Company profile:
Founded in 1986, Hengfa Optical Holdings Co., Ltd. is a manufacturer of glasses in China and Hong Kong. The company mainly produces and sells a variety of optical frames and sunglasses through ODM and OEM business models. For the years ended December 31, 2016, 2017 and 2018, the group's main source of income was optical frames, accounting for 90.1%, 79.7% and 81.1%, respectively. In terms of regional earnings, Europe is the group's main market, accounting for 71.8%, 72.3% and 69.3% of revenue from Europe for the years ended December 31, 2016, 2017 and 2018, respectively.
Sino-Thai point of view:
The growth of the glasses market is mainly driven by an increase in myopia and changes in consumer tastes: according to the Frost Sullivan report, the European retail glasses market is expected to grow at a compound annual growth rate of 4.2 per cent from 2019 and reach US $28.6 billion in 2023. China and Hong Kong are the largest and third largest exporters of optical frames in 2018, respectively. In addition, according to the Frost Sullivan report, China's optical frame manufacturing market is highly fragmented, with more than 6000 manufacturers in China. According to Frost Sullivan, the company is one of the top five manufacturers and exporters of optical glasses frames in Hong Kong, with a market share of about 3.3% in 2018. With the increasing prevalence of myopia and presbyopia in the world, the World Health Organization estimates that myopia will account for 33% of the global population in 2020, mainly due to the popularity of electronic devices that affect people's eyesight and increase the demand for glasses. On the other hand, the development of e-commerce in Europe and the United States and the changes in the taste preferences of consumers in Europe and the United States have made glasses a fashion product and promoted the growth of the overall eyewear market.
In terms of operating results: the total income of Hengfa Optical Holdings Limited in fiscal year 2016, fiscal year 2017 and fiscal year 2018 was HK $318 million, HK $363 million and HK $421 million respectively, and its gross profit was HK $87.19 million, HK $93.9 million and HK $96.68 million, respectively. The gross profit margin was 27.4%, 25.9% and 23%, respectively. The decline in the group's gross profit margin was mainly due to the decrease in the average selling price of metal optical glasses frames. The group's net profit margins over the past three years are 14.1%, 9.1% and 7.4%, respectively. The company's main customers are internationally renowned eyewear retailers, trading companies and franchised brand owners. For the years ended December 31, 2016, 2017 and 2018, the company's revenue from its five major customers accounted for about 81.1%, 77.3% and 77% of the total revenue, respectively.
Valuation: based on 500 million shares after the global public offering, the market capitalization of the corresponding company is HK $500 million, which is in the middle reaches of its Hong Kong counterparts; the corresponding price-to-earnings ratio of the company is about 16.4-19.7 times, which is higher than the industry average; and the price-to-book ratio is about 2.8-3 times, higher than the industry average. In terms of profitability, the 18-year ROE and ROA were 31.2% and 14.1% respectively, higher than the industry average. Considering the company's industry status, performance and valuation, we give it a rating of 57 points, with a rating of "neutral".
Risk tips: (1) customer concentration risk (2) risk of relying on overseas marketing (3) foreign exchange fluctuation risk