Report summary
Company Overview
Mengke Holdings is a cigarette wrapper manufacturer with more than ten years of industry experience. The main product lines are transfer paper and composite paper, which are used as cigarette outer wrappers for the production of cigarette packages and boxes. According to Ipsos, in 2015, in terms of cigarette wrappers sales, Mengke Holdings had the largest market share of 16.0% in Hubei Province. It was also one of the top ten cigarette wrappers manufacturers in China, accounting for 0.9% of the market share. All of the company's production and operation are carried out at the production base in Yichang, Hubei Province. It has seven production lines and a production capacity of 222.3 million meters.
In 2013-2015, revenue increased from 260 million to 319 million yuan, net profit increased from 17.03 million yuan to 21.89 million yuan. The three-year CAGR reached 9% and 13% respectively, and gross margin and net interest rate stabilized at around 20% and 6% respectively. In the first half of this year, operating income increased 5% year-on-year to 98.99 million, net profit changed from profit to loss, with a net loss of 1.15 million. The loss was mainly due to increased administrative expenses, especially related listing expenses of more than 8.8 million yuan.
Status and prospects of the industry
According to Ipsos statistics and forecasts, total cigarette sales in China increased steadily from about 2,342.1 billion in 2010 to about 2,489.5 billion sticks in 2015, with a compound annual growth rate of 1.2%. Sales volume is expected to grow at a compound annual rate of 0.6% in 2016-2020. Total cigarette sales in China increased steadily from 847.9 billion yuan in 2010 to 1,422.3 billion yuan in 2015, with a compound annual growth rate of 10.9%.
Sales value is projected to grow at a CAGR of 4.5% in 2016-2020. The growth rate of sales value is higher than the growth rate of sales volume because the National Tobacco Monopoly Administration promotes middle and high-end cigarettes and consumers increasingly prefer middle and high-end cigarettes due to rising income levels and purchasing power.
Advantages and opportunities
Over ten years of industry experience and strong partnerships with customers.
Customer industry experience is required: For customers, the supplier's track record is considered a key evaluation criterion. New practitioners have limited industry experience, and it takes a long time to pass all tests and customer requirements.
Weaknesses and risks
China's ever-tightening regulations or industry regulations on cigarette packaging affect company development. For example, in 2014, the National Tobacco Monopoly Administration issued the “Cigarette Packaging Design Requirements” to limit the cost of cigarette packaging to avoid excessive packaging by setting packaging costs as the highest ratio of the price of cigarettes.
The government and people are paying increased attention to health issues; for example, the government is calling for a ban on indoor smoking. Health awareness and increased awareness of smoking-related health hazards have become a global trend, affecting the development of the industry.
valuations
The price-earnings ratio corresponding to the 2015 fiscal year was 10.1-14.1 times. The company did not provide a specific profit forecast for 2016 in the prospectus, but indicated that although there were no major changes in core earnings, the reduction in listing expenses and post-listing maintenance and compliance costs caused net profit in 2016 to regress from 2015, and listing expenses would also cause cash outflows from operating activities. At the same time, competitive pressure is high in the industry where the company is located. We gave an IPO-only rating of “5.”