Fundamental Analysis on China Zaino

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.