 2019 2020 2018 2019 2020
Revenue 1,543 1,951 2,453 1,611 2,250 2,782 4.4% 15.3% 13.4% (01575 HK)
Gross profit 486 625 799 511 736 921 5.2% 17.7% 15.2% Profit before tax 256 336 438 258 359 466 0.9% 6.6% 6.6% Shareholders’ profit 216 282 368 218 300 390 0.8% 6.1% 6.1% 慕容控股 Growth: Revenue 28.6% 26.4% 25.8% 34.3% 39.6% 23.7% 5.7 ppts 13.2 ppts -2.1 ppts Gross profit 30.0% 28.7% 27.9% 36.7% 44.0% 25.2% 6.7 ppts 15.3 ppts -2.7 ppts
Profit before tax 29.2% 31.6% 30.2% 30.1% 39.1% 30.1% 1.1 ppts 7.5 ppts -0.1 ppts Morris Holdings Shareholders' profit 35.1% 30.8% 30.2% 36.1% 37.8% 30.1% 1.1 ppts 7.0 ppts -0.1 ppts Source: the Company, Guotai Junan International.
EPS & Dividend
We forecast 2018-2020 basic EPS to be RMB0.216, RMB0.282 and RMB0.368, respectively, representing a CAGR of 31.7% during 2017-2020. The Company received a convertible loan amounting of HK$200 million from International Finance Corporation with a conversion price of HK$2.22 per share in January 2018. On the assumption that the convertible loan will be converted into shares in full, the number of outstanding shares will increase to 1,090 million with an increase of around 9%. Taking account of the dilution effect, diluted EPS is expected to be RMB0.198, RMB0.259 and RMB0.337 in 2018-2020, respectively. The Company paid dividends of RMB0.083 per share, including special dividend of RMB0.039 in 2017, representing a payout ratio of 51.4%. The Company guides that it will maintain the payout ratio of around 25% in the coming
years, which represents dividend payment to be RMB0.054 million, RMB0.071 million and RMB0.092 million in 2018-2020,
respectively. Report
Working Capital Management
Company The Company keeps a healthy working capital management. Overall turnover cycle was 58 days and 129 days in 2016 and 2017, respectively. The sharp rise in 2017 was mainly due to the drop in payable turnover days in exchange for preferential See the last page for disclaimer Page 17 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
delivery prices, which decreased from 160 days in 2016 to 105 days in 2017. Inventory days increased by 5 days to 145 days,
of which inventory days of finished goods rose by 3 days to 12 days since the Company] has1 r beena M developingt h g i retailR _ e businessl b a T [
and increased inventory for online sales. Nevertheless, finished goods inventory kept at a low level due to the Company’s OEM
and OBM business feature. Trade receivables days also increased by 8 days to encourage customers in order to boost sales. Despite extended account days, 94% of trade receivables are within 3 months, remaining healthy. We forecast that overall turnover cycle days will be around 120-130 days in the coming years, but the overall financial structure will stay healthy.
August2018
Table-4: Key Financial Forecasts 30 Historical Forecasts YoY RMB mn 2015 2016 2017 2018 2019 2020 2018 2019 2020 Revenue 926 942 1,200 1,543 1,951 2,453 28.6% 26.4% 25.8% COGS (707) (671) (826) (1,057) (1,325) (1,654) 28.0% 25.4% 24.8% Gross profit 220 271 374 486 625 799 30.0% 28.7% 27.9% Operating expenses (131) (159) (175) (223) (281) (353) 27.6% 26.1% 25.8% Operating profit 122 126 210 265 347 450 26.4% 31.0% 29.5% Profit before tax 103 112 198 256 336 438 29.0% 31.6% 30.2% Income tax (20) (31) (38) (40) (54) (70) 3.7% 35.8% 30.2% Net profit 83 81 160 216 282 368 35.1% 30.8% 30.2%
Basic EPS (RMB) - 0.108 0.161 0.216 0.282 0.368 ] 34.2 1%r a M t 30.8h %g i R _ 30.e 2l % b a T [
Dilute EPS (RMB) - - - 0.198 0.259 0.337 - 30.8% 30.2%
Gross margin 23.7% 28.7% 31.1% 31.5% 32.0% 32.6% 0.3 ppts 0.6 ppts 0.5 ppts Operating margin 13.1% 13.4% 17.5% 17.2% 17.8% 18.3% -0.3 ppts 0.6 ppts 0.5 ppts Net margin 9.0% 8.6% 13.3% 14.0% 14.5% 15.0% 0.7 ppts 0.5 ppts 0.5 ppts
Source: the Company, Guotai Junan International.
