1H18 results lower than expected
Goodbaby’s sales and net profit rose 34.3% and 6.6% YoY in 1H18 toHK$4,426mn and HK$133mn （HK$0.08/sh）， missing our forecasts askey client Toys R Us declared bankruptcy and sales of durable goodsin China slowed.
Neutralizing M&A impacts: Assuming the Oasis Dragonacquisition was completed in January 2017, pro-forma revenueincreased 6.1% YoY, and operating profit fell 19.3% YoY for 1H18.
Net of nonrecurring accounting issues: Non-GAAP operatingand net profit rose 46% and 35.1% YoY, excluding stock optionexpenses, intangibles amortization & inventory appreciation,and one-off bad debt provisioning and other losses.
Own brand/private label retail sales rose 39.5% YoY while blue chipsales grew 8.8% YoY, accounting for 86% and 14% of total. China andEMEA sales rose 5.4% and 26.5% YoY, while sales in the Americasdipped 6.6% YoY. Cybex and gb sales grew 24.9% and 8.8% YoY; andEvenflo sales slipped 6.6% YoY. We attribute the Americas and Evenflosales declines to the Toys R Us liquidation.
GPM rose 5.7ppt YoY to 42% on a higher sales contribution from keystrategic brands and acquisition of new business （with higher GPMand opex ratio）， which also led to a 7.1ppt YoY rise for SG&A ratio.
Trends to watch
We expect Goodbaby’s non-durables business to keep growing and itsdurables goods sales in China to recover. The impact of the Toys R Usliquidation should diminish in 2H18 with channel adjustments.
Earnings forecast
Given the results, cut 2018 and 2019 GAAP EPS forecasts 12% and14% to HK$0.26 and HK$0.30 （implying 141.5% and 15.2% growth）。
Valuation and recommendation
The stock is trading at 13.4x 2018e and 11.7x 2019e P/E. MaintainHOLD and cut TP 14% to HK$3.89 （13x 2019e P/E; 11.5% upside）。Non-durables growth visibility and profitability should improve, whilea recovery in the Americas remains to be seen. Risks: Competitionfrom online brands; slowing growth