Rapid Growth: Reclining furniture firm Man Wah's Finance Director Francis Lee (in yellow long-sleeved shirt) is optimistic about ongoing orders from the country's high-speed rail system. On his right is Aries Consulting Deputy Managing Director Mark Lee. Photo by Frances Leung.

Aries Consulting Deputy MD Mark Lee (left) introduces Man Wah's Finance Director Francis Lee. Aries featured Man Wah in the Company of the Month series this week in Hong Kong to investors. Aries is one of the fastest growing investor relations specialists in the region with a strong niche in providing Strategic Investor Relations to public listed companies on Regional Stock Exchanges, or companies seeking listing in the future. Photo: Andrew Vanburen

“The CRH furniture agreement is the first of its kind for us. We believe the supply deal for next year is just the beginning and we will get new and extended contracts down the line,” Mr. Lee said.

And the location of the furniture in CRH’s first class cabins carries with it a cachet that speaks volumes about the reputation of Man Wah.

“This will allow us to prominently display and showcase our proprietary CHEERS furniture brand name on the trains. This is a strong testament to CHEERS market leading position for high quality furniture products in the PRC.”

“We will be putting our brand label on every reclining sofa chair in the system’s first class cabins. This is certainly a vote of confidence in our quality by the railway authority. In effect, it will be a moving advertising platform for us with thousands upon thousands of different passengers sitting on our clearly labeled products day in and day out.

Man Wah is currently trading at 9.38 hkd with a 52-wk range of 5.95-10.26 and a P/E of 11.0x.

“We believe we can firmly leverage on that position for advertising and promotional purposes and it will be a great help in our non-budgeted marketing. As we are number one in China in the reclining furniture sector, many people are familiar with our CHEERS brand name, but not necessarily with our Man Wah company name,” he said.

Margins on sales of reclining sofas and chairs for first class coaches in China’s rapidly expanding High-Speed Rail coaches are higher than either export sales or domestic retail sales for a variety of reasons, all the more reason for investors to pay close attention to potential supply contract extensions or expansions to CRH going forward.

300 Bln Yuan Prize: China plans massive investment in its high-speed rail system and Man Wah wants to supply the reclining furniture. Ministry of Railways file photo

“We will enjoy higher than average group margins for the CRH sales primarily because the inaugural 152.7 mln yuan contract was realized via direct negotiations and not through public tender. Therefore we can use markups where necessary to cover price fluctuations, especially for maintenance and replacement costs,” Mr. Lee said.

In fact, not only the reclining furniture supply contracts to CRH’s first class coaches has been awarded to Man Wah, but the Hong Kong-listed firm was also commissioned to supply tables and chairs to the connecting cabins.

“Although the supply contract is for 2011, not only to we expect more as the CRH system gets positive feedback and continues to expand, but also we consider it a source of semi-recurrent income because we also provide after-sales service. These coaches will carry lots and lots of people, so there will be considerable wear and tear. Our repair and replacement service is therefore a source of recurrent income for us.”

He added that the CRH first class coach furniture contract will contribute a “sizable portion” of Financial Year 2011 revenue.

“However, our main revenue stream will still be opening new stores in the PRC.”

A quick look at the company’s numbers tells the story.

Even though 2010 export revenue is expected to grow around 45% this year to 2.1 bln hkd, sales of sofa and bedding products via its growing network of CHEERS and ENLANDA retail stores in the PRC are forecast to grow much faster this year to over 870 mln hkd.

See also: MAN WAH: High-Speed Trains Driving Sofa Maker's Orders