Important disclaimer: Maxwell International is a 7.2%- owned investee company of OSK Property PP10551/09/2011 (028936) Management which is a wholly-owned subsidiary of OSK Ventures International Berhad 14 Jun 2011 MALAYSIA EQUITY ` Investment Research Daily Trading Idea The Research Team +60 (3) 9207 7688 [email protected] Maxwell International A Stock That Deserves Better The share price of Maxwell has languished alongside the rest of the M-chips since its BUY listing in January this year. Despite general investor concerns on the sector, Maxwell Fair Value 0.90 posted FY10 results that were in line with our IPO note forecasts, with revenue and Price 0.50 net profit rising 12% and 10% to RM335.9m and RM67.1m respectively. Having met CONSUMER our profit forecasts, we feel that Maxwell is trading at a ridiculously low PER of 3.0x, Maxwell International is an original equipment and see value in the company given its forecast double digit growth. A good manufacturing and original design investment idea for deep-value investors and generally a good trading idea for manufacturing company that designs and everyone else, we believe Maxwell deserves at least a FY11 PER of 5x, which gives manufactures sports shoes. the stock an indicative fair value of RM0.90. Stock Statistics Bloomberg Ticker MAXWLL MK Different from its competitors. Listed in January 2011, Maxwell is a pure China based Share Capital (m) 400.0 original equipment manufacturing (OEM) and original design manufacturing (ODM) Market Cap 200.0 52 week H | L Price 0.62 0.46 company involved in the manufacture and design of sports and casual sports shoes for 3mth Avg Vol (000) 16.6 China’s domestic and export markets. Unlike its competitors, Maxwell does not need to YTD Returns N/A spend heavily on advertising and promotions and hence can channel more funds to design Beta (x) N/A and development (D&D). We believe that the OEM business is more resilient as the smaller Major Shareholders (%) orders from a weaker brand owner will be buffered by the higher volume of orders from a Li Kwai Chun 54.6 stronger brand. Moreover, brand owners which outsource their production to third parties OSKTV 7.2 usually own leading brands that are less susceptible to changes in consumer demand. Double digit revenue growth to continue. Maxwell is in the midst of acquiring 4 new production lines to boost its annual production capacity to 16m shoe pairs in 2HFY12. Share Performance (%) Riding on a strong sales force, the extra capacity is expected to benefit Maxwell as the Month Absolute Relative 1m -2.0 -2.3 company can serve a larger customer base and wield more control over the quality of its 3m -5.7 -8.7 products. We are forecasting for the group to achieve sales of RM375.6m and RM422.5m 6m N/A N/A 12m N/A N/A in FY11 and FY12 respectively. 5-month Share Price Performance Summer sales galore. As with most China-based Malaysian-listed companies, or commonly known as M-chips, Maxwell is trading at a ridiculously cheap 3.0x PER. 0.58 Considering the current market PER of some 15x to 16x and Maxwell’s double-digit profit 0.56 growth, as well as factoring in the perceived risk of having its operations offshore in China, 0.54 we feel that there is significant value in the company just from the valuation viewpoint alone. We believe that Maxwell makes a good Trading Idea (not under our regular 0.52 coverage) and value the stock at a very conservative FY11 PER of 5x, which translates into 0.50 a FV of RM0.90. This extremely low price means that the company’s 3.35 sen dividend 0.48 payout for FY10 translates into a dividend yield of 6.7%, which is reasonable for this still Jan-11 Feb-11 Mar-11 Mar-11 Apr-11 May-11 growing company. FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f Revenue 218.1 301.0 335.9 375.6 422.5 Net Profit 41.7 61.2 67.1 71.5 78.8 % chg y-o-y 66.0 46.9 9.5 6.6 10.2 Consensus EPS (sen) 10.4 15.3 16.8 17.9 19.7 DPS (sen) 3.4 3.6 3.9 Dividend yield (%) 6.7 7.2 7.9 ROE (%) 45.0 40.2 19.2 17.1 16.0 ROA (%) 28.1 31.6 17.3 15.6 14.6 PER (x) 4.8 3.3 3.0 2.8 2.5 BV/share (RM) 0.21 0.34 0.52 1.04 1.23 P/BV (x) 2.2 1.3 1.0 0.5 0.4 OSK Research | See important disclosures at the end of this report 1 OSK Research COMPANY BACKGROUND Maxwell at a glance. Maxwell is a China-based OEM and ODM company involved in the manufacturing and designing of sports and casual sports shoes for China’s domestic and export markets. It manufactures leading brands such as Yonex, Diadora, Kappa, Brooks and Fila. The group was founded in 1999 when Chun Hing Industrial Ltd, which is owned by the Chairman, Li Kwai Chun and her husband