Company profile:
Zhihua Group is one of the famous manufacturers and exporters of backpacks and suitcases. Based on 2018 factory earnings, the company ranks eighth among OEM, ODM and OBM companies making backpacks and suitcases in China, with a market share of about 0.71 per cent, according to the cautionary report. The company started business in 1989 and is headquartered in Hong Kong, China. Its production plants are located in Shenzhen, Guangdong Province, China and Ganzhou, Jiangxi Province. It mainly sells all kinds of backpacks and suitcases to customers in North America, Europe, the Middle East and China. Sino-Thai point of view:
China has become the largest OEM region for backpacks and suitcases in the world, and the company is highly dependent on export sales, so its future business is challenged: according to the Xianshi Consulting report, the global market for backpack and suitcase OEM, ODM and OBM is highly dispersed, with thousands of manufacturers occupying a presence in different regions of the world. Taking advantage of its low-cost labor force, China has developed into the world's largest backpack and suitcase OEM region, accounting for more than half of the world's factory revenue in 2018. Zhihua Group is highly dependent on export sales, and its financial performance may be affected by global economic fluctuations, and the company may not be able to maintain its current level of sales to overseas customers in the future. If overseas customers no longer maintain the current level of purchase orders, the company's business, financial position and operating results are all challenged.
In terms of operating results: from 2016 to 2018, Zhihua Group realized operating income of HK $630 million, HK $660 million and HK $680 million respectively. The increase in 2017 was due to an increase in the number of products sold due to increased customer demand. The increase in 2018 is mainly due to the higher average selling prices of self-label products and brand products of the new product line. In addition, the company's sales mainly come from North America and Europe, accounting for about 44% and 37% of the total revenue, respectively, and the gross profit margin is 19.5%, 21.3% and 22.9%, respectively. The small increase in gross profit margin is due to the improvement of research and development capabilities, thus reducing costs. The net profit margin remained stable at about 4.0%. The average selling price is HK $52.1, HK $49.1 and HK $55.3 per piece respectively. The fluctuation of the average price is due to lower production costs and different product combinations as a result of technological improvements.
Valuation: based on 1 billion shares after the global public offering, the company's market capitalization is HK $500 million, which is lower than that of its Hong Kong counterparts. The 18-year price-to-earnings ratio of the company is about 18.4 times, slightly higher than the industry average, and the price-to-book ratio is about 5.00 times, higher than the industry average. In terms of profitability, the 18-year ROE and ROA were 33.9% and 6.3% respectively, higher than the industry average. Taking into account the company's industry status, performance and valuation, we give it a score of 51, with a rating of "neutral".
Risk tips: (1) market competition risk, (2) highly dependent on export sales, the impact of Sino-US relations.