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Thu, 12 Apr 2012
Equi ty Research Prince Frog (1259 HK) Consumer / China
Jumping on the growing leaf
Expanding market share. In 2010, the company’s core brand “Frog Prince”
was ranked the second with 23.1% market share in the children moisturising
lotions market, expanding from 19.3% in the previous year, only after
international brand “Johnson’s Baby”. Meanwhile, the brand also held 10%
and 14.6% market share in the children bath & shampoo products and
children oral care products market in China, respectively. Market share of
“Frog Prince” has shown an uptrend over the past few years, narrowing the
gap with “Johnson’s Baby”, which experienced declining market share.
Well positioned for secular growth. Despite the uncertainty on China’s
GDP growth, the children and baby care product segment in China is
considered defensive and expected to maintain strong growth. According to
Euromonitor, the markets for children moisturising lotions and the children
bath and shampoo products are expected to achieve 19.8% and 19.2%
CAGR for 2010-2013E, respectively, which are faster than the projected
16.6% CAGR for China’s overall retail market during the same period.
Gross margin is on the rise. We expect gross margin to increase about
100bps in each of the next three years on the back of 1) increasing
contribution from the higher margin “Frog Prince” brand products, 2)
increasing proportion of in-house production when the new plants are
completed in phases. The expanding gross margin will provide a thicker
cushion for heavier investment in marketing and promotion for penetrating
1st tier cities without dampening operating and net margins.
Initiate with a BUY rating and TP of HK$4.03. The counter is currently
trading at 8.1x FY12E PE, representing a deep discount of 42% to its peers.
The company’s net cash balance accounts for 32% of its market value,
higher than the average of 17% of its domestic peers. We set our TP at
HK$4.03, which is based on 12x FY12E PE, implying a discount of 15-20%
to its peers, which should be considered conservative as its FY11-14 EPS
CAGR of 32.3% is in line with domestic peers (29%) and well above
international peers (9%). Our TP offers a potential upside of 48% and we
initiate coverage on Prince Frog with a BUY rating.
Daniel Wong
Analyst
+852 2135 0209
Initial Coverage
BUY
Close price: HK$2.73
Target Price: HK$4.03 (+47.6%)
Key Data
HKEx code 1259
12 Months High (HK$) 3.94
12 Month Low (HK$) 1.33
3M Avg Dail Vol. (mn) 8.78
Issue Share (mn) 1,008.25
Market Cap (HK$mn) 2,752.52
Fiscal Year 12/2011
Major shareholder (s) Li Zhenhui (30.59%)
Source: Company data, Bloomberg, OP Research Closing price are as of 11/4/2012
All figures are subject to rounding
Price Chart
PE
Exhibit 1: Forecast and Valuation Year to Dec (RMB mn) FY10A FY11A FY12E FY13E FY14E
Turnover 838.0 1,269.2 1,677.8 2,146.3 2,707.3
Growth (%) 34.2 51.5 32.2 27.9 26.1
Net profit 144.5 183.9 277.4 313.8 425.6
Growth (%) 57.4 27.3 50.8 13.1 35.6
Diluted EPS (HK$) 0.237 0.223 0.336 0.380 0.515
Change to previous EPS (%)
0.0 0.0 0.0
Consensus EPS (HK$)
0.355 0.436 0.575
EPS growth (%) NA (6.0) 50.8 13.1 35.6
ROE (%) 98.9 33.6 26.1 24.0 26.3
P/E (x) 11.5 12.3 8.1 7.2 5.3
P/B (x) 14.1 2.9 2.3 1.9 1.5
Yield (%) 0.0 1.3 2.0 2.2 3.1
Diluted DPS (HK$) 0.000 0.036 0.054 0.061 0.083
Source: Bloomberg, OP Research
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
Jul/11
Sep
/11
No
v/1
1
Jan
/12
Mar/
12
HK$
1259 HK MSCI CHINA
0
2
4
6
8
10
12
Aug
/11
Sep
/11
Sep
/11
Oct/11
No
v/1
1
No
v/1
1
Dec/1
1
Jan
/12
Jan
/12
Feb/1
2
Mar/
12
Ap
r/12
Forward P/E Ratio
+1std.
avg.
-1std.
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 2 of 22
Table of Contents
Table of Contents ......................................................................................................................................... 2
Strong market position and innovative promotion fuelling growth ................................................................. 3
Leading domestic brand with increasing market share ................................................................................. 5
Key beneficiary of a rapidly growing industry ............................................................................................... 7
Entering new market with a new product line ..............................................................................................10
Strong FY11 results lend support to our upbeat view ..................................................................................12
Solid growth profile with expanding margins and attractive valuation ..........................................................13
Key Risk Factors .........................................................................................................................................15
Key management and major shareholders ..................................................................................................16
Competitive Analysis ...................................................................................................................................17
Financial Summary .....................................................................................................................................18
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 3 of 22
Strong market position and innovative promotion fuelling growth
Innovative promotion strategy. Prince Frog has placed a great emphasis on
brand building. In 2005, the company introduced an animation series featuring
the company’s trademark “Frog Prince” as the main character. The animation is
well received by the market and allows “Frog Prince” to enjoy nationwide
exposure at a reasonable cost, as the animation series have been provided to
television channels for free in exchange for advertising time slots before and after
the program. The first two seasons, which were launched in 2005 and 2010,
respectively, together cost the company only RMB13mn. Following positive
feedback on the first two seasons, the company budgeted RMB10mn for the third
season of the animation, which will be released by the end of 2012. In addition to
using the animation, Prince Frog has appointed Kelly Chan, a well-known Hong
Kong artist and a mother of two, as the ambassador of the “Frog Prince” brand to
further promote the brand to the affluent consumers in China. The aggressive
marketing campaign is likely to lead to further increase in A&P cost in the future.
