China Zaino - BUY On Current Price Weakness Despite Flat 2Q09 Sales Expectations

2Q09 sales to remain unchanged yoy but EPS could be down 10% yoy. While Zaino’s 2Q09 sales are likely to be flat yoy, we expect EPS to be dragged down 10.6% yoy as a result of lower ASPs and the negative impact of the outbreak of the H1N1 influenza in China. However, we expect sales to recover in 2H09 as the company restarts its TV advertisements to strengthen its brand image, and as the country’s economic climate begins to improve.

Earnings revision and valuation. We remain positive about Zaino’s outlook for FY09-11 but have lowered our ASP assumptions for its both backpack and luggage segments in FY09. Our new forecasts for its net profits stand at Rmb387.2m, Rmb435.9m and Rmb476.7m for FY09-11 respectively, implying a three-year CAGR of 10%. We value the stock at a 25% discount to its S-shares average and arrive at our target price of S$0.35, implying 4x FY09 PE.

Great opportunity at current price levels for both short-term and long -term investors. We reiterate that although the market does not forsee encouraging operating results from Zaino this year, we still favour the company due to its prospects for further growth, especially at current price levels which present good opportunities for both short-term and long term investors.

Short-term trading catalyst: 1) trading below net cash/share. 2) trading below recent share placement price at S$0.23/share.

Long-term investment catalyst: 1) EPS: 10% CAGR growth from FY09 to FY11. 2) Zaino restarted its TV advertisements from June to strengthen its brand image, and thus enhancing its future growth potential. 3) Possible M&A opportunities in the next 1-2 years.

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