We expect earnings to grow around 40%
We expect Goodbaby’s net profit to grow around 40% in 2019, giventhe low base due to bankruptcies of key clients and logistics providersin 2018, as well as the enhanced business performance of key brands.
Trends to watch
Latest quarterly updates showed positive signs: Goodbaby’s revenuedipped 0.1% YoY in 9M19 （or 4.2% growth YoY on a currency-neutralbasis）。 By brand, Cybex, gb, and Evenflo – three strategic brands –recorded +22%, -4.7%, and -0.4% YoY changes （or 29.6%, 0.9% and0.6% growth on a currency-neutral basis）。 We view the quarterlyresults as in line with interim guidance – i.e. we expect Cybex’sgrowth trend to hold; gb should regain growth momentum; andEvenflo should realize mild growth in 2H19.
Outlook for strategic brands:
Cybex remains the key growth driver with its solid brandpositioning and marketing strategy; we expect it to record a 20–30% CAGR over the next 2–3 years.
The performance of gb was dragged by changes in the executiveteam last year, and the situation stabilized this year. We expectover 10% growth for 2020 thanks to its BOOM （brand, online,offline, mobile terminal） strategy, despite the fact the number ofnewborns in China could come in below expectations. The firmis also adjusting its offline channel in China.
We believe Evenflo could marginally benefit from alleviation ofUS-China trade friction; the brand has already relocated itssupply chain and passed through tariffs to minimize the impactfrom trade issues. The bankruptcy of Toys R Us had a negativeinfluence on the brand’s performance over the last 2 years. Wethink gaining consumers’ wallet share in North America is thecompany’s key focus for now.
Valuation and recommendation
We lift our 2019 and 2020 EPS forecasts 18% and 19% to HK$0.14 andHK$0.17, implying 40.5% and 22.1% growth. Goodbaby is trading at13x and 11x 2019e and 2020e P/E. We maintain NEUTRAL and lift ourtarget price 19% to HK$2.02 （12x 2020e P/E, 11% upside） on theearnings forecast revision.
Risks
Geopolitical uncertainties; declining number of newborns in China.