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Company Report
30 May 2013
Lewis Pang
(852) 2235 7847
Trading data
52-Week Range (HK$)
3 Mth Avg Daily Vol (m)
No of Shares (m)
Market Cap (HK$m)
Major Shareholders (%)
Auditors
Result Due
2.06/3.32
3.7
1,015
3,156
Mr. Xiao (59.13%)
E&Y
1H13: Aug Company description
Established in 2002, Bolina is primarily engaged
in the manufacturing of ceramic sanitary ware.
Bolina sells its products through its self-owned
brand “Bolina” in PRC, with 450 POS as of end
2012. Bolina also acts as OEM/ODM ceramic
sanitary ware supplier of various foreign brands,
and is the key supplier of American Standard and
Niagara Conservation.
Price chart
Emerging brand in a fragmented market Rating BUY Initial
Target Price HK$4.30
Current price
HK$3.11 Upside +38%
Quality well recognized by global brands
OEM/ODM sales contributed 38% of Bolina’s revenue in FY12.
Product quality of Bolina is well recognized by various renowned
international ceramic sanitary ware brands. For instance, Bolina is
the key supplier of American Standard and Niagara Conservation
(mainly sold at Home Depot).
Strong export orders in 2013, new production line coming in
We visited Bolina’s production base in Zhangzhou and saw that the
warehouses were full with OEM/ODM products. We expect >20%
yoy export sales growth in FY13E, GPM of export sales should also
improve as Bolina has denied some lower margin orders. In view of
the strong demand, Bolina is likely to maintain its utilization rate at
>90% in FY13E. A new production line will commence production
earliest in late 2013, which would increase Bolina’s capacity from
4.9mn in FY13E to 5.9mn pieces in FY14E.
Expanding sales network in PRC
Bolina established its sales network in PRC by the help of
distributors. In addition to its headquarter in Zhangzhou, Bolina has
set up 3 more regional offices during 1H13 to have a more timely
management on distributors. Bolina targeted to increase its no. of
POS from 450 in end 2012 to 1,000 before the end of 2015, and
YTD store opening schedule is right on track.
Distinct brand position in a fragmented market
Bolina is the 5th largest brand and the 2
nd largest domestic brand in
PRC’s ceramic sanitary ware market with a share of 4.4% in 2011.
The aggregate share of the top 10 brands is only 44.5%. Bolina has
a more fashionable store outlook and product design in comparison
to Arrow, the largest domestic brand. Bolina also has a price
advantage to the international brands. According to our channel
check, YTD domestic sales performance is slightly better than 2012,
which may be due to the pickup in property transaction since 2Q12.
Valuation still undemanding, initiate with BUY
While Bolina’s stock price has surged by >20% since mid April 2013,
we find the valuation still undemanding at 9X FY13E PER, a 25%
discount to the low end of HK/China listed furniture companies. We
expect Bolina to enjoy 18% earnings CAGR during 2013-15E.
Initiate with BUY, target price at HK$4.30, which translate to 12X
FY13E PER.
RMB million FY11A FY12A FY13E FY14E FY15E
Revenue 655 817 986 1,161 1,371
Gross profit 304 390 482 569 679
Net Profit 161 246 287 340 404
Consensus NP N/A N/A N/A N/A N/A
EPS (RMB) 0.203 0.243 0.283 0.335 0.398
P/E (x) 12.2 10.3 8.8 7.4 6.3
ROE (%) 66.1 28.7 27.1 25.8 25.0
ROA (%) 27.5 21.5 21.3 20.6 20.2
Sources: Bloomberg, CIRL estimates
Bolina | 1190.HK
China Puti
China Puti
Page 2 of 15
Quality well recognized by global brands
Operating through both self-owned brand and ODM/OEM
Bolina is primarily engaged in the manufacturing of ceramic sanitary ware. Bolina sells
its products through its self-owned brand “Bolina” in PRC. Besides, Bolina also acts as
OEM/ODM supplier of various foreign brands including American Standard, Niagara
Conservation, Gerber, Kelim and Western Pottery. In FY12, sales of self-owned brand
products in PRC contributed 62% of total sales. For OEM/ODM segment, the orders
mainly come from Americas, which accounted for 34% of Bolina’s total sales.