Nevertheless, we believe the aggressive marketing strategy will help the
company gaining market share, especially in tier-1 cities.
Exhibit 2: Snapshot of the animation series “Frog Prince”
Source: Baidu
Proven track record of health and safety. Prince Frog always keeps a tight
control on product quality and all of its products are in compliance with China’s
national standards. Since its establishment, the company has never experienced
any product recall and return due to quality issue. In addition, the company has
also voluntarily engaged international product testing laboratories, such as
Intertek (HK) and Pony, to conduct tests on its products. The results show that all
products submitted for testing passed the standard of the Cosmetics Directive in
the EU. The company’s ability to supply OEM products for clients in Europe and
the US also suggests that its products achieve high level of quality.
Innovative marketing scheme is
well received by the market
Clean product safety record since
the brand was established in 1999
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 4 of 22
Strong sales team to maintain tight control on distribution channels. In
FY11, Prince Frog has 185 distributors across the country. In order to keep a tight
control over inventory levels in the distribution channel, the company assigned at
least one sales manager to handle business directly with each distributor. In FY11,
the inventory turnover days were 27 days. While the figure is higher than 24 days
in FY10, it remains relatively low comparing with other FMCG companies like
Magic (1633 HK, NR) (19 days), Vinda (3331 HK, NR) (142 days) and Hengan
(1044 HK, NR) (101 days). Hence, we see no significant risk on channel
overstocking in the near term. By the end of 2011, the total number of direct
employees for the business was 1,314, of which, 232 are sales personnel.
Expanding production capacity. Currently, Prince Frog manufactures most of
its products in-house, which include skin care products and body and hair care
products. The company’s plants are in Zhangzhou, Fujian Province with annual
capacity of 4,802 metric ton of skin care products and 7,882 metric ton of bath
and shampoo products. Utilization exceeded 100% in 2010 due to overtime
operation. In order to satisfy growing demand, the company is constructing a new
plant, which will be completed in three phases. The first phase has already
commenced operation in May 2011 with annual production capacity of 20,000
tones of skin care products and 60,000 tones of bath and shampoo products,
which will increase total production capacity by 3 times and 6 times, respectively.
The second and third phases, which are designated for the production of oral
care products and logistic center & staff quarters, will be completed in 2013. The
company is also building a new production base for baby diapers, which will also
be completed in 2013. With the sharp increase in capacity from the new
production plants gradually coming on stream, utilization rate will come down in
the near term but the company’s plan to expand into tier-1 cities, improving
product-mix and reduction in outsourcing will help improving margins and allow
the company to have better control on its product quality.
Exhibit 3: Plant construction schedule
Usage Floor area (sq m) Expected annual production
capacity
Expected time of
commencement
Capex
(Actual/Estimated)
Phase 1 Production of skin care
products and body and hair
care products
55,854 1) 20,000 metric tons for skin
care products
May-11 RMB99mn
2) 60,000 metric tons for body
and hair care products
Phase 2 & 3 Office building and production
of oral care products / Logistic
center and staffs
accommodations
88,550 990 metric tons for toothpaste
products
3Q 2013 RMB150mn
Another
production
base
Baby diapers 500mn pieces for each of the
baby diaper, nappy pants and
baby wiper products
3Q 2013 RMB150mn
Source: Company data, OP Research
Tight control on distribution
channels enables the company to
manage its inventory levels well
New plants will be completed in
phases until 2013
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 5 of 22
Leading domestic brand with increasing market share
The second most recognized brand in China. Prince Frog started its operation
as a personal care product manufacturer in 1995 and its own brand “Frog Prince”
was launched in 1999. The company is now one of the leading domestic children
and baby care products providers with a wide range of children care products,
including skin care products, body and hair care products, oral care products and
diapers. The company is targeting the growing middle class in China. In order to
capitalize on the rapid growth of the industry, Prince Frog was listed on the HKEX
in July 2011, raising about HK$591mn net to finance its expansion plan.
According to Frost & Sullivan, the “Frog Prince” (青蛙王子) brand is the second
most recognized children and baby care product brand in China, only after
“Johnson’s Baby”. In 2005/06, the company introduced insecticide, insect
repellent and air freshener, under the brands of Shuangfeijian and Shenhuxi,
respectively, in order to diversify the revenue source and mitigate the seasonal
effect of its children and baby care products.
Narrowing the gap with international brands. In 2010, the company’s core
brand “Frog Prince” was ranked the second with 23.1% market share in children
moisturising lotions market, expanding from 19.3% in the previous year and only
after international brand “Johnson’s Baby”. The brand also held 10% and 14.6%
share in the markets for children bath & shampoo products and children oral care
products in China, respectively. Although “Frog Prince” stands behind
international brands like Johnson’s Baby and Colgate in respective markets, its
market share has shown an uptrend over the past few years, while that of
“Johnson’s Baby” has been dropping since the quality scandal of their products in
2009. Given the proven safety record of the “Frog Prince” brand, which
experienced no product recall or return since the brand was launched, we believe
the setback of its major rivals will provide room for Prince Frog to gain further
market share going forward.
Exhibit 4: Top ten brands in China’s children care product market
Source: Euromonitor, OP Research
Johnson's baby, 27.3%
Frog prince, 10.0%
Yumeijing, 6.8%
Hai Er Mian, 5.5%Coati, 5.3%Pipedog, 4.4%
Omnibaby, 3.9%
Big eyes, 3.4%
Elsker, 0.9%
Pigeon, 0.7%
Others, 31.8%
Bath and shampoo product market (2010)
Johnson's baby, 24.1%
Frog prince, 23.1%
Yumeijing, 10.9%Pipedog, 4.7%
Haiermian, 4.4%
Coati, 3.6%
Big eyes, 2.8%
Omnibaby, 2.8%
Elsker, 0.8%
Xiaobailin, 0.8%Others, 22.0%
Moisturising lotions market (2010)
“Frog Prince” is the second most
recognized brand in the children
and baby care industry in China,
only behind “Johnson’s Baby”….
