Maintain Buy We visited the company’s headquarters in Kunshan on Dec 13. Overall,2016 has been a year of resource integration (Goodbaby acquired Cybex and Evenflo in2014) and senior management appointments aimed at growing the business. Sales haveimproved in 2H16 compared to 13% revenue decline in 1H16, driven by its China market,although the pace has been slower than we had expected. We lower our FY16/17 netprofit forecasts by 19%/15% to reflect weaker sales to blue chip customers, at Cybex andEvenflo, and a higher SG&A expenses ratio. After this revision, we still forecast a 25%CAGR for net profit in FY16-18. We expect the One-Dragon vertically integrated businessmodel to help the company unlock synergies (cost savings, efficiency improvements andsharing of distribution networks) and raise its below-peer OPM going forward. We reviseour target price from HK$4.20 to HK$4.45, still based on 18x P/E, as we roll forward ourvaluation benchmark from FY16 to FY17.
Business integration and senior management appointments 1) Business integration:The company consolidated its two operating platforms in North America in 1H16. In FY17,the company will terminate its business using the non-strategic Geoby brand and use theEvenflo brand to develop its non-European and North America markets instead, and willfurther centralize procurement of raw materials. 2) Senior management appointments:Apart from the appointment of CEOs for Cybex, Rollplay, and its China market, as well asthe appointment of Mr Rezab as Executive Director before the release of its 1H16 results,three ex-Britax US executives were appointed in 2H16 to lead Evenflo’s brandmanagement.
2H16 sales weaker than we had expected Due to the competition between blue chipcustomers and self-owned brands, management has said the decline in sales to blue chipcustomers in 2H16 has been bigger than it expected. Furthermore, management expectssales to blue chip customers to fall by 30% YoY in FY17. That said, the company willincrease its in-house production ratio for Cybex car seats and accessories for Evenflo carseats in FY17 to partly offset the decline in sales to blue chip customers. Revenue growthat Cybex in 2H16 is expected to come in similar to 1H16 (+5% YoY). The company hasguided that Evenflo sales in 2H16 will be similar to 1H16 (-5% YoY). Despite mostchannels seeing a sales improvement in 2H16, the company has proactively slowed itssales to Toys `R’ Us due to cash flow concerns. On the other hand, the company’s Chinamarket saw a notable sales improvement from a teen-level decline in 2Q16 to teen-levelgrowth in 3Q16, driven by the gb brand. This momentum is expected to continue in 4Q16.
Bullish FY17 targets Management expects sales to blue chip customers (around 20% oftotal revenue in FY16) to fall by 30% YoY in FY17. It targets 20% revenue growth for itsfour strategic brands (gb, Cybex, Evenflo and Rollplay contributed around 70% of totalrevenue in FY16). Overall, it has set a high single-digit revenue growth target for FY17.However, we conservatively assume 3% revenue growth during the year.