Exhibit 1: Major products of Bolina
Source: Bolina, CIRL
Exhibit 2: FY12 sales breakdown
Source: Bolina, CIRL
Page 3 of 15
Exhibit 3: Well known OEM/ODM customers of Bolina
Source: Bolina, CIRL
Purchased the 1st
production line and brand name from state-owned enterprise
Mr. Xiao, chairman of Bolina, worked as a senior management of ZhangZhou
Development (000753 CH, used to name as Double Rhomb), a listed state-owned
enterprise, during 1997-2002. ZhangZhou Development was involved in ceramic
sanitary ware business since early 1990s. For the purpose of business restructuring,
ZhangZhou Development leased its ceramic sanitary ware factory to Mr. Xiao in 2002,
and subsequently sold the ownership of the registered trademarks “Bolina” to Mr. Xiao
in early 2008.
Key supplier of renowned international brands including American Standard
Mr. Xiao started his ceramic sanitary ware business by supplying ceramic sanitary ware
products to foreign brands under an OEM/ODM arrangement. The products quality of
Bolina is well-recognized by various renowned international brands. For instance, Bolina
has built >5 years relationships with key customers including American Standard and
Gerber. Besides, according to management, Bolina is also one of the largest suppliers
of American Standard and Niagara Conservation.
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Strong export orders in 2013, new production line coming in
Production lines running at almost full capacity during our visit in May 2013
We visited Bolina’s production base in Zhangzhou, Fujian Province on 15-16 May 2013.
During our visit, all production lines were running at almost full capacity, and the
warehouses were full of packed products which will be delivered to international
customers including American Standard and Gerber.
Exhibit 4: Bolina’s Production lines is running at almost full capacity
Source: CIRL
Exhibit 5: Crowded warehouse with lots of packed products waiting for delivery
Source: CIRL
Expect >20% sales growth and GPM improvement for export segment in FY13E
Management stated that ODM/OEM orders from US are particularly strong in 2013, and
Bolina has denied some export orders due to capacity constraint and a higher priority of
self-owned brand in PRC. We expect >20% yoy export sales growth in FY13E, GPM of
export sales should also improve as Bolina could select relatively higher margin
OEM/ODM orders.
Page 5 of 15
Continue to maintain a high utilization rate
The effective capacity of Bolina is increased by ~15% from 4.3mn units in 2012 to 4.9mn
units in 2013. Bolina has successfully maintained >90% utilization rate in 2011-12. In
view of the strong demand, we expect Bolina continuing to utilize its capacity effectively
in FY13E.
New product line commence production earliest in late 2013
Bolina started constructing the 6th production line in August 2012, and is expected to
commence production earliest in late 2013. Excluding the land costs, the CAPEX for a
1mn piece capacity production line is about RMB130mn. We expect Bolina to announce
building or acquiring another new production in late 2013 due to capacity constraint and
positive sales outlook.
Exhibit 6: FY12 sales breakdown
Source: Bolina, CIRL
Page 6 of 15
Expanding sales network in PRC
Establishing footholds in PRC through distributors
Leveraged on the design and brand building knowledge learned from the OEM/ODM
customers, Bolina stepped into PRC ceramic sanitary ware retail market in 2008. Bolina
established its sales network in PRC by the help of distributors, and has 450 POS as of
end 2012.
Exhibit 7: Bolina has 450 POS as of end 2012
Source: Bolina
Cautious inventory management in retail end
All distributors need to sell “Bolina” branded ceramic sanitary ware products exclusively,
and full payment is needed before taking the goods from Bolina’s warehouses.
Distributors are required to make monthly report on their sales performance and
inventory level, which their inventory level should not exceed 2 months of sales. Bolina
would constantly send its representatives to monitor the POS operation.
Setting up regional offices to establish closer relationship with distributors
Bolina used to manage all POS nationwide in its Zhangzhou headquarter. In 1H13,
Bolina has set up regional offices in Tianjin, Wuhan and Foshan respectively. We
believe those offices would allow Bolina to establish a closer relationship and a more
timely management on the POS.
Sales network expansion plan on track
In late 2012, Bolina has announced a target to increase no. of POS from 450 in end
2012 to 1,000 before the end of 2015. Management expressed that YTD store opening
schedule is right on track. We expect Bolina to have ~600 POS by the end of 2013.
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Exhibit 8: Targets to have 1,000 POS by the end of 2015
Source: Bolina, CIRL
Allying with national furniture shopping mall chain
Bolina entered into strategic alliance agreement with Red Star Macalline and Jinsheng,
two national furniture shopping mall chains with >100 and >10 malls respectively, in
2011. Under the agreement, Bolina has the priority to establish POS in their shopping
malls. Currently Bolina has already entered into ~70 Red Star Macalline malls.
Page 8 of 15
Distinct brand position in a fragmented market
2nd
largest domestic brand in the mid-to-high end market
The PRC ceramic sanitary ware market is highly fragmented. In terms of 2011 retail
sales value, Bolina is the 5th largest brand and the 2
nd largest domestic brand in the
mid-to-high end (RMB1,200-9,000 for an one-piece toilet) ceramic sanitary ware market
with a share of 4.4%. The aggregate market share of the top 10 brands is only 44.5%.