(01575 HK)
慕容控股 Morris Holdings
Report
Company
See the last page for disclaimer Page 18 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
VALUATION
] 1 r a M t h g i R _ e l b a T [
Investment highlights for the Company include: 1) Strong reception in the U.S. market. The Company has successfully
transformed from an OEM manufacturer to an OBM company. Morris has established solid partnerships with key chain retailers in the U.S., including Costco and Sam’s Club. Also, the Company ranked second in terms of exporting value of upholstered sofas among all the companies which export sofas to the U.S., according to the Euromonitor in 2015. Considering that the U.S.
market is mature and fully competitive, the Company’s success has proved its outstanding competitiveness. 2) Outstanding August2018
sofa design and rich technical storage. The Company has hired famous designers from the U.S. and Italy who are experienced 30 in customized designs and production. Designs in the sofa industry are updating rapidly, as is fashion change. The design team in Morris is able to follow the latest trends and changes in the U.S. market to keep its products well received by the market and increase market share. The design team makes around 1,000 designs a year, of which 100-200 are put in to production. 3) Entering the retail market in China will further increase development. Starting from 2017, the Company has been tapping into the retail market by launching its offline flagship stores and online stores through e-commerce platforms. With its technical and design pool from OEM and OBM business and good value for money, we believe that the Company will enter into a stage of rapid growth in the retail business despite its current small market share. 4) Following the trend of smart sofas. Morris puts a high premium on research and development. The Company has its own R&D center and a R&D team with over 10 years of experience on average. The Company has possessed 25 issued patents in sofa manufacturing and 21 approved-level R&D
products. Currently, around 80% of the Company’s sofa products are functional, meeting the mainstream] 2 r a M t trend.h g i R _ e l b a T [
Our DCF model suggests an NAV of HK$4.25 per share. We have used the DCF model to evaluate the Company’s business. We have forecasted the Company’s free cash flow from 2018 to 2027 as well as the terminal value of cash flow afterwards. By discounting the FCFs and terminal value to present based on the assumptions shown in the table below, we arrive at an implied NAV of RMB3,652 million, which is equivalent to HK$4.25 per share.
Table-5: DCF analysis for Morris WACC Calculation DCF Calculation (RMB mn) Risk-free rate 2.31% PV of Free Cash Flow to the Firm (2019-2028) 2,068
Market risk premium 10.94% PV of Terminal Value 1,744 (01575 HK)
Beta 1.1 Net (Debt)/Cash (161) Cost of equity 14.34% Less: Minority Interests 0 NAV 3,652 Cost of debt 5.50% Number of Shares (mn) 1,000 慕容控股 Effective tax rate 15.5% NAV per Share (HK$) 4.25 After tax cost of debt 4.6% Sensitivity Analysis on 2017F NAV (RMB million)
E/(E+D) 70.00% Perpetual growth rate Morris Holdings WACC 11.69% 1.5% 2.0% 2.5% 3.0% 3.5% 10.2% 4,178 4,307 4,453 4,619 4,810
Perpetual growth rate 2.50% 10.7% 3,920 4,030 4,153 4,292 4,451
11.2% 3,689 3,783 3,888 4,006 4,139
WACC 11.7% 3,481 3,562 3,652 3,752 3,865
12.2% 3,292 3,362 3,440 3,526 3,622
12.7% 3,121 3,182 3,249 3,323 3,406
13.2% 2,964 3,018 3,076 3,141 3,212 Source: Guotai Junan International.
