Goldlion Holdings (Part 1) by SG Value investor, The Value Edge
We are going to do things slightly differently this time round. SC and I had a rigorous discussion on the merits of using the metrics (PER, EV/EBIDTA and FCF Yield) to value companies. Fortunately or unfortunately, we could not come to a consensus on whether they give an accurate representation of intrinsic value. To aid our own understanding, we have decided to analyze Goldlion Holdings Limited (HKG:0533) using 2 different methods based on our individual preferences. The first of which would be based on the usual metrics, while the second part is to be based on a SOTP valuation. Through this exercise, we hope that it will also allow you to form your own judgement in relation to your own investing style. Enjoy.
Est. in 1968 by Dr. Tsang Hin-Chi, Goldlion Holdings started out as a family workshop for neckties. Going forward, it has evolved to become what it is today, comprising of two business divisions – Property Investments & Development and Apparels. The Apparels division can be further split into two categories – Distribution & Manufacturing and License of Brand Name. Distribution & Manufacturing operates within China Mainland, Hong Kong SAR, Singapore and Malaysia markets, whereas the Licensing of Brand Name operates only within China Mainland.
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Goldlion Holdings Limited (HKG:0533) operates across mainly within the South East Asia region – China Mainland, Hong Kong, Singapore and Malaysia. While Goldlion Holdings may have two business divisions operating across a span of countries, they are heavily reliant on the Chinese spending power, whereby approximately 92% of their revenue is attributable to China Mainland & Hong Kong.
Given the growth of the Chinese market over the past decade or so, Goldlion Holdings Limited (HKG:0533) have benefitted from it where revenue and net income have grown at a 9-year CAGR of 14.1% and 22.0% respectively. Additionally, gross profit margins over these past 9 years have consistently been maintained above 50%, which is comparable to the likes of other major fast retailers like H&M, Fast Retailing Co Ltd (TYO:9983) (OTCMKTS:FRCOY), Industria de Diseño Textil SA and The Gap Inc. (NYSE:GPS).
While Goldlion Holdings have benefitted from their huge exposure to the Chinese market, it has negatively affected them recently, as seen in their latest results. We would observe that the company has been hit by the slowdown in growth of the China market and Central Government curbs on extravagance. Revenue from the Apparel division (China & Hong Kong) has decreased by 5%, with gross profit margins decreasing by 2.9 percentage points due to the provision for impairment of inventories. This was resulted from the increase in off-season inventories being returned from distributors in China to the company.
Also, operating profit margins has decreased significantly due to decrease in fair value gains on investment properties year on year of approximately 45%. Furthermore, sales & marketing costs has increased due to the increase in retail sales related expenses – rental expenses of retail shops and salesman salaries.
Trends in Chinese Market
Given Goldlion Holding’s huge exposure to the Chinese market, it is important to analyze the trends within the Chinese retail market to understand how the company would fare going forward.
The major trend in the Chinese market that would affect the retail market scene would be rise in e-commerce. Looking at the data collected by CINIC, we would observe the increasing trend of China’s Online Population and Online Penetration.
Without compromising offline sales, the company has formulated strategies to tap the online marketing, aimed at clearing off-season inventories and is expecting the e-commerce business to generate growth. Within 3Q2014, the company has launched their e-commerce business and online sales have been satisfactory.
(II) Balance Sheet & Cash Flows:
Debt Free Company
One thing that struck me when analyzing retail companies would be while many may be debt free, they have huge financial lease obligations. Some examples would be like Bauhaus, GAP Inc. and Fast Retailing (more on this later). With Goldlion Holdings, based on our assumptions that financial lease obligations are taken to be a form of debt, it increases the debt-to-equity ratio from 0 to 0.68%. One reason could be due to the company’s business structure, whereby they conduct their apparel operations primarily through wholesaling to distributors. While the company does have self-operated retail shops including factory outlets, these are mainly located in Guangzhou, Shanghai and Beijing. However, this is just a small proportion of the total of 1240 Goldlion Holding outlets within China Mainland.
Going forward, management has stated that they would consider going for more self-operated retail shops, building up its own retail capacity and brand innovation. To what extent this would increase their financial lease obligations, I find it hard to determine. However, one thing to note would be how the company engages in investment properties that are currently rented out. Hence, in the scenario that they start distributing their apparels via self-operated retail shops, these investment properties can be easily converted for their own use.
(III) Financial Ratios
Overall, in terms of liquidity, all the companies are considered to be within healthy ranges. Looking at the ROE and ROA of these companies, Goldlion Holdings may not be one that really stands out. However, while companies like GAP Inc, Bauhaus and Fast Retailing may offer ROE and ROA higher than that of Goldlion Holdings, their debt-to-equity ratio is not within our comfort zone. Moreover, with a ROE and ROA of 12.35% and 9.39%, Goldlion Holdings may not be the best, but it is still an acceptable level.
(I) Economic Moat:
One important aspect of an apparel company would be to be able to control production costs well. With the company purchasing less than 30% of their inventories from their largest 5 suppliers, it demonstrates to me bargaining power. Furthermore, with less than 30% of their goods being sold to their largest 5 customers once again demonstrates sufficient client diversification and bargaining power as well.
(II) Family Stake:
Looking at the breakdown of shareholders, the Tsang family effectively has 68.3% controlling power over the company. While investing in family owned businesses has its risks such as the controlling stakeholders have no incentive in unlocking the value in their assets, I do not foresee Goldlion Holdings falling under this category. On the other hand, my view would be that given Goldlion Holdings is a family owned company, they would adopt a more cautious approach, growing the company slowly and steadily.
(III) Market Share:
Fashion is a form of ugliness so intolerable that we have to alter it every six months – Oscar Wilde
In today’s world, fashion is something that is constantly changing. Companies like H&M, Uniqlo, Zara etc. are some of the top few fashion companies in the world given how they are able to constantly change their designs to cater to the young adults these days. Hence, for a company like Goldlion, the biggest question would be, “Are they still in the game?”
Looking at the Singapore apparel market, I would say that Goldlion does not dominate a significant market share at all. However, looking at research studies done by Li & Fung Research Centre, Goldlion is amongst the top 5 players in Men’s suits and shirts within China. In China, domestic brands dominate the mass market, especially the lower-tier cities and rural market.
At the current price of HKD3.42, the company is trading at PER 8.1x, EV/EBITDA 3.7x and 10-year normalised FCF yield of 7.42%. Given the risk of a slowdown in China we deem a base case of FCF yield 5% to be fair. Using such a multiple, we have a target price for the company of HKD5.08, translating to an upside of 48%.
Goldlion Holdings is a stable company that has grown tremendously under the leadership of Dr. Tsang Hin-Chi. Moreover, the company has weathered multiple of crises and has emerged from each one stronger than before. While the China market is undergoing a period of slowdown, I view it to be a period of consolidation within the apparel industry. Given the company’s strong financial background and reputable brand, the company is more than capable in weathering this current market conditions.
The biggest risk I see the company facing would be their investment in their plot of land in Meixian, which is to be developed into a residential and commercial property. While the Chinese Central Government has started relaxing the cooling measures, I do not view it as a solution to the root of the problem within China. I attribute the lacklustre in the housing market to be mainly due to market uncertainty. Earnings slowdown and housing market worries tends to weigh down investor’s sentiments.
Disclaimer: The authors are long 0533.HK