Naibu Global International - Fundamentally Undervalued

http://www.naibu.com/index.asp
Naibu Global International Logo
Naibu Global International (LSE:NBU) is the tenth largest sportswear brand in China and listed on the Alternative Investment Market in April this year. The firm closed its first day of trading at ~150p/share having listed at 124p/share, but the value has fallen by approximately 45% since. Trading in the share has been highly illiquid, but the fact remains that Naibu is one of the fundamentally cheapest shares listed on the London Stock Exchange with forecasts for FY2012 results giving the share a P/E ratio of just 1.9. Naibu appears to have suffered from being a Chinese listed AIM company - a problem that has hit many past Chinese listed shares. Naibu has a market capitalisation of ~£46.5m with 54.8m shares in issue. Naibu has a current share price of 85p/share.


As Naibu only listed in April, it is very difficult to draw trendlines, but what can be taken is that there has been very little interest in Naibu to date with many days where no trades are made. However, when results have been announced, spikes in the share price have taken place albeit finally being met with selling pressure in subsequent days. Perhaps this is due to the very large bid/ask spread which is currently set at around 20% due to a lack of liquidity. If interest in the stock were to pick up, there is little doubt that this spread would narrow somewhat. Naibu has a series of major shareholders. As per April 2012 the top five of these collectively held 88.4% with the largest shareholder, Central Win Global Investments holding 46.8% of shares thus there are few shares available in the open market.

So who are Naibu? The main area that the company targets is the sports shoes, clothing and accessories sector. The firm's products are aimed at the youthful customers with ages between '12-35 years old'. In 2011 the Group was producing approximately 325 different lines of product, with shoes accounting for 56% of sales, clothing for 41%, and Naibu-branded accessories the rest.
In addition, the firm produces casual clothing for young adults. Naibu says their brand represents a positive lifestyle including vitality and sustainability. Naibu has an estimated 3.6% market share in the student sportswear sector and 1.4% of the sportswear market in total.

The firm employs circa 2000 factory staff and has 2940 retail stores across 21 provinces which cover almost the entire East coast of China. This is the most populous area of China compared to the West where the firm has fewer stores. Using the listing money, the Group intends to use the net proceeds of the Placing, alongside cash generated from the business, to implement its strategy to expand its operations by building a new shoe production factory for the Group in central or western China. This factory will increase the Group’s current shoe production capacity. The Group has also entered into an agreement to purchase its existing factory in Jinjiang. The Directors believe this will improve Group profit margins, delivery time and quality control. Should these measures be implemented successfully, the company should see its market share increase as new locations are addressed.

courtesty of Tama Leaver
A key issue to address with investing in Naibu is the poor market sentiment towards Chinese AIM listed firms. Only 43 of these currently exist, most of which are out of favour with investors as they are perceived to lack transparency. One positive that Naibu benefits from is that it has a large customer base in the form of the Chinese general public thus fraudulent behaviour is very unlikely. The firm has also been progressing in recent years which boosts the reliability of the company - it has a proven past track record of increasing sales, not least due to slowly increasing Chinese incomes, the massive population and the 2008 Beijing Olympics which has led to increased sport participation. Furthermore, the company has UK based auditors and UK based solicitors hence the risk of potentially unlawful activities is far reduced.

A problem the firm may have is the significant competition within the Chinese sportswear market where many brands become outdated quickly. Therefore it is imperative the Naibu keep on top of trends with a steady product range. Also, brands such as Nike and Adidas are becoming increasingly popular as investment into China increases. However, strong sales figures coupled with the firm's objective to not go 'head-to-head' with international brands (but rather to target lower tier towns) should see the firm strengthen its position in China. Regardless of this, the firm is currently valued at rock-bottom levels in comparison to its financial state. A further point to support future growth are the rising household incomes in China. Between January and September 2012 per capita income rose faster than GDP highlighting the positive effects of China's rapid growth. In Shanghai and Beijing, disposable incomes experienced year-on-year growth rates in excess of 11% to 30,200 and 27,000 Yuan respectively. For Shanghai though, this only equates to around £3000. A study found that the top 10% of Chinese households accounted for a massive 57% of total income. Consequently, with increasing incomes, spending on all goods, including sports apparel is expected to increase significantly in coming years.

Its easy to understand that a retail sports company will not be releasing many updates and this has been the case since its initial public offering with the only news statements to attract investors being two sets of results and a trading statement. This is likely to form part of the reason why the share price has drifted so far - there has been little buying interest yet. The Annual Report for 2011 included these significant points:

- Y.O.Y sales ahead of forecast by 19.8%
- Pre-tax profits up to £34.5m from £28m
- Revenues up at £149m from £124m
- Profits after tax up to ~£28m from ~£23m
- Operating costs down by 5.7%
- Clothing and Accessories increased their growth as percentage of the overall portfolio to 44.4%
- Distribution footprint increased. Whilst revenue growth from the top five distributors was up 7%, this represented 38% of the overall revenue growth compared to 43% a year earlier representing the expansion of Naibu
- A further factory will be built in central/Western China to build exposure to previously unexplored areas
courtesy of Philip Jagenstedt
- Accessories had the largest revenue rise Y.O.Y by 54.7%
- Return on capital invested at 43.3%
- No debt
- Cash of £34m as of 1st July 2012

