UOB KAY HIAN Research said it is maintaining its “BUY” call on China Zaino International due to strong fundamentals and a solid market position for the Singapore-listed backpack and luggage producer.
The confidence comes despite a rollercoaster ride for the Chinese firm’s valuation of late amid drastic equity ownership shifts.
China Zaino’s shares jumped 26.8% to close at 26 cents on Apr 30 on news that chairman Chen Xizhong had raised is stake in the company from 50.8% to 72.2%, buying the shares from Great Season Group Ltd for 336 mln sgd.
Mr Chen bought the 202 million ordinary shares at 18 cents apiece.
However, before the ink on the press releases were dry, the chairman, on May 27, resold 25.0 million shares at 24 cents apiece and another 150 million shares at 23 cents each, with the main buyers being international institutional investors.
With the sale, Mr Chen’s stake has fallen from 682 mln shares, representing approximately 72.2% of company, to 507 mln shares, representing some 53.7%.
In the space of a few trading days, Zaino’s valuation flirted with recent lows and highs on the musical chairs maneuver with its equity ownership, finally setting at 0.275 sgd at market close on Friday.
Market strength a “Zaino” the times for backpack maker
UOB Kay Hian, in its report last Thursday (June 4), believes Zaino will continue to hold its market-leading position in China’s backpack market, assigning the firm a 12-month target price of 0.39 sgd.
Fujian Province-based China Zaino, which designs, manufactures and sells backpacks and luggage under its Dapai brand, markets though an extensive distribution network of 3,500 concessionaires in all the major provincial capitals of China.
“Strong demand in China’s backpack and luggage market is sustainable. This is underpinned by three factors:
a) double-digit growth of China’s retail sales over the next one to two years,
b) double-digit growth of China’s urban and rural per capita disposable income and
c) steady increase in outdoor activities and the number of customers, including students and tourists,” UOB said in a research note.
52-week trading range: 10.5 - 58.5 cents. UOB Kay Hian’s 12-month target is 39 cents.
The Singapore-based brokerage said Zaino is a market leader, an honor with enjoys “obvious advantages.”
“Dapai is the top brand in China’s backpack industry with a 35.8% market share. We believe further sales growth is achievable as:
a) it is the only manufacturer focusing on backpack and luggage business as there is less competition for brand building,
b) strong R&D and good quality help to secure orders and c) a vast distribution network operated by experienced local distributors.”
UOB said it expects Zaino to report revenue growth at a CAGR of 9.8% for 2009-11, driven by growing sales of backpacks and luggage, and expect earnings growth to slightly outperform its top-line growth of 10.7% CAGR during the same period, with a better product mix.
“Luggage sales are likely to continue to contribute more to total sales, in tandem with the Group’s strategy to expand its product portfolio. In addition, Zaino has also promised a yearly dividend payout ratio of at least 20%.”
UOB said it believes Zaino is a “unique China play” due to its exposure to the niche backpack and luggage market, leading market position as well as extensive distribution network.
“Considering its short history as a listed company and low brand equity compared with sportswear names, we have applied a 10% discount to the industry average 2009 PE, valuing the stock at 4x.”
The backpack and luggage market in China has seen double-digit growth since 2000 (with the exception of 2003 when sales figures were distorted by the outbreak of SARS) to 655.7 mln usd in 2007, translating into an 8-year CAGR of over 14% for both backpack and luggage segments.
According to market researcher Frost & Sullivan, China’s backpack manufacturers (including companies doing domestic and/or export business) totaled more than 5,000 in 2006 while there were over 2,700 players in the luggage market.
In the backpack segment, Tiers 1 and 2 manufacturers altogether accounted for 18% of the market share while the luggage sector is more fragmented with only 1.5% of the companies having annual sales of above five mln yuan.
It is clear that the industry is at its early stage of growth with most players being small-scale operations producing only non-branded backpacks and luggage. In 2006, China’s domestic backpack market was dominated by Zaino’s Dapai brand with a 35.8% market share, outpacing the second most popular name Jinhou’s 31.5%.
However, in the luggage industry, top-selling brand Crown only has a 7% stake while the Top 10 brands combined accounted for only one-fourth of the total market share.
Following extensive canvassing of points of sale offering Dapai-branded backpacks, luggage and other durable bags and satchels in Beijing, it soon became obvious that Dapai led the pack in stores that provide shelf space for its products.
The survey includes data NextInsight gathered from stand-alone retail outlets located at five major shopping venues in Beijing.
From points-of-sale clerks’ comments, shelf space allotment, pricing strategies and interviews with customers, it became evident that for most shoppers in the market for a backpack - primarily students expecting to tote heavy textbooks around all day - the No.1 driver was affordability, but only if product quality met a certain standard.
And clearly, Dapai met both of these requirements for the bulk of shoppers and retailers interviewed.
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