Strong demand in China's backpack and luggage market is sustainable. This is underpinned by three factors: a) double-digit growth of China's retail sales over the next one to two years, b) double-digit growth of China's urban and rural per capita disposable income and c) steady increase in outdoor activities and the number of customers, including students and tourists.
Market leader with obvious advantages. Dapai is the top brand in China's backpack industry with a 35.8% market share. We believe further sales growth is achievable as Zaino enjoys several advantages over its peers: a) it is the only manufacturer focusing on backpack and luggage business as there is less competition for brand building, b) strong R&D and good quality help to secure orders and c) a vast distribution network operated by experienced local distributors.
Earnings forecasts. For Zaino, we forecast revenue growth at a CAGR of 9.8% for 2009-11, driven by growing sales of backpacks and luggage, and expect earnings growth to slightly outperform its top-line growth of 10.7% CAGR during the same period, with a better product mix. Luggage sales are likely to continue to contribute more to total sales, in tandem with the Group's strategy to expand its product portfolio.
In addition, Zaino has also promised a yearly dividend payout ratio of at least 20%. Valuation and recommendation. We believe Zaino is a unique China play given its exposure to the niche backpack and luggage market, leading market position as well as extensive distribution network. Considering its short history as a listed company and low brand equity compared with sportswear names, we have applied a 10% discount to the industry average 2009 PE, valuing the stock at 4x. Maintain BUY with a 12-month target price of S$0.39.
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