Company profile
Changda Holdings mainly produces and sells clothing label and decoration products, such as hanging tags, cloth labels and heat transfer products. According to Frost Sullivan report, the company ranks fifth in the manufacturing market of clothing label and decorative products in China based on 2018 earnings. The company started printing business in Hong Kong in 1992 and has since set up major production facilities in Chinese mainland, Bangladesh and Vietnam, with a total floor area of about 37902 square metres, 3300 square metres and 2370 square metres respectively.
Sino-Thai viewpoint
The market for clothing label and decoration products will maintain steady growth in the future: according to the Frost Sullivan report, the market size of China's clothing label and decoration products manufacturing in terms of income is expected to grow at a compound annual growth rate of 8.6% from 15.6 billion yuan in 2019 to 21.7 billion yuan in 2023. In addition, taking into account the rising demand from foreign clothing manufacturers and buyers and the steady growth of the clothing retail market in the United States and Europe, the value of overseas sales of clothing labels and decoration products is expected to increase from 7.3 billion yuan in 2019 to 9 billion yuan in 2023, with a compound annual growth rate of 5.4 percent.
Operating results: in the fiscal year 2016-2018 and as of August 31, 2019, the company's operating income was HK $240 million, HK $310 million, HK $370 million and HK $230 million, respectively. The highest proportion of revenue from Chinese mainland and Hong Kong is about 62.8%, 61.8%, 55.3% and 53.1%, respectively. The gross profit margin was 44.3%, 42.8%, 43.7% and 48.2%, respectively. The increase in gross profit margin in 19 years was due to the decrease in the cost of sales due to the depreciation of RMB against the Hong Kong dollar, resulting in lower raw material costs and direct labor costs in Hong Kong dollars. The total cost of raw materials used by the company to produce printing products accounted for about 51.3%, 55.5%, 48.9% and 47.8% of the total cost of sales, respectively. The net interest rates are 8.1%, 8.4%, 9.1% and 5.5%, respectively.
Valuation: based on 2 billion shares after the global public offering, the company's market capitalization is HK $5 billion to HK $580 million, which is lower than the average of its peers in Hong Kong. In 18 years, the price-to-earnings ratio of the company is about 14.8-17.2 times, which is higher than the industry average; the price-to-book ratio is about 2.27-2.42 times, which is higher than the industry average. In terms of profitability, the 18-year ROE and ROA were 28.9% and 12.5% respectively, higher than the industry average. This is the sponsor's first project with no historical record to refer to. Considering that nearly 70% of the company's revenue comes from printing hanging tags, we compare the valuation level of the same printing industry rather than the clothing and textile industry, and think that the valuation is still on the high side and gives it a rating of "do not apply for purchase".
Risk tips: (1) A small portion of the income comes from the United States and Europe, international trade risks, and (2) fluctuations in raw material costs.
