Man Wah's booth at an international furniture exhibition. Photo by Mark Lee
Excerpts from latest analyst reports …..
Macquarie pegs Man Wah Holdings target price at HK$11.00
Macquarie Equities Research analysts: Jake Lynch, Charlie Chen & Jamie Zhou
Reclining sofa brand in China and abroad
Man Wah’s Cheers’ brand of reclining sofas is the fastest growing reclining sofa brand in the US market – now ranked No. 8 with a 59% CAGR in the past 30 months. Its high quality and affordable prices are giving market leader ‘La-Z-Boy’ a run for its money. Exports made up 75% of revenues in 1H10 (March YE). We see continued high momentum for market share expansion together with a cyclical recovery in the N. American market. Macy’s in the US will start carrying Cheers brand in the second half of 2010.
Source: Macquarie
We think HK investors are missing the strong outperformance of US listed furniture names. These stocks have been rising on the back of a clear rebound in US furniture sales that imply our 30% revenue growth forecast for exports in FY11 may be conservative.
Domestic sales network expanding rapidly
In 1H10, PRC sales made up 25% of the total. The company’s Cheers brand at the end of 1H10 had 225 stores run by distributors and 71 self-operated stores across over 20 provinces in China. Going forward, we are looking for them to add another 70 self-operated stores in FY11 and we expect the company to boost domestic sales as a percentage of total to 35% by FY12.
In addition, Man Wah’s fastest growing line is its smaller mattress line which is sold exclusively in the PRC and HK at their Enlanda branded stores (200 stores at 1H10). China’s market potential is a cliché but in the US, one in 12 households buy a recliner a year. In China today, it is less than one in 1300 households. We think recliners are a popular emerging middle class ’affordable luxury’ product.
Man Wah’s Cheers’ brand of reclining sofas is the fastest growing reclining sofa brand in the US market. Photo: Sim Kih
Pricing power leading to margin expansion
In 1H10, margins surged to 41% GM, 22% EBITDA margin and 20% net margin. This was the result of achieving greater scale (with a 30% YoY revenue growth rate), higher ASPs (as they sell more through their own stores and introduce higher-end models) and a 7% drop in the raw material cost per unit.
We forecast a 31% FY10-FY12 CAGR in export revenue and a 59% CAGR in domestic sofa and bedding revenue. We expect overall Net profit CAGR of 34% FY10-FY12.
Valuation: targeting 13.3x CY10 PER
We arrive at our target valuation of HK$11.00 by looking at furniture comparables globally and other types of slow-moving, high value consumption companies in China. Both these groups trade around 15x CY10 PER. We then apply a 10% discount to allow for execution risks on reaching its ambitious targets. Our DCF cross check implies a valuation of HK$14.28
Key Risks
As with any high growth company, execution risk is the key. EBIT margins are high compared to other Asian furniture makes. While we analyse inside why we are comfortable with our forecasts of maintaining margins, a wave of competition could erode those margins. Finally, Man Wah currently enjoys a very low tax rate of 7% which we calculate is due to effective offshore tax planning.
Samsung Securities analyst: Matthew Marsden
Research associate: Summer Wang
Man Wah has two engines for growth:
-> With its No. 1 ―Cheers’ brand of recliner sofas, the firm is adroitly positioned to capitalize on secular expansion of the PRC middle class and the resulting expansion in China‘s furniture market.
-> The company has established a fast growing export business, which is set to take advantage of gradual recovery in the U.S. housing market.
Our Growth At a Reasonable Price (GARP) screen, examining PE vs. EPS growth, indicates that Man Wah is one of the most attractively priced firms in the Hong Kong listed China Consumer Sector. We think that this is because the stock was previously dramatically undervalued when listed in Singapore; we expect this legacy to fade as the firm delivers decent earnings growth going forward.
Despite the challenging economic climate, the group is due to post 165% YoY net profit growth in FY10e. Our forecasts indicate that the company will maintain 29% net profit CAGR over FY10-12e, driven by robust new store build out in the PRC and continued market share gains overseas.
A sum-of-the-parts methodology is most appropriate to value the stock, in order to reflect the market‘s distinct valuations for exporters and China brand businesses. We apply 11.7x PE to our FY11e EPS to arrive at a 12-month target price of HK$9.10, representing 39% upside.
Recent story: MAN WAH re-listed in HK with S$1.2 billion market cap
