Let me give you the numbers first. This company has an annual revenue growth rate for the past five years of 25% a year. Its net income is growing at an even more impressive growth rate of 34% annually for the past five years. Its return on equity for FY2014 is 24.7% and it has a net margin of more than 16%. Its debt to equity ratio is only 17.6% and the company is free cash flow positive in 3 out of the previous 5 years.
Yet the company is only trading at a price to earnings ratio of 12 times and has a dividend yield of 4% for its shareholders. What seems to be the problem?
The company in question is Man Wah Holdings Limited (HKG: 1999). It is a manufacturer, distributor and retailer of furniture in China. According to its website, Man Wah consider itself as the market leader in the furniture industry. It exports its product globally and consider the U.S. as its largest market. In China, it also retails its furniture under brands like CHEERS and ENLANDA.
With the U.S. housing market still recovering, the export business for Man Wah to the U.S. seems to be bright as ever. In fact, its revenue from the North America market is still growing 9.4% year on year from its latest H1FY2015 result. The company is also seeing its gross margin for the North America market increased from 32.2% to 33.7% in H1FY2015.
However, apart from its stellar growth rate over the past few years, investors have to understand that it is still a mass market furniture company. This means that most likely its products are commodity-like and might be subjected to price pressure in the future when supply outgrows demand. Furthermore, with the Chinese property market slowing down, there are already concern that the slowdown might affect Man Wah Holdings in the near future. In the recent interim, some area in its business are showing a slight sign of worries. For example, the average sales per distributor store in China for its CHEERS brand has already dropped 4.5% year on year. Its retail revenue from its bedding retail stores for its ENLANDA brand saw a sharp 35.7% drop year on year.
Value In Action
The company is definitely a fast growing company in its field. It is also well-positioned to take part in the U.S. housing recovery. However, investors have to bear in mind that furniture businesses are cyclical in nature and the downswing in the industry can be just as violent or if not even more volatile than the upswing. Just look at the oil and gas industry.
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Error: Contact form not found.We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguardedThe information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim do not own shares in any of the companies mentioned above.
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