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July 18, 2011

HONG KONG/CHINA EQUITY Investment Research

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Baofeng Modern (1121.HK)

Riding the high wave

BUY Price Target

Initiate HK$1.39 HK$2.72

Stock Profile/Statistics Bloomberg ticker Hang Seng Index Issued share capital (m) Market capitalization (HK$m) 52 week H | L price (HK$) Average volume (3m) `000 YTD returns Net gearing (x) Altman Z-Score ROCE/WACC Beta (x) Book value/share (RMB) Major Shareholders (%) CHING BOR SZE CITIC CAPITAL 51.90% 8.53% 1121 HK 21,875.4 1,000.0 1,390.0 2.02 | 1.29 7,246.0 N/A Net Cash N/A 349.4% N/A N/A

Originating as an OEM enterprise, Baofeng is one of the largest suppliers of slippers and flip-flops in China. It has also expanded business into in-house branded products under two brands namely Baofeng and Boree. According to Frost & Sullivan, Baofeng was ranked 1st among suppliers of slippers and flipflops in China with a market share of 6.1% in terms of sales in 1H10, and it was also ranked 1st among suppliers of own-branded slippers and flip-flops in China with a market share of 4.3% in 1H10. We project EPS to grow at a CAGR of 29% for FY11e-13e, primarily driven by a CAGR of 25% top line growth during the same period and GPM expansion. Shifting focus from OEM to in-house brands. The company has shifted its resources from OEM business to in-house branded products. Baofeng rolled out its fashionable slippers and flip-flops in China under Boree brand in 2007 and Baofeng brand in 2009, respectively. Sales from this business have surged at a CAGR of 99% from Rmb20m in FY07 to Rmb314m in FY10. We expect contribution from this business to increase to 61% in FY13e from 38% in FY10. In May 2011, Baofeng has signed a cooperation agreement with NBA, we believe it will help boost the company's sales going forward. We project EPS to grow at a CAGR of 29% for FY11e-13e. We project a CAGR of 25% for top line for FY11e-13e, primarily driven by POS expansion and improving same store sales growth for in-house branded products business. We project 5-10% yoy growth for OEM revenue in the coming years. We expect GPM to expand to 35% in FY13e from 33% in FY10, primarily driven by increasing proportion of inhouse brands business. Initiation with BUY. Given the significant portion of revenue from slippers and flipflops business, we think there are no perfect peers for Baofeng. As such, we believe sportswear and ladies' footwear manufacturers would be close comparables to Baofeng. As Baofeng's earning history with its branded businesses is brief, we value Baofeng at a 25% discount to the mid-range of sportswear and ladies' footwear peers at 9-15x FY12e P/E. However, considering that the company has about Rmb800m cash on hand at present, which is Rmb500m more than its estimated working capital need. Therefore, we believe it is fair to take into account of the HK$0.42 excess cash per share into our valuation, translating into a TP of HK$2.72 based on 9x FY12e P/E plus excess cash, posing 96% upside to its current price.

FYE Dec (RMBm) Total revenue Net profit % chg YoY Basic EPS (RMB) Gross DPS (RMB) Gross Div. Yield (%) P/E EV/EBITDA (x) ROA (%) ROE (%)

Based on July 15, 2011 closing price. Sources: Company data; OSK Securities Hong Kong Limited

Share Performance (%) Month 1m 3m 6m 12m Absolute -4.11% -7.90% N/A N/A Relative -0.72% 0.36% N/A N/A

Share Price Performance

2.00

1.80

1.60

1.40

1.20

1.00 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11

2009A 588.6 70.1 20.5 N/A N/A N/A N/A N/A 18.0 37.2

2010A 833.3 114.2 62.8 N/A N/A N/A N/A N/A 23.0 43.1

2011F 1,142.7 171.5 50.2 0.171 0.043 3.6 7.0 1.77 20.4 29.8

2012F 1,414.8 212.8 24.1 0.213 0.053 4.4 5.7 1.46 17.8 23.0

2013F 1,621.8 245.5 15.4 0.245 0.061 5.1 4.9 1.17 17.9 22.4

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1

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Baofeng Modern (1121.HK)

