Strong demand in China’s backpack and luggage market sustainable. This is underpinned by three factors: a) double-digit growth in China’s retail sales in the next 1-2 years, b) double-digit growth in China’s urban and rural disposable income per capita, and c) steady increase in outdoor activities and the number of market consumers, including students and tourists.
A market leader. Dapai is the top brand in the backpack industry with a 35.8% market share. We believe further sales growth is achievable as the company enjoys several advantages over its peers: a) only focusing its brand building efforts on the backpack and luggage business which is less competitive, b) strong R&D and good quality help secure orders, and c) a vast distribution network operated by local experienced distributors.
A&P efforts to boost brand equity has worked well. Although the Group has seen good results from its advertising activities, it is worth noting that it had utilised its entire preliminary advertising budget of Rmb70m in six months. Management is likely to excise caution on the use of A&P expenditure to strike a balance between cost and efficiency.
Production capacity to double to 52.2m units by 2011. Construction of a new plant is underway and scheduled for completion in 1H10. The plant would boost capacity by adding 8m units to the 26m units currently, taking the total to 34m units by 1H10. Another 18.2m units are expected to come on stream from 2H11 onwards.
Eyeing M&A opportunities. Zaino is actively eyeing merger and acquisition (M&A) opportunities. The main targets are companies with a good track record in backpack manufacturing or original equipment manufacturers severely hurt by the slump in export orders. Although the current financial crisis has led to an overall slowdown in consumer demand, it also provides a good opportunity for the industry’s big boys to restructure.
We forecast revenue CAGR of 9.8% for 2009-11, driven by growing sales of backpacks and luggage, and expect earnings growth to slightly outperform top-line growth at a 10.7% CAGR in the same period on the back of a better product mix. Luggage sales are likely to continue to make up a larger proportion of total sales, which is in tandem with the company’s strategy to expand its product portfolio. In addition, the company has also promised a dividend payout ratio of at least 20%.
We believe Zaino is a unique China play given its exposure to the niche backpack and luggage market, leading market position and extensive distribution network. Considering its short listing history and weaker brand equity compared with big sportswear names, we have applied a 10% discount to the industry’s FY09 PE and value the stock at 4x. Maintain BUY and 12- month target price is S$0.39.
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