Shares in Maxwell International Holdings (43 sen) have not fared well in the year since listing on the Main Market. The stock hit a high of 56 sen in the week of its debut in early January 2011, but has since then seen waning investor interest. The stock fell to as low as 30 sen in July. Despite clawing back some lost ground in recent months, Maxwell shares remain well below the initial public offering price of 54 sen.
We believe the poor sentiment has less to do with Maxwell’s underlying fundamentals than it does with the negative perception surrounding all China-based companies listed on Bursa Malaysia. Even though most of have not disappointed earnings-wise, investors are leery of their reported numbers.
This negative perception can be attributed to news reports of financial irregularities and corporate governance issues in Chinese companies listed overseas, including those in neighbouring Singapore and most recently in the US.
It may not be quite fair to tar all the Bursa-listed Chinese companies with the same brush. Indeed, accounting irregularities and corporate governance issues are not exclusive to any particular class of companies. There have been ample such cases involving local companies, including more than a few investor darlings of yesteryear.
Re-rating from prevailing low valuations?
Maxwell shares are currently trading at an estimated forward price-earnings ratio (PER) of just about 4.3 times. Its share price is also well below the company’s net assets per share of 73 sen as at end-September 2011. This is including net cash of RM193.1 million, equivalent to 48 sen per share.
In addition, Maxwell intends to pay some 20% of its annual net profit as dividends. Based on our forecast, dividends are estimated to total roughly 3.5 sen per share for 2011, up from 3.35 sen per share in 2010. That would give shareholders a higher than market average net yield of 8.1% at the prevailing share price.
Such valuations would appear to provide a compelling case for further gains. The company’s executive chairman and major shareholder Li Kwai Chun has raised her stake to about 57.7%, up from 54.6% during the IPO.
Still, it remains to be seen if valuations and/or a longer track record will change investors’ perception and bring about an upward re-rating for the stock. Only time will tell.
Proven underlying business model
Operations-wise, Maxwell’s business model as OEM (original equipment manufacturer) and ODM (original design manufacturer) for primarily court sports shoes has been quite successful. The company’s net profit grew at a compound annual rate of nearly 53% from 2007 to 2010.
In recent years, major brand owners have shifted their focus to research and development as well as sales, marketing and distribution while outsourcing the manufacturing activities to third parties. This trend is likely to continue. As an ODM, Maxwell is able to provide greater value-added services to customers.
Currently, about half of its manufactured products are based on in-house designs.
The majority of Maxwell’s customers are trading houses and brand distributors, who in turn service a wide range of international brand names including Yonex, Diadora, Kappa, Hush Puppies, Brooks, FILA and most recently Li Ning.
Although Maxwell manufactures on a short-term contract basis, most of its customers are in fact repeat customers. The bulk of the company’s end products are ultimately exported to the rest of the world, where demand is expected to keep growing.
Case in point, few consumers own just one pair of shoes, which are considered now less a necessity and more an accessory and fashion statement. Consumers are, however, fickle. And fast-changing consumer preference is among the biggest threats for any brand name.
But as an OEM, Maxwell is buffered against such risks. It also does not have to spend on building and marketing its own brand name. Maxwell earns a manufacturing margin by pricing its products on a cost plus basis.
All in all, this business model has enabled the company to maintain pretty good margins and returns on assets over the years.
We estimate net profit at roughly RM69.3 million for 2011, including RM2.5 million in one-off listing expenses, up some 6% year-on-year. Earnings are forecast to expand further to RM81.5 million in the current year. Net margin is estimated at roughly 18% to 19% while the average return on assets for the two years is estimated at about 26.3%.
Putting cash to better use
Maxwell is sitting on net cash totalling some RM193.1 million, almost all of which is earning marginal interest income from bank deposits. The company expects to distribute about 20% of its annual net earnings as dividends — estimated to total some RM30 million for 2011/12. It intends to reinvest the bulk of the remaining cash.
The company is planning to double its production capacity, from the current eight million shoe pairs per year as well as to expand its in-house design division. At the moment, the company outsources about half of its orders to smaller contract manufacturers.
Outsourcing gives it greater flexibility to cope with surges in orders while limiting the downside risks, in terms of fixed overheads and salaries, on unexpected demand drops. Margins for both in-house production and outsource are about the same.
Elsewhere, Maxwell is in negotiations to acquire a sportswear apparel company based in Hong Kong. The acquisition will change the company’s scope of operations, expanding its product range to include its own apparel brand name and diversifying into the downstream retail business. This would also change the overall risks for the company.
On the other hand, contributions from the acquisition will provide an immediate boost to its earnings, compared with prevailing low interest income, and raise the company’s overall return on assets. Based on its existing operations, the stock is trading at just about 4.3 times our forecast earnings for 2012.
