China Zaino IPO

China Zaino is offering shares at 0.60
i) 143,000,000 by placement
ii) 2,000,000 by public offer

Facts

No 1 backpack company in China with 35.8% market share in 2006
DAPAI(达派) brand named 2006 Top 12 Bag Brands in China, it also won Top 500 Asia Valuable Brand Award
Sponsor of China Gymnastics Team in coming Olympic

Competitive strength

Market leader in backpack industry
Strong brand name
Extensive distribution network
Strong product design capabilities
Commitment to quality control
Strategic location

Future plans

Increase advertising and promotion activities
Expand distribution network
Expand production capacity
Target to become top 10 luggage players in China by 2008
Increase product design and development effort and multi branding strategy

Prospects

Rising affluence of China market
Growth in demand in consumer goods
Tourism boom in China
Directors sound that the rapid growth is going to continue

Risks

Intense competition
Brand image might be affected by negative publicity
Susceptible to change in general economic condition
May not able to respond to fashion and market trend timely
Fluctuation of raw material cost
Infringement of trademark and counterfeit of DAPAI brand
Operation might be disrupted if Dabao production facilities is ordered to reallocate

Statistics

FY2006 profit growth was 130%
9 months growth of FY2007 was 66%
Gross profit margin 31.8% (increasing)
NTA 12.84 cents
Hist EPS pre IPO: 7.59 cents
Hist EPS post IPO: 6.39 cents
PE post IPO: 9.39
Market capitalization: 567 million
Dividend policy 20% of net profit.

As the FY07 has not ended, the prospectus uses FY2006 figures. However, it also provided the profit figure after 9 months into FY2007. The profit growth was 66%, I think we can safely assume that it might be able to achieve 40% profit growth in FY2007. The EPS would then become 8.95 cents and the PE base on offer price would become 6.7.

Base on the industry outlook presented in the prospectus, the company is piggy back on the rising consumption in China and the increase of household income. The rising disposable income is set to create domestic travel boom and drive the demand for backpack and luggage. According to Frost & Sullivan, bag consumption in China was estimated to be approximately USD2.4 billion in 2006. The China bag industry is expected to continue to grow at a rapid pace with a CAGR of 20.0% between 2007 and 2009.

The report also shows that DAPAI, the number 1 brand commands as much as 35.8% market share compare to number 2 's 4.3% market share. This shows that it is not only the number 1, but also the strongest player. They are new to luggage market and the brand is not found in the top 10 luggage player list.

Since the company is market leader, industry trend is favourable and with reasonable valuation, it is worthwhile to subscribe. The public offer size is small, chance of getting is low.