Page 1 of 20 Company Report 15 January 2015 Lewis Pang [email protected](852) 2235 7847 Trading data 52-Week Range (HK$) 3 Mth Avg Daily Vol (m) No of Shares (m) Market Cap (HK$m) Major Shareholders (%) Auditors Result Due 2.56/3.46 0.3 1,259 3,424 Mr. He Xinming (68.51%) Deloltte FY14: Mar Company description Introducing its self-owned "Dongpeng" brand in 1996, Dongpeng is the largest ceramic tile company in the PRC. Leverage on the success of the ceramic tile segment, Dongpeng is also expanding its footprint in bathroom products. Price chart Ceramic tile market leader at trough valuation Rating BUY Initial Target price HK$3.80 Current price HK$2.72 Upside +40% Leading ceramic tile company in the fragmented PRC market Dongpeng ranked first with a market share of 1.74% in the entire PRC ceramic tile market in 2012, and China is the largest producer and consumer of ceramic tile globally. Among the top 5 ceramic tile consumption countries, China is the most fragmented market, we expect the leading players in China could gradually gain market share going forward. Strong fundamentals to further gain market share Dongpeng has established a solid foundation for its ceramic tiles, including 1) strong R&D capability to introduce innovative products such as ceramic tiles with health caring function; 2) extensive sales network with 1,825 POS nation-wide; 3) a reputable brand image, the Company was honored as “2013 most trustworthy brand among consumers”; 4) efficient logistics network, 5 central warehouses and 25 regional warehouses connected by SAP system; 5) environmental friendly production base, Dongpeng received the "National Green Building Selected Products" trademark in 2014; and 6) cooperation with foreign premium ceramic tiles brand. Benefit from the rebound in property market Under the sluggish PRC property market, Dongpeng still managed to achieve 15.1% yoy ceramic tile sales growth in 1H14. Policy started turning more favorable to property industry since Sep 2014, leading to a pickup in transaction volume of residential house. Besides, Dongpeng has established a cooperation relationship with real estate developers including CR Land, Vanke and Wanda, we believe it would benefit from the increasing sales proportion of decorated room. Bathroom products and one-stop decoration the new growth drivers The bathroom products segment was separated from the Dongpeng Group in 2006, and the Company consolidated it back in May 2013. The operating of the bathroom products segment could be further improved by additional synergy with ceramic tile products and more management effort after the restructuring. Furthermore, Dongpeng has launched the one-stop home decoration service in a few property projects recently, which aim to provide total decoration solution to undecorated room buyers. Trough valuation and improving outlook; Initiate with BUY We expect 24.1% earnings growth in FY14E and 14.9% CAGR during 2015-16E. Market attention on Dongpeng remained low since its listing, and the Company is now trading at 5.7X FY15E PER, a trough valuation for a market leader. Initiate with BUY, target price at HK$3.80, a 8.0X multiple of FY15E earnings, a 25% discount to the low end valuation of H share furniture companies. RMB million FY12A FY13A FY14E FY15E FY16E Revenue 2,498 3,368 3,938 4,580 5,254 Net Profit 167 340 421 486 557 Consensus NP N/A N/A 414 489 562 EPS (RMB) N/A 0.367 .329 0.379 0.434 P/E ( x) N/A 5.9 6.6 5.7 5.0 Dividend yield (%) N/A 2.6 4.6 5.3 6.1 Sources: Bloomberg, CIRL estimates Dongpeng Holdings | 3386.HK
Ceramic tile market leader at trough valuation Rating BUY Initial
Target price
HK$3.80
Current price
HK$2.72 Upside +40%
Leading ceramic tile company in the fragmented PRC market Dongpeng ranked first with a market share of 1.74% in the entire PRC ceramic tile market in 2012, and China is the largest producer and consumer of ceramic tile globally. Among the top 5 ceramic tile consumption countries, China is the most fragmented market, we expect the leading players in China could gradually gain market share going forward.
