Following the TA, here's the fundamental analysis (FA) on China Zaino.
China Zaino designs, develops, manufactures and sells backpacks and luggage under its proprietary DAPAI brand. According to Frost and Sullivan, DAPAI is the leading brand for double-strap backpacks in China, with a market share of 35.8% in terms of revenue in '06, way ahead of number 2 brand Jinhou which has a market share of 4.3%.
It has won awards including: "Top 500 Asia Valuable Brand Award" and "2006 Top 12 Bags Brand in China".
China Zaino has an extensive distribution network in China, with over 3,000 concessionary retail outlets in 26 provinces, municipalities and autonomous regions in China.
Based on '06 financial figures, the offer price of $0.60 was at a PER of 7.91x. Based on FY08 forecast, the IPO price indicates a post-dilution forward PER of 9.0x. Between FY04 and FY06, its net profits grew at a compounded annual growth rate (CAGR) of 87.7%, from RMB54.8m to RMB193m. For the first 9 months of FY07, it achieved a 56.6% growth.
Demand for bags is robust in the PRC, owing to a growing Chinese population and increased domestic and international travel. Armed with net IPO proceeds of RMB410m, Zaino will be expanding its production capacity to satisfy demand in China.
CIMB forecast a 3-year earnings CAGR of 37% for FY08-10. Their target price is $0.95, set at 7x CY09 earnings, which represents a 50% discount to average valuations for Chinese retailers, in view of the slower growth of the backpack and luggage industry, compared with sporting goods.
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Report from KE.
China Zaino is a leading backpack and luggage company in PRC with a market share of 36%. Selling its products under the DAPAI brand, Zaino has proven to be always ahead of the pack in product innovation, market penetration and brand building. We urge investors to seriously re-look at its unique value proposition of being a clear leader in the branded consumer goods segment and trading at a bargain.
We reckon that China Zaino is deeply undervalued given its market leadership and lucrative operating margins. Despite having a huge distribution network as sizable as China Hongxing, China Zaino merely trades at half of Hongxing's PER valuation. It is even trading below China Sports that is much smaller in terms of network and profitability. In fact, Zaino has deliberately avoided the highly competitive and crowded sports shoes and apparel segment.
Rising affluence underpins the strong demand for traveling among the Chinese, coupled with a progressive need for stylish and updated luggage will continue to drive demand for Zaino's products. Hence, we expect its earnings growth momentum to come from the luggage segment that commands higher selling prices and margins.
Measured expansion plans to drive sustainable growth Zaino's earning momentum will be sustained through the addition of 320 retail stores by FY08 and the doubling of its production capacity by FY10. At the same time, the group has stepped up aggressive brand building efforts through TV advertisements. Being the first backpack company in PRC to advertise on TV, the group anticipates positive responses, along with an enhanced brand image and visibility. No excess baggage here! We find Zaino's sharp discount to peers' valuations of 16x FY08 PER hard to ignore, given its market leadership in PRC. Our target price of $0.90 is derived based on the average of our PER valuation and 5-year DCF valuation (terminal growth of 1%). We initiate coverage on China Zaino with a BUY.
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