Executive summary of JNBY Design (3306.HK)
There is an extraordinary opportunity investing at JNBY Design (3306.HK). The annual profitability could reach 27% taking into account the dividends which would suppose multiplying by more tan 100 in 20 years
JNBY Design (3306.HK), is dedicated to the design, marketing and sale of fashion clothing, accessory products and household items in the People’s Republic of China and internationally. It is a high growth company, the level of sales has had an annual growth of 19,4% and the operating income has grown 23,2% annually. Despite this good growth it is trading at a reasonable P/E of 6.97x. If we compare the sales and operating income growth to the other comparable sector we have in our portfolio we can see a big difference, 143% growth on sales in the last five years vs 50% for China Lilang. This difference becomes even greater in the operating income being 183% vs 44%.
There is a good brand recognition, with consumer loyalty aiming to cover all the market segment. On the one side the main brand is 20 years old and still has a notorious growth, on the other, the young brands have a sales growth close to 20%.
JNBY Design (3306.HK) has a strong financial stability for the fact that it is mainly controlled by a marriage which have a 60% stake and among its shareholders a good number of investment funds of considerable size, with knowledge in the region and professionalized, these are FIL Investment Management (Hong Kong) Ltd, the Vanguard Group, Inc, Templeton Asset Management Ltd and Oberweis Asset Management, Inc.
|JNBY Design Limited|
|Market Cap (MM €)||400|
|Maximum 52 Weeks||16,12|
|Minimum 52 Semanas||6,13|
|Target price||41,6€ (+620%)|
|TIR (20 years)||27,4%|
Brief description of JNBY Design (3306.HK): clothing, accesory products and household items.
JNBY Design (3306.HK), is dedicated to the design, marketing and sale of fashion clothing, accessory products and household items in the People’s Republic of China and internationally (lo he llevado al executive summary). The company offers clothing, footwear and accessories for women, men and children, as well as home and furniture products under various brands created depending on the segment they are aimed at: JNBY, CROQUIS, jnby by JNBY, less, Pomme de terre, JNBYHOME, SAMO, REVERB, LASU MIN SOLA, and PERSONAL NOTE. As of June 30, 2019, it operated 2,018 retail stores. The company changed its name to JNBY Design Limited in June 2016. JNBY Design Limited was founded in 1994 and has its’ headquarter in Hangzhou, People’s Republic of China.
Reference shareholders in JNBY Design (3306.HK):
|Wu Jian Family||59,2%|
|FIL Investment Management (Hong Kong) Ltd.||2.22%|
|The Vanguard Group, Inc.||1.35%|
|Templeton Asset Management Ltd.||1.31%|
|Oberweis Asset Management, Inc.||1.10%|
Wu Jian family. JNBY Design (3306.HK) is controlled by the marriage of Mr. Wu Jian and Ms. Li Lin. Control is exercised through a trust in which the beneficiaries are each one of them and her children. Wu Jian and Li Lin have very similar indirect stakes although it is Wu Jian who exercises the direction of the company while Li Lin seems more focused on design issues. Wu Jian is 51 and Li Lin is 48.
FIL Investment Management (Hong Kong) Ltd.: Fidelity is an American company specialized in asset management and pension funds. It is one of the largest management companies in the world with $ 3,000 bll managed. Fidelity has a reputation within the investment world for conducting an in-depth study of the companies in which it invests
The Vanguard Group, Inc.: Manager specialized in passive management. It is the largest investment fund manager in the world and the second largest provider of ETFs after iShares, a Blackrock3 company. Created in 1975 by John Clifton «Jack» Bogle, this American mutual fund company had 5.3 billion dollars under management as of September 2018, 4 16,600 employees and interests in about 70 companies.
Templeton Asset Management Ltd. Franklin Templeton Investments, Inc. is a US fund manager. Founded in New York in 1947 and today it is one of the largest venture capital management groups in the world, with funds of more than $ 850,000 million under management (AUM), which include private equity, professional and institutional investors. Today, Franklin Templeton has offices in 35 countries and clients in more than 150. Franklin Templeton Investments has more than 200 investment funds.
Oberweis Asset Management, Inc. It operates as an investment management company. The company focuses on investing in small and mid-cap emerging growth stocks, as well as providing portfolio management and advisory services to high net worth individuals, investment companies, pension plans, etc. You have an AUM of $ 3,000 MM
Conclusion of the shareholding structure: JNBY Design (3306.HK) out of risk.
