Bolina (1190 HK)

Transcription

Bolina (1190 HK)

China/Hong Kong
Consumer Staples
Bolina (1190 HK)
20 September 2012
Company Rating: Outperform
Playing with the big bowls now
(initiation)
Bolina is one of China’s leading domestic ceramic sanitary ware
players. Based in the city of Zhangzhou in the coastal province of
Fujian, it began as an OEM manufacturer for international
customers in 2002 but by 2008 it had developed its own brand,
“Bolina”, as a way to improve profits and the company’s long-term
viability. We initiate coverage on Bolina with an Outperform
rating based on the following positive features and developments.
Leading player with high brand recognition. By 2011,
four years after its launch, the “Bolina” self-owned brand
had carved out a 4% market share of China’s ceramic
sanitary ware market, making it the second-largest
mid-to-high-end ceramic sanitary ware company in China.
Greater contribution from its self-owned brand. Bolina
saw an increase in gross profit margin after its self-owned
brand contribution went from 35% in FY10 to 58% in FY11.
Fostering strategic partnerships to grow its network. In
an effort to expand its sales network, boost market share
and gain greater exposure for its brand, Bolina has formed
alliances with Red Star Macalline and Jinsheng, two
well-established national home decoration malls and
department store chains. Bolina targets increasing
storecount from the 321 outlets it had in 2011 to 600 in
2012 and 1,000 in 2013.
Bright earnings outlook. We forecast a 46% EPS CAGR
for Bolina for 2011-2014. Our target valuation for the
company is 6x CY13F earnings and a HK$2.85 target price.
Price:
HK$2.37
Target:
HK$2.85
(initiation)
Trading data
52-week range
Market capitalization (m)
Shares outstanding (m)
Free float (%)
3M average daily T/O (m share)
3M average daily T/O (US$m)
Expected return (%) – 1 year
Closing price on 19 September 2012
Stock price vs. HSCEI
HK$
2.6
2.5
2.4
2.3
2.2
2.1
13-Jul-12
30-Jul-12
Bolina
Risk. Intense competition and a further downturn in the
global economy affecting the real estate markets of China,
the US and Europe would lower demand for sanitary ware.
16-Aug-12
2-Sep-12
HSCEI (rebased)
Source: Bloomberg
Financial forecasts
Year to 31 December
2010
2011
2012F
2013F
2014F
Revenue (RMB m)
Revenue (YoY, %)
Net profit (RMB m)
Net profit (YoY, %)
EPS (RMB)
EPS (YoY, %)
P/E (x)
Yield (%)
ROAE (%)
Net gearing (%)
Source: CCBIS estimates
371
54
82
55
NA
NA
NA
NA
52.3
97
655
77
160
95
0.159
NA
12.4
4.5
77.8
Net cash
933
42
290
81
0.287
81
6.6
3.0
50.9
Net cash
1,280
37
409
41
0.405
41
4.6
4.3
38.6
Net cash
1,572
23
501
23
0.496
23
3.8
5.3
35.2
Net cash
HK$2.06 – 2.57
HK$2,404/US$310
1,015
27
NA
NA
24.5
Claudia Ching
(852) 2532 2528
[email protected]
Timothy Sun
(852) 2532 6746
[email protected]
Please read the analyst certification and other important disclosures on last page
19-Sep-12
Bolina (1190 HK)
20 September 2012
Table of Contents
Playing with the big bowls now .................................................................................................... 1
Investment summary and valuation analysis................................................................................ 3
Recognized domestic ceramic sanitary ware player in China ...................................................... 5
Distribution and marketing strengths.......................................................................................... 14
Positive industry prospects ........................................................................................................ 17
Financial forecasts ..................................................................................................................... 20
Key investment risks .................................................................................................................. 25
Appendix 1: Industry landscape and peer comparisons............................................................. 27
Appendix 2: Company background ............................................................................................ 30
Appendix 3: Production process ................................................................................................ 33
2
Bolina (1190 HK)
20 September 2012
Investment summary and valuation analysis
In 2011, Bolina, having carved out a 4% market share, was ranked second in China’s
mid-to-high end ceramic sanitary ware market in terms of retail sales value. Today the
company designs, develops, markets and distributes sanitary ware products under its
“Bolina” brand name. Outside of China, its products are sold to international
customers under third-party brands on an OEM or ODM basis.
Not satisfied to rest on its laurels, Bolina has taken positive steps to gain further
market share within China’s rapidly consolidating ceramic sanitary ware market,
among them the following four initiatives, which form the basis of our Outperform
rating on the stock.
1.
Increasing penetration of the Bolina brand in China. The group established
its self-owned brand “Bolina” in 2008. Since then, the Bolina brand has quickly
gained market recognition to the point now where the company has decided to
shift its business model away from one that relies primarily on the contribution of
its OEM and ODM businesses to one emphasizing sales of its self-owned brand.
It is still early days, but so far the shift has paid off, with the group’s gross profit
margin enjoying a marked boost while recognition of the Bolina brand continues
to grow within the domestic market. Bolina will continue to reallocate resources
to increase its own-brand presence by means of store expansion and additional
brand promotions.
2.
Strategic partnerships to strengthen brand presence and status. As part of
its initiative to expand the Bolina brand, the group has entered into strategic
alliances with Red Star Macalline and Jinsheng, two well-established national
and regional home decoration malls and department store chains. These
partnerships will improve awareness of the company’s brand and assure
Bolina’s priority in selecting the locations of its points of sale which would greatly
facilitate its campaign to extend its penetration of different regions in China.
3.
Rapidly growing distribution network. In order to meet the rising demand for
quality ceramic sanitary ware in China and, by implication, capture additional
market share, Bolina has set for itself a target of 600 stores by 2012 and 1,000
by 2013, up from the 321 stores it had in 2011. For the most part, the new stores
will be established in tier-three-to-four cities where competition is relatively light.
4.
New production line part of larger expansion effort. In addition to expanding
its store network, Bolina has been aggressively expanding production capacity.
Its fifth production line began mass production in July this year and the group
already has plans to begin construction on its sixth production line in mid-2013.
Based on the added capacity afforded by the new production lines, by end-2012,
Bolina’s production capacity is expected to reach 4.9m units per year, up from
3.9m units in 2011. Meanwhile, growing recognition of the Bolina brand is
creating opportunities to expand the existing product portfolio and the
company’s non-ceramic product offering.
High forecast growth warrants decent valuations. We project Bolina’s net profit will
rise 81%, 41% and 23% in FY12F-14F, respectively, based on a FY11-14F CAGR of
46%, superior to most listed comparables. Key growth drivers, in our view, will be high
sales growth supported by capacity expansion, the growing reputation of the
company’s self-owned Bolina brand and network additions. We initiate on Bolina with
an Outperform rating and target price of HK$2.85 based on 6x FY13F P/E, in line with
Hong Kong-listed household peers.