July 18, 2011

INVESTMENT SUMMARY

A leading supplier of slippers and flip-flops in China. Baofeng is one of the largest suppliers of slippers and flip-flops in China with an annual production volume of approximately 38m pairs of shoes in 2010. According to Frost & Sullivan, Baofeng was ranked 1st among suppliers of slippers and flip-flops in China with a market share of 6.1% in terms of sales, and it was also ranked 1st among suppliers of ownbranded slippers and flip-flops in China with a market share of 4.3% in 1H10. We expect Baofeng's market share in China's slipper and flip-flop market to expand in the coming years. Shifting focus from OEM to in-house brands. The company has shifted its resources from OEM business to in-house branded products. Baofeng rolled out its fashionable slippers and flip-flops in China under Boree brand in 2007, targeting the medium-to-high end market. In order to diversify its customer base, it launched Baofeng brand in 2009, which targets the mass market in China. In-house branded products have recorded robust growth in recent years. Sales from this business have surged at a CAGR of 99% from Rmb20m in FY07 to Rmb314m in FY10. The company will continue to expand its in-house branded products business and increase its contribution to total profits. We expect contribution from this business to increase to 61% in FY13e from 38% in FY10. POS expansion would stimulate top line growth. Total number of POS reached 520 at the end of 2010, representing a net addition of 373 POS in 2010. Most Boree brand products were sold directly to end consumers at specialty stores and concessionary counters with cooperation with distributors. Management will also look for prime locations for setting up flagship shops and showrooms in first-tier cities in China such as Beijing, Guangzhou, Shanghai, Shenzhen and Hong Kong. They will also continue to cooperate with distributors to open new POS and target to achieve a total of 800 POS as at the end of 2011 in China. Gross profit margins can further expand. Baofeng's gross profit margin has improved from 24.4% in FY07 to 33.0% in FY10, mainly attributable to the increasing contribution from in-house branded products business, which recorded a higher gross margin of 38-41% while OEM business recorded a gross margin of 28.7% in FY10. We expect gross profit margin to expand to 35% in FY12e from 33% in FY10, due primarily to increasing proportion of in-house branded product sales. We project EPS to grow at a CAGR of 29% for FY11e-13e. We project a CAGR of 25% of top line for FY11e-13e, primarily driven by POS expansion and improving same store sales growth for in-house branded products. As OEM is not management's top priority, we project 5-10% yoy growth for the revenue in the coming years. We believe SSS growth for in-house branded products can further improve as newly opened POS in 2010 will be entering fast growing phase. In order to enhance brand image and brand awareness, the company will lift its investment in A&P in next few years, which we believe can stimulate its in-house branded products sales in the long term. We expect A&P expenses as percentage of sales to increase to 8-10% in the next few years. Initiation with BUY and TP of HK$2.72. Given the significant portion of revenue from slippers and flipflops business, we think there are no perfect peers for Baofeng. As such, we believe sportswear and ladies' footwear manufacturers would be close comparables to Baofeng. As Baofeng's earning history with its branded businesses is brief, we value Baofeng at a 25% discount to the mid-range of sportswear and ladies' footwear peers at 9-15x FY12e P/E. However, considering that the company has about Rmb800m cash on hand at present, which is Rmb500m more than its estimated working capital need. Therefore, we believe it is fair to take into account of the HK$0.42 excess cash per share into our valuation, translating into a TP of HK$2.72 based on 9x FY12e P/E plus excess cash, posing 96% upside to its current share price.

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2

OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

COMPANY BACKGROUND AND BUSINESS MODEL

Originated from OEM business. Based in Quanzhou, China, Baofeng began its OEM business in 2001. OEM business has been a stable source of Baofeng's revenue which contributed 62% to total revenue in FY10. It manufactures footwear on an OEM basis for companies and licensees of companies including some names on the Fortune Global 500 List for the year 2009. The company has also maintained long-term relationships with key OEM customers. As at the end of 2010, four of its top five OEM customers had been its customers for five years or more. Its OEM products come in a broad range of designs and styles, such as slippers and flip-flops with cartoon characters for children and the youth market. Shifting to in-house branded fashionable slipper and flip-flop business. Baofeng rolled out its fashionable slippers and flip-flops in China under Boree brand in 2007, targeting the medium-to-high end market. In order to diversify its customer base, the company launched the Baofeng brand in 2009, which targets the mass market in China. In-house branded products business has recorded robust growth in recent years. Sales have surged at a CAGR of 99% from Rmb20m in FY07 to Rmb314m in FY10. The company will continue to expand its in-house branded products business and increase its contribution to the profits. Wholesale business model for in-house branded products. Baofeng cooperated with distributors to expand its POS in China. As at the end of 2010, Baofeng had 23 distributors who operated about 520 POS in China. Currently, top five distributors account for about 40% of total sales in branded products. The company will focus on brand building and enhancement for in-house brands and will continue to cooperate with distributors to expand retail network in China.

