Performance review
2018 results fell short of our expectations
In 2018, Goodboy International's sales increased 20.8% year over year to HK$8.629 billion, and net profit decreased 8.7% year over year to HK$164 million, corresponding to a profit of HK$0.10 per share. Due to the bankruptcy of its main customer, Toys R Us, and the slowdown in domestic durable goods sales growth, the company's performance fell short of our expectations.
Excluding the impact of mergers and acquisitions: Assuming that the Oasis Dragon acquisition was completed in January 2017, the 2018 exam preparation revenue was the same year over year, and operating profit fell 37.9% year over year.
Excluding non-recurring accounting items: After excluding costs associated with stock options, amortization of intangible assets and inventory appreciation, one-time bad debt accrual, and other losses, non-general standard operating profit increased 4.3% year over year in 2018, and profit decreased 12.9% year over year.
Private label and retailer brand sales increased 25.9% year over year, while blue chip business sales fell 6.8% year over year, accounting for 88% and 12% of total sales, respectively. Sales in the Asia Pacific region increased 62.2% year over year, mainly due to non-durable goods sales contributions. Sales in Europe, Africa, and the Middle East increased 11.8% year over year, while sales in the Americas fell 2.6% year over year. Cybex sales increased 16.5% year over year, while sales of Infant Floss and Good Kids fell 1.5% and 0.1% year over year, respectively.
Gross margin increased 4.0 percentage points year over year to 42.4%, mainly due to increased sales contributions from high-margin core strategic brands and improved cost efficiency. The operating expenses ratio increased 5.5 percentage points year over year, mainly due to the merger of acquired businesses and the increase in logistics and warehousing costs due to the bankruptcy of logistics service providers in Europe, Africa, and the Middle East.
Development trends
We think China's business is expected to see a turnaround in 2019 after the new management takes office. Cybex's growth momentum is expected to continue, and Goodboy and Infant Fortune's profitability is expected to grow on a low basis. However, the US market and the Chinese market still faced challenges in the first quarter of 2019.
Profit forecasting
Considering the decline in the company's profit margin, we lowered our 2019 earnings per share forecast by 54% to HK$0.14, and introduced the 2020 earnings per share forecast of HK$0.17, corresponding to 40% and 21% year-on-year increases, respectively.
Valuation and advice
The company's current stock price corresponds to 16.4 times the 2019 price-earnings ratio and 13.6 times the 2020 price-earnings ratio. Maintain a neutral rating. Considering the optional consumption characteristics of durable goods, profit certainty is limited. The target price was lowered 36% to HK$2.49, corresponding to 15 times the price-earnings ratio in 2020, and there is room for an increase of 11% from the current stock price.
risks
Online brand competition; growth slows.