Initiate with "Buy" investment rating and TP is set at HK$2.40. Morris is on track for fast growth over the next few years with
revenue expansion in both China and U.S. markets. The Company is currently trading at 5.5x 2018 PER and 4.2x 2019 PER;
the valuation is attractive. Morris has been ignored by the market due to its relative small market size despite its solid
Report
fundamentals and rapid growth. We initiate with a TP of HK$2.40, which represents 9.6x, 7.3x and 5.6x 2018- 2020 PER and
10.4x, 8.0x and 6.1x 2018-2020 diluted PER, respectively. In comparison, the Company’s competitor Man Wah is trading at
13.3x 2018 PER and 10.6x 2019 PER. Considering Man Wah’s larger scale and market share, we think it is fair to give the Company Company a valuation discount. Our TP is equivalent to 72.7% upside potential, and therefore we give the Company a "Buy"
See the last page for disclaimer Page 19 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
rating.
] 1 r a M t h g i R _ e l b a T [
Major risk factors include: 1) Intense competition in the sofa industry in China. The retail market of sofas is fully
dispersed and full of competition in China. The Company’s growth may miss our forecasts if retail sales face higher-than-expected challenges. 2) Raw material price hikes. Raw material costs account for the majority of the Company’s total costs. A sharp increase in raw material price may negatively affect the Company’s profit margin. 3) Property sales
slowdown. The Company’s sales may be dragged by further slowdown in property sales and renovation rate. 4) China-US August2018
trade war intensification. Currently, the trade war has had no impact on the Company’s exports since sofas have been 30 excluded from the tariff list. However, the Company’s operations may be negatively affected if the trade war intensifies in the future.
Table-6: Peers Comparison Table
PE(x) PB(x) ROE(%) D/Y(%) Market Cap Company Stock Code Currency Last price 17A 18F 19F 20F 17A 18F 19F 20F 18F 18F HKD mn HK listed furniture companies
Man Wah Holdings 1999 HK HKD 5.360 11.7 13.3 10.6 9.4 4.1 3.4 2.9 2.6 27.9 4.0 20,546
Samson Holding 531 HK HKD 0.640 2.8 n.a. n.a. n.a. 0.7 n.a. n.a. n.a. n.a. n.a. 1,996
Morris Holdings 1575 HK HKD 1.390 7.5 n.a. n.a. n.a. 3.0 n.a. n.a. n.a. n.a. n.a. 1,390
Royale Furniture 1198 HK HKD 0.700 27.1 n.a. n.a. n.a. 1.0 n.a. n.a. n.a. n.a. n.a. 1,405
] 2 r a M t h g i R _ e l b a T [ Simple Average 12.3 13.3 10.6 9.4 2.2 3.4 2.9 2.6 27.9 4.0
Weighted Average 11.7 13.3 10.6 9.4 3.6 3.4 2.9 2.6 27.9 4.0
PRC listed furniture companies
Oppein Home Groupnc-A 603833 CH CNY 97.770 30.5 24.0 18.5 14.3 6.5 5.3 4.3 3.4 22.8 0.9 47,278
Suofeiya Home Collection C-A 002572 CH CNY 24.330 24.8 18.7 14.2 10.8 5.0 4.1 3.4 2.8 22.9 2.3 25,850
Jason Furniture Hangzhou C-A 603816 CH CNY 52.160 26.2 21.0 16.2 12.8 5.6 4.4 3.6 2.9 21.4 1.7 25,679
Markor Intl Home Furnishin-A 600337 CH CNY 5.340 22.3 19.1 14.8 11.6 1.9 1.8 1.7 1.5 9.5 2.6 10,906
Yihua Lifestyle Technology-A 600978 CH CNY 5.710 11.2 9.2 7.5 5.8 1.1 1.0 0.9 0.8 10.7 2.2 9,742
Xilinmen Furniture 603008 CH CNY 16.430 22.2 17.4 13.0 9.7 2.3 2.1 1.8 1.6 12.1 0.7 7,464
Qumei Home Furnishings Grp-A 603818 CH CNY 8.780 17.2 15.2 11.1 8.9 2.7 2.0 1.7 1.5 14.3 1.4 4,965
Zhejiang Henglin Chair Ind-A 603661 CH CNY 36.350 16.9 19.5 15.5 12.1 1.7 1.5 1.4 1.2 7.9 n.a. 4,182
A-Zenith Furniture Co Ltd-A 603389 CH CNY 14.080 50.3 45.4 40.2 n.a. 3.5 n.a. n.a. n.a. n.a. n.a. 3,547
Guangdong Piano Customized-A 002853 CH CNY 19.140 28.6 22.5 18.1 n.a. 3.3 n.a. n.a. n.a. n.a. n.a. 3,421 (01575 HK)
