Earnings are expected to grow by about 40% in 2019 compared with the same period last year.

We expect the profit of good Boys International to grow by about 40% in 2019 compared with the same period last year, mainly due to the low base caused by the bankruptcy of major customers and logistics suppliers in 2018, as well as the improvement in the operating performance of major brands.

Pay attention to the main points

The latest quarterly operating data show positive signs: revenue fell 0.1% year-on-year from January to September 2019 (currency neutral growth of 4.2%). Of the three strategic brands, Cybex grew 22 per cent year-on-year and GB and Evenflo fell 4.7 per cent and 0.4 per cent year-on-year (currency neutral up 29.6 per cent, 0.9 per cent and 0.6 per cent, respectively). We believe that the third quarter results are in line with the China report guidelines, that is, the growth trend of Cybex will continue, GB will return to growth potential energy, and Evenflo is expected to achieve small growth in the second half of the year.

Strategic Brand Outlook:

Cybex's strong brand positioning and marketing strategy remain the main drivers of growth, and we expect a compound annual growth rate of 20-30 per cent over the next 2-3 years.

GB's performance was dragged down by the adjustment of the executive team last year and has stabilized this year. Considering that the company continues to implement the BOOM strategy, we expect a year-on-year growth of more than 10% in 2020, although the number of newborns in China may fall short of expectations. In addition, GB is gradually adjusting domestic offline channels.

Evenflo is expected to benefit from the easing of trade frictions between China and the United States. Previously, Evenflo reduced the impact of trade frictions by shifting supply chains and passing tariffs downstream. The bankruptcy of Toys R us has dragged down Evenflo's performance over the past two years. At present, the focus of the brand's business is to expand the market share of North American consumers.

Valuation and suggestion

We raised our earnings per share forecasts for 2019-2020 by 18 per cent and 19 per cent to HK $0.14 and HK $0.17, corresponding to year-on-year increases of 40.5 per cent and 22.1 per cent. Good Boys International currently trades at 13. 2 times and 10. 8 times 2019-20 earnings. Maintain a neutral rating while raising the target price by 19 per cent to HK $2.02 (corresponding to 12 times 2020 price-to-earnings ratio and 11 per cent upside from the current share price), mainly taking into account earnings forecast adjustments.

Risk

Geopolitical uncertainty; the number of newborns in China is lower than expected.