Exhibit 1: Baofeng's POS

Source: Company

Exhibit 2: Baofeng's products

Source: Company

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OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

Innovative marketing strategy for brand image building. Baofeng has placed a great emphasis on brand building and promoting its branded products in recent years. It has appointed Ms. Jacqueline Li Xiao-lu, a famous movie star in China as its spokesperson to enhance its brand awareness. In 2010, Baofeng was selected to be a licensed manufacturer of slippers and flip-flops and a retailer of footwear products for the 2010 Shanghai World Expo. We believe the national and global media exposure presented by the 2010 Shanghai World Expo will have a significant positive effect on its brand image. Cooperation with NBA. Baofeng has signed a 3-years exclusive cooperation agreement with NBA in May 2011. The company will manufacture, distribute, advertise and promote the slippers and flip-flops collection featuring NBA logos through its network in China. The NBA series is estimated to be launched in 2011, primarily targeting at medium-to-high end market. We believe the cooperation with NBA will increase Baofeng's market image and present more opportunities to cooperate with foreign well-known organizations in the future. Increasing manufacturing capacity to support sales growth. The major production facilities of Baofeng are located in Quanzhou, China, which is considered to be a hub city of the footwear industry, with many of raw material providers located in the region. Therefore, the company are able to maintain a low level of raw material inventory since purchases are generally made when manufacturing needs dictate. The company has an annual production of approximately 38m pairs of shoes in FY10. Baofeng plans to start building new production facilities to support its expansion plans. Improved financial position. Baofeng's net cash generated from operating activities increased from approximately Rmb32m for FY09 to approximately Rmb177m for FY10. This was primarily due to the composite effect of decrease in inventories and trade receivable and smaller decrease in trade payable. Cash and bank balances totalled approximately Rmb328m at end-2010, representing a net increase of Rmb149m from end-2009. Baofeng's gross gearing ratio also decreased from 46% at end-2009 to 37% at end-2010.

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OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

INDUSTRY OVERVIEW

Rapid growth in retail sales. According to National Bureau of Statistics of China and US Bureau of Economic Analysis, China's total consumer expenditure in 2009 stood at US$1.8tn, significantly smaller than US$10.0tn in the US. In 2009, consumer expenditure accounted for only 35.1% of China's GDP, compared to 70.8% in the US. However, China has the world's largest population. This, combined with increasing disposable income, presents huge market potential for consumer industry. We believe the expectation of a constantly growing retail sales market is likely to lead to an increase in the sales revenue of slippers and flip-flops in China. A fast growing industry. According to the Frost & Sullivan Report, the revenue of China's slipper and flip-flop market has grown from approximately Rmb11bn in 2007 to approximately Rmb13bn in 2009, representing a CAGR of 10.2%. As most slipper and flip-flop suppliers were export-oriented, the total revenue in China contributed by exports account for 52.7% in FY09, higher than the proportion deriving from domestic sales. However, due to the fast-growing domestic demand, revenue from domestic sales is anticipated to surpass the exports in 2014, reaching about 51.2% of the total revenue of China's slipper and flip-flop market, according to Frost & Sullivan. Going forward, the robust growth of demand will continue to be supported by rising disposable income and urbanisation in China.

Exhibit 3: Total revenue from slippers and flip-flops in China (Rmb m)

30,000 25,000 20,000 15,000 10,000 5,000 0 2007 2008 2009 2010E 2011E

Exports

12,625.9 7,925.3 8,939.8 10,137.7 11,354.2

7,044.7 6,101.7 6,342.7

11,490.0 13,270.9 8,502.3 9,905.2 4,883.8 5,508.9 6,307.7 7,316.9 2012E 2013E 2014E

Domestic Sales

Source: Frost & Sullivan

Baofeng is the leader in the fragmented market. Baofeng is one of the largest suppliers of slippers and flip-flops in China with an annual production volume of approximately 38m pairs of shoes in FY10. According to Frost & Sullivan, Baofeng was ranked 1st among suppliers of slippers and flip-flops in China with a market share of 6.1% in terms of sales, and it was also ranked 1st among suppliers of ownbranded slippers and flip-flops in China with a market share of 4.3% in terms of domestic sales in 1H10. We expect Baofeng's market share in China's slipper and flip-flop market to expand in the coming years.

