Maintain Buy We believe the acquisition of the non-durable juvenile branded business andthe online and offline sales platforms from Goodbaby China （the “Target Group”） could becompleted by the end of 2017. We think consensus estimates are significantlyunderestimating the net profit of the consolidated group in FY18. We revise up our FY18 EPSestimates by 24% to factor in the acquisition of the Target Group. Our target price is liftedfrom HK$4.35 to HK$6.90, based on 21x FY18E P/E as we roll forward our valuation basis.
After the acquisition, we estimate 36% of revenue will come from the China market in FY18.
The company is one of the few companies listed in HK that can benefit from China’s two-childpolicy. Catalysts: the completion of the acquisition; possible inclusion into the SZ-HK stockconnect list as the company’s market cap is likely to exceed HK$5.0bn after the acquisition.
Risk: the acquisition not being completed.
Acquisition approved by EGM The acquisition of the Target Group was approved by99.99% of the independent shareholders who voted at the EGM on Sep 21. There are stillthree prerequisites for the acquisition to be completed: 1） the granting of a Whitewash waiverby the SFC; 2） the permission for listing of the consideration shares （536.1m new shares） bythe Listing Committee; and 3） the approval from the Anti-Monopoly Bureau of the Ministry ofCommerce. We expect the acquisition to be completed by end-2017.
Strong EPS accretion in FY18 We estimate the net profit of the Target Group will grow110%/21%/17% in FY17/18/19, led by 27%/18%/15% revenue growth and a3.2pp/0.3pp/0.4pp EBIT margin expansion. Based on our estimates, the acquisitionconsideration （HK$2,812m） represents 11.6x/9.5x FY17/18E P/E. We forecast net profit ofRmb255m （or HK$297m） for the Target Group in FY18. Assuming a 3.9% borrowing cost forthe cash consideration （HK$941m） of the deal, we estimate the company’s FY18 net profitprior to the acquisition would be HK$276m. This means the acquisition will increase thecompany’s net profit by 107% in FY18 。 As the acquisition increases the totalnumber of shares by just 48% in FY18, we see strong EPS accretion during the year.
Acquisition not factored in by FY18 consensus estimates Assuming the acquisition iscompleted on 1 Jan 2018, we estimate the total net profit of the consolidated group will beHK$544m （HK$297m from the Target Group and HK$247m from Goodbaby International），which is 64% above Bloomberg estimate of HK$332m 。 Among consensusrevenue estimates for FY18， only one estimate （HK$9,157m） has factored inthe acquisition. We think our estimates are not aggressive because our HK$276m forecast forthe company’s FY18 net profit before acquisition is 17% below consensus estimate ofHK$332m.
Re-rating justified by acquisition We expect a re-rating following the acquisition of theTarget Group as: 1） It should ease market concerns about the low-visibility of connected partytransactions and the chairman’s low equity stake in the company. 2） The revenue contributionfrom self-owned brand businesses will go up. 3） It will give the company increased exposureto the fast-growing China market. 4） Pigeon （7956 JP）， a globally leading MBC brand, istrading at above its international peers. Goodbaby’s valuation may edge up as its productportfolio will become more similar to Pigeon’s.