Strong fundamentals to further gain market share Dongpeng has established a solid foundation for its ceramic tiles, including 1) strong R&D capability to introduce innovative products such as ceramic tiles with health caring function; 2) extensive sales network with 1,825 POS nation-wide; 3) a reputable brand image, the Company was honored as “2013 most trustworthy brand among consumers”; 4) efficient logistics network, 5 central warehouses and 25 regional warehouses connected by SAP system; 5) environmental friendly production base, Dongpeng received the "National Green Building Selected Products" trademark in 2014; and 6) cooperation with foreign premium ceramic tiles brand.
Benefit from the rebound in property market Under the sluggish PRC property market, Dongpeng still managed to achieve 15.1% yoy ceramic tile sales growth in 1H14. Policy started turning more favorable to property industry since Sep 2014, leading to a pickup in transaction volume of residential house. Besides, Dongpeng has established a cooperation relationship with real estate developers including CR Land, Vanke and Wanda, we believe it would benefit from the increasing sales proportion of decorated room.
Bathroom products and one-stop decoration the new growth drivers The bathroom products segment was separated from the Dongpeng Group in 2006, and the Company consolidated it back in May 2013. The operating of the bathroom products segment could be further improved by additional synergy with ceramic tile products and more management effort after the restructuring. Furthermore, Dongpeng has launched the one-stop home decoration service in a few property projects recently, which aim to provide total decoration solution to undecorated room buyers.
Trough valuation and improving outlook; Initiate with BUY We expect 24.1% earnings growth in FY14E and 14.9% CAGR during 2015-16E. Market attention on Dongpeng remained low since its listing, and the Company is now trading at 5.7X FY15E PER, a trough valuation for a market leader. Initiate with BUY, target price at HK$3.80, a 8.0X multiple of FY15E earnings, a 25% discount to the low end valuation of H share furniture companies.
RMB million FY12A FY13A FY14E FY15E FY16E
Revenue 2,498 3,368 3,938 4,580 5,254
Net Profit 167 340 421 486 557
Consensus NP N/A N/A 414 489 562
EPS (RMB) N/A 0.367 .329 0.379 0.434
P/E ( x) N/A 5.9 6.6 5.7 5.0
Dividend yield (%) N/A 2.6 4.6 5.3 6.1
Sources: Bloomberg, CIRL estimates
Dongpeng Holdings | 3386.HK
Page 2 of 20
Leading ceramic tile company in the fragmented PRC market
Introducing its self-owned brand since 1996, Dongpeng is the largest ceramic tile
company in the PRC. Leverage on the success of the ceramic tile segment, Dongpeng
is also expanding its footprint in bathroom products. Ceramic tile and bathroom products
represented 86.3% and 13.7% of revenue in 1H14.
Exhibit 1: 1H14 revenue breakdown
Source: Dongpeng
Leading ceramic tile company in the fragmented PRC market
Dongpeng is the leading brand in the fragmented PRC ceramic tile market. According to
Frost & Sullivan, Dongpeng ranked first in terms of retail sales value of ceramic tile
products in the PRC in 2012, with a share of 1.74% in the entire PRC ceramic tile
market. The top 10 brands only accounted for less than 10% of the ceramic tile market.
Exhibit 2: Top 10 ceramic tile brands in the PRC
Source: Frost & Sullivan
Rank Company2012 Retail sales value
(RMB bn)Market share in 2012
1 Dongpeng 5.77 1.74%
2 Nabel 5.12 1.54%
3 Marco Polo 4.85 1.46%
4 Hongyu 3.60 1.09%
5 Guanzhu 3.12 0.94%
6 New Zhong Yuan 2.71 0.82%
7 Oceano 2.31 0.70%
8 Summit 1.88 0.57%
9 Bode 1.66 0.50%
10 Eagle Ceramic 1.61 0.49%
Top 10 total 32.63 9.85%
Page 3 of 20
China is the largest producer and consumer in global ceramic tile market
China is the largest global producer as well as consumer of ceramic tile, representing
48% and 39% of global production and consumption by volume respectively in 2013.