Exhibit 4: 1H10 market share of the top ten suppliers in terms of sales of slippers and flip-flops in China (left); 1H10 market share of the top ten suppliers in terms of domestic sales of own-branded slippers and flip-flops in China (right)

Baofeng 0.5% 0.7% 0.7% 0.8% 1.0% 1.3% 1.3% 1.4% 2.2% 6.1%

Source: Frost & Sullivan

0.9% 0.9% 1.0% 1.1% 1.5% 1.6% 2.4% 2.7% 3.5% 4.3% 80.1%

Hengren Yaoli Crocs 84.0% Fynex Hualong Chengda Loloka Biti's Huangbao Others

Baofeng Hengren Crocs Yaoli Loloka Biti's Hualong NBA Vento Fynex Others

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OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

Large potential in fashionable slipper market. In 2009, the proportion of revenue derived from fashionable slippers and flip-flops was approximately 35.4% of the total slipper and flip-flop market in China although the sales volume of fashionable slippers and flip-flops was only approximately 20.0% of the total sales volume. According to Frost & Sullivan, the proportion of revenue derived from China fashionable slipper and flip-flop market is expected to increase by approximately 6.8% from 2009 to approximately 42.2% in 2014 in China. Given the increasing attention to fashion trends, product design and style, we believe there is still a huge room for growth in the fashionable slipper and flip-flop market.

Exhibit 5: Breakdown by fashionable and traditional slippers and flip-flops in terms of total revenue in China

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

67.2%

65.4%

64.6%

63.4%

62.0%

60.8%

59.3%

57.8%

32.8%

34.6%

35.4%

36.6%

38.0%

39.2%

40.7%

42.2%

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

Fashionable slippers

Source: Frost & Sullivan

Traditional slippers

Exhibit 6: Per capita annual disposable income of urban households in China

35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

29,031 19,109 21,130 23,475 26,104

RMB

10,493 11,759

13,786

15,781 17,175

Disposable income per capita

YoY growth

Source: National Bureau of Statistics of China, Frost & Sullivan, OSK Securities HK Limited

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OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

EARNINGS OUTLOOK

Solid growth for FY10. Baofeng reported RMB114mn net profit for FY10, representing a 62.8% yoy growth. The robust growth was primarily driven by rapid expansion of POS and growing demand for inhouse branded products. Total revenue for the year was up 41.6% to RMB833mn. By segment, sales for the in-house branded products (37.7% of total) and OEM (62.3% of total) were up 160.4% and 11.0%, respectively. Gross profit margin has improved from 28.1% in FY09 to 33.0% in FY10. The margin improvement mainly attributable to the increasing contribution from in-house branded products business. Net profit margin also expanded 1.8ppt to 13.7%. We believe the company will continue to expand its in-house branded products business and increase its contribution to total profit. We project EPS to grow at a CAGR of 29% for FY11e-13e. We project a CAGR of 25% for top line for FY11e-13e, primarily driven by POS expansion and improving same store sales growth for in-house branded products. As OEM is not management's top priority, we project 5-10% yoy growth for revenue in the coming years. We believe SSS growth for in-house branded products can further improve as new opened POS in 2010 will be entering fast growing phase. In order to enhance brand image and awareness, the company will lift its investment in A&P in next few years, which we believe can stimulate its in-house branded products sales in the long term. We expect A&P expenses as percentage of sales to increase to 8-10% in next few years.

Exhibit 7: Earnings History and Projection

FY09 Revenue OEM Products growth % Branded products growth % Total revenue COS Gross profit S&D expenses Administrative expenses Other operating expenses Operating profit Net finance income/cost PBT Tax Tax rate Net profit growth %

Source: Company data and OSK estimate.

FY10 519 11.0% 314 160.4% 833 41.6% (558) 275 (65) (34) (17) 159 6 165 (51) 30.8% 114 62.8%

FY11F 561 8.0% 582 85.3% 1,143 37.1% (748) 394 (109) (40) (2) 246 (1) 245 (73) 30.0% 171 50.2%

FY12F 600 7.0% 815 40.0% 1,415 23.8% (920) 495 (139) (57) (3) 299 5 304 (91) 30.0% 213 24.1%

FY13F 636 6.0% 986 21.0% 1,622 14.6% (1,054) 568 (154) (65) (3) 348 3 351 (105) 30.0% 245 15.4%

468 0.1% 121 276.8% 589 17.9% (423) 165 (27) (22) (0) 119 (14) 104 (34) 32.8% 70 20.5%

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OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

VALUATION AND KEY RISKS

Initiation with BUY and TP of HK$2.72. Given the significant portion of revenue from slippers and flipflops business, we think there are no perfect peers for Baofeng. As such, we believe sportswear and ladies' footwear manufacturers would be close comparables to Baofeng. As Baofeng's earning history with its branded businesses is brief, we value Baofeng at a 25% discount to the mid-range of sportswear and ladies' footwear peers at 9-15x FY12e P/E. However, considering that the company has about Rmb800m cash on hand at present, which is Rmb500m more than its estimated working capital need. Therefore, we believe it is fair to take into account of the HK$0.42 excess cash per share into our valuation, translating into a TP of HK$2.72 based on 9x FY12e P/E plus excess cash, posing 96% upside to its current share price. Key risks (1) Low entry barrier and competition; (2) reliance over distributors for in-house branded products; (3) seasonal restriction; and (4) margins contraction due to increasing COS.

