Guangzhou Shangpin: YTD Underperformance Moves Valuation Below Fair Value

33 ratings

Guangzhou Shangpin Home Collection Co Ltd is a company engaged in the manufacturing and sales of furniture and the provision of related services. The company operates in the Furniture Manufacturing and Sales, along with the Development, Production and Software Sales segments. The company is based in China, and is led by Li Lianzhu.

The stock currently trades at RMB 62.32, with a 52-week high of RMB 82, and a 52-week low of RMB 57.7. The earnings multiple stands at 47.6x on a trailing basis and 23.5x on a next twelve months basis, with a market cap of RMB 12,347 million.

Economic Value-Added (EVA) Analysis

The company has posted operating income of RMB 461 million, RMB 568 million, and RMB 624 million in the last three fiscal years, respectively. Adjusted for ongoing operating lease expenses of RMB 224 million and taxes of - RMB 297 million, the company's adjusted net operating profit after taxes (NOPAT) amounts to RMB 551 million in the most recent fiscal year. A full breakdown of the company's NOPAT trend is as follows:

The company's NOPAT is generated using the following capital structure – a minimal debt balance, minority interest of RMB 1 million, and an equity balance amounting to RMB 3,517 million. The company's adjusted capital base stands at RMB 3,518 million as at the most recent fiscal year.

The company's WACC stands at 7.9%, in-line with the cost of equity. Meanwhile, the cost of equity assumptions include an inflation-adjusted risk-free rate of 1.2%, an equity risk premium of 8.0% based on the SHCOMP index, and a beta of 0.85.

The WACC assumption results in a capital charge of RMB 277 million in the latest fiscal year, offsetting NOPAT of RMB 551 million, and driving annual economic value added (EVA) of RMB 274 million. Thus, relative to its cost of capital, the company is generating 7.8% in economic value added as of the most recent fiscal year. An illustration of the company's EVA trend is as follows:

Discounted Cash Flow (DCF) Valuation

The company's unlevered free cash flow stands at RMB 25,604 million as at the most recent fiscal year, with prior years' FCF at RMB 25,072 million and - RMB 1,931 million. The unlevered FCF numbers are calculated based on adjusted operating cash flows of RMB 26,406 million in the most recent fiscal year, offset by capex of - RMB 803 million, based on additions to PP&E. The forecast period's FCF numbers are generated based on consensus' revenue growth assumptions of -2.7%, 16.7%, 14.7%, 12.7%, and 10.7% in the five-year forecast period, along with EBIT margin assumptions of 5.4%, 7.6%, 8.6%, 9.6%, and 10.6%.

Assuming a WACC of 7.9%, the sum of the present value of the total forecast unlevered FCF is - RMB 468 million.

Assuming an in-line exit EBITDA multiple of 13x, this brings the present value of the company's terminal value to RMB 12,905 million (103.8% of the total equity value).

Based on the assumptions laid out above, the fair value of the company's equity stands at RMB 15,108 million after accounting for a minimal debt load and - RMB 2,672 million in cash and short-term investments, as well as RMB 1 million in minority interest. With shares outstanding at 198 million, the per-share equity value stands at RMB 76.26, a 22.4% difference relative to the current price.

Sensitizing the DCF results, the per-share equity valuation rises by RMB 5.01 for every additional turn in the exit EBITDA assumption and decreases by RMB 2.94 with an additional %pt increase in the WACC assumption.


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