3
Bolina (1190 HK)
20 September 2012
Although there are few listed companies in China’s ceramic manufacturing and
distribution sector, we consider it reasonable to take Hong Kong-listed furniture and
household product manufacturers as our primary valuation peer group. Similar to
Bolina, these companies primarily operate and sell their wares within the domestic
market.
According to Bloomberg consensus estimates, on average, this basket of peers
(i.e. furniture and household product manufacturers) is trading on 16-18x 2012F P/E
and 9-10x 2013F P/E. We do not think Bolina should trade at a premium to these
names as: (1) it has a significantly shorter history as a listed company; (2) its business
model still puts a heavily reliance on its OEM and ODM business, which trades at a
lower multiple; (3) the company’s retail network is not self owned but is operated
solely by distributors; and (4) Bolina’s self-own brand is only five years old, which is
still relatively young compared with the brands of its peers, some of which have been
in the market for decades.
Over the next two years, Bolina’s self-owned brands will make a greater contribution
to the company’s coffers, especially as Bolina extends its product range and expands
its network. High profitability and strong growth momentum are Bolina’s key positives.
Taking into account these factors, we set Bolina’s target price at HK$2.85 based on
6x FY13F P/E, putting it roughly in line with industry peers. We initiate on Bolina with
an Outperform rating on the stock.
Valuation summary of Hong Kong and overseas-listed furniture and household product manufactures
Company
Stock
code
Share price Market 3M average
(local
cap value traded
currency) (US$m)
(US$m)
EPS growth
(%)
CY12
CY13
P/E
(x)
CY12
CY13
NA
1,567
82
(91)
(15)
386
9.5
12.9
6.6
48.7
3.8
16.3
7.4
12.9
4.6
19.0
3.0
9.4
PE/G
(x)
CY12
Yield
(%)
CY12
P/B
(x)
CY12
ROAE
(%)
Net cash/ Net cash/
CY12
share
share
0.3
NA
0.1
0.1
0.1
4.3
7.8
3.0
0.0
9.9
5.0
4.6
0.7
2.2
0.6
0.5
1.7
11.3
5.2
50.9
1.0
12.4
16.2
18
Net cash
60
Net cash
24
Net cash
41
Net cash
Net debt
7
0.2
0.6
2.0
0.0
1.0
4.5
0.6
5.8
6.5
11.0
8.8
Net debt
16
HK-listed peers
Man Wah
Samson
Bolina*
China Flooring
Royale Furniture
Average
1999 HK
531 HK
1190 HK
2083 HK
1198 HK
3.85
1.00
2.37
1.21
1.00
447
392
310
233
99
1
0
NA
0
1
29
0
44
156
27
51
Overseas peers
TOTO
5332 JP 590.00
2,773
7
NA
88
30.1
16.0
Joyou
JY8 GY
8.50
249
0
(5)
9
5.6
5.1
Average
(5)
49
17.8
10.5
Calculated in Hong Kong dollar terms; * Denotes CCBIS estimates; ** Price as at close on 19 September 2012
Source: Bloomberg, CCBIS estimates
4
10
Net cash
Bolina (1190 HK)
20 September 2012
Recognized domestic ceramic sanitary ware player in China
Based in the city of Zhangzhou in the coastal province of Fujian, Bolina is one of
China’s leading domestic ceramic sanitary ware players. It began life as an OEM
manufacturer for international customers in 2002 but in 2008 it developed its
self-owned brand, “Bolina”, as a way to improve profits and the company’s long-term
viability. Then as now, the company targets the mid-to-high end customer segment by
providing a full range of branded sanitary ware products to the Chinese market. To
cater to its international customers, the group also manufactures products under
third-party brands on an OEM and ODM basis.
Bolina has a reputation for offering high-quality sanitary ware in China, based in part
on its stringent production and quality control standards. In 2011, Bolina ranked
second in size among domestic companies in China’s mid-to-high end ceramic
sanitary ware market, with a 4% market share (up from 2% in 2010). In the same year,
its self-owned “Bolina” brand ranked second among domestic brands and fifth among
all brands in China. In 2010 it ranked fifth in terms of both brand awareness and
consumer preference among mid-to-high end domestic ceramic sanitary ware brands
in China.
We believe Bolina is on track to become the largest ceramic sanitary ware player in
China on the strength of its reputable in-house brand, high product quality, ample
production capacity, extensive network coverage, in-depth knowledge of the industry
and management expertise.
Bolina products
Bolina products
Source: Bolina Holdings, CCBIS
5
Bolina (1190 HK)
20 September 2012
OEM for top international sanitary ware providers
By 2011 Bolina had evolved into the second-largest ODM/OEM manufacturer in the
ceramic sanitary ware industry in China, according to Frost & Sullivan. Many leading
international brands have turned to Bolina to provide them higher value-added ODM
services. The company has built a broad ODM and OEM customer base which
includes American Standard, Gerber, Kelim, Crane and Western Pottery. Since 2008,
Bolina has been part of American Standard’s prestigious “Partners in Business –
American Standard Brands”. Bolina has an extensive overseas network covering the
United States, Canada, Korea, Argentina and various European countries.
In 1H FY12, Bolina’s OEM business accounted for 14% of the company’s total sales
while ODM accounted for 21%. Bolina intends to direct more resources to the
development of its branded products as they continue to make a greater contribution
to its bottom line. The group will still maintain steady growth in the ODM business
while placing less emphasis on the OEM business, which generates lower profit
margins.
Rising self-owned brand recognition
Leveraging the experience it accrued in the ODM and OEM ceramic sanitary ware
market, Bolina took the step of launching its self-named “Bolina” brand in the domestic
market in 2008. Then as now, Bolina targets the mid-to-high end domestic market with
a focus on providing attractive highly functional sanitary products. Following its launch
in 2008, the Bolina brand quickly won over customers and, by 2011, was ranked
second among domestic brands and fifth among all brands in China’s mid-to-high end
ceramic sanitary ware market in 2011. Bolina had 4% market share in the mid-to-high
end ceramic sanitary ware market in China in 2011.