Exhibit 8: Peer Comparable

3-Yr 3-mth Mkt cap Company Baofeng Modern HSI HSCEI CSI300 Sportwear Li Ning Anta Sports China Dongxiang Xtep Intl 361 Degrees Peak Sport Average Apparel Ports Design Bosideng Intl China Lilang Giordano Intl I.T Trinity Average Textile Shenzhou Intl Pacific Textile Texhong Textile Average Footwear Belle Intl Daphne Intl Le Saunda Hldgs Stella Intl Average 1880 HK 210 HK 738 HK 1836 HK 16.10 8.37 4.38 20.20 17,425 1,759 359 2,059 23.5 4.4 1.0 0.6 32.9 23.0 16.6 16.8 22.3 26.7 17.6 13.3 14.4 18.0 22.0 14.6 10.7 12.5 14.9 23.4 30.9 25.2 16.9 24.1 21.0 20.6 24.2 15.6 20.3 21.7 22.6 25.0 13.5 20.7 2.3 1.4 3.0 4.1 2.7 1.6 1.7 3.5 4.6 2.9 6.58 4.39 2.69 2.57 4.1 5.82 3.95 2.43 2.88 3.8 2313 HK 1382 HK 2678 HK 11.24 5.24 4.41 1,796 964 501 1.6 0.5 0.3 9.1 8.6 3.9 7.2 7.5 7.7 4.3 6.5 6.4 7.1 3.5 5.6 21.9 11.8 (10.0) 7.9 17.3 8.2 24.0 16.5 18.4 9.6 8.1 12.0 3.2 5.9 6.3 5.2 4.2 7.3 7.5 6.3 2.42 1.98 1.46 2.0 1.96 1.75 1.17 1.6 589 HK 3998 HK 1234 HK 709 HK 999 HK 891 HK 16.60 2.30 10.20 6.23 7.25 8.01 1,211 2,294 1,571 1,212 1,136 1,743 4.8 4.6 2.1 7.6 7.7 5.5 16.4 11.6 24.2 17.3 22.0 37.1 21.4 14.4 10.4 18.4 14.8 16.6 28.1 17.1 11.8 9.5 14.6 13.2 13.7 21.1 14.0 13.7 11.4 31.6 16.7 32.1 31.9 22.9 22.2 9.3 26.1 12.1 21.6 33.0 20.7 17.7 9.2 25.8 13.0 24.4 31.5 20.3 3.5 7.7 2.0 4.3 2.0 1.9 3.6 4.2 8.2 2.4 4.8 2.6 2.4 4.1 4.74 2.16 5.46 3.87 4.70 5.65 4.4 4.11 2.16 4.76 3.64 3.71 4.52 3.8 2331 HK 2020 HK 3818 HK 1368 HK 1361 HK 1968 HK 8.96 12.00 1.86 4.47 4.17 4.73 1,214 3,840 1,352 1,248 1,106 1,273 8.8 15.0 4.7 2.8 3.2 2.3 7.0 16.0 6.0 9.9 7.8 10.0 9.4 12.3 13.7 12.0 8.5 6.5 8.2 10.2 10.6 11.9 10.3 7.3 5.7 7.0 8.8 (42.9) 16.4 (50.1) 16.8 19.6 22.2 (3.0) 16.4 15.5 16.3 16.2 14.7 16.3 15.9 (9.9) 15.8 (16.2) 15.5 13.9 18.5 6.3 5.5 3.7 11.4 4.9 4.5 3.6 5.6 3.2 4.4 5.6 6.2 6.1 4.4 5.0 2.32 4.37 1.16 2.41 2.10 2.36 2.5 2.08 3.84 1.03 2.12 1.73 2.06 2.1 Ticker 1121 HK Price 1.39 21,875 12,266 3,129 (US$m) 178 avg t/o (US$m) 1.4 PER Hist (x) N/A 11.5 11.3 17.2 PER FY1 (x) 7.0 11.8 10.1 14.2 PER FY2 (x) 5.7 10.4 8.8 11.6 EPS FY1 YoY% N/A (2.7) 11.6 21.8 EPS FY2 YoY% 23% 14.0 15.5 22.5 EPS Cagr (%) N/A 7.6 13.6 21.2 Div yld Hist (%) N/A 3.0 2.6 1.4 Div yld FY1 (%) 3.6 3.5 3.2 1.6 P/B Hist (x) N/A 1.66 1.90 2.63 P/B FY1 (x) 1.36 1.54 1.70 2.27