Supported by the growth in disposable income and the urbanization development,
ceramic tile consumption in China achieved a CAGR of 10.0% during 2008-13, largely
in-line with the growth in production volume. It can be noted that 7 out of the 10 largest
ceramic tile consuming countries were also in the top 10 producers list, suggested that
localized production is common in the ceramic industry, which should be due to
transportation concern.
Exhibit 3: Top 10 ceramic tile manufacturing and consumption countries
Source: Ceramic World Review
China is the most fragmented market among top 5 consumption countries
While all of the 5 largest ceramic tile consumption countries are developing counties,
their consumption volume per capita vary significantly. which could be attributed to the
difference in consumer habit. Besides, among the 5 countries, production volume of the
largest player in China only represented 1.1% of total consumption, versus ~7-17% for
other 4 counties, suggesting that China is the most fragmented market. It is mainly due
to China's vast geographical area and rapid growing property sector in last decade,
which gave some room to small players, in our view. However, we believe the leading
players in China could gradually gain market share going forward.
Exhibit 4: Leading domestic ceramic tile companies in different countries
Source: Company websites, CIRL
Rank CountryManufacturing
volume (mn sqm)
2008-13
CAGRRank Country
Consumption
volume (mn sqm)
2008-13
CAGR
1 China 5,700 10.9% 1 China 4,556 10.0%
2 Brazil 871 4.1% 2 Brazil 837 6.7%
3 India 750 14.0% 3 India 748 13.2%
4 Iran 500 9.3% 4 Indonesia 360 6.6%
5 Spain 420 -3.2% 5 Iran 350 5.7%
6 Indonesia 390 7.2% 6 Vietnam 251 2.7%
7 Italy 363 -6.7% 7 Saudi Arabia 235 11.6%
8 Turkey 340 8.6% 8 Russia 231 3.9%
9 Vietnam 300 2.1% 9 USA 230 1.7%
10 Mexico 228 0.4% 10 Turkey 226 11.9%
Top 10 total 9,862 7.6% Top 10 total 8,024 8.8%
World Total 11,913 6.7% World Total 11,574 6.7%
Top 10 ceramic tile manufacturing countries in 2013 Top 10 ceramic tile consumption countries in 2013
CompanyTotal sales in 2013
(mn sqm)
% of national
consumption
China 1.36 3.35 Dongpeng 49.4 1.1%
Brazil 0.20 4.19 Incefra 63.4 7.6%
India 1.25 0.60 Kajaria ~50 ~6.7%
Indonesia 0.25 1.45 Mulia ~60 ~17%
Iran 0.08 4.52 Apadana ~30 ~8.5%
Leading domestic playerTotal
population
(bn)
Ceramic tile
consumption per
capita (sqm)
Country
Page 4 of 20
Strong fundamentals to further gain market share
We expect Dongpeng to win more market share in China's ceramic tile market in the
future, given its 1) strong R&D capability, 2) extensive retail network, 3) well established
brand reputation, 4) efficient logistics network equipped with SAP software, 5)
environmental friendly production facilities, and 6) cooperation with foreign premium
ceramic brand.
Innovative products with different outlook and texture
Over past years, Dongpeng has continuously developed and brought to market “hit” new
products, including "Perlato Svevo" ("金花米黃") series in 1999, "Travertine" ("洞石")
series in 2006, "Navona" ("納福娜") series in 2008 and "Italian Wood" ("意大利木紋")
series in 2011. To produce a new ceramic tile products with distinct outlook and texture,
manufacturers need to formulate a specific raw material formula and production
parameters, hence a strong R&D capability is essential. As of 30 June 2014, the R&D
team of Dongpeng consisted of 364 professional staff.
Exhibit 5: Dongpeng's ceramic tile products that resemble the outlook and texture of wood
Source: CIRL
Offering ceramic tile products with health caring function
In addition to product outlook and texture, Dongpeng is offering new functional ceramic
tile products. For instance, Dongpeng launched the "Health Treasure" ("健康寶") series
in mid 2013, which could auto adjust indoor humidity to a desirable level as well as lower
the concentration of toxic TVOC gas, according to the analysis from independent test
centers. The graphic and the size of "Health Treasure" tiles could be tailer-made.