Nanjing Olo Home Furnishin-A 603326 CH CNY 9.710 22.7 19.4 14.1 8.7 2.9 2.7 2.3 2.0 14.3 1.8 2,525
Simple Average 27.1 24.4 19.8 9.9 2.8 2.1 1.8 1.6 12.1 1.6 2 24.4
Weighted Average 26.3 23.8 19.3 10.0 2.7 2.0 1.7 1.5 12.0 1.5 72 23.8 慕容控股 Global listed furniture companies .6
La-Z-Boy Inc LZB US USD 33.500 19.1 19.8 16.4 14.6 2.8 2.6 2.4 2.3 13.4 1.6 1. 12,277 Natuzzi Spa-Sp Adr NTZ US USD 1.510 n.a. n.a. n.a. n.a. 0.6 n.a. n.a. n.a. n.a. n.a. 3 650
Simple Average 19.1 19.8 16.4 14.6 1.7 2.6 2.4 2.3 13.4 1.6 Weighted Average 19.1 19.8 16.4 14.6 2.6 2.6 2.4 2.3 13.4 1.6
Source: Bloomberg, Guotai Junan International. Morris Holdings
Figure-41: Morris’s Historical Forward PER Figure-42: Morris’s Historical Forward PBR
Closing price (HK$) 3X 5X 7X 9X 11X Closing price (HK$) 1X 1.5X 2X 2.5X 3X
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
1.5 1.5
1.0 1.0
0.5 0.5
0.0 0.0
01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018 01/2017 04/2017 07/2017 10/2017 01/2018 04/2018 07/2018
Report
Source: Bloomberg, Guotai Junan International. Source: Bloomberg, Guotai Junan International.
Company
See the last page for disclaimer Page 20 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Financial Statements and Ratios
[Table_IncomeStatement] [Table_BalanceSheet] ] 1 r a M t h g i R _ e l b a T [ Income Statement Balance Sheet
Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F
Total Revenue 942 1,200 1,543 1,951 2,453 Property, plant and equipment 44 58 149 227 263
Cost of sales (671) (826) (1,057) (1,325) (1,654) Prepaid land lease payments 8 7 7 7 7
Gross profit 271 374 486 625 799 Deferred tax assets 3 2 2 3 4 August2018
Total Non-current Assets 55 67 158 236 273 30 Selling and distribution costs (82) (102) (132) (167) (211)
Administrative expenses (77) (72) (91) (114) (142) Cash & Cash Equivalents 74 26 164 211 363
Other income and gains 16 13 2 3 4 Inventories 315 343 468 542 709 Operating Profit 126 210 265 347 450 Trade & other receivables 220 389 382 564 613 Pledged deposits 221 182 182 182 182
Finance cost (14) (12) (9) (11) (12) Others 218 89 154 121 137
Profit Before Tax 112 198 256 336 438 Total Current Assets 1,047 1,029 1,348 1,620 2,004
Income Tax (31) (38) (40) (54) (70)
profit After Tax 81 160 216 282 368 Total Assets 1,102 1,096 1,507 1,856 2,277
Non-controlling Interest 0 0 0 0 0
Shareholders' Profit / Loss 81 160 216 282 368 Trade & other payables 543 438 564 645 737
Basic EPS 0.108 0.161 0.216 0.282 0.368 Short-term borrowings 277 150 154 185 209
] 2 r a M t h g i R _ e l b a T [ Diluted EPS 0.108 0.161 0.198 0.259 0.337 Taxation Payable 44 62 64 87 113 Others 76 55 0 0 0
[Table_CashFlowStatement] Cash Flow Statement Total Current Liabilities 939 704 783 917 1,059
Year end 31 Dec (RMB m) 2016A 2017A 2018F 2019F 2020F Deferred tax liability 4 9 9 13 16
PBT 112 198 256 336 438 Convertible bonds 0 0 170 170 170
Financial costs 14 12 9 11 12 Total Non-current Liabilities 4 9 179 183 186
Depreciation of PPE 3 6 9 22 34 Total Liabilities 943 713 962 1,099 1,245 Change in WC (134) (198) 6 (179) (127)
Others (12) (22) (178) 6 (55) Total Shareholders' Equity 159 383 545 757 1,032
Cash from Operating Activities (16) (4) 102 197 301 Minority Interest 0 0 0 0 0
Total Equity 159 383 545 757 1,032
(01575 HK)
Interest received 2 3 1 1 2 [Table_FinancialRatio] Purchase of PPE (6) (23) (100) (100) (70) Financial Ratios
Others (0) 40 0 0 0 2016A 2017A 2018F 2019F 2020F 慕容控股 Cash from Investing Activities (4) 20 (99) (99) (68) Gross margin 28.7% 31.1% 31.5% 32.0% 32.6%
Operating margin 13.4% 17.5% 17.2% 17.8% 18.3%