JNBY Design (3306.HK) is controlled by Mr. Wu Jian and Ms. Li Lin, both founders of the company and who share the responsibilities of managing the company and designing and fashioning. In this sense, the alignment of the interests of the company’s management with those of the shareholders seems assured. The age of both is 51 and 48 years, so the continuity in the direction of the company is out of risk.
Some of the investment funds that are part of the shareholders are first-rate and / or experienced in this type of investment. In this sense, they provide certain guarantees that JNBY Design (3306.HK) may be a good investment.
JNBY Design (3306.HK) is a leading fashion designer group with its’ headquarter in China. According to information provided by CIC (China Insights Consultancy Limited), in 2018 it was ranked as the top Chinese designer in the branded fashion industry in terms of total retail sales. The products are aimed at medium and high-income customers, who are reached through ten brands that make up JNBY Design (3306.HK)’s business segments, according to their state of development:
- Mature brand: JNBY with more than 20 years of history.
- Three younger brands: CROQUIS, jnby por JNBY, less
- Six emerging brands: POMME DE TERRE, JNBYHOME and other brands, each targeting a specific customer segment.
The activity of the company began in 1994 selling women’s clothing. According to a survey conducted by CIC, the mature brand, JNBY, is considered the most exclusive and recognizable women’s apparel designer brand in China, ranks first in terms of brand awareness, and enjoys the highest brand loyalty. in terms of the number of customers with repeat purchases among the top 10 women’s clothing designer brands in China.
The first state of expansion of the brands occurred between 2005 and 2011 by including CROQUIS, jnby by JNBY and less. During 2016–2019, POMME DE TERRE was launched for Generation Z, JNBYHOME with designer home products, SAMO for professional men, REVERB for a new sustainable fashion, LASU MIN SOLA, a collection store brand of designer brands and A PERSONAL NOTE 73, a high-street style designer brand. All this so that the product mix can be more diversified and segmented and most of the age segments of the consumers can be covered.
Mature Brand: maximum contributor to JNBY Design (3306.HK)’s operating income.
According to JNBY Design (3306.HK)’s business segmentation, the maximum contributor to the operating result is the mature brand that generates 67% of the contribution to this heading.
In addition, all brands are experiencing double-digit growth in sales. The young brands jnby by JNBY and less stand out, with sales growth of over 20%. Emerging brands together grow at 57%. However, in this case it is less significant as it starts from a still incipient level.
The weakest brand that is weighing on the good performance of the group is CROQUIS, which as of June 2019 had the lowest growth, although still high, of 14.1%, but with the year-on-year results of December 2019 it had fallen to a drop of -6.4%. In any case, the decline in terms of sales growth was generalized in the aforementioned year-on-year results.
Revenues for sale channels:
Taking into account the purchasing patterns and information needs of customers, they have established an omnichannel interactive platform comprising physical store retail, online platforms and WeChat-based interactive social media marketing service platform, with each component playing a vital role in attracting fans and transforming potential fans into loyal fans.
During fiscal year 2019, driven by interactive omnichannel social media platforms mainly under WeChat, they reached 3.6 million accounts that include more than 3.1 million subscribers on the WeChat platform. Retail sales contributed to JNBY Design (3306.HK) by subscribing customers to these accounts represented around 70% of total retail sales. Among these, those who made purchases worth more than RMB 5,000 represented more than 40% of total retail sales in traditional channels and 20% in sales of seasonal products through the online channel.
This reality is reflected in the distribution of business by sales channel with a more pronounced growth in that of distributors, but especially in the online channel that increased its income by 47% and already accounts for 12% of the group’s total sales, compared to 9% the previous year.
JNBY Design (3306.HK)’s geographic expansion: China and 17 other countries.
On June 30, 2019, the independent retail stores operated by JNBY Design (3306.HK) around the world reached 2,018, in addition to 161 outlets abroad. On the other hand, the sales network has covered all the provinces, autonomous regions and municipalities in China and 17 other countries and regions around the world.
At any given moment, JNBY Design (3306.HK) is totally focused on China where it concentrates 99% of its income.
The main impact of coronavirus will foreseeably affect the deadlines as regards Research and Development activity. The effect on sales and results would foreseeably be less for JNBY Design (3306.HK), at least compared to what other sectors will suffer.
