Kingdom Holdings (528HK)：Blossom with flax

Tue, 11 Aug 2015 E q u i t y R e s e a r c h Kingdom Holdings (528 HK) Te x t i l e/ C h i n a Blossom with flax With over 30% market share in 2014 Kingdom Holdings (528 HK, “Kingdom”) is the largest linen yarn exporter in China. With natural characteristics, energy efficiency in production and improvements in spinning technology, linen has overtaken cotton in recent fashion trends. We initiate our coverage on Kingdom with a BUY rating and 55% upside with increasing industry demand and capacity expansion in Ethiopia benefiting from One Belt One Road (“OBOR”) policy.  Fast growing trend in higher linen adoption Because of the natural style and being environmental friendly during production, linen has gained higher adoption in the fashion and apparel industry in recent years. Better spinning technology now allows linen to be used in knitting and as dope-dyed fibre, to such an extent that major fashion stores, such as H&M, Uniqlo and Muji, have been increasing product lines focusing on premium linen, sending demands soaring.  A leader with solid track record Kingdom has been China’s top linen yarn exporter for 12 consecutive years, driven by efficient production lines and cooperation with Siemens. Since the linen export value increased by 29% during 1H15 in China, we believe Kingdom will see robust growth in FY15E as full year contribution from the new capacity added in mid-2014.  OBOR policy opens up development in Africa Kingdom has secured a parcel of land of 300,000 sqm in Ethiopia to build new factories as model projects of the OBOR initiative. In addition to the 28% increase in capacity, the first phase development in Ethiopia will also lower production costs of Kingdom and improve their profitability in the long run.  Initial BUY for undemanding valuation with decent yields Kingdom is trading at an undemanding 5.8x FY15E PE with a decent 6.0% dividend yield. Given the robust earnings growth from Africa development under OBOR policy and stable profitability in linen industry, we believe Kingdom has the best risk-reward ratio and our target price of HK$2.3 represents 55% upside. Bruce Yeung, CFA +852 2135 0214 bruce.yeung@oriental-patron.com.hk Initial Coverage BUY Close price: HK$1.48 Target Price: HK$2.3 (+55%) K e y D a t a HKEx code 528 12 Months High (HK$) 1.90 12 Month Low (HK$) 1.12 3M Avg Dail Vol. (mn) 1.50 Issue Share (mn) 629.68 Market Cap (HK$mn) 931.92 Fiscal Year 12/2014 Major shareholder (s) Ren Weiming (46.3%) Source: Company data, Bloomberg, OP Research Closing price are as of 10/8/2015 P r i c e C h a r t 1mth 3mth 6mth Absolute % 3.5 2.9 28.6 Rel. MSCI CHINA % 7.1 20.9 30.1 C o m p a n y P r o f i l e s Kingdom Holding manufactures linen yarns. The Company markets its products elsewhere in Asia, and in the European Union. E x h i b i t 1: F o r e c a st a n d Va l u a t i o n Year to Dec (RMB mn) FY13A FY14A FY15E FY16E FY17E Revenue 761.9 914.3 1,044.4 1,228.1 1,487.8 Growth (%) 6.0 20.0 14.2 17.6 21.2 Net Profit 100.4 110.5 127.8 158.2 208.5 Growth (%) 6.6 10.0 15.7 23.8 31.7 Diluted EPS (HK$) 0.204 0.219 0.254 0.314 0.414 EPS growth (%) 8.8 7.4 16.0 23.8 31.7 Change to previous EPS (%) 0.0 0.0 0.0 Consensus EPS (HK$) N/A N/A N/A ROE (%) 11.7 11.9 12.7 14.3 16.8 P/E (x) 7.3 6.8 5.8 4.7 3.6 P/B (x) 0.8 0.8 0.7 0.6 0.6 Yield (%) 5.1 5.1 6.0 7.4 9.8 DPS (HK$) 0.075 0.075 0.089 0.110 0.145 Source: Bloomberg, OP Research 0.00.51.01.52.0Aug/14Nov/14Feb/15May/15Aug/15HK$528 HKMSCI CHINA Tue, 11 Aug 2015 Kingdom Holdings (528 HK) Page 2 of 29 Table of Contents Table of Contents ......................................................................................................................................... 2 Investment Summary ................................................................................................................................... 3 Fast growing trend for higher linen adoption ................................................................................................ 4 A leader with solid track records ................................................................................................................... 8 OBOR policy opens up development in Africa ............................................................................................. 11 Initial BUY with undemanding valuation and yields .....................................................................................15 Investment risks ..........................................................................................................................................19 Management profile ....................................................................................................................................20 Share