Retail sales of the top-ten domestic brands
mid-to-high end ceramic sanitary ware market (2011)
in
Market share of the top-ten domestic brands in
mid-to-high end ceramic sanitary ware in China (2011)
RMB m
1,600 1,468
7.5%
1,400
6.0%
7%
1,200
951
1,000
774
800
4%
736
3%
178
160
1%
1.5%
1%
149
1%
1%
1%
1%
YING
200
183
VICTOR
228
HeGII
305
400
DOFINY
3.0%
600
Source: Frost & Sullivan
Giessdorf
MICAWA
Annwa
Faenz
Bolina
YING
VICTOR
HeGII
DOFINY
Giessdorf
MICAWA
Annwa
Faenz
Bolina
Arrow
Arrow
0.0%
0
6
4%
4.5%
Bolina (1190 HK)
20 September 2012
Retail sales of the top-ten brands in mid-to-high end
ceramic sanitary ware market in China (2011)
RMB m
2,000
9%
8%
7%
7%
7%
6%
1,400
1,127
5%
5%
4%
951
736
534
305
400
Brand awareness – top-of-mind awareness
Consumer preferences – first choice
16%
20%
18%
15%
14%
14%
16%
15%
14%
13%
12%
14%
10%
12%
3%
1%
Kohler
MICAWA
Roca
HCG
Annwa
Bolina
Faenz
0%
American
Standard
0
TOTO
1%
Arrow
3%
2%
200
18%
3%
3%
HCG
552
600
Kohler
4%
American
Standard
774
800
4%
TOTO
1,000
Annwa
1,200
MICAWA
1,458
Faenz
1,468
Bolina
1,600
8%
Roca
1,726
Arrow
1,800
Market share of the top-ten brands in mid-to-high end
ceramic sanitary ware market in China (2011)
8%
10%
8%
10%
8%
6%
5%
5%
6%
4%
4%
2%
2%
0%
0%
Kohler
科勒
Arrow
箭牌
TOTO
东陶
American
Standard
美标
Bolina
航标
Arrow
箭牌
Kohler
科勒
TOTO
東陶
American
Standard
美標
Bolina
航標
To improve efficiency and to expand effectively on the retail front and overall brand
awareness, the company has adopted a third-party distributor model for its sales and
distribution. With this approach the company hopes to lower its capital expenditure
requirements and reduce execution risk by leveraging the local knowledge of its
distributors. Bolina’s distribution network has grown rapidly and provides wide
coverage throughout China. The business began with 19 third-party regional
distributors with no points of sales in FY08. By 1H FY12 it had 178 third-party regional
distributors and 44 sub-distributors operating 373 points of sale.
From 2008 to 2011, sales of the company’s own-branded products took off, resulting
in an impressive CAGR of 303% for the period. Sales contribution from Bolina
branded products jumped from 3% in FY08 to 58% by FY11 and 64% by 1H FY12.
7
Bolina (1190 HK)
20 September 2012
Bolina – sales breakdown
100%
80%
3%
11%
34%
40%
58%
60%
66%
72%
75%
15%
13%
15%
13%
12%
2012F
2013F
2014F
63%
45%
40%
25%
56%
19%
20%
26%
20%
17%
0%
2008
2009
2010
2011
OEM
ODM
Own brand
Source: Bolinda Holdings for historical data, CCBIS estimates for forecast years
Sizable production capacity and strategic plant location
Bolina’s production facilities are based in the city of Zhangzhou in Fujian province.
There, ceramic sanitary ware products are manufactured for the company’s
ODM/OEM and in-house brands. According to Frost and Sullivan, by 2011, Bolina had
become one of the largest manufacturers of ceramic sanitary ware products in China
in terms of designed production capacity. The group manufactured about 2m units of
ceramic sanitary ware products in 1H FY12 and its designed production capacity had
expanded to 3.9m units per year in 2011.
Bolina’s production facility
Bolina’s production facility
8
Bolina (1190 HK)
20 September 2012
Top-five ceramic sanitary ware manufacturers in China
by revenue from ODM/OEM business in China (2011)
RMB m
550
Top-five ceramic sanitary ware manufacturers in terms of
designed production capacity (2011)
RMB m
11,000
506
500
10,000
450
9,000
400
8,000
10,000
7,000
350
275
300
6,000
230
250
215
205
5,000
200
4,000
150
3,000
100
2,000
50
1,000
3,900
3,500
3,500
2,300
0
0
Huida 惠达
Bolina 航标
Swell 四维
Monopy 梦牌
Cascade 宏延
Huida 惠达
Bolina 航标
Arrow 箭牌
Annwa 安华
Swell 四维
Bolina’s main production plant is strategically located in Fujian province, one of the
principal sources of ceramic materials in China, offering easy access to high-quality
raw materials. Bolina’s production sites give it a logistic advantage as they are closely
located to the port of Xiamen as well as major highways, including national highway
no.324 and the Shenhai Highway, availing Bolina of cost-efficient and timely transport
for its products. Furthermore, the company has access to local subcontractors as well
as a skilled labor force as Fujian is a manufacturing and trading centers for water tank
fittings and sanitary products.
Bolina’s large production capacity gives it strong bargaining power when it comes to
sourcing raw materials and water tank fittings. The long-term relationships it has with
local raw materials suppliers allow it to bid for down prices without worrying about
securing sufficient raw materials. Meanwhile, its production capacity gives it the
flexibility and scope to manufacture products with different designs and functions. In
addition, Bolina’s large production capacity ensures better control of its production
process and the flexibility to respond in a timely manner to changing market demand.
It also allows the company to swiftly allocate sufficient production capacity towards the
manufacture of its branded products, which command higher margins than ODM/OEM
products.
Expanding production capacity to support growing demand
China’s domestic ceramic sanitary ware industry is undergoing a period of
consolidation that is seeing smaller producers suffer from cost pressure and
intensifying competition. As an industry leader, Bolina sees current industry conditions
as a golden opportunity to strengthen its market position.
The group plans to increase its capacity by constructing a new production facility,
namely, the Wanrong factory. This facility is expected to house the group’s fifth and
sixth production lines, each with capacity of about one million units per year. We
believe manufacturers with scalable production and economies of scale are taking the
opportunity to capture additional market share.
9
Bolina (1190 HK)
20 September 2012
Bolina’s fifth production line has commenced mass production in July, with an
estimated capital expenditure requirement of about RMB122m. The group plans to
commence construction of its sixth production line in mid-2013 and the planned
capital expenditure is about RMB130m. When suitable opportunity arises, the group
may consider acquiring other local sanitary ware manufacturers or facilities that would
complement its existing production facilities for ceramic products. By end-2012, the
company is expected to increase its production capacity to 4.9m units per year.
Designed production capacity
m unit
5.5
4.9
5.0
4.5
4.0
3.5
3.9
3.9
2010
2011
3.1
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2009
2012F
The growing recognition of the in-house brand Bolina is creating more opportunities
for the company to enhance its existing product portfolio and expand its non-ceramic
product offering, which includes showers, faucets, hooks, bathroom cabinets, shower
rooms and soap discs.
