Maintain Buy but lower TP Net profit rose 5% to HK$207m. Excluding one-off integrationcosts and recognition of deferred tax, core net profit fell by 5% to HK$188m, 11%/13%below our estimate/consensus respectively, mainly due to higher-than-expectedoperating expenses. We expect the One-Dragon vertically integrated business model tohelp the company unlock synergies (cost savings, efficiency improvements and thesharing of distribution networks) and raise its below-peer OPM going forward. We revisedown our FY17/18 net profit estimates by 3%/5% to factor in lower OPM assumptions andlower our TP from HK$4.45 to HK$4.30, still based on 18x FY17E P/E.
2017 a year of offense Management thinks the company’s integration is now completeand that the right leadership is now in place for each key strategic brand and groupfunction. Management targets double-digit revenue growth for its three strategic brands,driven by product innovation, utilization of the company’s global distribution platforms, andits digital business. The digital business unit’s set-up is now complete and has three keygoals: 1) big data analysis, such as Weibo analytics; 2) engagement with customers; 3)development of new products. The company will launch a new product (not a child’s carseat or stroller) in 2017. Going forward, the business will not be limited to car seats andstrollers. The company is seeking to establish a parenting ecosystem, with a platformopen for cooperation with third parties.
Good start to 1Q17 The chairman stated that the China market has seen strong growthYTD after the restructuring of its management team, channel strategy and brands in 2016.Growth momentum should be more sustainable going forward. Revenue in its threestrategic brands has seen double-digit growth YTD, according to management.
Results highlights 2016 revenue fell 10%, driven by 29%/14%/6% revenue declines forblue-chip customers/China market/Evenflo. GPM was up 4.3pp to 33.8% led by anincreased sales contribution from its own brands, from 73% to 78%, improved contributionfrom high-margin products and forex gains. OP fell 2% due to a revenue decline andincreased staff costs, while OPM was up 0.4pp to 5.0%, 0.3pp below our expectation. In2H16, the YoY decline in revenue narrowed to 8%, from 13% in 1H16, as revenue fromChina and Evenflo reversed their YoY declines (from -25%/-16% in 1H16 to +5%/+3% in2H16). Net debt was reduced from HK$652m to HK$445m on better working capitalmanagement.