Sheng Nuo, a manufacturer of polyurethane foam (memory sponge) bedding, has successfully achieved a leading position in the United States, mainland China and Hong Kong using the vertical integration model. Thanks to the Group's capacity expansion and the acquisition of new orders, we expect its export business to be the growth driver of the Group in the next few years. Although Shino's interim results will be weighed down by weak retail and corporate sales, we believe its business will gradually pick up in the second half of 2016. The stock is currently trading at 8 times forward 2016 earnings and is undervalued. We have a buy rating for the first time, with a target price of HK $0.88.
Vertically integrated leader with a large sales network. All of Sheng Nuo's memory sponge bedding, including pillows, mattresses, mattresses, etc., are self-produced and sent to more than 6400 outlets in the United States, the mainland and Hong Kong. This will help the Group to control quality, improve operational efficiency and meet market demand more quickly, thereby enhancing the competitiveness of the company.
A recovery in exports is in sight. Export sales in 2015 fell 14% from a year earlier, mainly due to a drop in unit prices. Due to the stabilization of unit prices, the Group expanded production and acquired new US retail customers in May 2016 as scheduled. It is estimated that the Group's export revenue this year will have double-digit growth, leading to overall revenue growth.
It gradually recovered in the second half of 2016. We expect Shino's medium-term core net profit in 2016 to be weighed down by weak retail and corporate sales, upfront spending on new plants in the United States, and sharing losses in the newly merged subsidiary Dormeo. Nonetheless, we expect profits to improve gradually in the second half of this year due to orders from its new US retailer customers and the start of production of new US plants.
Rated buy with a target price of HK $0.88. Sheng Nuo is currently valued at a 40 per cent discount to its peers. Gu's earnings gradually improved in the second half of the year, and we set the target price at 9.4 times forward earnings in 2016, a standard deviation higher than its historical average price-to-earnings ratio.
Main risks: retail business is worse than expected; export growth is lower than expected.