Net bank borrowings 74 (125) 5 31 23 Net margin 8.6% 13.3% 14.0% 14.5% 15.0%
Interest paid (14) (12) (9) (11) (12) ROA 7.9% 14.5% 16.6% 16.8% 17.8%
Dividend paid 0 (143) (31) (71) (92) ROE 69.3% 59.1% 46.6% 43.3% 41.1% Morris Holdings Issue of new shares 0 234 0 0 0 Issue of CB 0 0 170 0 0 Inventory days 140.2 145.3 140.0 139.0 138.0
Others 0 (15) 0 0 0 Account receivable days 77.7 88.9 88.0 85.0 85.0
Cash from Financing Activities 59 (61) 135 (51) (81) Account payable days 159.9 105.1 83.3 103.0 101.0
Net Changes in Cash 39 (44) 137 47 152 Current Ratio (x) 1.1 1.5 1.7 1.8 1.9
Cash at Beg of Year 33 74 26 164 211 Net gearing (%) 128.2% 32.2% 29.5% 19.1% 1.5%
Foreign exchange effect 2 (3) 0 0 0 Interest coverage (x) 7.7 16.8 27.7 31.6 37.4
Cash at End of Year 74 26 164 211 363 Dividend payout ratio (%) 115.2% 51.4% 25.0% 25.0% 25.0%
Source: the Company, Guotai Junan International.
Report
Company
See the last page for disclaimer Page 21 of 22 [Table_PageHeader]Morris Holdings (01575 HK)
Financial[Table_FinancialRatio] Ratio Company[Table_CompanyRatingDefinition] Rating Definition
] 1 r a M t h g i R _ e l b a T [
The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months
Rating Definition Buy 买入 Relative Performance>15%; or the fundamental outlook of the company or sector is favorable.
Accumulate 收集 Relative Performance is 5% to 15%; August2018
or the fundamental outlook of the company or sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; 30 or the fundamental outlook of the company or sector is neutral. Reduce 减持 Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell 卖出 Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable.
Sector[Table_ RatingIndustry DefinitionRatingDefinition] The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform 跑赢大市 Relative Performance>5%;
] 2 r a M t h g i R _ e l b a T [ or the fundamental outlook of the sector is favorable. Neutral 中性 Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform 跑输大市 Relative Performance<-5%; Or the fundamental outlook of the sector is unfavorable.
[DISCLOSURETable_DISCLOSUREOFINTERESTS OF INTERESTS ] (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for KAISA GROUP (01638 HK),GUOTAI JUNAN I (01788 HK),BINHAI INVESTMENT (02886 HK),GFI MSCI A I (03156 HK),CAM SCSMALLCAP (03157 HK),ZHENRO PPT (06158 HK),MR CSI300 ETF-R (CNY) (83127 HK),GFI MSCI A I-R (CNY) (83156 HK),Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer
mentioned in this Research Report. (01575 HK)
(4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. (5) Guotai Junan and its group companies are not making a market in the securities in respect of the issuer mentioned in this
Research Report. 慕容控股 (6) Guotai Junan and its group companies have not employed an individual serving as an officer of the issuer mentioned in this Research Report. There is no officer of the issuer mentioned in this Research Report associated with Guotai Junan and its group companies.
Morris Holdings
DISCLAIMER
This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services, etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily).
Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan.
Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision.
This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which
would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. Report
© 2018 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen’s Road Central, Hong Kong.
Tel.: (852) 2509-9118 Fax: (852) 2509-7793 Website: www.gtja.com.hk Company
See the last page for disclaimer Page 22 of 22