The outlook for US business is uncertain, but valuations attract
Partnering with space travel company XCOR helps develop brands in the United States, and new smart products pave the way for future growth potential
The opening of the US plant in the second half of 2016 will meet the demand for "made in America" products.
Summary of the press conference on space science and technology and new products
We attended Sheng Nuo's press conference on the formation of a strategic alliance with space tourism company XCOR (whose service will be launched in the United States in 2017) and the launch of the second generation space cotton material "X-FOAM TM". With this cooperation, Sheng Nuo will provide special space cotton for XCOR's spaceship seats. The Group will also introduce "X-FOAM TM" to all Sheng Nuo product lines (pillows, mattresses and massage series). In addition, Sheng Nuo also demonstrated the newly developed smart living products, which apply the latest technology to traditional health products. We expect that the partnership with XCOR will further boost Citrus's US business, while the new smart products will positively reflect Citrus's potential in the digital health market.
The opening of US plants in the second half of 2016 should be beneficial to US business sales
As US consumers increasingly prefer "made in America" products, we expect the group's US business growth (exports accounted for 51 per cent and 66 per cent of 2014 revenues and profits, respectively, of which more than 90 per cent went to the US) will be hampered. To cope with this trend, the Group has planned to open its own plant in the United States. Sheng Nuo expects the first phase (foam cutting and assembly) to be launched in the second half of 2016, while the second phase (foam production plant) will be completed in the second half of 2017. Despite the high cost, we expect profit margins to remain stable, based on the higher average selling price of "made in America" products.
Low valuation, maintain buy rating
We expect that the current strong growth in Shino's retail and foam products business will partially offset the weakness in exports. Given the low valuation (7 times forecast 2016 earnings, compared with 16 times in the US and 12 times in Hong Kong) and more than 20 per cent return on equity, we maintain our buy rating. The target price of HK $1.43 represents 10 times the 2016 forecast price-to-earnings ratio, a 20 per cent discount to the recent Hong Kong-listed peer Man Wah (1999 HK, unrated) and a 40 per cent discount to US-listed peers.