Exhibit 9: Highly fragmented PRC mid-to-high en ceramic sanitary ware market
Source: Frost & Sullivan
Well located store in nationwide furniture mall chain
We have visited the Red Star Macalline mall in Zhangzhou, Fujian Province. There are
~30 stores of foreign and local sanitary ware brands in the ground floor, and we see that
Bolina’s store is located in a relatively prime locations right next to the lift lobby and
opposite to the store of Arrow, the largest domestic ceramic sanitary ware brand in
China. We think it is another proof of Bolina’s market position.
Exhibit 10: Bolina’s store is located right next to the lift lobby
Source: CIRL
Page 9 of 15
A more modern store outlook and promotion strategy
In comparison to Arrow, we found that the store outlook as well as the product design of
Bolina is more fashionable and more comparable to those foreign brands such as
Kohler and TOTO. We also observed that Bolina is one of the very few sanitary ware
brands which have employed a celebrity as brand ambassador. We believe these help
Bolina to gain market share in the fragmented market.
Exhibit 11: Bolina has a more modern store outlook in comparison to Arrow
Source: CIRL
Exhibit 12: Bolina employed Christine Fan as brand ambassador since May 2012
Source: CIRL
Competitive pricing in comparison to the international brands
Based on our channel check in the Red Star Macalline mall, the average retail price of
Bolina products is about 10-20% lower than that of the major international brands with
comparable quality. Besides, as a local brand, we also expect that Bolina should enjoy
an advantage over international brands in expanding sales network in lower tier cities.
Page 10 of 15
Stable YTD sales performance
According to Bolina store manager in the Zhangzhou Red Star Macalline mall, YTD
sales performance is slightly better than that in 2012. We expect a mid-low single digit
SSSG for Bolina’s PRC retail stores versus a flat SSSG in 2012, as we see the growth
of PRC property transaction has stepped up since 2Q12, and the demand of furniture as
well as sanitary ware from new house should lag ~12 months behind the transaction.
Exhibit 13: PRC property sales has picked up since 2Q12
Source: WIND
Page 11 of 15
Financial analyst and valuation
Healthy revenue growth for both self-owned brand and OEM/ODM
We expect sales of Bolina’s self-owned brand to achieve 22% CAGR during 2013-15E,
mainly support by the expansion of POS network. Our forecast is largely in-line with the
18.5% expected industry growth in PRC estimated by consulting company Frost &
Sullivan.
For the OEM/ODM segment, we expect 22% yoy growth in FY13E and 10% CAGR
during FY14-15E. With a well-established relationship with various international brands
and proven product quality, we believe the OEM/ODM segment would act as a stable
income stream to Bolina.
Mild improvement in GPM of OEM/ODM segment
The GPM of Bolina’s OEM/ODM segment should improve in FY13E, as the demand
from international brands exceed the capacity of Bolina, which allows Bolina to select
some orders with relatively higher margin. For self-owned brand, we expect a stable
GPM at ~56% going forward.
Slightly higher S&D expense ratio
S&D expenses increased by >50% in FY12 as Bolina is putting more effort on
advertisement. S&D expenses to self-owned brand sales ratio would increase from
7.7% to 8.2% under our forecast, as Bolina is setting up more regional offices to
manage its POS network.
Increase in FY13E effective tax rate
Effective tax rate is expected to increase significantly from 12.9% in FY12 to 21.5% in
FY13E, as 1) Bolina received RMB14mn one-off tax rebate in 2012, and 2) the 50% tax
reduction enjoyed by Zhangzhou Wanhui, one of Bolina’s production base is expired in
2013. Bolina could lower its effective tax rate if it successfully applies the accreditation
of New and High technology Enterprise for Zhangzhou Wanhui.
Page 12 of 15
Exhibit 14: Key assumptions
Source: Bolina, CIRL
Valuation still undemanding at 9X FY13E PER
While Bolina’s stock price has surged >20% since mid April 2013, we find the valuation
still undemanding at 9X FY13E PER, a 25% discount to the low end of HK/China listed
furniture companies. We believe Bolina has built a strong OEM/ODM customer base,
and is likely to further gain market share in the fragmented PRC ceramic sanitary ware
market. Bolina also has >RMB500mn net cash on hand after paying out FY12 final
dividend with limited CAPEX plan (~RMB150mn) in FY13E. Initiate with BUY, target
price at HK$4.30, which translate to 12X FY13E PER.
