2018 results miss our expectation
Goodbaby’s sales and net profit rose 20.8% and fell 8.7% YoY in 2018to HK$8,629mn and HK$164mn （HK$0.10/sh）， missing our forecastsdue to key client Toys R Us’ bankruptcy and slowdown in sales ofdurable goods in China.
Neutralizing M&A impacts: Assuming the OD acquisition wascompleted in January 2017, pro-forma revenue remained stableYoY, and operating profit fell 37.9% YoY for 2018.
Net of nonrecurring accounting issues: Non-GAAP operatingprofit and profit for the year rose 4.3% and fell 12.9% YoY,excluding stock option expenses, intangibles amortization andinventory appreciation, and one-off bad debt provision andother losses.
Own brand/private label retail sales rose 25.9% YoY while blue chipsales decreased 6.8% YoY （88% and 12% of total）。 APAC and EMEAsales rose 62.2% （due to the contribution from non-durables） and11.8% YoY, while sales in the Americas dipped 2.6%. Cybex sales grew16.5% YoY; while Evenflo and gb sales slipped 1.5% and 0.1% YoY.
GPM rose 4.0ppt YoY to 42.4% on a higher sales contribution fromkey strategic brands （with higher GPM） and improved costefficiency. Opex ratio was up 5.5ppt due to acquisition consolidationand additional logistics/warehousing costs resulting from thebankruptcy of an EMEA logistics provider.
Trends to watch
We expect a turnaround in China in 2019, after the leadership （NicoleJiang as the new regional CEO） changes. The growth trend of Cybex islikely to continue, and the profitability of gb and Evenflo couldexpand on low base; while 1Q19 looks set to be challenging in US andChina.
Earnings forecast
Cut 2019 EPS forecasts by 54% to HK$0.14 on its undermined marginsprofile and introduce 2020 projection of HK$0.17, +40%/21% YoY.
Valuation and recommendation
The stock is trading at 16x/14x 2019/2020e P/E. Maintain HOLD, butgiven its limited earnings visibility given the discretionary nature ofdurable goods, cut TP 36% to HK$2.49 （15x 2020e P/E） implying an11% upside. Risks: Competition from online brands; slowing growth.