Tight inventory control to keep healthy working cashflow
The group has laid out a stringent inventory control policy to monitor inventory levels
and minimize obsolete inventory. The system tracks inventory levels and estimates
the amount of obsolete raw materials and finished goods. Steps in the inventory
control procedure include the following.
10

All raw material purchases, parts and accessories and non-ceramic sanitary
products must be authorized and approved by the head of each respective
department with the approval recorded in the inventory management system.
Each of the aforementioned parts must also be examined and verified against
purchase orders before they can be accepted. Once parts and materials have
been authorized they are tagged with appropriate references;

Customers acknowledge delivery of all finished goods. Customer confirmations
are then recorded in the inventory management system;

Monthly and annual inventory counts are performed to ensure the number of
items in the company’s storage facilities corresponds to all record entries for the
relevant period.
Bolina (1190 HK)
20 September 2012
Extensive research and development capabilities
Similar to other manufacturing industries, continuous product innovation and timely
response to market trends are crucial for sustained success within the ceramic
sanitary ware industry. Bolina’s has established a solid track record of maintaining
product quality and introducing novel features thanks to its technical expertise and
R&D capabilities. By constantly improving its production process, the group has been
able to increase operating efficiency, maintain product quality and reduce production
costs. The results can be seen in the quality of the Bolina brand, which Bolina
consistently showcases its marketing campaigns.
Bolina has a dedicated team of 83 R&D staff who focus on product development and
improving the company’s production processes. This team developed 38 new
products in 2009, 42 in 2010 and 41 in 2011. The group owns 14 patents in China and
has filed for two design patents for ceramic sanitary ware products, one being a
water-conserving toilet that uses only three liters of water per flush.
The group is implementing the following measures in an attempt to enhance its
existing R&D capabilities.

Development of the company’s materials formulas for its ceramic products.
Bolina’s products are recognized for their durability, functionality and innovative
designs, particularly in the areas of water-conservation and sanitation, including
dirt removal and anti-bacterial materials;

Aggressive recruitment of experienced professionals within the international
sanitary ware industry. Both new hires and longstanding employees are given
rigorous staff training to maintain the company’s reputation for developing new
products in short lead times;

Collaboration with academic and professional institutions for the R&D of
sanitary ware products and the establishment of laboratories for product
development;

Facilitation of communications within the company’s marketing team, R&D and
production departments to effectively incorporate client feedback into product
development.
Bolina – product design flow
Preparation of a model
design
Proposal for a new idea
Product approval
Sample product testing
Production of a product mould
11
Production of a sample
product
Production of a plaster mould
Mass production
Project planning and cost
estimation
Trial production
Assessment and
confirmation
Bolina (1190 HK)
20 September 2012
Dedication to brand building
Bolina places great emphasis on brand promotion. Key channels that give its brand
national media coverage include celebrity endorsements, national television program
sponsorships, internet commercials, advertisements in magazines and other outdoor
media promotional activities.
In terms of celebrity endorsements, Ms. Christine Fan (范瑋琪) has been appointed
the company’s brand ambassador for May 2012 to May 2014. The group also plans to
establish eight new self-operated showrooms to display its self-own branded products
in China by December 2013. The use of showrooms increases brand awareness
among customers while enhancing Bolina’s image as a leading ceramic sanitary ware
brand within the domestic market.
Bolina advertisement
Bolina advertisement
Source: Baidu, CCBIS
Source: Baidu, CCBIS
A&P expense ratio FY08-FY14F
1.4%
1.3%
1.3%
1.3%
1.3%
FY12F
FY13F
FY14F
1.2%
1.2%
1.0%
0.8%
0.8%
0.6%
0.5%
0.4%
0.2%
0.0%
FY08
FY09
FY10
FY11
12
Bolina (1190 HK)
20 September 2012
Dedicated and experienced management team
Bolina’s senior management team has an average of 23 years of experience within
the sanitary ware industry. Most members of the team have been working with the
group for about eight years. That senior staff members have been appointed to
various positions in industry associations or organizations reflects their technical and
management expertise. These appointments place Bolina in an advantageous
position insofar as management has the industry experience to first notice and then
rapidly respond to new developments in the China sanitary ware industry.
Bolina’s products feature advanced and often unique features, including high water
conservation, dirt removal, anti-bacterial materials and high durability. For its efforts,
the group has been recognized through various awards, including the China
Water-Conservation Products certificate for 19 of its models and by the China Quality
Certification Centre. Chinese Nominated Green and Environmental Friendly Building
Materials for Energy-saving Design, Construction and, finally, the China Building
Decoration Materials Association has conferred upon it the Decoration Integration
Certificate for Bolina’s branded products between 2007 and 2009.
In recognition of its brand and high quality products, the group’s self-owned brand
“Bolina” was recognized as one of the top-ten bathroom sanitary ware brand names in
China by the China Ceramics Industrial Association and Organizing Committee for
Chinese Bathroom Sanitary Ware in 2010 and by the Assessed Quality Products of
Sanitary Ware in China for 2010 conferred by the Kitchen and Bathroom Works
Committee of China Building Decoration Association in 2010. The group was
accredited as a Renowned Trademark of Fujian Province in 2010. In addition, in 2004,
its branded products were included in the 2008 Beijing Olympic Games
Recommended Building Engineering Materials and Equipment.
13
Bolina (1190 HK)
20 September 2012
Distribution and marketing strengths
Bolina has been beefing up its distribution network as a way to improve its brand
image and recognition, and, ultimately, drive up sales. The company’s sanitary ware
products under its Bolina brand are sold mainly through its distribution network in
China, with a small portion sold directly to customers. Sanitary ware products
manufactured on an ODM or OEM basis are sold to overseas customers, including
international brands and wholesalers. These customers, in turn, sell the products
either under their own brand names or other brands.
The group has direct contractual relationships with its distributors. All distributors and
sub-distributors can only sell and display Bolina-branded products. Their points of
sale have consistent exterior and interior design themes to improve awareness of the
Bolina brand. Most importantly, since early 2010, the group has put in place strict
requirements for its distributors, requesting that they pay for products upon delivery.
The company generally does not extend credit to its distributors.
Stretching its footprint from regional to nationwide
Bolina has a strong presence in northern and eastern China. It is now set extend its
network to other regions by securing new distributors through different channels. Part
of this involves participating in various industry trade exhibitions, including the
prestigious International Construction Trade Fair in China. The company has
established a dedicated distributor development team to manage potential
distributors.
Distribution of in-house brands in China
Bolina
Holdings
14
Third-party
regional
distributors
(governed by
distribution
agreements
between
Bolina and its
distributors)
Subdistributors
(governed by
subdistribution
agreements
between
distributors
and subdistributors)
Points of sale
(operated by
distributors or
subdistributors)
Bolina
Holdings
Bolina (1190 HK)
20 September 2012
The company has seen a net increase in the number of its distributors.