Exhibit 15: Peers comparison
Source: Bloomberg, CIRL
Year to Dec (RMB mn) FY11A FY12A FY13E FY14E FY15E
Total revenue 655 817 986 1,161 1,371
- Own branded 380 509 610 748 916
- ODM/OEM 275 308 376 414 455
Gross Profit 304 390 482 569 679
- Own branded 217 282 343 420 515
- ODM/OEM 87 108 139 149 164
Year to Dec FY11A FY12A FY13E FY14E FY15E
Growth rate
Revenue 76.5% 24.6% 20.8% 17.7% 18.0%
- Own branded 196.9% 33.8% 20.0% 22.5% 22.5%
- ODM/OEM 13.2% 11.9% 22.0% 10.0% 10.0%
Ratio
Gross margin 46.3% 47.7% 48.9% 49.0% 49.5%
- Own branded 57.0% 55.5% 56.2% 56.2% 56.2%
- ODM/OEM 31.6% 34.9% 37.0% 36.0% 36.0%
S&D costs to self owned brand sales 6.7% 7.7% 8.2% 8.0% 8.0%
Admin costs to sales (ex listing costs) 5.1% 6.6% 6.0% 6.0% 6.0%
Effective tax rate 25.4% 12.9% 21.5% 21.5% 21.5%
Ticker Mkt cap Price
(HKD mn) (HKD) FY12A FY13E FY14E FY12A FY13E FY14E
MAN WAH HOLDINGS 1999 HK 7,057 7.97 14.3 12.1 11.1 2.1 1.9 1.7
SAMSON HLDG LTD 531 HK 4,413 1.45 18.6 18.6 12.5 N/A 1.0 1.1
ROYALE FURNITURE 1198 HK 662 0.57 3.0 N/A N/A N/A N/A N/A
CHINA FLOORING 2083 HK 2,267 1.53 127.5 15.1 12.1 0.7 0.7 0.7
MARKOR INTL FU-A 600337 CH 5,660 8.95 178.9 29.5 23.7 1.8 1.7 1.6
Average 68.5 18.8 14.8 1.5 1.3 1.3
TOTO LTD 5332 JP 29,978 80.66 33.0 22.0 18.5 1.6 1.8 1.7
JOYOU AG JY8 GY 2,920 121.82 8.1 7.3 6.6 0.9 0.8 0.7
Average 20.6 14.6 12.6 1.2 1.3 1.2
Bolina 1190 HK 3,156 3.11 10.3 8.8 7.4 2.9 2.4 1.9
International sanitary ware brands
HK/China listed furniture companies
P/E(x) P/B(x)
Page 13 of 15
Exhibit 16: Financial statement
Source: Bloomberg, CIRL
Income statement Cash flow
Year to Dec (RMB mn) FY11A FY12A FY13E FY14E FY15E Year to Dec (RMB mn) FY11A FY12A FY13E FY14E FY15E
Revenue 655 817 986 1,161 1,371 Pre-tax profit 215 283 366 433 514
Gross profit (reported) 304 390 482 569 679 Taxes paid (55) (36) (79) (93) (111)
EBITDA 238 307 389 463 555 Depreciation 8 9 14 22 31
Depreciation (8) (9) (14) (22) (31) Associates 0 0 0 0 0
EBIT 230 298 375 441 524 CFO bef. WC change 169 256 302 362 435
Net interest income (exp.) (14) (15) (9) (8) (10) Change in working cap 157 21 (13) (6) (7)
Associates 0 0 0 0 0 Cashflow from operation 327 276 289 356 428
Exceptionals/others 0 0 0 0 0 CAPEX (67) (47) (150) (200) (200)
Profit before tax 215 283 366 433 514 Free cash flow 259 230 139 156 228
Tax expenses (55) (36) (79) (93) (111) Dividends (102) (18) (82) (86) (102)
Minority interest 0 0 0 0 0 Balance sheet adj. 43 2 (0) (0) (0)
Net profit 161 246 287 340 404 Shaes issued 0 369 0 0 0
Dividends (18) (82) (86) (102) (121) Others 0 0 0 0 0
Net cash flow 200 583 57 69 126
Balance sheet Net cash (debt) start (164) 36 619 676 745
Year to Dec (RMB mn) FY11A FY12A FY13E FY14E FY15E Net cash (debt) at year-end 36 619 676 745 871
Cash & equiv 261 790 826 922 1,080
Trade receivables 58 58 70 77 84 Ratios
Other receivables 13 11 15 17 21 Year to Dec FY11A FY12A FY13E FY14E FY15E
Inventories 74 73 86 101 118 Growth rate (%)
Other current assets 0 0 0 0 0 Revenue 53.1 24.6 20.8 17.7 18.0
Fixed assets 174 209 345 523 692 EBITDA 438.1 29.0 26.7 18.9 20.0
Intangible assets 0 0 0 0 0 EBIT 687.9 29.6 26.0 17.5 19.0
Investment, associates etc 3 6 6 6 6 Net profit 138.2 53.2 16.7 18.1 18.9
Total assets 585 1,147 1,347 1,645 2,000 Fully diluted EPS 134.4 (3.9) 2.4 66.2 32.3
Margins (%)
Account payables 25 32 37 43 51 Gross margin (reported) 46.3 47.7 48.9 49.0 49.5
Other payables 48 59 69 81 95 EBITDA 36.3 37.6 39.5 39.9 40.5
Short-term debt 225 171 150 177 208 EBIT 35.1 36.5 38.0 38.0 38.3
Other current liabs 34 8 8 8 8 Net margin 24.5 30.1 29.1 29.2 29.5
Long-term debts 0 0 0 0 0 Other ratios
Deferred tax and others 10 20 20 20 20 ROE (%) 66.1 28.7 27.1 25.8 25.0
Other long-term liabs 0 0 0 0 0 ROA (%) 27.5 21.5 21.3 20.6 20.2