… and the gap with “Johnson’s
Baby” is narrowing”
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 6 of 22
Exhibit 5: Market share movement between (2008 - 2010)
China's children moisturising lotions market China's children bath and shampoo product market
Source: Euromonitor, OP Research
Johnson's baby, 27.5% Johnson's
baby, 25.6% Johnson's baby, 24.1%
Frog prince, 17.8%
Frog prince, 19.3%
Frog prince, 23.1%
Yumeijing, 8.9%
Yumeijing, 10.1%
Yumeijing, 10.9%
0%
5%
10%
15%
20%
25%
30%
2008 2009 2010
Johnson's baby, 30.6% Johnson's
baby, 28.4% Johnson's
baby, 27.3%
Frog prince, 5.7%
Frog prince, 8.3%
Frog prince, 10.0%
Yumeijing, 5.4%
Yumeijing, 6.2%
Yumeijing, 6.8%
0%
5%
10%
15%
20%
25%
30%
35%
2008 2009 2010
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 7 of 22
Key beneficiary of a rapidly growing industry
Riding on a fast-growing industry. Due to rising disposable income, improving
living standard as well as the change of consumer behavior, parents in China
have become more conscious on the quality and safety of products used by their
children and thus more willing to pay a premium for quality and reliable products.
According to Euromonitor, the children care product market in China grew
substantially from RMB3.3bn in 2006 to RMB5.3bn in 2010 in value terms,
representing a CAGR of 12.6%. Euromonitor predicts that the overall children
care products market will reach RMB8.6bn by 2013, representing a CAGR of
17.6% between 2010-2013. In particular, the markets for moisturising lotions and
bath and shampoo products for children are projected to enjoy a CAGR of
19-20% over the same period. These growth rates are higher than the projected
16.6% CAGR during the same period for China’s overall retail sales. We believe
Prince Frog, which is one of the leading players with an extensive distribution
network and innovative brand building strategies, will continue to be one of the
key beneficiaries of the strong industry growth in its core markets.
Foreseeing rapid growth in demand. Although China’s baby and children care
product market has experienced rapid growth over the past few years, the per
household spending on baby and children care products in China still lags behind
developed markets such as the US, Europe and Japan by a significant margin.
According to Euromonitor, China’s household spending on baby and children
products per year was RMB13, which is low comparing to RMB57.9 in the US,
RMB45.7 in Europe and RMB39.3 in Japan. While China remains a developing
country with per capita income lagging behind these developed economies, and
that the recently announced lower GDP growth target may also raise some
investors concerns, we believe there is still significant growth potential for the
children and baby care product market in China.
Exhibit 6: Retail sales of consumer goods in China (RMB bn)
Source: National Bureau of Statistics, Frost & Sullivan, OP Research
7,6418,921
10,84912,534
15,700
18,392
21,600
24,900
0
5,000
10,000
15,000
20,000
25,000
30,000
2006 2007 2008 2009 2010 2011 2012F 2013F
(RMB bn)
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 8 of 22
Exhibit 7: Industry outlook
Retail sales of children care products market in China Retail sales of baby care products market in China
Retail sales value of children moisturising lotions market in China Retail sales value of children bath and shampoo products market in China
Source: Euromonitor, OP Research
3,325 3,655
4,111 4,633
5,337
6,277
7,414
8,679
0
2,000
4,000
6,000
8,000
10,000
2006 2007 2008 2009 2010 2011F 2012F 2013F
(RMB mn)
2,165 2,409
2,715 3,069
3,546
4,165
4,903
5,758
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2006 2007 2008 2009 2010 2011F 2012F 2013F
(RMB mn)
1,308 1,497
1,732 1,975
2,282
2,732
3,283
3,926
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2006 2007 2008 2009 2010 2011F 2012F 2013F
(RMB mn)
946 1,064
1,221 1,374
1,573
1,873
2,239
2,664
0
1,000
2,000
3,000
2006 2007 2008 2009 2010 2011F 2012F 2013F
(RMB mn)
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 9 of 22
Exhibit 8: Per household spending on baby and children care products per
year by country
Source: Company data, Euromonitor
Dragon baby boom. As one of the major children care products providers in
China, the company is set to benefit from the baby boom in the year of the
Dragon. As the dragon is always considered as the most auspicious zodiac sign
in Chinese culture, we believe the number of new born babies will increase in
2012. Although the majority of Prince Frog’s products are tailored to children
aged 4-12, larger number of new born babies should bode well for the future
development of the baby care product market.
One-child policy. Since the implementation of the “one child policy” in China,
there are an increasing number of one child families which has resulted in a
common family structure consisting four grandparents, two parents and one child.
As a result, parents are more willing to provide a better living environment for
their only child. However, the three-decade-old policy has caused China's
population to become seriously unbalanced. The market is speculating that a
certain extent of relaxation will be introduced in the coming years. We believe any
easing on the one child policy would lead to the rise in the number of new born
babies, thus, offering further growth potential to the company.
9.6 10.9 12.3 13
41.7 40.9 40.2 39.340.6
46.550.1
45.7
56.5 57.9 57.2 57.9
0
10
20
30
40
50
60
70
2006 2007 2008 2009
China Japan Europe US
(RMB)
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 10 of 22
Entering new market with a new product line
Offering more than 300 SKU currently. Prince Frog currently distributes its
products under three brands, namely Frog Prince (for children’s products),
Shuangfeijian (for insecticide) and Shenhuxi (for air freshener). In FY11, the Frog
Prince brand was the major revenue contributor to the company, representing
76% of the total revenue, followed by “Shuangfeijian” (13%) and “Shenhuxi” (9%).
