Investing Ideas - Cacola Furniture

(The following article is reproduced from OCBC Research)

Cacola Furniture International Ltd turned in an impressive set of 4Q07 results. Sales grew 16.8% YoY to RMB148.5m while net profit surged 42.8% to RMB28.5m. Cacola enjoyed broad-based sales growth, coupled with improved gross margins, across all its products segments. Same store sales recorded double-digit growth, reflecting sturdy organic growth. These attest to the strong demand for furniture in the PRC.

Going forward, Cacola’s prospects remain rosy, supported by China’s strong consumption growth and housing boom, which will lead to firm demand for furniture. Its enlarged capacity (which will bump up its Sofa and Mattress segments’ capacities by 84% and 105%, respectively) will be a key growth engine in 2008, and we expect to see positive revenue contribution from the enlarged facilities by 2Q08.

The Group has declared a HK$0.10 dividend for its shareholders, implying a dividend yield of 4.1%. Cacola offers a high ROE of 40%, yet it trades at an undemanding 3.7x FY08 PER. We retain our BUY rating and fair value estimate of S$0.75.

Impressive 4Q07 results. Cacola Furniture International Ltd turned in an impressive set of 4Q07 results, where the numbers were largely in line with our estimates. Sales grew 16.8% YoY to RMB148.5m while net profit surged 42.8% to RMB28.5m. PBT declined by 1.5% due to a surge in listing-related expenses, despite getting a RMB1.7m write-back of impairment loss. Nevertheless, its bottomline soared thanks to tax exemptions. In terms of its full year results, Cacola’s FY07 sales grew 23.8% to RMB564.2m, while net profit surged 64.0% to RMB123.3m.

Cacola has declared a HK$0.10 dividend for its shareholders, implying a dividend yield of 4.1%.Backed by robust sales and improved margins. The topline improvement was backed by broad-based sales growth across all product segments. The Panel Furniture, Sofa and Mattress segments reported sales improvements of 29.8%, 14.5% and 19.4%, respectively. Same store sales at its mega store and specialty stores grew by 13.8% and 21.7%, respectively in FY07, reflecting sturdy organic growth.

Furthermore, gross margins across all its product segments improved, thanks to Cacola’s push towards premium products. The Group recorded gross and net margins of 33.8% and 21.9%, respectively, in FY07, vs. 32% and 16.5% in FY06. Expanded production capacity to kick in this year. A key growth engine for Cacola in 2008 is the completion of its capacity expansion. By 2Q08, its Sofa segment will see a 84% increase in capacity, while its Mattress segment will be able to increase its output by 105%. Management is confident that the new facilities will be operational by March-April 08. We expect these expansions to have a significant impact on Cacola’s revenue by 2Q08.

China consumption still strong. OCBC continues to favour Cacola over its SGX-listed peers for having the highest sales exposure (>80%) to the PRC market. While fellow furniture maker Koda Ltd has recently felt the heat from a weakening US housing market, Cacola has no such concerns. China, contrary to the US, is still enjoying a housing boom. Its rosy macro environment bodes well for Cacola, and OCBC expects furniture demand to remain firm as more young couples set up new homes, and as more properties exchange hands. A gem indeed. Cacola offers a high ROE of 40%, yet it trades at an attractively low PER of 3.7x FY08F earnings. In the midst of ongoing economic uncertainty, Cacola is indeed a gem that offers solid fundamentals and strong growth prospects. OCBC retains its FY08 estimates and BUY rating. Their fair value estimate remains at S$0.75.