Rating: BUY* (Initiation)
Target price: RMB25.50
Share price (6 Sep): RMB23.55
Market Cap (RMBm): 8,810.2
Up/downside: 8.3%
From a low-margin OEM/ODM-based model, Shuhua Sports made a breakthrough by developing house brand products that have increased its brand premium. We believe that future demand growth would propel its house brands, along with an R&D and innovations focus and quality customer resources, and help the company increase market share. We initiate coverage with a BUY call and a target price of RMB25.50.
A leading provider of sports and health solutions in China
Its main products are fitness equipment and display racks under its own brands as well as OEM/ODM services for overseas brands. Shuhua is building up its own brands. Its fitness equipment brands, including Shuhua and Bokang, have clear market positioning. In revenue terms, Shuhua focuses on the production and sale of fitness equipment, supplemented by display racks. In 2020, fitness equipment revenue accounted for 82.8% of total revenue. Application scenarios comprise indoor fitness equipment and outdoor products, including treadmills and strength-training equipment.
Policy favors sports industry growth; potential room for product manufacturing
In recent years, China’s Sports Power Construction Program, 14th Five-Year Plan, National Fitness Program 2021-25 and other planning initiatives have supported the development of multiple sports industry segments. Levels of per-capita disposable income and national fitness awareness are both increasing gradually, which benefits the upstream sports goods manufacturing industry. Demand and development prospects would also rise, along with growth in sports stadium services, sports training and so on.
Shuhai’s core competitive advantages
1) The Shuhua brand is a strong one empowered further by the company’s Olympics IP.
2) Its R&D team continues to grow and cross-industry cooperation has brought new technology possibilities.
3) It has a country-wide marketing network, which integrates the development of multiple forms and channels.
Shuhua benefits from enormous industry potential due to national policies
Market: The fitness business penetration of the Chinese population is only 4.98%; an increase in penetration in the future would increase market potential. Simultaneous policy measures would also tilt resources toward new incremental market demand.
Company: Shuhua’s revenue has grown steadily with good cash flow. 2017/18/19/20 revenue were RMB1.13bn/1.18bn/ 1.33bn/1.48bn, up 6.4/4.4/12.8/11.3% yoy. The ratio of net cash flow from operating activities to net profit in 2018-20 was greater than 1, reflecting good sales payment collection capability.
Valuation and risks
From a low-margin OEM/ODM-based model, Shuhua Sports made a breakthrough by developing house brand products that have increased its brand premium. We believe that future demand growth would drive its house brands, R&D and innovations focus, and quality customer resources to help the company increase market share. We expect net profit of RMB170m/210m/240m in 2021/22/23E. We are optimistic about Shuhua’s future potential as a leading fitness equipment manufacturer and assign a 50x PE with a corresponding target market cap of RMB10.5bn in 2022E. We initiate coverage with a BUY rating and a target price of RMB25.50. Risks include: high customer concentration risk in the display rack segment; accounts receivable risks; and revenue fluctuations in the outdoor sports segment.
* Note: The investment ratings given by TFI Asset Management Limited may have taken reference to the research report previously issued by other entities of the TF Group. For details, please contact us at research_tfi@tfisec.com.
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