Prince Frog currently offers more than 300 SKU (stock keeping unit) with 130
were introduced in 2011. Management targets to launch 50-60 new products per
year going forward. By introducing new products, which generally carry higher
price tags, the company could further enhance the brand value and improve the
overall profitability. We believe the timely refresh of its products portfolio could
help retain a fresh image of its products and quickly response to the changing
requirement of customers.
Exhibit 9: Revenue breakdown by brand (FY 2011)
Source: Company data, OP research
Exhibit 10: Products selection
Brand Product categories Product series num.of products Image of products
Frog Prince Child care products
Adult care products
Skin care products
Body and hair care
products
Oral care products
Diaper products
Oral care products
79
33
37
48
66
Shuangfeijian Household hygiene
products
Insecticide
products
42
Shenhuxi Household hygiene
products
Air fresheners 19
Source: Company data, OP research
67.6% 69.3% 69.4%76.3%
81.4% 84.4% 86.7%
14.2%15.6% 19.7%
13.4%9.9% 7.8% 6.2%
14.6% 13.2% 9.1% 9.3% 8.1% 7.3% 6.6%
0%
20%
40%
60%
80%
100%
2008 2009 2010 2011 2012F 2013F 2014F
Frog Prince Shuangfeijian Shenhuxi Others
The company currently markets
its product under three brands,
namely Frog Prince,
Shuangfeijian and Shenhuxi.
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 11 of 22
Expanding network with more exposure in 1st cities. After 13 years of
exploration and expansion, Prince Frog has established an extensive distribution
network nationwide. The company currently has more than 7,000 POS with
selling area over 3,000 sq m nationwide, which are mainly consist of local
supermarkets and hypermarkets, and thousands of convenient stores and small
street-corner stores. However, the majority of these POS are located in 2nd to 4th
tier cities due to less intense competition in these markets and the brand’s
mass-market positioning. Due to the weak presence in 1st tier cities, the brand’s
image and popularity are relatively low in these markets. Prince Frog started
venturing into 1st tier cities in 2011.
KA product line for more developed market. In order to break into 1st tier cities
and upgrade the brand value of “Frog Prince”, the company has introduced a
premium series of Frog Prince products, internally known as the “KA product line”.
In response to the higher requirements of customers in tier 1 cities, Prince Frog
has crafted more attractive packages for KA products and set the selling price
similar to the levels of Johnson’s Baby, which is about 30% higher than the
company’s old product lines. Currently, the new product line is available in
hypermarkets such as Tesco, Carrefour and Lianhua in 1st tier cities. In July this
year, the company’s products, including the premium KA line and its mainstream
products, will also be sold in Wal-mart stores in Shenzhen. The company plans to
expand the cooperation with Wal-mart in other major Chinese cities. In our view,
selling products through well-know hypermarkets in major cities will project a
better image for the brand and offer faster penetration into these markets.
On the back of its
well-established strength in lower
tier cities, Prince Frog begins to
venture 1st
cities.
Entering 1st
tier cities by
introducing a premium product
series.
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 12 of 22
Strong FY11 results lend support to our upbeat view
Robust FY11 results. Prince Frog delivered a strong set of FY11 results.
Turnover increased by 51.5% yoy to RMB1,269mn, which was mainly driven by
the 81.6% sales growth in the core "Frog Prince" brand products and expansion
of its distribution network, with distributors increasing from 160 in 2010 to 185 in
2011. Net profit increased 27.3% yoy to RMB184mn. The slower growth in net
profit was mainly due to listing expense of RMB28mn and the surge in A&P
expense, which increased by 101% yoy to RMB165mn. As a result, net profit
margin decreased by 2.7ppts to 14.5% during the same period. Stripping out the
listing expense, adjusted net income would have been higher at RMB211mn,
representing a yoy increase of 46% with a NPM of 16.6% (2010=17.2%).
Gross margin expansion well on track. Blended gross margin edged up
3.9ppts to 42.4%. The improvement is attributable to rising contribution from core
“Prince Frog” brand products and cost savings from higher proportion of in-house
production. The company also lowered the discount rates to distributors for some
new products in order to pass on higher raw materials costs. As a result, gross
margin have been on the uptrend over the last three years.
Ongoing expansion lead to higher operation costs. Because of the
introduction of the “KA product line” in 1st tier cities and the appointment of Kelly
Chan as the brand ambassador, A&P expense as a percentage of sales
increased from 9.8% in FY10 to 13% in FY11. The increase in marketing
expenses was also due to the supporting and marketing works extended to
distributors in 1st tier cities. Administrative expense as a percentage of sales
increased from 2.8% in FY10 to 6.3% in FY11 due partly to the listing expense,
excluding which, the percentage would have been 4%.
Healthy balance sheet and well managed working capital levels. Prince Frog
has maintained a healthy balance sheet with a net cash balance of RMB707mn in
FY11, with most of which coming from the IPO proceeds. Net cash from operation
has been improved significantly over the last three years from RMB66mn in FY08
to RMB126mn in FY10, due to well managed working capital levels. The average
inventory turnover days increased to 27 days from 24 days in FY10, while AR
turnover days decreased to 22 days in FY11 from 29 days in FY10. The
company’s overall cash cycle shortened significantly from 54 days in 2008 to just
21 days in 2011. FCF remained positive in the past four years and increased
healthily over the same period due to relatively modest spending on capex.
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 13 of 22
Solid growth profile with expanding margins and attractive valuation
Upbeat earnings outlook. We project EPS CAGR of 32.3% for FY11-14E on the
back of the strong turnover CAGR of 28.7% for FY11-14E. Key growth drivers, in
our view, include deeper penetration into 1st tier cities, improved product mix and
rapid industry growth. The management revealed that sales in the first two
months of FY12 continue to be robust with double digit growth, signifying a good
start for the year.