The very brief trading statement released at the start of August uncovered slightly more information of the company's progress. The firm commented on a roadshow that they had showcased at during April noting 'extremely positive feedback' and 'encouraging levels of orders placed'. The interim statement released in September (reporting for the 6 months to July)confirmed this view:

- Sales up 16.6% to £79m
- Pre-tax earnings up 19.3% to £18.5m
- Increased earnings derived through increased unit sales and increased unit prices
- Naibu eventually plans to roll out its products internationally
- Through investment in television and other media advertising, Naibu branded products have gained popularity and captured market share, which in turn has enhanced the enthusiasm of our distributors to expand their scale of operations. There were 69 new stores opened by distributors and sub-distributors during 2012 H1.

The company's broker Daniel Stewart has the following view on Naibu:
Forecasts: Naibu has made a strong start to the current year and, with good visibility of revenue, as distributors are committed to take orders placed at twice yearly trade fairs, we look for revenue growth of 12% both this year and next. Assuming a gross profit margin of 28.5%, we look for profits growth of 10% this year and 11% next. Once the first new factory comes on-stream ( expected in FY'14), we expect eps growth of 20% per annum
Valuation: the p/e for Dec '12 is a mere 1.9x. Ex the cash, the p/e is just 0.9x. We assume a final dividend for FY'12 of 3p, giving a yield of 3.2%, and for FY'13 we look for a total dividend of 6p, split 2p interim and 4p final, giving a yield of 6.3%.
View: we initiate coverage with a Buy and a Target Price of 200p which would still leave the Dec ’12 p/e at just 3.5x.

There is no doubt that Naibu offers a strong choice for most portfolios as it offers a risk-off option to many more volatile natural resource based companies. The financial position of the company is very strong, so the fact that it is capitalised at less than £50m is astounding (particularly considering most of this is made up for in cash and profits equate to over two-thirds of the figure). The company appears to be operating well, increasing market exposure in China and consistently releasing strong results.  Furthermore, it is highly unlikely that any placings will need to be undertaken due to the financial position of the company. In essence, Naibu looks very undervalued and it is inexplicable as to why it is trading at such a discount.

11 comments:

  1. Wow- looks so cheap

    might wait for the b/a spread to narrow though first

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  2. Makes a change from natural resource plays. thanks

    Nd16

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  3. I really enjoy reading this blog.

    For this one though I am thinking what/where the inflection point is to change sentiment on UK and US listed Chinese firms. If it is a value trap at least evidence of a catalyst to change sentiment would likely be easy to spot.

    Keep up the good work. :)

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  4. Great find, but I'm worried it looks too good to be true.

    I can't find anything online about them other than their own website. No online site..?

    As risks go this is massive and probably why the share price has sunk. They state they are China's 10th largest sportswear manufacturer (who are the 9 bigger ones?) yet have 3000 stores on one side of the country. The scale of China retailing is unreal.

    Interesting and worth keeping an eye on. Shame it's an AIM stock and not available for the old ISA.

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    Replies
    1. Valid point- Its surprising that its being ignored at present despite what it has. Yet on its first day pf trading it was up over 25% at its peak.

      Perhaps, like you say, the reason why it not trading higher is due to a lack of information about the company. Currently only 1 broker target, a few RNS', its website (with little writing) etc. Perhaps as time moves on, more may be uncovered.

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  5. Their better website is at naibu.cn and you have to pick chinese text to access it. I suppose this is because they are only currently targeting China so there is no neccessity for it to be on the UK site yet.

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  6. On the motley fool message boards this company was discussed recently - a thread started on 24th Oct.
    In a nutshell people were highly suspicious.
    The UK based auditors may give some trust perhaps. A dividend would also help!

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  7. Thanks for the heads up. I have just run the numbers through my spreadsheet.

    The thing that jumps out at me is the accruals position. In particular from the HY vs HY receivables increased almost as much as revenues (more on a % basis). Consequently the working capital flow ratio and cash conversion cycle figures are poor.
    But why (not mentioned in text).
    Retailers are paid in cash by the consumer, so should have good flows of cash from the sharp end even if they are not very profitable.
    I would be interested if you can shed some light on why this business is growing receivables at such a rate.

    Another thing that I notice is that the margins are high for a second tier retail business. Do you think they will be sustainable over a reasonable period?

    Yes, it is definitely cheap, really really cheap, and not likely to be in trouble because of its strong cash position.

    It will probably still be cheap after the next set of results, when we might have a bit more to go on.

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    Replies
    1. Difficult to ascertain the reason for the cash cycle.

      I would expect the margins to be maintained. They have steadily been increasing these and are growing their market. The nature of the business (i.e. sportswear) requires the brand to be strong. If they can continue to strengthen the brand then they can charge premium prices and perhaps even increase prices further.

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