Upgrade to BUY and raised TP to HK$ 2.40, based on 10x FY20E (unchanged) as 2H20E guidance is better than expected, which is supported by resilient stay home entertainment demand in EU and US. The Company is trading at 8x/ 6x FY20/ 21E P/E, undemanding given an 8% NP FY19-22E CAGR.
- 1H20 net profit inline while outlook turned more positive. Bestway’s NP att. fell by 26% to US$ 33mn, inline with profit warning. GP margin surged by 2.0ppt to 27.7% in 1H20, better than expected thanks to: 1) favorable FX as CNY depreciated, 2) more efficient production and 3) better product mix as Spas grew faster. However, opex is also greater than expected, because of 1) more online business related A&P and transportation expenses and 2) higher D&A expenses. Moreover, finance costs and minority interests were also greater than expected.
- Stay home products (e.g. Pools and Spas) and online outperformed amid hot weather in EU and US. During the pandemic and historically hot weather in EU and US, e-commerce business was highly impressive, above ground pools & inflatable spas sales grew by 8%, while recreation products, sporting goods and camping products fell by 11%, 30% and 14% in 1H20. Noted ASP still managed to increase by 4% YoY to US$ 8.2 per unit and GP margin for pools & spas and recreational products also jumped in 1H20.
- 2H20 outlook beat expectation. We previously forecast a 41% sales decline and net losses of US$ 8mn in 2H20E, but the outlook is now much better. Given a resilient EU, a gradually recovering US and fast growing China demand (although Latin America remained weak), management is now guiding a 1) 5% sales growth in 2H20E, 2) slightly lower (vs 1H20) GP margin in 2H20E and 3) stable opex, as % of total sales (vs 2H19) in 2H20E.
- Vietnam factory is now running and target to break even in FY21E. Vietnam production has been started since Jan 2020 and is expected to generate ~US$ 12mn sales in FY20E and ~US$ 40mn sales once matured. 2nd phase is not finalized and will be subject to client demand. Profit breakeven in FY21E should be achieved with 80-90% efficiency rate vs that in China.
- Upgrade to BUY and lifted TP to HK$ 2.40. We upgrade to BUY (from HOLD) and raised TP to HK$ 2.40, based on 10x FY20E P/E (unchanged). The counter is trading at 8x/ 6x FY20E/ 21E P/E, undemanding with a better outlook (8% 3-year NP CAGR). We revised up our FY20E/ 21E/ 22E EPS est. by 22%/ 8%/ 10% to factor in 1) better orders and 2) better GP margin.