Li Chun Tak, set up Zhenxing Shoes in Zhushuxia Industrial Zone, Jinjiang City in China’s Fujian province. Through Mrs Li’s well established relationship with various footwear trading houses and brands distributors, Maxwell managed to secure sports shoe orders and started with a single production line and an annual production capacity of some 1m pairs of sports shoes. Today, with increasing orders as the group manufactures for more customers, its production capacity has swelled to 12.0m pairs (as of FY10). Figure 1: Group structure Maxwell 100% Zhenxing Shoes Source: Prospectus Figure 2: History 1999 Established Zhenxing Shoes Started with one production line with annual production capacity of circa 1m pairs of sports shoes Set up design and development department Secured contract to produce shoes for US sports brand Riddell 2000 Added 2nd production line to expand production capacity Secured contract for US Polo 2002 Secured contract with another US brand – Fubu 2005 Secured contracts with Japanese brands Mizuno and Yonex 2006 Added 3rd production line Secured contract with Kappa 2008 Became member under SATRA Attained ISO9001: 2000 status Added 4th production line Secured contracts with US and Italian sports brand Brooks and Diadora respectively 2009 Awarded Quanzhou Famous Trademark 2010 Secured contract with Italian brand Fila Source: Prospectus OSK Research | See important disclosures at the end of this report 2 OSK Research KEY HIGHLIGHTS OEM, a resilient business model. Although Maxwell has its brand, Sodeng, the group is putting this branding initiative on hold given the strong competition from established local brand names and to focus on OEM. While the original brand manufacturing (OBM) business usually commands higher margins and bargaining power owing to its integrated business model, we believe that the OEM business is more resilient than OBM since the smaller order volume from a weaker brand would be buffered by the higher orders from a stronger brand owner. Furthermore, brand owners which outsource their production to third parties are usually leading brand which are less susceptible to changes in consumer demand. Figure 3: OEM and OBM brands OEM brands Riddell US Polo Fubu Mizuno Yonex Kappa Brooks Diadora Fila Own brand Sodeng Source: Prospectus, OSK Quality is the best policy. The ability to secure contracts from leading brands such as Yonex, Diadora, Kappa, Brooks and Fila is a testament to the quality of Maxwell’s products. In fact, Maxwell conducts quality checks on all the products manufactured and implements quality controls at every process. As Maxwell also outsources to third parties due to capacity constraints, to ensure the quality of its outsourced products, the group also sends its personnel to conduct on-site inspection on the appointed external contract manufacturers’ factories. As another step towards reinforcing its commitment towards continuous improvements and maintaining product quality, the group joined SATRA in March 2008. SATRA is the world’s leading research and technology centre and a leading authority on international legislation and testing, as well as the technical aspects of a wide range of consumer products. Its accreditation and awards program is widely used worldwide as a mark of commitment to high and consistent product and service quality. Good product quality, strong D&D capabilities and timely delivery. While Maxwell does not sign long-term contracts, the group has established a track record and strong relationships with its customers. In FY09, some 53.2% of Maxwell’s sales came from repeat customers. This we believe is due to its consistent product quality, strong D&D capabilities and timely delivery, which have stood it in good stead to secure more OEM contracts from brand owners over the past few years. We also note that due to rigid outsourcing requirements in relation to product quality and the trustworthiness of OEM manufacturers, it is unlikely for customers to switch from one OEM to another without serious consideration. Having said that, the loss of a major customer would severely impact Maxwell given that its top 8 customers account for 43.8% of the group’s 1HFY10 sales. Intensifying sales and marketing activities. Other than improving on basic communication tools such its website, Maxwell will expand its sales force to further beef up sales by penetrating new markets. To reach out to potential customers more effectively, the group also intends to participate in more transnational trade fairs such as the Harbin border trade fair and other international trade fairs in Russia and Europe.