Exhibit 11: Net Profit
Source: Company data, OP Research
Gross margin poised to improve. We expect gross margin to increase by about
100bps in each of the next three years on the back of 1) increasing contribution
from the higher margin “Frog Prince” brand products, 2) increasing proportion of
in-house production when the new plants are completed in phases. The
expanding gross margin will provide a thicker cushion for heavier investment in
marketing and promotion for penetrating 1st tier cities without severely dampening
operating and net margins.
Higher A&P and tax rate going forward. In order to enhance the brand value
and improve penetration in 1st tier cities, the company will spend more heavily on
marketing going forward. We expect A&P to sales ratio will increase to 15-16% in
FY12E and FY13E. Effective tax rate was 15.8% in FY11 due to tax holiday but it
will jump to 25% in FY13 because of the expiration of the holiday. Hence, there
will be a slowdown in earnings growth in FY13 but we expect growth will pick up
again in the following year.
Healthy financial condition maintained. Capex was low over the past few
years due to limited spending on plant expansion. However, based on
management guidance and our estimate, we project capex to be RMB201mn in
FY12E and RMB215mn in FY13E. FCF is expected to remain positive and
growing despite higher capex. We expect the company will remain in net cash
position for the coming years due to its strong cash generating capability. With
the healthy cash position, the company can continuously invest in the business to
capture the growth opportunities and comfortably achieve our projected 20%
dividend payout ratio going forward.
0%
10%
20%
30%
40%
50%
60%
70%
0
50
100
150
200
250
300
350
400
450
2008 2009 2010 2011 2012E 2013E 2014E
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 14 of 22
Exhibit 12: Prince Frog’s margin outlook
Source: Company data, OP Research
More POS in 1st cities. The company currently has over 7,000 POS with selling
area of over 3,000 sq m nationwide and thousands of convenient stores and
street-corner stores. However, the majority of POS are located in 2nd to 4th tier
cities due to less competition and the brand’s mass market positioning. While the
company’s brand is well known in 2nd to 4th tier cities, the brand’s image and
popularity are relatively low in 1st tier cities. Management indicates that the
distribution network will continue to grow together with the company’s ongoing
expansion.
Initiate with a BUY rating and TP of HK$4.03. With a market cap of HK$2.7bn,
the counter is currently trading at 8.1x FY12E PE and 2.3x FY12E PB,
representing a deep discount of 42% to its peers, which are trading at 14x FY12E
PE. We believe domestic FMCG players and children and baby products
providers are the closest comparables to Prince Frog, given similar business
nature and competitive environment (with international brands as major
competitors). Prince Frog’s stock price has corrected about 30% from its recent
peak of HK$3.81 on 5 March and we believe it was mainly due to the slightly
weaker-than-expected 2011 earnings and rising concerns on corporate
governance of privately-owned Chinese enterprises triggered by a series of
negative events from some privately-owned Chinese enterprises listed in HK and
other markets. However, we believe Prince Frog remains financially healthy and
the management is communicating with investors well. In our view, the recent
pullback provides an attractive entry point to investors. We set our TP at HK$4.03,
which is based on 12x FY12E PE, implying a discount of 15-20% to its peers,
which should be considered prudent on the back of its FY11-14 EPS CAGR of
32.3%, which is in line with domestic peers (29%) and well above international
peers (9%), the smaller scale and relatively short listing history. We see good
potential for the company to capture the rapid industry growth. Our TP offers a
potential upside of 47.6% and we initiate coverage on Prince Frog with a BUY
rating.
10.0
20.0
30.0
40.0
50.0
2008 2009 2010 2011 2012E 2013E 2014E
Gross profit margin Operating profit margin Net profit margin
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 15 of 22
Key Risk Factors
Products quality and safety. As a children-care product provider in China,
product safety and quality issue remains one of the major concerns among
investors. Investors will note the other businesses include insecticide products
perhaps not usually associated with a children care brand.
More competition while entering 1st tier cities. Major competitor of Prince
Frog is US-based Johnson & Johnson which also manufactures and distributes
children-care products under the brand of Johnson’s Baby in China. But it is worth
to note that whereas the products of Johnson’s Baby mainly target to baby group
aged between 0-3, most of the “Frog Prince” products are focusing on juvenile
group aged between 4-12. On the other hand, international brand like Johnson’s
Baby now mainly sells their products in major cities where consumer has higher
purchasing power, while majority of Prince Frog’s business still focus on the lower
tier cities. The difference in the geographical distribution is mainly due to different
pricing strategy. Although the penetration of 1st tier cities will bring more
face-to-face competition between two brands, we believe the general competition
landscape will not change significantly in the short term.
Limited control over distribution channel. Prince Frog distributes all of its
products through different levels of distributors. The company has limited control
over the ultimate retailers and may have difficulty to quickly response to any
change in market.
Short track record. Prince Frog was listed in July 2011, hence, the financial
history can only be traced back to 2008.
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 16 of 22
Key management and major shareholders
Prince Frog’s key management has extensive experience and knowledge in the
personal care product industry. Most of them have more than 16 years of
experience. Mr. Li Zhenhui and Mr. Xie Jinling, founders of the company, together
hold a total of 55% interests in the company. Other major investors include
CCBIAM and Public Mutual Berhad, which hold 5.97% and 5.14% stakes of the
company, respectively.
Exhibit 13: Management Profiles
Profiles
Mr. Li Zhenhui Mr. Li Zhenhui, aged 51, is the chairman and CEO of Prince Frog. He is
one of the founders of the company and responsible for overall
management, business development and strategic planning. Mr. Wang has
over 16 years of experience in the personal care products industry in
China.