Unfortunately, we only have financial data since 2014, which does not allow us to have a complete idea of what the business has been during a complete economic cycle. For what we have, it seems to be a company that has experienced very high growth from 2014 to 2019:
- Annual Sales growth of 19.4%.
- Annual growth in operating income of 23.2%.
- Growth in Net Profit of 26.5% per year.
- Furthermore, this growth has been achieved by maintaining a high ROE every year above 26%.
Comparison with the sector: JNBY Design (3306.HK) vs China Lilang.
The growth of JNBY Design (3306.HK) if we compare it with that of the other comparable sector that we have in our portfolio and that also operates in China is very favorable in favor of JNBY Design (3306.HK) with a sales growth of 143% in the 2014-2019 period vs 50% for China Lilang.
Regarding Operating Income, the situation is qualitatively similar: 184% in the 2014-2019 period for JNBY Design (3306.HK) vs 44% for China Lilang.
And finally for Net Profit 223% vs 47% in favor of JNBY Design (3306.HK).
JNBY Design (3306.HK) evolution from 2018 to 2019.
Regarding the evolution of the business in 2019, with respect to the evolution of the business in 2019, the part of sales in relation to the behavior of each of the brands and sales channels, has already been described in the previous section.
- Just add that like-for-like sales growth was 3.4% mainly due to the following factors:
• On June 30, 2019, JNBY Design (3306.HK) had 3.6 million accounts subscribed compared to 2.5 million a year earlier. Subscribers’ contribution to total retail sales represents about 70% during fiscal 2019.
• The number of active accounts in 2019 (accounts with at least two purchases during a period of 180 consecutive days in the last 12 months) increased from more than 360,000 in 2018 to more than 450,000 for 2019.
• The number of accounts with annual purchases totaling more than RMB 5,000 increased from more than 162,000 in 2018 to more than 203,000 in 2019, and the retail sales contributed by those accounts have reached RMB 2.4 billion (in 2018: RMB1. 900 million), representing more than 40% of total retail sales from traditional channels. Among these accounts, the number of subscribers on the WeChat platform with an annual purchase volume of more than RMB5,000 increased from more than 157,000 in 2018 to more than 199,000 in 2019.
- JNBY Design (3306.HK)’s gross margin decreased from 63.7% for fiscal year 2018 to 61.2% for 2019, which was mainly attributed to the change in the channel mix (the percentage of sales through its own traditional channels with a higher gross margin has decreased).
Income for each channel:
Gross margin for each channel:
- In any case, gross margin growth was double-digit for all brands:
- In terms of percentage over sales marketing expenses and sales represented 34.8% in 2019 compared to 36.2% in 2018). The decrease in expenses was mainly attributable to improvements in operating efficiency in own stores.
- Administrative expenses were practically in line with last year, representing 9.0% of sales compared to 8.8% the previous year, caused by an increase in expenses related to research and development and an increase in professional service expenses.
- Due to the factors mentioned above, the net profit for the fiscal year 2019 was RMB484.8 million, which represents an increase of 18.1%.
JNBY Design (3306.HK)’s financial situation: stable evolution in terms of sales.
The inventory item is the most important within current assets with an amount of RMB 860 MM. Inventory levels referred to sales volume has evolved flat compared to last year. There has been an increase of 60 RMB of the net provising volume representing 25% of gross inventories compared to 24% in the previous year. The auditor has indicated this point as one of the most controversial of JNBY Design (3306.HK), but considers that the calculations for the provisions are adequate.
After discounting RMB 26 MM of provisions for defaults the customer item is RMB 115 MM net. The volume of debt with clients with a maturity of less than 30 days is RMB 114 MM. For this debt tranche, the expected default percentage is 5%. The percentage provisioned on gross debt is relatively stable at 18.4% compared to 16.8% last year. With regard to concentration, the 5 largest customers account for 5% of turnover. The evolution of the customer item referred to sales compared to the previous year has been stable.
Other current assets are made up of deposits and other receipts, advances to suppliers, rights of use and others. JNBY Design (3306.HK)’s evolution in terms of sales is stable compared to 2018.
Within other tangible assets, RMB 128 MM of deferred taxes is recorded, which is the largest part of the account.
Regarding the item of suppliers (RMB 202 MM) and its concentration, the 5 largest represent 16% of total purchases.
Within the heading of other current liabilities (RMB 659 MM) the main items are: advances from distributors for RMB 276 MM, provisions for return of sales for RMB 105 MM, payroll and other creditors for RMB 86 MM and provisions for rebates for RMB 42 MM. The amount of this item referred to cost of sales has remained more or less stable with a slight decrease.