No. of distributors
2008
4
4
2
6
1
0
2
19
Northeast China
Northern China
Southeast China
Eastern China
Central China
Northwest China
Southwest China
Total
2009
8
14
6
19
1
1
3
52
2010
9
23
7
21
3
2
5
70
2011
17
43
25
41
10
3
19
158
Bolina’s sales and distribution network has also grown rapidly. Through a third-party
distributor model, the company continues to improve its operational capacity and the
quality of the distribution network. Bolina aims to standardize its distribution network
governance, to promote differentiated operation innovation, to improve the quality of
its network operation team and to optimize its existing network layout.
By 1H FY11, the group’s distribution network comprised 101 distributors and 36
sub-distributors operating 189 points of sale. This increased to 178 distributors and 44
sub-distributors operating 373 points of sale by 1H FY12, covering a wide area
throughout China.
Bolina points of sales breakdown by region
90
79
80
70
65
60
55
48
50
43
40
34
27
30
24
18
20
9
10
34
22
15
9
3
11
7
5
1
9
3
0
Northeast China
2009
Northern China
Southeast China
2010
Eastern China
Central China
2011
Northwest China Southwest China
Bolina sales network number
400
373
350
321
300
250
189
200
150
100
126
74
50
0
FY09
15
FY10
FY11
1H11
1H12
Bolina (1190 HK)
20 September 2012
The group plans to expand its third-party distribution network by adding approximately
390 points of sale in 2012 and approximately 320 points of sale in 2013, for a total of
approximately 1,029 points of sale by the end of 2013. In addition, the group plans to
establish eight new self-operated showrooms in the PRC by FY13F to display Bolina’s
branded products.
Strategic alliances with regional home decoration mall
According to Frost & Sullivan, nationwide home renovation and furniture shopping
mall chains are the most popular and effective distribution channels for sanitary ware
products in China due to their nationwide geographic footprint, diversified product
portfolio and because of the one-stop shopping experience they offer. In order to
accelerate its business expansion, in 2011 Bolina entered into an alliance with Red
Star Macalline, a nationwide home renovation and furniture shopping mall chain with
over 100 shopping malls in about 80 cities in China. This alliance has since provided
Bolina’s third-party regional distributors and sub-distributors priority in establishing
points of sale in Red Star Macalline malls.
Bolina also signed a three-year term alliance agreement in August 2011 with Jinsheng,
a regional home decoration mall and department store chain with twelve home
decoration malls in China. Bolina is entitled to set up stores in all of the malls operated
by Jinsheng, and has priority when it comes to allocating of points of sale, advertising
space and media promotions.
In December 2011, Bolina entered into a strategic cooperative partnership with
Onelink (万菱实业), a real estate developer in China with extensive experience
developing and managing large-scale commercial properties, including shopping
malls, serviced apartments and hotels. According to the terms of the deal, Bolina will
be given exclusive preferential consideration when Onelink procures sanitary
products for its real estate projects.
Bolina’s third-party regional distributors and/or sub-distributors have established 63
points of sale in Red Star Macalline shopping malls and five points of sale at malls
operated by Jinsheng by July 2012. In our view, the strategic alliances with Red Star
Macalline, Jinsheng and Onelink help increase the company’s penetration of the
overall Chinese market and increase awareness of the company’s brand.
Bolina store at Fujian Red Star Macalline
Bolina store at Fujian Red Star Macalline
Source: CCBIS
Source: CCBIS
16
Bolina (1190 HK)
20 September 2012
Positive industry prospects
Frost & Sullivan projects China’s sanitary ware market will grow to RMB144,000m by
2015, driven by demand growth for housing and an increase in home renovation
activities. This pace of growth would represent a CAGR of 13% for the period from
2010 to 2015.
Historical and forecast completed floor space of residential properties in China
m sqm
4,000
Projected 2010-2015F CAGR = 12.5%
3,500
3,582
3,246
2,922
3,000
2,533
2,500
2,203
1,842
2,000
1,314
1,500
1,464
1,957
1,594
1,000
500
0
2006
2007
2008
2009
2010
2011F
2012F
2013F
2014F
2015F
The chart below sets forth the historical and forecast retail sales value of the sanitary
ware market in China from 2006 till 2015F.
Retail sales value of sanitary ware market in China
RMB m
160,000
144,000
140,000
125,000
120,000
110,000
97,300
100,000
85,000
72,871
80,000
60,000
40,000
49,557
55,787
60,293
39,259
20,000
0
2006
2007
2008
2009
2010
2011F
2012F
2013F
2014F
2015F
Based on the type of raw material used during the manufacturing process, sanitary
ware products can be divided two categories, namely, ceramic and non-ceramic
products. Ceramic sanitary ware products include toilets, basins, urinals, squat pans,
bidets, mop sinks and other like products. Non-ceramic sanitary ware products include
tubs, bath cabinets, show room products, faucets, flushers, hand dyers and electronic
parts.
17
Bolina (1190 HK)
20 September 2012
Ceramic sanitary ware products accounted for about 55% of China’s sanitary ware
market in 2010 and came to a retail sales value of RMB40,371m. Non-ceramic
products accounted for 45% of the market in 2010 and had a retail sales value of
RMB32,501m.
The retail sales value of the ceramic sanitary ware market in China increased from
RMB18,963m in 2006 to RMB40,371m in 2010, a CAGR of 21%. Such growth
outpaced growth of the overall sanitary ware market in China during the same period.
Frost & Sullivan forecasts that China’s ceramic sanitary ware market will grow to
RMB78,652m by 2015, representing a CAGR of 15% during the period from 2010 to
2015.
Retail sales value of the ceramic sanitary ware market in China
RMB m
90,000
78,652
80,000
66,400
70,000
57,952
60,000
50,327
50,000
Historical 2006-2010 CAGR = 20.8%
40,000
33,212
30,000
20,000
40,371
44,909
18,963
23,419
27,743
10,000
0
2006
2007
2008
2009
2010
2011F
2012F
2013F
2014F
2015F
Based on a number of factors, including product quality, retail sales price, product
design and brand positioning, China’s ceramic sanitary ware market can be divided
into three segments: the premium segment, the mid-to-high end segment and the
low-end segment. The premium segment is defined as those brands with an average
retail selling price of between RMB9,000 and RMB15,000 for a one-piece toilet; the
mid-to-high end segment as those between RMB1,200 and RMB9,000; and the
low-end segment as those between RMB500 and RMB1,200.
