Investment positives
We initiate coverage with an OUTPERFORM rating and a targetprice of Rmb39.00, based on our SOTP valuation applying 45x2020e P/E to its distinctive business-to-consumer (B2C) business,and 27x 2020e P/E on its B2B business. The stock is trading atRmb28.35, implying 25x/20x 2020e/2021e P/E. Our target priceoffers 37.6% upside.
Why an OUTPERFORM rating?
B2C cost leadership achieved by cheaper distribution andwell-managed supply chain; market share gains for its 90Funand Xiaomi luggage brands to continue. Given China’sCOVID-10 containment, we expect domestic travel demand torebound ahead of global travel.
Stable cash cow B2B business provides buffer. Lookingbeyond COVID-19, being the world’s largest soft bagODM/OEM, Korrun enjoys order visibility from high-qualityclients at comfortable gross margin (30–40%). We think therelatively stable and profitable B2B business can support thecompany during setbacks in the riskier B2C business.
Sales of 90Fun and Xiaomi (US$188mn sales in 2019) amountto only 5% of Samsonite’s sales (US$36bn sales in 2019), buthave yet to expand to international markets. We believeKorrun can become China’s Samsonite.
How do we differ from the market? We believe Korrun’s growthpotential and earnings upside have not been fully priced in.
Potential catalysts: China’s travel recovery post COVID-19; resultsbeat in next 6–12 months.
Financials and valuation
Our EPS forecast is Rmb1.12, Rmb1.42 and Rmb1.84 in 2020e,2021e, and 2022e, a CAGR of 22%, on revenue growth forecasts of28%, 32%, and 33% in 2020e, 2021e, and 2022e.
Risks
Worsening of COVID-19; slower-than-expected travel demandrecovery; intensified competition; overseas operational risks (incl.forex risk); cannibalization between brands.