Based on July 15, 2011 Closing Prices Source: I/B/E/S, OSK Securities Hong Kong Limited Sources

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Baofeng Modern (1121.HK)

July 18, 2011

Exhibit 9: Peer Comparable (cont')

EV/ Rev Hist Company Baofeng Modern HSI HSCEI CSI300 Sportwear Li Ning Anta Sports China Dongxiang Xtep Intl 361 Degrees Peak Sport Average Apparel Ports Design Bosideng Intl China Lilang Giordano Intl I.T Trinity Average Textile Shenzhou Intl Pacific Textile Texhong Textile Average Footwear Belle Intl Daphne Intl Le Saunda Hldgs Stella Intl Average 3,668 850 169 1,294 530 76 22 121 23.2 11.7 10.1 11.5 14.1 18.5 9.4 7.5 9.3 11.2 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.94 0.79 0.68 0.29 0.7 55.7 57.4 62.9 21.9 49.5 14.4 9.0 12.8 9.4 11.4 18.6 18.9 16.6 14.0 17.0 21.1 22.4 17.2 15.5 19.0 23.2 24.2 19.5 19.1 21.5 5.9 14.2 (0.7) 6.2 6.4 4.8 30.0 8.7 13.9 14.3 1,040 921 847 197 112 130 6.5 5.0 3.9 5.1 5.4 5.1 4.0 4.8 16.3 N/A 62.2 26.2 N/A N/A N/A N/A 0.68 0.58 0.50 0.6 29.9 18.0 23.9 23.9 18.9 12.2 15.4 15.5 22.5 22.2 27.0 23.9 29.3 24.8 45.5 33.2 29.6 24.6 N/A 27.1 8.1 (1.9) (17.1) (3.6) 24.6 8.9 (37.9) (1.4) 266 1,089 318 607 492 258 73 197 65 69 50 44 13.7 7.9 18.0 11.3 14.6 26.8 15.4 10.7 6.5 13.7 9.3 10.5 19.9 11.8 N/A N/A N/A N/A N/A 2.9 0.5 N/A N/A N/A N/A N/A N/A N/A 0.88 1.30 0.91 0.76 1.13 N.A 1.0 79.1 46.9 37.9 57.7 63.3 77.2 60.4 27.5 18.1 20.4 11.4 10.1 16.9 17.4 21.6 15.0 21.6 18.4 18.4 10.7 17.6 31.5 18.7 23.9 23.7 23.3 16.0 22.8 31.2 20.8 27.3 25.1 21.9 18.5 24.2 (7.9) 13.9 (8.8) (7.8) 3.0 4.8 (0.5) (21.5) (11.5) (10.1) 20.8 4.0 (2.0) (3.4) 1,467 1,146 659 690 670 657 172 240 226 126 142 127 3.9 11.3 1.4 5.6 5.4 5.8 5.6 6.2 9.4 2.9 4.8 4.6 4.7 5.4 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.84 1.08 0.95 0.78 0.68 0.85 0.9 47.3 42.8 59.7 40.6 39.4 38.0 44.6 11.7 20.9 34.3 18.3 21.2 19.4 21.0 33.3 26.0 17.5 24.9 25.3 23.2 25.0 36.7 28.8 19.7 25.7 31.0 25.4 27.9 17.2 29.3 8.5 26.3 27.8 25.6 22.5 (31.1) (14.3) (22.8) (20.9) (16.4) (11.9) (19.6) (37.8) (5.5) (25.6) (22.1) (23.6) (22.5) (22.8) (US$m) 129 NP Hist (US$m) 18 Ebitda Hist 4.5 EV/ Ebitda Cur Yr N/A Net gearing Hist (%) N/A Net gearing FY1 (%) N/A Unlev beta N/A Gross margin Hist (%) 33.0 Net margin Hist (%) 13.7 ROIC Hist (%) 33.9 ROE Hist (%) 43.1 14.4 16.8 15.3 ROE FY1 (%) 29.8 13.1 16.8 16.0 Sh px 1-mth % (2.8) (2.1) (1.1) 5.6 Sh px 3-mth % (8.6) (8.9) (9.4) (6.8)

Based on July 15, 2011 Closing Prices Source: I/B/E/S, OSK Securities Hong Kong Limited Sources