In 2010, the low-end, mid-to-high end and premium segments accounted for 49%,
45% and 6% of the ceramic sanitary ware market in China, with a total retail sales
value of RMB19,782m, RMB18,167m and RMB2,422m, respectively. While the
current market is dominated by the low and mid-to-high end segments of the ceramic
sanitary ware market, the mid-to-high end market segment is expected to achieve
higher growth with a projected CAGR of 18% from 2010 to 2015. Such growth would
outperform the other two segments. The premium and low-end market are set to grow
17% and 10%, respectively, for the same period. Apart from delivering better growth,
the mid-to-high end market segment is expected to be the largest segment in the
sanitary ware market in China for the year 2011.
18
Bolina (1190 HK)
20 September 2012
Retail sales value of the ceramic sanitary ware market by segment in China
RMB m
80,000
70,000
31,311
60,000
25,805
50,000
23,900
40,000
19,782
30,000
17,934
20,000
10,000
0
20,890
22,407
12,136
14,520
16,646
9,987
13,617
6,258
569
7,962
937
1,110
1,661
2006
2007
2008
2009
Premium
18,167
20,952
23,981
29,926
35,960
42,154
3,939
4,126
4,635
5,187
2010
2011F
2012F
Mid-to-high end
Low end
2013F
2014F
2015F
2,422
3,067
The ceramic toilet product segment is the largest product segment in the ceramic
sanitary ware market in China, accounting for 45% of the market in 2010 with a retail
sales value of RMB18,167m. Retail sales value of the ceramic toilet product segment
is projected to grow at a CAGR of 16% from RMB18,167m in 2010 to RMB38,292m
by 2015, and to account for 48% of China’s ceramic sanitary market in 2015.
The ceramic basin product segment accounted for approximately 35% of the ceramic
sanitary ware market in 2010 with a retail sales value of RMB14,130m. The retail
sales value of the ceramic basin product segment is projected to grow at a CAGR of
15%, from RMB14,130m in 2010 to RMB28,719m by 2015, and to account for 36% of
China’s ceramic sanitary market in 2015.
Retail sales value of the ceramic toilet, ceramic basin and other ceramic
products in China
RMB m
80,000
12,764
70,000
11,080
60,000
10,360
50,000
9,703
8,947
40,000
8,075
30,000
20,000
10,000
0
7,533
5,938
4,741
6,257
7,379
7,965
10,102
2006
2007
19
6,984
9,157
11,602
14,130
21,938
18,866
16,482
11,056
14,622
2008
2009
Ceramic toilets
18,167
28,719
24,930
21,661
25,335
28,642
2010
2011F
2012F
2013F
Ceramic basins
Other ceramic products
33,240
2014F
38,292
2015F
Bolina (1190 HK)
20 September 2012
Financial forecasts
46% net profit CAGR in FY11-14F
We project annual net profit growth of 81%, 41% and 23% for Bolina for FY12F-14F
as the company continues to expand sales and market share. Top-line revenue
growth is likely to be driven by a combination of factors, including steady underlying
market growth and growing brand recognition of its in-house “Bolina” brand supported
by the company’s rapidly growing sales network. New product launches and extended
production facilities will provide additional sales upside. Stable overseas sales
generated from its OEMs and ODMs will also contribute to company sales growth,
with modest ASP increases likely to provide further support.
Profit and loss projections
Year to 31 December (RMB m)
2008
2009
2010
2011
2012F
2013F
2014F
185
0
240
30
371
54
655
77
933
42
1,280
37
1,572
23
(137)
(153)
(237)
(352)
(492)
(657)
(794)
47
0
25.7
87
84
36.2
135
55
36.3
304
125
46.3
441
45
47.3
623
41
48.7
777
25
49.5
1
1
5
2
1
1
1
1
–
0.5
2
114
0.8
5
150
1.3
8
68
1.2
12
53
1.3
17
37
1.3
20
23
1.3
Other SG&A expense
YoY (%)
As % of revenue
20
–
11.1
23
12
9.5
33
45
8.9
69
106
10.5
89
29
9.5
125
42
9.8
157
25
10.0
Total SG&A expense
YoY (%)
As % of revenue
21
–
11.6
25
16
10.3
38
53
10.2
77
102
11.7
101
32
10.8
142
41
11.1
178
25
11.3
EBIT
YoY (%)
EBIT margin (%)
27
0
14.5
63
137
26.4
102
61
27.5
229
125
35.0
342
49
36.6
482
41
37.7
601
25
38.3
5
2.7
5
7
2.2
6
19
1.7
8
28
1.2
17
107
1.8
22
30
1.7
23
8
1.5
32
0
17.2
69
117
28.6
108
58
29.2
237
119
36.2
358
51
38.4
504
41
39.4
625
24
39.7
Interest income
Interest expense
0
(8)
0
(6)
0
(9)
0
(14)
2
(14)
2
(14)
2
(13)
Profit before tax
Tax
Effective tax rate (%)
19
(2)
8.9
58
(4)
7.8
93
(11)
12.0
215
(55)
25.5
329
(40)
12.0
470
(61)
13.0
590
(88)
15.0
53
207
22.1
82
55
22.1
160
95
24.5
290
81
31.1
409
41
32.0
501
23
31.9
Revenue
YoY (%)
COGS
Gross profit
YoY (%)
Gross margin (%)
Other income
Advertising and promotional expense
YoY (%)
As % of revenue
D&A included in COGS and SG&A
YoY (%)
As % of revenue (%)
EBITDA
YoY (%)
EBITDA margin (%)
Net profit
17
YoY (%)
0
Net margin (%)
9.3
20
Bolina (1190 HK)
20 September 2012
Bolina’s overall gross margin was 46.3% in FY11. We expect this to improve to
47-50% in FY12F-14F as the company’s gross margin expands as the business
model shifts from lower-margin OEM and ODM products to a model emphasizing
higher-margin in-house products. We view this shift as the main potential catalyst for
the company. As shown in the table above, OEM and ODM sales are forecast to have
slower growth than Bolina’s in-house products.
In addition to the shift in the product mix to higher-margin items, Bolina management
is looking to eke out greater margin through better control of costs and, leveraging its
growing brand recognition, through ASP increases we expect in FY12F-14F. So far,
production costs stemming from high raw material and labor costs have been modest.
It helps that Bolina’s product mix is diversified and its production processes highly
automated. It also bears mentioning that the company’s production plant is
strategically located, which minimizes transportation costs.
We expect non-A&P operating expense to remain below 4% as a percentage of sales
for FY12F-14F. A sustained period high revenue growth has translated to high
operating leverage. We fully expect Bolina’s EBIT margin to rise from 35% in FY11 to
37-38% in FY12F-14F.