Dongpeng management expressed that "Health Treasure" is well received in the market,
and the Company has other new functional products in the pipeline.
Page 5 of 20
Exhibit 6: Promotion of "Health Treasure" products in POS of Dongpeng
Source: CIRL
Exhibit 7: Utility Model Patent and test report of "Health Treasure"
Source: Dongpeng
Page 6 of 20
Extensive sales network with 1,825 POS nation-wide
As of 30 June 2014, Dongpeng had 1,825 retail outlets covering >600 cities across all
provinces in China, representing an increase of 216 POS from the end of 2013, of which
158 of the new stores were located in third and fourth-tier cities to capture the
urbanization demand. Dongpeng targets to add ~300 new POS annually during
2015-2016.
Dongpeng sells its products through both distributor channel (tier-one and tier-two) and
direct sales channel. The distribution network of Dongpeng is relatively flat, each
tier-one distributor is managing 2-3 POS on average (including the stores operated by
its underlying tier-two distributors). In 1H14, sales to distributors contributed 73.6% of
Dongpeng's total revenue. On the other hand, its direct sales channels consist of (i)
self-managed retail outlets, (ii) direct corporate sales (customers included real estate
developers, interior design companies and construction companies), and (iii) preferred
dealers (who mainly act as store managers).
Exhibit 8: 1H14 sales breakdown and no. of POS as of 30 June 2014
Source: Dongpeng
Developing O2O model supported by the vast POS network
The extensive store network also helps Dongpeng to develop the O2O business model.
In comparison to pure online sales, we are of the view that O2O model is more
appropriate for ceramic tile market, as it is generally a planned purchase instead of
impulse buying, customers can experience the texture of the tiles and match it with other
decorations in physical stores. Besides, physical stores are more effective in providing
installation and after sales service in neighborhood area. Dongpeng has conducted
online marketing sales events with many well known internet portals, including Jia.com,
CityTogo.com, Meilele.com, 17house.com, to8to.com, etc.
Page 7 of 20
Honored as “2013 most trustworthy brand among consumers”
Dongpeng's ceramic tile products were honored as "2013 national best-selling brand"
and “2013 most trustworthy brand among consumers” by the China Industrial
Information Issuing Centre. According to our channel check with renovation contractors,
durability of different domestic brands' ceramic tiles vary significantly, and product
quality of Dongpeng outperform most of its domestic peers. Since consumers could
hardly judge the durability of the products at the time of purchase, and the replacement
of existing ceramic tile decoration is costly and time consuming, we believe consumer
would more prefer products from reputable brands such as Donggeng when the ceramic
tile market is getting more mature.
Exhibit 9: Dongpeng was honored as "best-selling" and "most-trustworthy" brand
Source: China Industrial Information Issuing Center
Efficient logistics network equipped with SAP software
The logistics network of Dongpeng consisted of 5 central warehouses which are close to
its production facilities, and 25 regional warehouses at strategic locations across China
as of 30 June 2014. Furthermore, the Company has implemented a comprehensive
SAP enterprise resource planning system in stages. Through the SAP system,
management and distributors can access real time inventory level and delivery progress
of each warehouses, and distributors can complete the ordering process online. This
effective logistics system allows a faster delivery at lower cost, which leads to better
production planning and inventory management for Dongpeng, and helps the
distributors to further penetrate into third and fourth-tier cities. Dongpeng is starting to
connect the SAP system with distributor stores in order to have more real time
information on retail end.
Page 8 of 20
Exhibit 10: Logistics network of Dongpeng as of 30 June 2014
Source: Dongpeng, CIRL
Production facilities with high environmental protection standard
Dongpeng has 5 production facilities for ceramic tiles, which are located at Qingyuan,
Foshan, Lixian, Zibo and Fengcheng, with a total annual capacity of 41.3 million sqm in
2013. Dongpeng plans to install additional production lines in existing facilities to
increase its capacity to ~65 million sqm by the end of 2016.