OSK Research

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9

OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

APPENDIX

Exhibit 10: Baofeng's Company Structure

Source: Company

Exhibit 11: Management Background

Mr. Zheng Liuhe, aged 73, the Chairman and an executive Director, is primarily responsible for the overall strategic planning and development of Baofeng. He has been a Director since 21 July 2008. Mr. Zheng Liuhe has more than 10 years of experience in the slipper and flip-flop business in China. He joined the company in January 2000 as vice-general manager and has been appointed as the chairman of the board of Quanzhou Baofeng since 28 March 2007. Mr. ZHANG Aiguo, aged 53, the vice-chairman and an executive Director, is primarily responsible for the financial management and human resources management of Baofeng. Mr. Zhang has been a Director since 21 July 2008. Mr. Zhang has more than 10 years of experience in the slipper and flip-flop business in China. He has been a vice-general manager of Quanzhou Baofeng since 2000 and is responsible for financial management. He was appointed as the vice-chairman of the board of Quanzhou Baofeng on 28 March 2007 and as a director of BAOF (HK) on 21 July 2008 of the Group. Prior to joining Baofeng, he was a vice-general manager of Quanzhou Travel from 1989 to 1999. Mr. CHEN Qingwei, aged 55, the chief executive officer and an executive Director, is primarily responsible for the overall operational management of Baofeng. He has been a Director since 10 March 2008. Mr. Chen has more than 10 years of experience in the slipper and flip-flop business in China. He was the vice-general manager of Quanzhou Baofeng from 2000 to 2006 and was responsible for the production management of the company. Mr. ZHENG Jingdong, aged 44, an executive Director, is primarily responsible for overseeing the export sales division and the R&D department of the Group. He has been a Director since 21 July 2008. Mr. Zheng Jingdong has more than 10 years of experience in the slipper and flip-flop business in China. Mr. Zheng Jingdong joined Quanzhou Baofeng as the general manager in 2000. He became the vice-general manager in 2006 and since then he has been responsible for the management of the export sales division of Quanzhou Baofeng. He has been appointed as a director of Quanzhou Baofeng since 28 March 2007 and as a director of Baof HK since 21 July 2008. Prior to joining the Group, he was a vice-general manager of Quanzhou Travel from 1994 to 1999.

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10

OSK Research

Baofeng Modern (1121.HK)

July 18, 2011

Financial Summary (FYE 31 December)

Valuation and Growth 2009A Valuation Ratios PER (Basic) (x) Dividend yield P/BV (x) Growth Revenue Gross profit Net profit Per Share Data (RMB) EPS (Basic) DPS Payout ratio BV/S Income Statement (RMBm) Total revenue OEM Products Branded products COS Gross profit Other operating income S&D expenses Administrative expenses Other operating expenses Operating profit Net finance income/cost PBT Tax Net profit N/A N/A N/A 17.9% 26.7% 20.5% 2010A N/A N/A N/A 41.6% 26.7% 62.8% 2011F 7.0 3.6% 1.36 37.1% 66.4% 50.2% 2012F 5.7 4.4% 1.15 23.8% 43.3% 24.1% 2013F 4.9 5.1% 0.97 14.6% 25.6% 15.4% Profitability Ratios Gross margin Operating margin Net margin Pre-tax ROA After-tax ROE Balance Sheet Ratios Current ratio Gross debt/equity Net debt/equity Inventory days Receivable days Payable days Balance Sheet (RMBm) Total current assets Cash and cash equivalents Receivables Inventories Other current assets Total current assets Net PPE Other non current assets Total fix assets Total assets Liabilities Short-term borrowings Trade payable Other current Liabilities Total current Liabilities Non-current borrowings Other non-current liabities Total non-current liabilities Total liabilities Shareholeders' equtiy Total liabilities & total equity Financial Ratios 2009A 28.1% 20.1% 11.9% 18.0% 37.2% 1.7 60.3% 39.8 55.8 47.7 2010A 33.0% 19.1% 13.7% 23.0% 43.1% 1.9 44.0% 34.8 39.0 28.8 2011F 34.5% 21.5% 15.0% 20.4% 29.8% 3.6 11.6% 31.9 33.7 32.4 2012F 35.0% 21.1% 15.0% 17.8% 23.0% 3.7 6.0% 34.7 36.1 39.7 2013F 35.0% 21.4% 15.1% 17.9% 22.4% 3.9 2.9% 35.5 36.0 41.5

