Zhongwang Fabric Co.Ltd(605003) (605003)
Key investment points
Historical revival: deeply cultivate the American market and lead the decorative fabric industry
The U.S. market accounts for more than 90% and is deeply bound to the top ten furniture manufacturers in the United States. Since its establishment in 1994, the company has been focusing on the decorative fabric industry. Its main products are decorative fabrics and sofa covers. The company entered the U.S. market in 2003 and established a U.S. subsidiary in 2011. At present, more than 90% of its products are directly or indirectly sold to the U.S. market, deeply binding with the top ten furniture manufacturers in the United States. Ashley, the first furniture brand in the United States, accounts for more than 30% of the company’s total revenue.
Steady performance growth, resilience under the epidemic and outstanding profitability. From 2016 to 2020, the CAGR of the company’s revenue / net profit attributable to the parent company were 7.8% / 13.9% respectively. Thanks to the strong anti risk ability of key customers, it still maintained positive growth under the epidemic situation in 20 years. The gross profit margin of the company is generally maintained at a high level of about 40%. With the continuous improvement of fee control ability, the net profit margin will increase to 28.4% in 2020.
Winning core: how to bind key customers and achieve high gross profit margin?
1) The systematic design process accurately grasps the local fashion trend and provides a one-stop matching scheme. The company cooperates with more than 20 well-known painting companies around the world, designs thousands of proofing fabric styles every year, leads the global market in fashion, and provides customers with a package of color matching schemes for sofas, pillows, seats and bedding according to the concept of “big home”.
2) Continue to overcome technical problems, launch new functional fabrics and expand application scenarios. The company’s product technical indicators such as color fastness, tensile strength and wear resistance are leading in the industry. In order to solve the pain points of cloth sofa, the company has developed and launched three representative differentiated products: sunbelievable outdoor series, neverfear antifouling series and z-cycle environmental protection series, which are highly irreplaceable among customers.
3) The model of “China’s whole industry chain + U.S. R & D and sales” maximizes the advantages of cost and delivery time. The company has set up a subsidiary in the United States to undertake some design, R & D and sales functions, while the domestic company undertakes all production functions (but not limited to production links), which better combines the advantages of the two. It has strong competitiveness compared with the fabric enterprises in the United States and China.
4) Outstanding international operation ability to provide customers with long-term and in-depth products and services. With 20 years of foreign trade experience and all foreign American sales team, we have been able to form a positive interaction with American customers quickly and accurately, and accumulated many high viscosity customers.
Growth driven: high quality production expansion, volume and price profit margins are expected to rise
The production capacity of decorative fabrics will expand from 16.5 million meters to 31.5 million meters. In recent years, the utilization of the company’s own capacity has been saturated for a long time, and the outsourcing proportion has increased year by year to 30% in 2020, which has a certain limit on the performance. The raised investment capacity will increase by 15 million meters. It is expected to be put into operation in the first half of 22 years and reach 100% production in 23 years.
Outsourcing transfer + large volume of new products with high gross profit, the company is expected to usher in the synchronous improvement of volume / price / profit margin. It is expected that the outsourcing proportion of the company will drop from 30% of the peak to 10% – 15%, significantly improving the operation quality; The company will also continue to enjoy the bonus of improving the concentration of key customers, and the digestion of new production capacity will be guaranteed; In addition, new products with high gross profit such as z-cycle and sunbelievable are expected to be sold in large quantities, and the company’s profit margin still has room for upward imagination.
Profit forecast and valuation
It is estimated that the company will realize an operating revenue of RMB 570 / 690 / 840 million from 2021 to 2023, with a year-on-year increase of 15% / 22% / 21%; The net profit attributable to the parent company was 150 / 200 / 270 million yuan, with a year-on-year increase of 10% / 32% / 30%, and the corresponding EPS was 1.40/1.85/2.41 yuan. The current price corresponds to 19 / 14 / 11 times of PE. Considering the integration advantages of the company’s industrial chain and its strong bargaining power in the upstream and downstream, we believe that the reasonable valuation in 22 years is 20 + times, which is covered for the first time and given a “buy” rating.
Risk statement
Raw material price fluctuation risk, foreign trade environment deterioration risk, epidemic recurrence risk.
