Selling its branded apparel for almost three decades. Goldlion has been operating in Mainland China since the late 1980s. However, the Group has encountered major setback in 1998-99 by making HK$250m provision for inventory as a result of its negligence on product design, product quality and inventory control. In 2000, Goldlion underwent a major re-structuring by replacing its China management team. The Group currently has about 900 retail outlets in Mainland China with over 30 of them under direct management (located in Guangzhou, Beijing and Shanghai). The Group has over 100 distributors (under license agreement) which supply merchandise to over 900 Goldlion branded stores in Mainland China. Apparel turnover has been growing at 22% CAGR in 2004-2008 with growth mainly coming from MainlandChina (over 24% CAGR). Hong Kong market now accounts for less than 1% of total apparel turnover. Goldlion management believes that its success is attributed to its focus on products and the design of retail outlet. Goldlion also benefit from its highly successful and asset light wholesale business model.
Operating performance remains robust so far this year. Management was very surprised with our naïve question "was there a substantial slowdown in your Mainland China apparel business?". On the contrary, Goldlion's operating performance in Mainland China remains robust with double digit growth so far this year. Both gross margin and operating margin have been maintained similar to last year level as a result of lower sourcing cost but higher quality products (thanks to the slump in export market). While Singapore and Malaysia markets are faced with the financial tsunami, Goldlion has been able to maintain the sales level similar to last year level.
Low receivable risk. Even though Goldlion's China apparel business is primarily wholesaling to over 100 distributors, the receivable risk is very low with receivable turnover of only 13 days. It is attributed to the fact that distributors need to pay 50% upfront in cash at the time of placing orders, which will be sufficient for Goldlion to cover the cost of the merchandise. And the distributors need to pay the remaining 50% amount in cash at the time of delivery. Turnover growth would have been even stronger if Goldlion had relaxed its credit policy. However, management maintains its prudent approach in receivable management.
Over HK$1.64b worth of investment properties, representing 90% of current share price. The Group has several investment properties in mainland China and Hong Kong, representing a total of about HK$1.64b in its book. Major investment properties in mainland China include Goldlion Digital Network Centre (located in Tianhe, Guangzhou, GFA 50,582 sq m, representing slightly over HK$1.1b in its book, rental income of Rmb80-90m per year), Goldlion Commercial Building in Shenyang (GFA 14,801sq m, rental income of Rmb8m-9m). Major investment properties in Hong Kong include Goldlion Holdings Centre in Shatin (GFA 19,580 sq m, representing about HK$200m in its book) and No 3 Yuk Yat Street in To Kwa Wan (GFA 7,013 sq m). Rental income from Hong Kong property portfolio contributes over HK$20m per year. The total rental income for the Group in 2008 stood at HK$109m per year. If we plug in the rental yield of 6%, the Group's China and Hong Kong investment property portfolio will have a value of over HK$1.82b. This does not include its Meizhou low-density residential property development project (unsold portion: 17,672 sq m residential area, 4,317 sq m car parking area and 13,228 sq m commercial area).
Valuation. The Group has a cash pile of over HK$600m (HK$0.61/share) and HK$1.64b worth of investment and development properties (HK$1.67/share), with no debt. The current share price is trading at 22% discount to its investment properties and net cash. Don't forget that Goldlion has a lucrative and growing apparel distribution business with leading position in the Mainland China menswear market. Taking a 30% discount to its investment properties, Goldlion's investors are buying the rest of the group (net profit from apparel business minus headquaters' expenses) at 0.01x FY09 PE. Hence, the market is paying almost nothing for its strong and leading business franchise in the world's fastest growing mid-to-high end consumer market. Another mid-to-high-end China apparel distributor Ports Design (589.HK) is trading at 16x FY09 PE. Assuming that Goldlion's apparel business is worth 10x 2009 earnings, the stock will have a fair value of HK$4.
Increasing dividend payout with no corporate governance issue. Historical dividend yield is 10%. Dividend payout has been increasing at 32% in 2004-2008. Management is very low key in promoting the company to investors, making the stock grossly under-researched. However, the Chairman of the Group, Dr Tsang Hin Chi, is a well-known and reputable figure both in Hong Kong and Mainland China. There has been no corporate governance issue.
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