The company's advantages (1) provide a variety of products to enhance cross-sales opportunities; (2) Benefit from Guangdong Province's high output advantages. Of the 3 production facilities currently in operation, 2 are located in Guangzhou, fully benefiting from Guangdong's huge manufacturing industry; (3)
By combining quality control and internationally recognized certificates, it has become a trustworthy paint manufacturer; (4) has a stable and experienced management team, and the 3 executive directors all have over 20 years of experience in the paint industry.
Industry Overview Coatings are divided into two main categories: Industrial coatings (including liquid and powder coatings)
and architectural coatings. The industrial coatings industry is scattered, and industrial coatings are used in many industries, including automobiles, consumer electronics, toys, and shipbuilding. Architectural coatings refer to paint products used in construction, such as interior and exterior coatings for buildings. Benefiting from China's booming economic growth over the past ten years, industrial and architectural coatings have developed rapidly.
China's paint industry has developed rapidly over the past 10 years. According to data from the China Paint Industry Yearbook 2013, more than 1,900 paint manufacturers generated revenue of more than RMB 20.0 million in 2013, while in 2002, less than 1,000 paint manufacturers generated revenue exceeding RMB 5.0 million. Production value and production volume maintained double-digit growth. According to the China Paint Industry Yearbook 2013 and statistics from the China Paint Industry Association, China's paint production increased from about 7.6 million tons in 2009 to about 16.5 million tons in 2014, while the corresponding production value increased from about 183.6 billion yuan to about 431.8 billion yuan.
The slowdown in production growth in 2013 was mainly due to regulatory reforms, as the Chinese government has been trying to encourage more companies to produce environmentally friendly products. Products that failed to meet the environmental standards set out in Chinese regulations were forced out of the market, leading to a decline in overall production growth in 2013. However, with increased environmental requirements for paint products and the subsequent transformation of the paint market, production volume is expected to increase moderately over the next few years. On the other hand, due to improvements in environmental requirements, the current quality standards for paint products have also been raised. As a result, the average price of paint has risen from about RMB 2,3073 per ton in 2012 to about RMB 26,212 per ton in 2013.
In terms of production volume, the production volume of industrial coatings was about 11.9 million tons in 2013, with a compound annual growth rate of 16.1% from 2009 to 2013. The development of industrial coatings is closely related to the rapid development of the end-user industry, such as toys, automobiles, consumer electronics, etc. Chinese regulations have raised the standards for environmental requirements, which has had an impact on the industrial coatings market, while overall production growth has declined. The annual growth rate of production fell from about 16.1% in 2012 to about 5.3% in 2013. However, several industry sources suggest that the growth rate will stop falling and pick up soon, and will maintain moderate growth during the forecast period from 2014 to 2018. According to industry data, production of industrial coatings is expected to grow at a compound annual growth rate of 9.0% from 2014 to 2018.
The industrial coatings industry's output value (based on producer prices) maintained a high compound annual growth rate of 15.6% in terms of value from 2009 to 2013, although it slowed to about 10% from 2012 to 2013. According to the China Coatings Industry Yearbook 2012, the slowdown in growth was mainly due to lower overall average paint prices in 2012 and overall price fluctuations over the past few years.
The production value of industrial coatings is expected to maintain a compound annual growth rate of 9.2%, with a production value of approximately RMB 458 billion by the end of 2018. The growth rate of production value is expected to be slightly higher than production volume, as tight competition and tight profit margins have prompted industrial paint manufacturers to focus on upgrading their product portfolios with high value-added products. According to industry data forecasts, prices will rise slightly as the markets of different customers will gradually prefer and seek higher quality products.
Profitability and financial figures based on track records for the past 3 years, the Group's revenue increased from HK$288.8 million in fiscal year 2012 to HK$328.0 million in fiscal year 2014, with a compound annual growth rate of 6.6%; net profit increased from HK$33.4 million in fiscal year 2012 to HK$42.0 million in fiscal year 2014, a compound annual growth rate of 12.2%. Revenue and net profit declined by 3.2% and 15.4% respectively in the first half of 2015. The increase in revenue during the period was mainly due to the increase in demand for the Group's paint products and the increase in revenue from Cascieux Baohui. The decline in revenue in the first half of 2015 was mainly due to a decrease of about 28.8% in sales under Songhui's contract manufacturing agreement. The gross margin during the Group's track record period fluctuated between 25.7%-29.6%, with little change. The net interest rate during the period was about 11.6%-12.8%, and the net interest rate reached 20.1% in 2013, mainly from the one-time income from the sale of properties. Overall, the Group's revenue and profit margins are relatively stable.
The purpose of the fund-raising is HK$121.5 million (calculated at the sale price of HK$1.00 per share) of the proceeds from this fund-raising will be used for the following purposes: approximately HK$81.7 million (equivalent to approximately 67.2% of the net proceeds from the sale of shares) for part of the second-stage construction of Yuanhui's production facilities; approximately HK$12.0 million (equivalent to approximately 9.9% of net proceeds from the sale of shares) for the purchase of additional machinery and equipment; approximately HK$3.3 million (equivalent to approximately 2.7% of the net proceeds from the sale of Shares) will be used to partially pay for the production of Yuanhui's production Second facility Purchase price of phased construction land; approximately HK$20.0 million (equivalent to approximately 16.5% of net proceeds) to repay bank overdraft financing; and approximately HK$4.5 million (equivalent to approximately 3.7% of net proceeds from sale of shares) for the Group's general working capital.
The Valuation Group did not provide a net profit estimate for fiscal year 2015. Based on the net profit of HK$42.0 million for fiscal year 2014, the historical price-earnings ratio was about 14.3 times. According to the 12th Five-Year Plan, the government will gradually raise the entry threshold for the paint industry, close obsolete production facilities, develop industrial parks, and rebuild the paint industry.
The Government will also support mergers and acquisitions in the petrochemical industry and rationalize product standards to improve production levels, technology, applications, energy efficiency and quality. The Government will also raise the standards of testing technology and systems and actively encourage enterprises to meet international standards. Many enterprises will be forced to upgrade their production lines. It is expected that stricter regulations will speed up market integration. Large market participants that have already met certain industry standards will continue to gain market share in the process of structural upgrading in the paint industry, and small market participants that do not meet environmental standards may gradually fade out of the relevant industries. Industry consolidation is expected to be beneficial to the Group, but its industry lacks other growth points. Performance figures also reflect that it is only a relatively stable profitable enterprise, and valuations are not cheap. We recommend speculative subscribing to this stock.
Risk factors (1) Customers generally place orders according to individual circumstances, and demand for products may fluctuate; (2) Casiubaohui is one of the Group's top five suppliers. If it is disrupted, reduced or terminated from the supply of raw materials from Casiubaohui, it may adversely affect the Group's business operations; (3) the Group's business relies on continuously changing production procedures and technology, and the Group cannot guarantee that it can successfully develop or obtain new production procedures and technologies in a timely manner, or fail to develop or obtain relevant procedures or technology at all; (4) Quality control system failures may damage the business and cause potential product liability claims; (5) it is vulnerable to labor supply shortages at reasonable costs; (6) there are no long-term agreements with suppliers, changes in raw material costs It may have a significant adverse effect on the Group's financial results.