Successful completion of the proposed acquisition would drive valuations even lower, although this would likely entail higher earnings risks.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, February 15, 2012.
We believe the poor sentiment has less to do with Maxwell’s underlying fundamentals than it does with the negative perception surrounding all China-based companies listed on Bursa Malaysia. Even though most of have not disappointed earnings-wise, investors are leery of their reported numbers.
This negative perception can be attributed to news reports of financial irregularities and corporate governance issues in Chinese companies listed overseas, including those in neighbouring Singapore and most recently in the US.
It may not be quite fair to tar all the Bursa-listed Chinese companies with the same brush. Indeed, accounting irregularities and corporate governance issues are not exclusive to any particular class of companies. There have been ample such cases involving local companies, including more than a few investor darlings of yesteryear.
Re-rating from prevailing low valuations?
Maxwell shares are currently trading at an estimated forward price-earnings ratio (PER) of just about 4.3 times. Its share price is also well below the company’s net assets per share of 73 sen as at end-September 2011. This is including net cash of RM193.1 million, equivalent to 48 sen per share.
In addition, Maxwell intends to pay some 20% of its annual net profit as dividends. Based on our forecast, dividends are estimated to total roughly 3.5 sen per share for 2011, up from 3.35 sen per share in 2010. That would give shareholders a higher than market average net yield of 8.1% at the prevailing share price.
Such valuations would appear to provide a compelling case for further gains. The company’s executive chairman and major shareholder Li Kwai Chun has raised her stake to about 57.7%, up from 54.6% during the IPO.
Still, it remains to be seen if valuations and/or a longer track record will change investors’ perception and bring about an upward re-rating for the stock. Only time will tell.
Proven underlying business model
Operations-wise, Maxwell’s business model as OEM (original equipment manufacturer) and ODM (original design manufacturer) for primarily court sports shoes has been quite successful. The company’s net profit grew at a compound annual rate of nearly 53% from 2007 to 2010.
In recent years, major brand owners have shifted their focus to research and development as well as sales, marketing and distribution while outsourcing the manufacturing activities to third parties. This trend is likely to continue. As an ODM, Maxwell is able to provide greater value-added services to customers.
Currently, about half of its manufactured products are based on in-house designs.
The majority of Maxwell’s customers are trading houses and brand distributors, who in turn service a wide range of international brand names including Yonex, Diadora, Kappa, Hush Puppies, Brooks, FILA and most recently Li Ning.
Although Maxwell manufactures on a short-term contract basis, most of its customers are in fact repeat customers. The bulk of the company’s end products are ultimately exported to the rest of the world, where demand is expected to keep growing.
Case in point, few consumers own just one pair of shoes, which are considered now less a necessity and more an accessory and fashion statement. Consumers are, however, fickle. And fast-changing consumer preference is among the biggest threats for any brand name.
But as an OEM, Maxwell is buffered against such risks. It also does not have to spend on building and marketing its own brand name. Maxwell earns a manufacturing margin by pricing its products on a cost plus basis.
All in all, this business model has enabled the company to maintain pretty good margins and returns on assets over the years.
We estimate net profit at roughly RM69.3 million for 2011, including RM2.5 million in one-off listing expenses, up some 6% year-on-year. Earnings are forecast to expand further to RM81.5 million in the current year. Net margin is estimated at roughly 18% to 19% while the average return on assets for the two years is estimated at about 26.3%.
Putting cash to better use
Maxwell is sitting on net cash totalling some RM193.1 million, almost all of which is earning marginal interest income from bank deposits. The company expects to distribute about 20% of its annual net earnings as dividends — estimated to total some RM30 million for 2011/12. It intends to reinvest the bulk of the remaining cash.
The company is planning to double its production capacity, from the current eight million shoe pairs per year as well as to expand its in-house design division. At the moment, the company outsources about half of its orders to smaller contract manufacturers.
Outsourcing gives it greater flexibility to cope with surges in orders while limiting the downside risks, in terms of fixed overheads and salaries, on unexpected demand drops. Margins for both in-house production and outsource are about the same.
Elsewhere, Maxwell is in negotiations to acquire a sportswear apparel company based in Hong Kong. The acquisition will change the company’s scope of operations, expanding its product range to include its own apparel brand name and diversifying into the downstream retail business. This would also change the overall risks for the company.
On the other hand, contributions from the acquisition will provide an immediate boost to its earnings, compared with prevailing low interest income, and raise the company’s overall return on assets. Based on its existing operations, the stock is trading at just about 4.3 times our forecast earnings for 2012.
Successful completion of the proposed acquisition would drive valuations even lower, although this would likely entail higher earnings risks.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
This article appeared in The Edge Financial Daily, February 15, 2012.