The ceramic tile products of Dongpeng received the "National Green Building Selected
Products" trademark from China Building Material Test & Certification Center (CTC) in
2014. This trademark program was initiated by Ministry of Industry and Information
Technology of the PRC in 2012, in order to elect building material products that are
environmental friendly (in terms of energy saving and population control) throughout the
whole cycle of production, usage and disposal. There are only ~10 ceramic tile
companies have received such trademark so far, it demonstrates Dongpeng's effort on
environmental protection. We believe PRC Government would gradually issue policy to
encourage the usage of Green Building Material, and those ceramic tile manufacturers
with poor pollution control mechanism is subject to regulation risk.
Page 9 of 20
Exhibit 11: Dongpeng received the "National Green Building Selected Products" trademark
Source: Dongpeng
Acting as the sole agency of REX, a premium Italian brand
Dongpeng ceramic tile products is generally targeting at the mid-high market in the PRC.
To capture the demand for premium products, Dongpeng started to act as the sole
agency of REX in the PRC since 2012, which is a premium ceramic tile brand owned by
Italian Florim Group. Dongpeng offers REX products in some of its retail POS. While the
sales contribution from REX is not significant, such cooperation helps to enrich the
product portfolio in Dongpeng's POS and enhance the brand image of Dongpeng.
Exhibit 12: Imported REX ceramic tiles are offered in the POS of Dongpeng
Source: CIRL
Page 10 of 20
Benefit from the rebound in property market
Dengpeng 1H14 ceramic tile sales amid the sluggish property market
Demand of ceramic tile products is correlated with, but less volatile than, the property
market, as customers of ceramic tiles are mainly property users but not investors.
Hence, under the sluggish PRC property market in 2014, with 11M14 residential GFA
sold declined by ~10% yoy, the operation of ceramic tile industry was under pressure in
general. According to media reports, some mid-small scale ceramic tile manufacturers
were having inventory problems and a few of them have been closed down.
Amid the challenging environment, Dongpeng still managed to deliver a decent
performance and achieved 15.1% yoy ceramic tile sales growth in 1H14. Its product
quality and innovativeness as well as its well established POS and logistics network are
key factors for Dongpeng to outperform in the fragmented market, in our view.
Property transaction volume started to rebound
Policy started turning more favorable to property industry since Sep 2014, including the
interest rate cut and easing of mortgage restrictions. As a result, monthly transaction
volume of residential house in 10 major cities and 30 major cities picked up since Oct
2014. We expect the PRC government would continue to adapt an expansionary
monetary policy in 2015, which should be supportive to property market and create
more demand for ceramic tiles.
Exhibit 13: Monthly transaction volume of residential house resumed growth
Source: WIND
Page 11 of 20
Dongpeng is benefited from the increasing sales proportion of decorated room
It can be noted that real estate developers, especially those large scale players, are
increasing their sales proportion of decorated room in response to the change in
customer preference. These property developers would generally prefer to source from
sizable suppliers to ensure a stable supply. Dongpeng has established a cooperation
relationship with real estate developers including CR Land (1109 hk), Vanke (2202 hk),
Wanda (3699 hk) and Longfor (960 hk). Thus we believe the growing popularity of
decorated room would be favorable to Dongpeng.
Increasing exposure in international market
Besides, Dongpeng is enthusiastic in promoting its brand in overseas market, which
included participating in various international exhibitions. For instance, Dongpeng has
joined the Bologna Cersaie Trade Fair, one of the most reputable international ceramic
product exhibition, for two consecutive years. Only 5 PRC ceramic tile companies were
invited to join the Bologna Cersaie Trade Fair in 2014, which demonstrated the
competitiveness of Dongpeng in international market. Export sales of Dongpeng
increased from RMB57.0mn in 1H13 to RMB130.9mn in 1H14, which represented 8.1%
of 1H14 sales. We believe Dongpeng's expansion into overseas market could reduce
the concentration risk.