Net Cash Net Cash Net Cash Net Cash Net Cash

2009A N/A N/A 99.9% N/A

2010A N/A N/A 53.4% N/A

2011F 0.171 0.043 25.0% 0.845

2012F 0.213 0.053 25.0% 1.005

2013F 0.245 0.061 25.0% 1.189

2009A 178.5 97.2 55.6 11.4 342.8 49.9 37.7 87.6 430.3 134.8 45.2 23.2 203.2 0.0 3.5 3.5 206.7 223.6 430.3

2010A 327.9 80.8 50.9 18.2 477.8 49.3 33.6 83.0 560.8 98.1 42.9 113.2 254.3 0.0 0.0 0.0 254.3 306.5 560.8

2011F 742.3 130.0 80.0 10.0 962.3 127.3 30.0 157.3 1,119.7 60.0 90.0 120.6 270.6 0.0 4.0 4.0 274.6 845.1 1,119.7

2012F 737.9 150.0 95.0 10.0 992.9 251.3 30.0 281.3 1,274.3 35.0 110.0 120.6 265.6 0.0 4.0 4.0 269.6 1,004.7 1,274.3

2013F 767.0 170.0 110.0 15.0 1,062.0 371.3 35.0 406.3 1,468.4 35.0 130.0 110.6 275.6 0.0 4.0 4.0 279.6 1,188.8 1,468.4

2009A 588.6 467.9 120.6 (423.2) 165.4 2.8 (26.9) (22.5) (0.2) 118.5 (14.2) 104.3 (34.2) 70.1

2010A 833.3 519.2 314.1 (558.1) 275.2 0.9 (65.4) (34.1) (17.4) 159.2 5.7 164.9 (50.7) 114.2

2011F 1,142.7 560.7 582.0 (748.5) 394.2 2.0 (108.6) (40.0) (2.0) 245.7 (0.7) 245.0 (73.5) 171.5

2012F 2013F 1,414.8 1,621.8 599.9 635.9 814.9 985.9 (919.6) (1,054.2) 495.2 567.6 2.0 2.0 (138.7) (154.1) (56.6) (64.9) (3.0) (3.0) 298.9 347.7 5.0 3.0 303.9 350.7 (91.2) (105.2) 212.8 245.5

Cashflow Statement (RMBm) Profit before taxation Depreciation and Amortization Changes in WC Income tax paid Others Operating Cash flow Capex Interest received Others Investing Cash flow Equity raised Debt movement Dividend paid Others Financing Cash flow Total Cash flow Opening Cash Balance Exchange rate changes Closing Cash Balance

2009A 104.3 9.0 (67.7) (28.5) 14.5 31.6 (2.9) 0.0 (2.4) (5.3) 0.0 23.1 (70.0) 64.0 17.1 43.3 135.2 0.0 178.5

2010A 164.9 10.7 54.8 (50.7) (2.7) 176.9 (33.0) 0.0 28.8 (4.2) 0.0 (23.3) 0.0 0.0 (23.3) 149.3 178.5 0.0 327.9

2011F 245.0 22.0 (31.1) (73.5) 0.0 162.3 (100.0) 0.0 (5.0) (105.0) 410.0 10.0 (42.9) (20.0) 357.1 414.5 327.9 0.0 742.3

2012F 303.9 26.0 (15.0) (91.2) 0.0 223.8 (150.0) 0.0 (5.0) (155.0) 0.0 10.0 (53.2) (30.0) (73.2) (4.4) 742.3 0.0 737.9

2013F 350.7 30.0 (15.0) (105.2) 0.0 260.5 (150.0) 0.0 5.0 (145.0) 0.0 10.0 (61.4) (35.0) (86.4) 29.1 737.9 0.0 767.0

Source: Company data, OSK Securities Hong Kong Limited

Source: Company data, OSK Securities Hong Kong Limited

OSK Research

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11

OSK Research July 18, 2011

OSK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclaimer This report is published by OSK Securities Hong Kong Limited ("OSKSHK"), a subsidiary of OSK Investment Bank Berhad ("OSKIB"). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This report is prepared for internal circulation. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for the information of addresses only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal or financial advice. OSKSHK and OSKIB accept no liability whatsoever for any direct or consequential loss arising from any use of this report or further communication given in relation to this report. This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. This report is for the use of intended recipients only and may not be reproduced, distributed or published for any purpose without prior consent of OSKSHK. OSKSHK, OSKIB and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other services for the company covered in this report. OSKSHK, OSKIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company. OSKSHK, OSKIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. OSK Securities Hong Kong Limited and/or its affiliates received in the past 12 months compensation or mandate for financial services from Baofeng Modern International Holdings Limited (1121 HK) Risk Disclosure Statements The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling securities. Growth Enterprise Market ("GEM") stocks involve a high investment risk. In particular, companies may list on GEM with neither a track record of profitability nor any obligation to forecast future profitability. GEM stocks may be very volatile and illiquid. You should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors. You should seek independent professional advice if you are uncertain of or have not understood the nature and risks involved in trading of GEM stocks. All Rights Reserved. Published and printed by : OSK SECURITIES HONG KONG LIMITED (A subsidiary of OSK Investment Bank Berhad, Malaysia)

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