DBS Research on 8 Aug 2008: Outsourcing remains intact Story: Man Wahââ¬â¢s 1Q09 results were ahead of our earnings estimates, as it continues to benefit from the furniture outsourcing trend in the US and the strong retail market positioning in China. Man Wah delivered 41% y-o-y topline growth to HK$474.9m in 1Q09, while its net profit jumped 65% y-o-y to HK$62.6m. Gross profit margin rose 9ppt y-o-y, or 3ppt q-o-q, to 34.9% in 1Q09, as the group benefited from better economies of scale at its relatively new manufacturing facility in Huizhou. The prices for treated leather hides were relatively stable and Man Wahââ¬â¢s ability to increase selling prices for its new sofa designs have allowed the group to manage operating costs increase. Point: We have mentioned in our last report that the May-July periods usually give good insights into the actual follow-through orders for new models introduced at furniture trade shows in the January-March periods, which were successful ones for Man Wah. The outlook looks positive, as Man Wah posted good 1Q09 results, and there are no major order cancellations by its customers to-date for all geographical regions, with a typical up to 3 months order book visibility intact. Still, we remain cautiously optimistic on Man Wah, in view of the protracted weakness in the US housing market and the slowing China housing sector. Indeed, Man Wah saw its sales to Europe down 24% y-o-y in 1Q09, due to UK housing market weakness. With little visibility on the extended duration of US housing market problems, we have revised down our net profit estimate by 6.2% to HK$228.5m in FY09. Relevance: Our fair value for Man Wah is now S$0.54, using 9x FY09 PE (financial year ended March). While we have downgraded the earnings estimates due to concern on the longer than expected drag in US housing market, we still like Man Wah for its strong business execution to ride on the furniture outsourcing trend. Maintain BUY.
I believe the 1Q2009 results show that the Company should be doing fine despite the strong headwind that it encounters. But one has to seriously consider whether the growth is sustainable. Man Wah reminds me of HTL when it was in its prime times, taking orders like no tomorrow. Until a point that it has grown so big that its growth would resembles that of the industry norm. No company can escape this reality. When you are small, you can still find niche position in the market. You can take small business away from the established players who are engrossed in the big businesses. When you grow to a certain size, you find that the niche market is no longer big enough. You start to muscle your way into the big boys\' game. You find bigger contracts\' values, bigger playing fields. Until the big boys fight back. That\'s when you realize that if the industry is not growing fast enough, sooner or late, everybody has to fight for the same pie. That\'s when price wars start..... Let\'s give Man Wah its due credit. I suggest we revisit the Company in a year\'s time. By then, we should be anticipating sales of maybe HK 2 billion and profit of HK 250m. If margin does not erode, then it passed its first test. :laugh: :laugh:
MacGyver, I agree with your points. It is a scary thought to see Man Wah turn into another HTL. I don\'t know the details how HTL sell to US market, but I do know they lost their top guy Stephen Barr to Man Wah in 2006. Of course he can also leave Man Wah to other firms but this is the risk in any business. Compensation of course plays a part in any move, but there must be something good about Man Wah that Stephen Barr saw compared to HTL. I was in yesterday analyst briefing (I got myself invited - thanks Li Li of Financial PR), there is a slide on why Man Wah is increasing market share in US: Why Man Wah is able to capture more market share: - Move from wholesale to US BIG retailers since 2006 - Strong rapport with US BIG retailers over the years - Quality services provided to clinch bigger deals: (a) on time delivery, (b) obtaining feedback and catering different product mix - Expand production capacity to cater to the bigger volume orders of the BIG retailers - Targeting mid market which consists of large volume - Demand from just one TOP 30 customer is overwhelming compared to Man Wah\'s existing capacity, for eg: (a) Rooms To Go, >150 stores, approx 202,000 sofa sets per year (b) American Signature (Value City), >130 stores, approx 180,000 sofa sets per year (c) Berkshire Hathaway furniture, 154,000 sofa sets per year. It is difficult for us as outsiders to assess the sustainability of their strategy. My own approach is to observe the management track record, monitoring their words and subsequent actions. In their May 14 press release, the management said \"The increasing costs of manufacturing domestically in the US have made it more price competitive for US furniture companies to increase their manufacturing outsourcing activities. There are not many sofa manufacturers in PRC who have the capacity and manufacturing standards to produce quality sofa sets at our prices.\" So far they have delivered. Can a competitor in PRC or Vietnam or some other low cost countries replicates Man Wah\'s advantages (brand new large production capacity, tax free pricing on export via Macau, a US marketing team)? It may not be so easy. I see the major risk being a sanction on Chinese products imposed by US congress. If the US strategy does hit a wall in the future, there is still the PRC domestic market sales which will provide some relief - the Cheers brand is one of the top 8 sofa brands in China. This fall back position is not available to others like HTL. There is risk in investing but considering Man Wah at - PE 30% - dividend yield > 8% (with a 25% dividend payout policy) - minimal debt - account receivables are credit-insured - lower capex requirements in the next 2 years, the risk/reward to me is justified.
MacGyver, scbchan, and other readers: NextInsight has just published a short article on the Man Wah Q1 results, plus some big-picture charts & tables. Direct link:
www.nextinsight.net/content/view/523/60/
Man Wah participated in the JP Morgan China investment conference on 23-25 April in which more than 1500 investors and fund managers participated. According to their 18 April press release, Man Wah did a series of one-on-one meetings and group presentations about the company operations and growth strategies. On the Monday following the conference (28 April), there was a huge spike of trading with 9,634,000 shares changing hand between 25 and 29.5 cts. The next day the volume went back down to 323,000 shares. No doubt some fund managers gave order to buy immediately after the conference. With Q1 result confirming management\'s story told during the conference, I\'d not be surprised that once the result is digested fully by fund managers, there will be more accumulation in the near future.