Margins trend
55%
50%
46%
49%
49%
37%
38%
38%
31%
32%
32%
2012F
NPM
2013F
2014F
47%
45%
40%
36%
36%
35%
35%
30%
25%
26%
26%
27%
22%
22%
2009
2010
24%
20%
15%
14%
10%
9%
5%
2008
GPM
2011
EBITM
At the pre-tax level, the aforementioned estimates imply earnings growth of 52%, 42%
and 25% in FY12F-14F, or a pre-tax profit CAGR of 39% for FY11-14F. Zhangzhou
Wanhui, the group’s main operating subsidiary, was granted a foreign-invested
enterprise tax exemption under the Enterprise Income Tax Law (EIT) for the two years
ending 31 December 2009. It also received a preferential EIT rate of 12.5% for the
three years ending 31 December 2012. Bolina’s other operating subsidiary,
Zhangzhou Wanjia, is also subject to preferential tax rates. We forecast the group’s
effective tax rate will be 12% in FY12F, and 13-15% for FY13F-14F.
Healthy working capital turnover and strong financial position
Within the domestic market, Bolina obliges its distributors to settle payments
immediately after purchase. Through its overseas distributors, the company grants
credit terms to its OEM and ODM customers that can be anywhere from three-to-six
months. In light of the company’s shift to selling self-owned branded products,
average trade receivable days has declined sharply from 73 days in FY09 to 31 days
in FY11. We expect average trade receivables turnover for the company to remain
below 30 days in FY12F-14F.
21
Bolina (1190 HK)
20 September 2012
The group typically keeps about six months of supply in stock, mainly raw materials,
packaged goods and finished goods. The company’s average inventory turnover
came down from 252 days in FY09 to 168 days in FY10 due to better inventory
controls, including closer monitoring of distributor inventory levels and more
responsive communications with those distributors. By virtue of vigilant inventory
management, inventory levels improved sharply from 168 days in FY10 to 87 days in
FY11. We expect inventory turnover days to decline to under 60 days in FY12F-14F.
The group’s achieved cash conversion cycle came to 92 days in FY11. We expect this
to improve to 60-65 days in FY12F-14F.
Bolina working capital cycles
days
300
270
240
210
180
150
120
90
60
30
0
(30)
(60)
(90)
(120)
255
252
193
168
73
92
87
64
65
60
31
(39)
30
(25)
63
58
30
(25)
(25)
55
60
30
(25)
(70)
2009
2010
2011
Average inventory days on cost of sales
Average payable dyas on cost of sales
2012F
2013F
Average receivable days on revenue
Cash conversion cycle
2014F
We project operating cash flow of RMB291-527m per year in FY12F-14F, with annual
capex of RMB200m for FY12F and RMB50m for both FY13F and FY14F, largely
towards the construction of a new production facility and a self-operated showroom in
China.
Bolina CAPEX
RMB m
220
200.0
200
180
160
140
120
100
80.6
80
60
50.0
50.0
2013F
2014F
40
20
8.0
9.2
2009
2010
0
2011
2012F
Bolina gained approximately RMB420m after listing on July 2012 and is now in a net
cash position. It may be more accurate to say the company is cash rich as in FY11 its
ending cash amounted to RMB261m. Bolina continues to grow its business and we
expect its operating cash flow to remain positive in FY12F-14F.
22
Bolina (1190 HK)
20 September 2012
Bolina cash generation
RMB m
720
625
640
560
480
320
237
240
160
0
(80)
400
358
400
80
527
504
32
108
69
477
350
291
283
203
150 147
91
(5)
(13)
(40) (54)
(160)
2008
2009
2010
EBITDA
2011
Operating cash flow
2012F
Free cash flow
2013F
2014F
Balance sheet projections
2008
2009
2010
2011
2012F
2013F
2014F
Property, plant and equipment
84
87
102
159
342
371
397
Prepaid land lease payments
15
14
15
15
16
17
18
Intangible assets
0
0
0
0
0
0
0
Deferred tax assets
0
0
1
3
5
5
5
99
102
118
178
363
393
420
Inventories
87
125
93
74
88
121
118
Trade and bills receivables
17
79
51
58
95
115
143
Amounts due from related parties
24
13
79
0
0
0
0
Prepayments, deposits and other receivables
44
42
98
13
19
26
31
Pledged deposits
1
0
1
0
0
0
0
Other assets
0
6
0
0
0
0
0
Cash
8
9
66
261
701
959
1,326
Current assets – total
181
275
388
407
902
1,221
1,618
Trade and bills payables
31
28
23
25
42
48
61
Other payables and accruals
28
34
53
48
74
99
119
Interest-bearing borrowings
101
130
230
225
230
220
210
36
34
16
1
0
0
0
1
3
2
15
15
15
15
Non-current assets – total
Amounts due to related parties
Tax payable
Dividend payable
0
0
13
18
0
0
0
197
230
336
332
361
382
405
Deferred tax liabilities
1
2
1
10
10
10
10
Non-current liabilities – total
1
2
1
10
10
10
10
83
145
169
243
895
1,222
1,623
Total assets
280
377
506
585
1,266
1,614
2,038
Total liabilities and shareholder equity
280
377
506
585
1266
1614
2,038
Gross debt
101
130
230
225
230
220
210
93
121
165
(36)
(471)
(739)
(1,116)
112
83
97
Net cash
Net cash
Net cash
Net cash
Current liabilities – total
Shareholder equity
Net debt
Net gearing
23
Bolina (1190 HK)
20 September 2012
Cash flow projections
EBIT
Depreciation and amortization
EBITDA
Adjustments for other non-cash items
Operating cash flow before changes in working capital
2008
2009
2010
2011
2012F
2013F
2014F
27
63
102
229
342
482
601
5
5
6
8
17
22
23
32
69
108
237
358
504
625
2
0
1
0
0
0
0
34
69
109
238
358
504
625
(54)
(38)
32
19
(13)
(34)
3
8
(67)
22
78
(43)
(28)
(34)
Working capital changes:
Inventories
Receivables
Payables
Working capital changes – total
Interest received
Interest paid
16
2
11
(2)
43
31
33
(30)
(103)
65
94
(14)
(31)
2
0
0
0
0
2
2
2
(8)
(6)
(9)
(14)
(14)
(14)
(13)
(88)
Tax paid
(0)
(0)
(15)
(35)
(41)
(61)
Operating cash flow
(5)
(40)
150
283
291
400
527
Capex
(8)
(14)
(3)
(80)
(200)
(50)
(50)
Free cash flow after capex
(13)
(54)
147
203
91
350
477
Net proceeds from issue of new shares
(0)
0
(1)
1
0
0
0
Other investment cash flow
(7)
18
(115)
62
(1)
0
0
Net proceeds from new shares
0
0
0
0
420
0
0
Dividend paid
0
0
(46)
(84)
(76)
(82)
(100)
Other financing cashflow
14
8
(30)
(95)
0
0
0
Net cash flow
(7)
(28)
(44)
86
435
268
377
Proceeds from bank loans
124
216
386
415
0
0
0
Repayment of bank loans
(141)
(187)
(286)
(421)
5
(10)
(10)
2
0
0
0
0
0
0
(22)
1
56
81
440
258
367
Forex gain
Gross cash flow
Key financial ratios
Year to 31 December
2008
2009
2010
2011
2012F
2013F
2014F
ROAE (%)
NA
47
52
78
51
39
35
ROAA (%)
NA
16
19
29
31
28
27
Average inventory days
NA
252
168
87
60
58
55
Average receivable days
NA
73
64
31
30
30
30
Average payable days
NA
70
39
25
25
25
25
Cash conversion cycle (days)
NA
255
193
92
65
63
60
Net gearing (%)
112
83
97
Net cash
Net cash
Net cash
Net cash
Gross gearing (%)
122
90
136
92
26
18
13
24
Bolina (1190 HK)
20 September 2012
Key investment risks
Macro risk
Any changes in the market demand for sanitary ware products in both China or the
company’s export destinations may have a significant effect on its financial health and
operations. The US economy is a key risk as a major percentage of the company’s
OEM and ODM revenues are derived from US exports. The Chinese economy is
another key risk to the company’s expansion plans for its branded product business. A
further downturn in the global economy affecting the real estate markets of China
would lower demand for sanitary ware.
