Summary. Maintain BUY and lifted TP to HK$ 4.20. Thanks to 1) faster growth in 2H19E, 2) limited impact from trade war and 3) excellent risk reward, we see chance of re-rating. It trades at 8.5x FY19E P/E but with a 28% 3 years NP CAGR.
- 1H19 net profit inline. Bestway’s net profit rose by 24% YoY to USD 44mn, accounting for 81%/70% of CMBI/ BBG’s FY19E estimates (vs 2 years avg. of 78%), roughly inline. But we are glad that loss from FX hedging contacts was lower than expected. 15% sales growth was driven by 22%/ 8%/ -28%/ 11% for Europe/ North America/ China/ Rest of the world, or 25%/ 7%/ 7%/ 5% for Pools & Spas/ Recreation/ Sporting goods/ Camping products.
- A better 2H19E ahead, thanks to less FX hedging losses and GP margin expansion. Firstly, the Company guided a 15%+ sales growth in FY19E, implying a faster growth in 2H19E, aided by pickups in North America and China market (1H19E water sports sales was dragged by bad weather). Secondly, GP margin shall improve, due to RMB depreciation (-3% YoY in Aug 2019) and potential lower input prices from more localized raw material supply. Thirdly, thanks to a much lower FX hedging loss (~ USD 20mn one off drag in 2H18), we expect NP to jump by 96%/ 33% in 2H19E/ FY19E.
- Impact from trade war is limited since retailers are well prepared. Even though more tariffs will be charged when exporting to the US market, from only ~3% of US sales to ~50% starting from Sep 2019, but the impact should not be material, because 1) Bestway is not affected as prices were already set in the past trade fairs, and 2) retailers had already adapted by raising retail prices since late 2018, another round of price increase is also likely.
- Vietnam expansion begins. The Company began its Vietnam expansion. Total capex of the 1st phase is ~USD 15mn for next 3 years, and is targeted to generate ~USD 40mn revenue. Operation will commence in Feb 2020, with ~800 workers. Since Bestway is one of first key manufacturers in the sector to move out of China, we expect it to gain more market shares and enjoy a higher bargaining power over its customers in near future.
- Maintain BUY and raise TP to HK$ 4.20. We maintain BUY and lift TP to HK$ 4.20, based on 10x FY19E P/E (unchanged). The counter is trading at 8.5x/ 6.7x FY19E/ 20E P/E and we believe its risk reward is excellent, given 3-year NP/ adjusted NP CAGR of 28%/ 13%. We fine-tuned our FY19E/ 20E/ 21E EPS estimates by +5.8%/ -1.5%/ -1.6%.