Total liabilities 342 290 284 329 382 Net gearing (%) (15.0) (72.2) (63.6) (56.6) (53.9)
Interest coverage (x) 16.1 19.7 41.5 53.7 52.1
Share capital 0 8 8 8 8 Receivables days 32.5 26.1 25.7 24.1 22.4
Reserves 243 849 1,054 1,307 1,609 Payables days 26.4 27.2 26.8 26.8 26.8
Shareholders' equity 243 857 1,062 1,316 1,618 Inventory days 77.0 62.4 62.1 62.1 62.1
Minorities 0 0 0 0 0 Effective tax rate (%) 25.4 12.9 21.5 21.5 21.5
Total equity 243 857 1,062 1,316 1,618
Net cash (debt) 36 619 676 745 871
Page 14 of 15
Risk factors
Inventory risk
All Bolina's POS in PRC is managed by third party distributors. Although the
distributors need to make full payment before receiving the products, and Bolina has no
obligation to buy back any inventories from distributors, it would still bring unfavorable
effect to Bolina's sales performance and brand name if there are excess inventories in
retail end.
Key customer risk
Niagara Conservation is the largest customer of Bolina, and contributed 19.5% of its
sales in FY12. Sales of Bolina would be affected if Niagara Conservation terminates the
cooperation with Bolina.
Product quality risk
The ODM/OEM customers are highly concerned about product quality. While Bolina has
an established relationship with those customers, it may still loss some orders if its
products have any quality issue.
Competition risk
The ceramic sanitary ware market in PRC is highly fragmented. Other players in the
market may decide to expand in an aggressive way or lower the selling price, which
could affect Bolina's profitability.
Short track record
Listed in July 2012, track record of Bolina is relatively short and may not able to
demonstrate its execution ability.
Page 15 of 15
Rating Policy
Rating Definition
Stock Rating Buy Outperform HSI by 15%
Neutral Between -15% ~ 15% of the HSI
Sell Underperform HSI by -15%
Sector Rating Accumulate Outperform HSI by 10%
Neutral Between -10% ~ 10% of the HSI
Reduce Underperform HSI by -10%
Analysts List
Antony Cheng Research Director (852) 2235 7127 [email protected]
Hayman Chiu Senior Research Analyst (852) 2235 7677 [email protected]
Kenneth Li Senior Research Analyst (852) 2235 7619 [email protected]
Lewis Pang Research Analyst (852) 2235 7847 [email protected]
Susanna Chui Research Analyst (852) 2235 7131 [email protected]
Shawn Yang Research Analyst (852) 2235 7617 [email protected]
Analyst Certification
I, Lewis Pang hereby certify that all of the views expressed in this report accurately reflect my personal views about the
subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is /
are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.
Disclosure
Mr. Leung Ka Man, currently the managing director and the deputy head of investment banking division of Cinda
International Capital Ltd., which is a wholly-owned subsidiary of Cinda International Holdings Ltd., is an independent
non-executive Director of Bolina Holding.
Disclaimer
This report has been prepared by the Cinda International Research Limited. Although the information and opinions
contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International
cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not
be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and
comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers
prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from
the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so
uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is
published solely for information purposes, it does not constitute any advertisement and should not be construed as an
offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential
loss arising from any use of the materials contained in this report. This document is for the use of intended recipients
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