Mr. Xie Jinling Mr. Xie Jinling, aged 52, is an executive Director of the Company. He is
also one of the founders of Prince Frog. With more than 16 years
experience in the industry, he is mainly responsible for production
management including procurement and production.
Mr. Ge Xiaohua Mr. Ge Xiaohua, aged 41, is an executive Director of the Company. Mr. Ge
has over 10 years of experience in the domestic sales and marketing. He
has been with the company since 2002. He is responsible for marketing
and brand development. Before joining Prince Frog, Mr. Ge worked for
Nanjing Phosphate Fertilizer Factory, Fujian Fulong Biological Products
Co, and Zhangzhou Ge Laiya Cosmetics Factory
Source: Company data, OP Research
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 17 of 22
Competitive Analysis
Growth path
Past
Sales by brand (FY11)
Prince Frog started operation in 1995 as a children and baby care
products supplier with a wide range of children care products including
skin care products, body and hair care products, oral care products and
diaper products, which are tailored for the growing middle class in China.
The core brand “Frog Prince” was established in 1999. In order to
capitalize on the rapid industry growth, Prince Frog was listed on the
HKEX in July 2011, raising HK$591mn net at HK$2.6 per share.
Present
Sales by market (FY11)
According to Frost & Sullivan, Its self-owned brand, Frog Prince (青蛙王
子), is the second most recognized brand in the children and baby care
product industry after only Johnson & Johnson. In order to diversify its
revenue source and reduce seasonal effect, the company introduced the
brands insect repellent and air freshener in 2005 and 2006, respectively.
Future
Cost of sales breakdown(FY11)
Looking forward, Prince Frog will focus on penetrating 1st tier cities while
continue to strengthen its established competitive edge in low tier cities.
The company will continue to invest in brand building through more
marketing and promotion initiatives and refreshing product portfolio to
bring up the ASP. Meanwhile, the "Frog Prince" brand will remain the
main focus of development. We forecast the contribution to revenue from
the brand will increase from 76.3% in FY11 to 86.7% by FY14.
Competitive analysis
Substitutes
Competitive threats
Direct competitors are international personal care products suppliers
such as Johnson & Johnson and Colgate. Apart from the international
brands, the company also faces competition from local brands like
Yumeijing, Pipedog, and Coati.
As a well-known domestic brand, the company's major competitors are
international brands having strong foothold in China. However, we
believe the market is still growing rapidly and the company can ride on
this growing industry going forward. Given the rising purchasing power of
Chinese consumers, we believe the company’s customers will continue
to spend more and more on improving their living standard, offering more
room for the company to launch premium products, which will help lifting
ASP and margins.
Foreign brands usually establish their presence in first tier cities and
they are usually more reluctant to reduce their prices to gain market
share in low tier cities as it will affect the premium image of their brand.
Hence, direct competition between “Frog Prince” and international brands
was relatively mild in the past. However, along with the company’s
increasing exposure in 1st tier cities, more head-on competition with
international brands is expected in the future. However, on the back of
the increasing marketing efforts and its clean safety record, we expect
the "Frog Prince" brand will gradually gain market share in 1st tier cities.
New entrants
The entry barrier is low as market players can enter the market with no
explicit regulatory restriction. However, customers have a strong
preference to reputable brand with good quality and proven safety track
record. Hence, new entrants will see difficulty to build up the brand in a
short period of time. Customers
Brand loyalty is high, thus, giving more room for the company to have a
more flexible pricing strategy. The company usually offers 40-55%
discount on retail price to its distributors, as compared with about 18%
discount offered by Johnson & Johnson.
Suppliers
Key cost components are raw material (eg. White oil, octadecanol,
glycerol, etc) and packaging, accounting for about 80% of its cost of sales
in 2011. The company sources raw material both domestically and
overseas. Due to the high bradn loyalty mentioned above, the company
is able to pass on higher cost to end users.
Frog Prince, 76%
Shuangfeijian, 13%
Shenhuxi, 1%
Other products, 9%
Mainland China, 91%
Overseas, 9%
Raw material, 45%
Packaging Materials,
40%
Outsourcing, 8%
Direct labour, 2%
Manufacturing overheads,
5%
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 18 of 22
Management
Vision: On the back of its well-established strength in lower tier cities,
Prince Frog is now increasing its exposure in 1st tier cities to capitalize
on the rapid growth of the industry.
Growth strategy: Leading brand like "Frog Prince" is well positioned to
benefit from the fast-growing children and baby industry. Together with
the efforts it places on marketing and promotion as well as tight quality
control, the company is expected to continue the growth momentum.
Financial prudence: Prince Frog has maintained a healthy balance
sheet with net cash position in FY11. We believe its net cash position will
further strengthen on the back of solid growth and improving profitability.
Transparency: Senior management appears engaged and dynamic and
we are impressed with transparency of information and quality of IR
presentation.
Minority interest: 20% payout is expected to maintain in the near term.
Risk
Industry: Despite the uncertain outlook for the Chinese economy, the
FMCG market is generally considered as defensive. Moreover, majority
of the company’s distribution channels are established in low tier cities,
where we believe the impact of an economic slowdown would be less. On
the other hand, on the back of the rising income and the improvement in
living standard, we see a great potential for industry growth in the long
run. We give average risk profile to the industry.
Business: “Frog Prince” is the second most recognized brand in the
industry only after “Johnson's Baby”. Since the establishment of the
brand in 1999, the company has never announced any product recall and
return due to quality issue. However, given a series of negative incidents
and scandals in personal care product and the F&B industry in China,
product safety and quality remain the major concerns for the personal
care product industry, in particularly when the target customers are
children and baby. We take this as a relatively high risk.
Management: Most of the management members have more than 16
years of experience in the personal care product industry.
