Performance review

2019 performance is in line with our expectations

Good Boys International announced 2019 results: revenue rose 1.7 per cent year-on-year to HK $8.777 billion, while net profit rose 23.5 per cent to HK $202 million, corresponding to HK $0.12 per share, in line with our expectations.

Core strategic brand revenue increased by 8.5% year-on-year (all growth percentages in this article are calculated at fixed exchange rates), accounting for 81% of the company's total sales. Of this total, Cybex, gb and Evenflo brand revenue increased by 25.9 per cent, 1.1 per cent and 1 per cent, respectively, compared with the same period last year. The Cybex brand remains the core growth driver of the company; the gb brand reversed its decline in China in the second half of 2019 after its restructuring; and the Evenflo brand has shown some resilience in an unfavorable political and retail environment. Sales in the blue-chip business fell slightly by 0.6% from a year earlier. Sales of tactical brands and retailer-owned brands fell 18.4% from a year earlier. Sales in Europe, the Middle East and Africa and the Americas increased by 18.5% and 2.7% respectively compared with the same period last year, while sales in the Asia-Pacific region were basically flat, with gb growth offsetting the decline in Happy Dino.

Thanks to the tilt of the business structure towards core brands, the company's gross profit margin rose 0.6 percentage points year-on-year to 43.1 per cent (Cybex gross profit margin of more than 50 per cent Cybex GB close to 50 per cent Evenflo is in the high range of 20-30 per cent). From the point of view of operating expenditure, the decrease in the provision for impairment of personnel, R & D expenditure and accounts receivable exceeds the increase in investment in Guangxuan and logistics.

Trend of development

In the first half of January, the company's sales increased by about 20% compared with the same period last year. Affected by the domestic COVID-19 epidemic, February sales fell sharply compared with the same period last year. After the company quickly shifted to online business with its cloud retail system, the decline in sales narrowed in March. The company expects more than 80% of its stores to resume operations by the end of March. Thanks to the balanced distribution of the company's business across regions, the decline in the Asia-Pacific region in the first quarter of this year may be offset by growth in Europe, the Middle East and Africa, and if the pattern of subsequent overseas outbreaks is similar to that at home, management expects the decline in the latter to be offset by the growth of the former. Considering the limited proportion of the company's fixed operating costs, we believe that the impact of operational deleveraging is manageable and that strengthening the cash position is the company's top priority in difficult times.

Profit forecast and valuation

We have lowered our 2020 earnings per share forecast by 27 per cent to HK $0.12 and introduced a 2021 earnings per share forecast of HK $0.14. The company's current share price corresponds to 7.2 times 2020 and 6.1 times 2021 earnings. We maintain our neutral rating and, given the additional uncertainty caused by its multinational business during the COVID-19 epidemic, we cut our target price by 51 per cent to HK $0.99 (corresponding to 8 times 2020 price-to-earnings ratio), which is 10.9 per cent higher than the current share price.

Risk

The epidemic affects global supply chains and demand.