Exhibit 14: Dongpeng participated in various international ceramic tile exhibitions
Source: Dongpeng
Page 12 of 20
Bathroom products and one-stop decoration the new growth drivers
In the early days of Dongpeng's history, the bathroom products segment (mainly
included ceramic products such as toilets and wash basins) and the ceramic tile
segment were managed by the same management team. To focus on the core
Dongpeng ceramic tile brand, the Company restructured its business in 2006, the
bathroom products segment as well as two supplementary ceramic tile brands were
subsequently separated from the Dongpeng Group and operated independently.
Consolidated the bathroom products segment in May 2013
After the reorganization, Dongpeng ceramic tile has grown into a more mature business
and became the leading brand in the PRC, while the bathroom products business
(which also used the "Dongpeng" brand) has established a position in the PRC ceramic
bathroom product market, ranked tenth in terms of retail sales value in 2012. As
management believe that there would be synergy between ceramic tiles and bathroom
products by cross-selling, the Company consolidated the bathroom products segment
back into the Group from certain related parties in May 2013. Dongpeng now produces
its bathroom products in Foshan of Guangdong Province and Fengcheng of Jiangxi
Province.
Exhibit 15: Top 10 ceramic bathroom product brands in the PRC
Source: Frost & Sullivan
Brand positioning of Dongpeng bathroom products has room to improve, in our
view
During our visit to Dongpeng's POS, we noted that the bathroom products is displayed
in a separated section as well as packaged into a total toilet decoration solution with the
ceramic tiles. Besides, we noticed that there are a number of sub-brands for bathroom
products with limited distinct characteristic, and the bathroom products are relatively low
end in comparison to the ceramic tile products. We believe the brand building of the
bathroom products could further improve after the Dongpeng Group consolidated the
business and put more management effort into it.
Rank Company2012 Retail sales value
(RMB bn)Market share in 2012
1 Kohler 2.79 5.36%
2 Toto 2.30 4.42%
3 Arrow 1.36 2.61%
4 Faenza 0.84 1.61%
5 Hegii 0.73 1.40%
6 Bolina 0.71 1.36%
7 Annwa 0.50 0.96%
8 HCG 0.47 0.90%
9 Ying 0.46 0.88%
10 Dongpeng 0.45 0.86%
Top 10 total 10.61 20.36%
Page 13 of 20
Exhibit 16: Bathroom products offered in Dongpeng's POS
Source: CIRL
Exhibit 17: Sub-brands under Dongpeng bathroom products segment
Source: CIRL
Cooperation with foreign brand to develop higher end bathroom products
In July 2014, Dongpeng acquired 62% equity interest in Guangzhou Yinai by making
capital contribution of RMB15mn. Guangzhou Yinai was originally a wholly owned
subsidiary of Innoci. Management stated that Innoci is a Germany brand established by
former employee of America Standard, with talented and experienced design team in
mid to high-end bathroom products. The cooperation with Innoci should help Dongpeng
to develop its mid to high end bathroom products.
Page 14 of 20
Venturing into the one-stop home decoration business
Dongpeng is also venturing into the one-stop home decoration market recently. While
decorated room becomes more and more popular than undecorated room, the extra
working capital required might not be affordable for some mid-small scale real estate
developers. In view of the opportunity, Dongpeng starts establishing its one-stop home
decoration business model by cooperating with its distributors, real estate developers,
furniture and household appliance brands and local construction contractors.
Under this business model, distributors of Dongpeng would set up a few model flat in
the real estate, and then the home buyers could order a total decoration solution based
on their performance. Dongpeng would supply ceramic tile and bathroom products for
the room. For other part of the decoration, Dongpeng could source from other renowned
brands including Midea Group, Suofeiya Home Collection (002572 CH) and Youpon
Integrated Ceiling (002718 CH). These brands have established a cross-selling
cooperation relationship with Dongpeng in past few years, hence Dongpeng is able to
purchase their products with better price and payment terms. The decoration work
would be outsourced to local contractors.