Execution: The company is targeting to increase exposure in 1st tier
cities to further develop the brand and business. However, we see
execution risk in its expansion plan, given its short track record in 1st tier
cities and more direct competition with international players.
Regulation: Regulatory risk is relatively high for personal care product
market as all of its products are required to meet the relevant national
standard of Chinese authorities.
Source: Company, OP Research
4
4
34
3
Vision
Growth strategy
Financial prudenceTransparency
Alignment with minority shareholders' interest
5: Best; 1: Worst
3
4
24
4
Industry
Business
ManagementExecution
Regulation
5: High risk; 1: Low risk
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 19 of 22
Financial Summary
Year to Dec FY10A FY11A FY12E FY13E FY14E
Year to Dec FY10A FY11A FY12E FY13E FY14E
Income Statement (RMB mn) Ratios
Frog Prince 581 968 1,355 1,802 2,343
Gross margin (%) 38.5 42.4 43.5 44.7 46.0
Shuangfeijian 165 171 176 181 187
Operating margin (%) 20.2 17.6 19.6 19.6 21.0
Shenhuxi 15 12 12 12 12
Net margin (%) 17.2 14.5 16.5 14.6 15.7
Others 77 118 135 151 166
Selling & dist'n exp/Sales (%) 5.8 5.9 4.9 4.8 4.7
Turnover 838 1,269 1,678 2,146 2,707
Admin exp/Sales (%) 2.8 6.3 4.5 4.7 4.7
YoY% 34 51 32 28 26
Payout ratio (%) 0.0 19.9 19.9 19.9 19.9
COGS (515) (731) (947) (1,188) (1,461)
Effective tax (%) 14.0 15.8 15.0 25.0 25.0
Gross profit 323 538 731 959 1,246
Total debt/equity (%) 72.3 3.2 2.5 2.1 1.7
Gross margin 38.5% 42.4% 43.5% 44.7% 46.0%
Net debt/equity (%) 21.1 Net cash Net cash Net cash Net cash
Other income 1 5 8 8 9
Current ratio (x) 1.34 6.47 5.49 4.40 4.62
Selling & distribution (131) (240) (334) (446) (559)
Quick ratio (x) 1.11 5.94 5.11 4.07 4.29
Admin (24) (79) (76) (100) (126)
Other opex (0) (0) (0) (0) (1)
Inventory T/O (days) 24 27 27 27 27
Total opex (154) (320) (410) (547) (686)
AR T/O (days) 29 22 22 22 22
Operating profit (EBIT) 170 223 328 420 569
AP T/O (days) 25 29 29 29 29
Operating margin 20.2% 17.6% 19.6% 19.6% 21.0%
Cash conversion cycle (days) 29 21 21 21 21
Provisions 0 0 0 0 0
Finance costs (2) (4) (2) (2) (2)
Asset turnover (x) 2.68 1.81 1.37 1.40 1.41
Profit after financing costs 168 218 326 418 567
Financial leverage (x) 2.14 1.28 1.15 1.17 1.19
Associated companies & JVs 0 0 0 0 0
EBIT margin (%) 20.2 17.6 19.6 19.6 21.0
Pre-tax profit 168 218 326 418 567
Interest burden (x) 0.99 0.98 0.99 1.00 1.00
Tax (23) (35) (49) (105) (142)
Tax burden (x) 0.86 0.84 0.85 0.75 0.75
Minority interests 0 0 0 0 0
Return on equity (%) 98.9 33.6 26.1 24.0 26.3
Net profit 144 184 277 314 426
YoY% 57 27 51 13 36
Year to Dec FY10A FY11A FY12E FY13E FY14E
Net margin 17.2% 14.5% 16.5% 14.6% 15.7%
Balance Sheet (RMB mn)
Fixed assets 103 163 347 524 578
EBITDA 171 226 339 451 616
Intangible assets 0 6 0 0 0
EBITDA margin 20.4% 17.8% 20.2% 21.0% 22.8%
Associated companies & JVs 0 0 0 0 0
EPS (RMB mn) 0.193 0.181 0.273 0.309 0.419
Long-term investments 0 0 0 0 0
YoY% NA (6) 51 13 36
Other non-current assets 8 3 0 0 0
DPS (RMB mn) 0.000 0.036 0.054 0.061 0.083
Non-current assets 111 171 347 524 578
Year to Dec FY10A FY11A FY12E FY13E FY14E
Inventories 35 75 71 89 109
Cash Flow (RMB mn)
AR 59 93 101 129 162
EBITDA 171 226 339 451 616
Prepayments & deposits 4 7 10 12 15
Chg in working cap (28) (24) (5) (21) (25)
Other current assets 26 8 8 8 8
Others 0 0 0 0 0
Cash 75 737 830 947 1,269
Operating cash 144 201 334 431 591
Current assets 198 919 1,018 1,184 1,563
Interests paid (2) (3) (2) (2) (2)
Interests received 0 2 6 7 8
AP 34 81 74 93 114
Tax (16) (35) (7) (49) (105)
Tax 7 7 49 105 142
Net cash from operations 126 166 331 386 492
Accruals & other payables 17 25 32 42 52
Bank loans 0 30 30 30 30
Capex (60) (66) (201) (215) (108)
Finance leases 0 0 0 0 0
Investments 0 0 0 0 0
Other current liabilities 90 0 0 0 0
