Results miss expectation due to one-off issues
Goodbaby International announced 2016 results: revenue wasHK$6,238mn, down 10.3% YoY; net profit was HK$207mn, up5% YoY, or HK$0.19 per share. Results missed expectationsdue to one-off expenses totaling HK$97mn (related todiscontinuation/integrations), leading to a 33% decline in GAAPoperating profit; net of that, recurrent operating profit +0.6%.
Sales decline caused by business transformation. Themanufacturing & distribution partnership with a European brandand the operation of the Goodbaby brand were discontinued.OEM revenue fell 29.3% on business transformation, whilerevenue from its own brand and retailer’s labels fell 3.9%,accounting for 80.3% of total sales (+5.3ppt). Sales in Chinadeclined 14.9%, but narrowed compared to the drop in 1H16due to the improved performance of its high-tier brands. Sales inAPAC, EMEA and the Americas -9%, +9.5% and -7.3% YoY.
GPM +4.4ppt to 33.8%, recurrent OPM +0.6ppt due tothe ongoing transformation. SG&A expense ratio +4.3ppt.
Trends to watch
Cost saving and optimized product mix should be the short-termprofit driver. A new digital team could enhance its R&D capacity.
Earnings forecast
Cut 2017e earnings forecast 5.7% and introduce 2018eforecast. 2017/18e EPS is HK$0.23/0.28, +23.1%/20.1% YoY.
Valuation and recommendation
The stock is trading at 15.2x/12.7x 2017/18e P/E. MaintainHOLD and cut TP 7% to HK$3.86 (14x 2018e P/E) onlower-than-expected sales growth and valuationrollover, 10.5% upside. One-off expenses will not erodebottom-line growth in 2017, while the sales slowdown from thebusiness transformation takes time to turn around.
Risks
Competition from online brands; growth trend to slow down.