As customers of Dongpeng are the home buyers instead of the real estate developers,
the Company is subjected to limited credit risk. Dongpeng already launched the
one-stop home decoration business in a few property projects in Guangdong, Guangxi
and Guizhou. Management believe that this new business could develop into an
important revenue stream in next 5 years.
Page 15 of 20
Financial analyst and valuation
Better sales outlook in FY15E thanks to the rebound in property market
Sales of ceramic tiles generally lag behind that of real estate by around 6 months. Given
the sluggish property market in 9M14, we project a 10.0% yoy growth rate for
Dongpeng's ceramic products in 2H14E, versus 15.1% achieved in 1H14. Since
property market transaction started to rebound since 4Q14, we forecast a stronger
demand and a higher growth rate at 16.0% and 14.5% for ceramic tile products in
FY15/16E respectively.
Bathroom products is expected to achieve 18.0% and 16.0% growth in FY15/16E
respectively, slightly higher than that of ceramic products, as the bathroom products
segment should be benefited from a more sophisticated management team and
additional synergy with ceramic tile products after Dongpeng consolidated the business
in May 2013, in our view.
Stable GPM for ceramic tiles and improving margin in bathroom products during FY15-16E
GPM of ceramic tile products slightly declined from 37.6% in 1H13 to 37.3% in 1H14,
due to an increase in sales contribution from direct sales to real estate developer (which
generally have a lower GPM) and price adjustment on certain products to increase
competitiveness in the market. Ceramic tile segment generally has a lower GPM in first
half of the year due to lower utilization rate as a result of Chinese New Year holidays.
Leverage on Dongpeng's capability in introducing new products, we expect GPM of
Dongpeng's ceramic tile products would only slightly decline in FY14E and maintain
relatively stable in FY15-16E.
For bathroom products, before the acquisition in May 2013, this segment only generated
a small amount of revenue by re-selling finished products, hence margins before and
after the acquisition is not comparable. Bathroom products segment recorded a GPM of
25.5% in 1H14. Management aims to upgrade its brand image in bathroom products
market and introduce higher end products, we believe GPM of this segment would be in
an uptrend during FY15-16E. As a comparison, Bolina (1190 hk), another bathroom
products brand in the PRC, achieved >40% GPM during FY11-13 and 1H14.
Largely stable SG&A expenses in FY14-16E
S&D costs to sales ratio declined significantly from 17.6% in FY12 to 12.6% in FY13, as
there was substantial set-up costs incurred in order to develop the national warehouse
network as well as implement the SAP system in FY12. We expect the ratio to stay at
13.0-13.5% during FY14-16E (13.4% in 1H14). For admin costs to sales ratio, we
project a mild increase from 7.6% in FY13 to 8.0-8.5% in FY14-16E after Dongpeng
listed in HKEx in late 2013 (8.2% in 1H14).
Page 16 of 20
24.1% yoy earnings growth in FY14E and 14.9% CAGR during 2015-16E
Dongpeng achieved 47.7% net profit growth in 1H14, it was mainly due to 1) 22.4%
growth in gross profit and 2) RMB49.9mn government grants received in 1H14 versus
RMB9.6mn in 1H13 (RMB44.3mn in FY13), which was partially offset by the
RMB34.9mn non-cash expenses incurred in 1H14 related to the grant of share options.
We forecast 24.1% yoy earnings growth in FY14E and 14.9% CAGR during 2015-16E.
We are slightly conservative toward 2H14E earnings as we believe the recent rebound
in property market would be reflected in Dongpeng performance during FY15E but not
2H14E, Besides, we only assume a government grant of RMB10mn in 2H14E.
Management stated that the government grant income is mainly tax benefit related to its
operation, which would be recurring in next few years.
Exhibit 18: Financial figures and key assumptions
Source: Dongpeng, CIRL
Year to Dec (RMB mn) FY12A FY13A FY14E FY15E FY16E 1H13 1H14
Total revenue 2,498 3,368 3,938 4,580 5,254 1,275 1,624