Dividends received 0 0 0 0 0
Current liabilities 148 142 186 269 339
Sales of assets 0 0 0 0 0
Investing cash (60) (66) (201) (215) (108)
Bank loans 16 0 0 0 0
Finance leases 0 0 0 0 0
FCF 66 100 130 172 384
Deferred tax 0 0 0 0 0
Issue of shares 0 674 0 0 0
MI 0 0 0 0 0
Buy-back 0 0 0 0 0
Non-current liabilities 16 0 0 0 0
Minority interests 0 0 0 0 0
Dividends paid 0 0 (37) (55) (62)
Total net assets 146 948 1,180 1,439 1,803
Net change in bank loans 2 (75) 0 0 0
Shareholder's equity 146 948 1,180 1,439 1,803
Others (108) (37) 0 0 0
Share capital 0 8 8 8 8
Financing cash (106) 562 (37) (55) (62)
Reserves 146 940 1,172 1,431 1,795
Net change in cash (40) 661 93 117 322
Book NAV (RMB mn) 0.19 0.94 1.17 1.43 1.79
Opening cash 114 74 735 828 946
Total debts 105 30 30 30 30
Closing cash 74 735 828 946 1,267
Net cash/(debts) (31) 707 800 917 1,239
CFPS (RMB mn) 0.168 0.163 0.326 0.380 0.484
Source: Company, OP Research
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 20 of 22
Exhibit 14: Peer Group Comparison
Company Ticker Price
Mkt
cap
(US$m)
3-mth
avg t/o
(US$m)
PER
Hist
(x)
PER
FY1 (x)
PER
FY2 (x)
EPS
FY1
YoY%
EPS
FY2
YoY%
3-Yr EPS
Cagr (%)
PEG
(x)
Div yld
Hist
(%)
Div yld
FY1
(%)
P/B
Hist
(x)
P/B
FY1
(x)
EV/
Ebitda
Hist
EV/
Ebitda
Cur Yr
Net
gearing
Hist (%)
Gross
margin
Hist (%)
Net
margin
Hist (%)
ROE
Hist
(%)
ROE
FY1
(%)
Sh px
1-mth
%
Sh px
3-mth %
Prince Frog Intl 1259 HK 2.73 354 3.2 12.3 8.1 7.2 50.8 13.1 32.3 0.72 1.3 2.0 2.90 2.33 9.1 5.8 Net cash 42.4 14.5 33.6 26.1 (24.0) 31.3
HSI 20,140.67 9.5 10.2 9.2 (6.4) 10.9 5.0 2.03 3.4 3.9 1.41 1.30 14.8 12.8 (4.5) 5.2
HSCEI 10,503.83 8.8 8.0 7.1 11.3 12.0 11.7 0.68 3.1 3.9 1.47 1.29 16.6 16.3 (6.7) (0.1)
CSI300 2,520.04 12.6 10.4 8.8 21.3 18.5 18.2 0.57 1.6 2.2 1.95 1.64 15.5 15.8 (5.4) 3.5
Adjusted sector avg* 19.7 14.8 12.7 15.4 20.2 19.0 0.9 1.9 2.2 3.6 3.3 11.6 9.9 13.0 48.3 13.3 17.6 18.3 0.9 6.9
Domestic
Vinda Intl Hldgs 3331 HK 12.28 1,514 3.3 28.4 16.5 13.2 71.6 24.8 36.7 0.45 1.0 1.4 3.67 3.08 19.3 11.1 39.3 27.2 8.5 13.9 20.6 7.2 19.2
Magic Holdings I 1633 HK 2.76 359 1.6 16.1 12.5 9.3 28.2 35.0 32.9 0.38 1.1 1.6 2.23 1.97 9.2 6.9 0.0 76.9 16.8 20.4 14.5 (18.3) (4.8)
Hengan Intl 1044 HK 78.95 12,497 24.4 36.6 27.3 22.1 33.8 23.5 25.2 1.08 1.6 2.3 7.86 7.02 26.5 19.4 0.0 39.9 15.5 23.2 26.8 5.9 10.0
Goodbaby Interna 1086 HK 2.82 363 4.1 15.7 12.8 10.3 22.2 24.1 21.8 0.59 1.8 2.2 1.86 1.53 6.1 7.8 0.0 20.0 4.5 13.1 12.3 (11.0) 10.2
Adjusted sector avg*
20.0 14.0 11.0 28.1 26.8 29.1 0.6 1.4 1.9 3.9 3.4 11.5 8.6 9.8 41.0 13.6 17.6 18.6 0.7 8.6
International
Johnson&Johnson JNJ US 64.20 176,234 627.1 18.1 12.6 11.8 44.0 7.1 18.2 0.69 3.6 3.7 3.06 2.62 8.5 7.7 0.0 68.7 14.9 17.0 22.8 (0.8)
Procter & Gamble PG US 66.35 182,754 729.4 16.1 16.6 15.3 (3.0) 8.8 4.9 3.37 3.2 3.2 2.90 2.98 11.4 11.1 43.0 50.6 14.3 18.3 17.7 (0.9) 1.0
Colgate-Palmoliv CL US 96.17 46,121 215.6 19.3 17.9 16.3 8.1 9.6 8.6 2.09 2.4 2.5 19.42 17.84 11.8 11.2 154.7 57.3 14.5 96.3 108.0 2.3 8.7
Unicharm Corp 8113 JP 4,320.00 11,091 38.5 24.3 N/A N/A (25.6) 28.9 3.7 N/A 0.7 0.7 3.82 3.61 15.0 13.4 8.5 46.0 8.9 17.4 13.2 4.0 12.5
Adjusted sector avg*
19.5 15.7 14.4 5.8 13.6 8.8 1.4 2.5 2.5 3.3 3.1 11.7 10.9 17.2 55.7 13.1 17.6 17.9 1.2 5.2
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Thu, 12 Apr 2012
Prince Frog (1259 HK)
Page 21 of 22
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Rating and Related Definitions
Buy (B) We expect this stock outperform the relevant benchmark greater than 15% over the next 12 months. Hold (H) We expect this stock to perform in line with the relevant benchmark over the next 12 months. Sell (S) We expect this stock to underperform the relevant benchmark greater than 15% over the next 12 month. Relevant Benchmark Represents the stock closing price as at the date quoted in this report.
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