JNBY Design (3306.HK) has neither long-term liabilities nor debt. Its net cash is RMB 566 MM.
It is a highly capitalized Group with a 62% FFPP / Total Balance volume.
Conclusion: JNBY Design (3306.HK) with a solid financial situation.
Company with a solid financial situation:
- With net cash of RMB 566 MM.
- With a volume of equity that represents 62% of its balance.
- No relevant long-term financial liabilities.
- Your working capital is approximately 25% of your market capitalization.
Assesstment: enormous growth at the end of the time horizon.
The target price we obtain for JNBY Design (3306.HK) is HK $ 41.6 / share which represents a potential upside of + 534%. The main hypotheses we have used are:
- Time horizon of our estimates: 2039
- Average growth in sales until 2039 of 9.6% vs 19.4% in the 2014-2019 period
- EBITDA margin of 20% vs 20.66% in 2019 and in line with the 2016-2019 average
- ROE over the entire time horizon between 32% -47% and 37% at the end of the time horizon.
- Net cash over the entire time horizon.
- g of 4% and Beta of 1.38 per month 5 years.
Despite this enormous growth at the end of the time horizon, JNBY Design (3306.HK) would have an equity value of less than 6 billion of € , much higher than the current one, but it would still remain a medium-sized company.
At current levels JNBY Design (3306.HK) is attractive from a valuation point of view for the following reasons:
- It is trading at a 12-month P / E of 6.97, which is more attractive considering that it is a company that has maintained a 19% growth in Net Profit in the last 5 years.
- Price / Sales of 1.00x.
- EV / EBITDA of 4.88x
- The high amount held in liquid assets causes its working capital to represent an amount equivalent to 25% of its Market Cap.
- JNBY Design (3306.HK) knows how to combine the financing of its growth with a dividend policy that provides a return for this concept of 9% with a Payout of 70%.
- JNBY Design (3306.HK) is down 65% from highs.
JNBY Design (3306.HK)’s attractiveness to the investor: high growth company.
The attractiveness of JNBY Design (3306.HK) can be summarized in the following points:
- High growth company although we only have evidence of it for the last 5 years both at the level of sales with net profit and it is trading at P / E of 6.97x.
- The main brand is more than 20 years old, still has great growth with great notoriety.
- Young brands have a sales growth of close to 20% and are already contributing significant positive results to the group
- Brand recognition is good, with great customer loyalty and a brand policy that aims to cover most of the market segments.
- JNBY Design (3306.HK) seems to have entry barriers judging by an average ROE of 44% in the last 6 years and always higher than 26%.
- It has a net cash of RMB 560 MM and is very well capitalized.
- The president of JNBY Design (3306.HK) and his wife jointly have a 60% stake, which guarantees the alignment of the interests of the management with those of the shareholders.
- The CEO is 51 years old, young enough to be able to continue JNBY Design (3306.HK).
- JNBY Design (3306.HK) has among its shareholders a good number of investment funds of considerable size, with knowledge in the region and professionalized. This is not at all common for a company of its size and it is an aspect that supports our opinion in the sense that it is shared by other investors, in principle reliable and professionalized.
- Very attractive valuation due to dividend discount and multiples.
- JNBY Design (3306.HK) is open abroad although today the business is mainly focused on China. However, we believe that further development of some markets within Asia or globally could be considered in the long term.
JNBY Design (3306.HK)’s weaknesses: emerging brands.
- Husband and wife being the owners of the company, each with a stake of close to 30%, generates a certain risk in the sense that the possible deterioration of their personal relationship could destabilize the control and direction of the Group.
2. Marketing – commercial risk affects the group in the sense that its success depends to a large extent on hitting the fashion trends right and on knowing how to maintain product quality and design that does not damage the brand image achieved.
4. Competition both traditional and from other sectors such as luxury or fashion brands, as well as foreign could cause adverse commercial effects, cause an increase in unscheduled marketing expenses or deteriorate prices to achieve more competitive costs. In any case, foreign competition in the country is already a fact. Inditex already has 600 stores in China.
4. JNBY Design (3306.HK)’s main brand is 20 years old but the rest are relatively young, especially the so-called emerging ones. The launch of these brands requires a large consumption of resources both in people, talent, suppliers, finances … and the results are not assured and they have the danger of not contributing to positive cash generation.