Downgrade to HOLD and cut TP to HK$ 1.97. Due to sharp drop in EU/ US demand and operating deleverage, NP could plummet despite falling raw material costs. But still, significant upside risk can arise in FY21E if: 1) demand can turn around and 2) low cost environment will stay. The Company is trading at 9x/6x FY20/21E P/E, which is not too attractive given only 5% NP FY19-22E CAGR.
- We forecast sales to decline by 5%/ 41%/ 11% YoY in 1H20E/ 2H20E/ 1H21E. We believe Bestway has been hit hard by global pandemic, as 50%+ of sales are water, outdoor sports and camping related and 95%+ are exporting to EU, N.A. and others. Revenue decline in 1H20E, in our view, should be mild as orders were pre-placed, but shall intensify from 2H20E as the virus spread and lockdowns begun.
- We are worried for Bestway due to pressure from the Industry stand point, overall US retail sales slumped by 5.8% YoY in Mar 2020, the worst decline since 2009. Sales of sporting goods, furniture and clothing also fell by 23%/ 27%/ 51% MoM. We believe Apr 2020 is likely to be worse and such pressure will sustain into 2Q20E.
- Stay home entertainment and online outperformed, but not enough to offset the drags. We believe products like above ground pools and inflatable spas and e-commerce business can benefit as demand for stay home entertainment surged during Mar - Apr 2020. But those products and online channel only made up 48% and 20% of sales in FY19.
- GP margin to be benefited by falling oil price in near future. PVC resin and plasticizer accounted for ~40% of Bestway’s COGS, while others are labour costs, metals, packing materials, electronic components, etc. Therefore, ~66% YTD drop in WTI and Brent oil prices should lead to further decline of PVC Resin and plasticizer prices, which had only fallen by 3% and 10% YTD. We forecast GP margin to be 25.7% (flattish YoY) in 1H20E, 30.0% (up 2ppt YoY) in 2H20E and 27.4% in FY21E (vs 27.8% in FY20E).
- However, OP margin is still under pressure as many opex are fixed. We estimate ~55% of opex are relatively fixed, which include factory and headquarters staff costs, D&A, R&D, maintenance, royalty fees, audit fees etc. Hence, we forecast OP margin to be 8.8% (down 1.6ppt YoY) in 1H20E, -1.5% (down 5.3ppt YoY) in 2H20E and 8.3% in FY21E (vs 6.2% in FY20E).
- Downgrade to HOLD and cut TP to HK$ 1.97. We downgrade to HOLD and cut TP to HK$ 1.97, based on 10x FY20E P/E (from 10x FY19). The counter is trading at 9x/ 6x FY20E/ 21E P/E, not too attractive with various challenges ahead and 5% 3-year NP CAGR. We revised down our FY20E/ 21E EPS est. by 63%/ 50% to factor in 1) orders cut but 2) better GP margin.
