Main points of investment
For the first time, coverage gives a prudent overweight rating, with a target price of HK $5.27. We expect the company to achieve HK $102 billion in revenue from its main business in 2018-19-20, which is + 29.3%, 10.9% and 11.6% over the same period last year. Realized a net profit of HK $6.10 billion, or + 167.4%, 10.7% and 11.1%, compared with the same period last year. We are optimistic about the transformation of the company from the OPM model to its own brand-led business model, as well as the competitive advantages of multi-brand, multi-price, whole-industry chain production and global distribution. It is expected that the company will be included in the Lugang Stock Connect in September 2018, which will attract more southward capital. We give the target price HK $5.27, corresponding to a PE of 16.0x in 2018, an increase of 11.0% over the current price.
Demand-side volume and prices have risen, contributing to the significant growth of the industry scale. On the one hand, the new consumer demand highlights the "two-child" policy and the population base ushering in the fourth baby boom. In 2017, the number of people aged 0-14 in China accounted for 16.78% of the total population. On the other hand, the escalation of consumption, the new concept of parenting population and the improvement of per capita income prompt consumers to pursue higher quality. The average consumer confidence index in 2017 was + 10.7% compared with the same period last year. In China, 77% of the parenting families spend more on their children's monthly living expenses, and 30% of them spend more than ten thousand yuan on their babies' monthly living expenses, and the quality of consumption is improved. We expect the industry to grow by about 13%.
The brand management strategy of multi-brand global layout promotes the growth of the company's performance. On the one hand, the revenue of the three private brands GB, Cybex and Evenflo is the core of the company, accounting for 75% of the company's 2017 revenue. On the other hand, the sales markets of GB, Cybex and Evenflo are China, the United States and Europe respectively, and the sales channels and brands do not conflict with each other. In addition, GB's revenue from durable goods and non-durable goods in 2017 was HK $1.58 billion and HK $1.35 billion respectively, which was + 24.2% and 31.3% respectively compared with the same period last year. The GB business of durable goods and non-durable goods is growing rapidly.
Optimize the configuration of the industrial chain, eliminate major related transactions, and enhance the ability to control costs. On the one hand, the company has set up four production bases and corresponding production plants around the world, which can realize the independent production process from raw materials and parts to finished products. On the other hand, the elimination of related party transactions will provide greater transparency to the company's distribution and retail channels in China. The acquisition of Oasis Dragon to obtain the leading omni-channel pregnancy and baby product sales platform will help the company to open up the industrial chain, downstream business value-added and more end customers. Oasis Dragon's own online retail network had 1.2 million and 730000 active customers in 2016 and 2015, respectively.
Risk tips: goodwill impairment risk, overseas market expansion is not as expected, acquisition integration effect is not as expected, exchange rate fluctuations, product safety accidents