Summary of the report
Company overview
The company is a well-known Chinese and Japanese art auction house in Hong Kong and Japan. the company specializes in auctioning a variety of works of art based on Chinese and Japanese art, including Chinese calligraphy and painting, Chinese antiques and Japanese and Chinese tea sets.
Based on the 2017 transaction value of Chinese art auction business in Japan and Hong Kong, the company ranks second and fifth among all auction houses engaged in Chinese art auction business in Japan and Hong Kong respectively, with a market share of 26.8 per cent and 4.4 per cent, respectively, according to the cautionary consultancy report.
The company's FY2016-18 revenue CAGR reached 11.8% to HK $173 million of FY2018, while FY2016-18 net profit CAGR reached 54.3% to HK $44.06 million of FY2018.
Industry status and prospects
With the abundance of works of art and the participation of a large number of Chinese buyers in the art auction market, the Chinese art market is expected to continue to develop in the future.
As buyers' tastes become more diversified, the hammer prices of works created by Chinese contemporary artists such as Zhao Wuji, Wu Guanzhong and Zeng Fanzhi have reached record highs, and appreciation of Chinese contemporary art may also grow as a result of the increase in popularity.
The global Chinese art auction market is expected to reach 3.2 per cent in 2017-22e CAGR.
Advantages and opportunities
The company is a well-known Chinese and Japanese art auction house in Hong Kong and Japan and enjoys high brand awareness.
The company has established a solid and expanding customer base and maintained a long-term and stable relationship with customers.
The company has established effective risk management and internal control system in the identification and valuation of works of art.
Weakness and risk
The risk of demand fluctuation in the art market.
The types of works of art focus on risk.
The appraisal, valuation and price of works of art depend more on the subjective judgment of management.
Valuation
We calculate that the historical price-to-earnings ratio of the company's FY2018 is about 17-19 times the IPO price range of HK $1.50-1.71. Considering that I) the performance of the art auction industry is less uncertain; ii) the company is small; and the valuation is too high (Hong Kong listed interbank Poly Culture 03636.HK has a historical price-to-earnings ratio of only about 8 times earnings), we give the order IPO a dedicated rating of 5.