Summary of the report
Company overview
Kaizhi is happy to engage in the retail and wholesale of toys and baby products in China, as well as toy retail in Hong Kong. According to the Euromonitor report, Kaizhile is China's largest toy retailer by retail sales value in 2016, with a market share of about 14%. Lego Group is the largest brand owner of Kaizhile, accounting for more than 60% of the group's total purchases for three consecutive years. Kaizhile also buys 26 international toy and baby product brands from 23 brand owners.
As of April 30, 2017, the company had 754 retail outlets, mostly in first-and second-tier cities in China, and operated a retail store in Hong Kong. The company plans to continue to expand its retail network in the mainland and Hong Kong, adding 44 retail outlets in the six months ending December 31, 2017, and 64 and 73 retail outlets respectively in 2018.
In the four months to 2017, the company's core net profit rose 24% year-on-year, revenue increased 14%, gross profit margin rose 200 basis points year-on-year, and core net profit margin rose 40 basis points year-on-year. In fiscal year 2016, the company's core net interest rate fell 8% year-on-year, mainly due to a slowdown in revenue and a decline in profit margin. The company's revenue increased by 5% (up 18% year-on-year), gross profit margin fell 270 basis points year-on-year, and core net profit margin fell 160 basis points year-on-year. The company's performance rebounded in the first four months of 2017.
Industry status and prospects
According to the Euromonitor report, sales of traditional toys and games are expected to grow at a compound annual growth rate of 5.9% between 2017 and 2021, and the market for assembled toys is expected to exceed that of traditional toys and games, with a compound annual growth rate of 16.9% between 2017 and 2021.
Under the two-child policy, the demand for toys and baby products will gradually increase. There are growth opportunities for toys and baby products in urban areas, especially in third-tier cities.
Advantages and opportunities
The Lego Group represented by the company is a world-renowned assembly toy manufacturer with high brand awareness, loyal fans and a wide range of ages, including adults with childlike innocence.
The company has plans to expand its retail outlets, including opening flagship stores and channels in first-and second-tier cities to further sink into third-tier cities to support continued growth.
Weakness and risk
Some of Lego's international business tends to operate on its own, including online e-commerce and international large-scale wholesale. Kaizhile will terminate the exclusive distribution rights of some Lego products from this year.
Valuation
IPO pricing corresponds to 2017E core price-to-earnings ratio of 12-17 times, the valuation belongs to the reasonable range of clothing toys. It is reported that the company plans to use 60% of the money raised to expand its domestic and Hong Kong retail networks, including opening flagship stores, Lego certified specialty stores, Kidsland and Babyland stores, developing online business and paying for marketing expenses. We believe that the company's industry benefits from the two-child policy, the company is the industry leader, store expansion plans and marketing activities have a positive impact on the company's performance, and the performance is also sustainable. We give IPO a dedicated rating of "6".