Product risk
Bolina’s revenue and scale of operations are dependent on its ability to maintain high
utilization rates. Its branded product business is determined by consumer demand,
which is driven by China’s economic growth, household disposable income and
overall consumption of sanitary ware products.
Brand risk
The company’s financial condition and the health of its operations are a function of its
ability to leverage its brand recognition. Many of Bolina’s ODM and OEM customers
recognize the company as a reputable ODM and OEM supplier of sanitary ware
products in China. To maintain this perception, the company has strengthened its
R&D department and implemented a comprehensive quality control system.
Competition risk
Competition and demand affect the pricing of Bolina’s products. Any changes in the
selling price of its branded products and/or ODM/OEM products may impact its
profitability and financial condition. Bolina determines the prices of its products based
on such factors as brand awareness, production cost, marketing information,
packaging requirements, quantity and method of product delivery.
The company’s ability to continue providing high quality products with strong
functionality is crucial to gaining customer acceptance. This also entails offering
competitive prices for its ODM and OEM products. Competition in the sanitary ware
product market in China will intensify as more suppliers (both domestic and
international), enter the market. Bolina’s company directors believe its major
competitors will be ODM suppliers and various domestic and international brand
suppliers with their own retail networks in China.
Cost of raw materials
During the track-record period, raw materials, toilet lids, water tank fittings and fuel
accounted for the major components of Bolina’s cost of sales. The major type of raw
materials used in Bolina’s ceramic sanitary ware products are feldspar (长石), sericite
(绢云母) and clay (粘土). For the years ended 31 December 2009, 2010 and 2011,
raw materials cost accounted for 55%, 57%, and 63% respectively, of Bolina’s total
cost of sales. For the years ended 31 December 2009, 2010 and 2011, fuel accounted
for 15%, 13%, and 11%, respectively, of total cost of sales. It is obviously critically
important that the company obtains sufficient quantities of raw materials, toilet lids,
water tank fittings and fuel from its suppliers in a timely manner and at competitive
prices.
25
Bolina (1190 HK)
20 September 2012
Foreign currency exchange rate fluctuations and taxation
88%, 65%, and 42% of Bolina’s revenues for the years ended 31 December 2009,
2010 and 2011, respectively, were derived from its export sales denominated in
US dollars, exposing the company to considerable foreign currency exchange rate
risk. The renminbi appreciated 0.1%, 3%, and 5% against the US dollar for the years
ended 31 December 2009, 2010 and 2011, respectively. There is a provision in some
of its export sales contracts stipulating that the company is entitled to renegotiate the
selling prices of its products in the event the exchange rate of the renminbi fluctuates
against the US dollar over a certain level. Revenue may be significantly affected by
foreign currency exchange rate fluctuations to the extent that export sales that do not
enjoy the aforementioned selling price adjustment provisions with respect to
exchange rate fluctuations could see significant margin erosion.
The company’s profitability and financial performance is affected by the level of
taxation that it pays on its profits and the preferential tax treatment to which it is
entitled. On 16 March 2007, the National People’s Congress of the PRC promulgated
the Enterprise Income Tax Law of the PRC, which took effect on 1 January 2008. This
tax law bears on the level of taxation that the company pays on its profit and the
preferential tax treatment to which it is entitled.
26
Bolina (1190 HK)
20 September 2012
Appendix 1: Industry landscape and peer comparisons
The sanitary ware products market in China is competitive and highly fragmented,
according to Frost & Sullivan. In 2010, there were about 50 manufacturers with a
production capacity of over 500,000 units per year, with the top-ten non-local brands
accounting for 16% of the mid-to-high end market segment. Mergers and acquisitions
in recent years have been common with overseas sanitary ware companies acquiring
well-known local manufacturers.
International players have entered China’s sanitary market to tap its enormous
potential. Bolina’s leading international and domestic sanitary ware peers are listed
below:
Leading international players:
Kohler Co.
Kohler was first founded by John Michael Kohler in 1873 in Wisconsin, United States.
Kohler Co. has more than 50 manufacturing locations worldwide. There are more than
30,000 Kohler Co. associates working on six continents, with about 18,200 outside the
United States. Kohler Co. is comprised of 50 brands within four major business units –
Kitchen & Bath, Global Power, Interiors, and Hospitality.
Kohler Co. is a recognized leader in kitchen and bath design. Its products target
mid-to-high customers and the price ranges from RMB1,500 to RMB15,000.
TOTO
TOTO is Japan’s leading producer of sanitary ware and is a name that has been
synonymous with the advancement of bathroom culture since its creation in 1917. Its
technological innovations and high standard of quality have made it an iconic and
much-loved brand in Japan. With European consumers demanding an ever-more
luxurious bathroom experience, TOTO aims to elevate the bathroom from the merely
functional to the restorative and meditative.
TOTO’s toilets provide the latest in technological innovation and intelligent product
design targeting high-end luxurious market with automatic toilets that can go up to
RMB30,000.
American Standard
The brand represents 130-year tradition of quality and innovation that puts the
company in three out of five homes in America as well as countless hotels, airports,
and stadiums. American Standard provides style and performance, targeting
mid-to-high end customers. Prices range from RMB4,000 to RMB10,000.
27
Bolina (1190 HK)
20 September 2012
The American Standard brand was established in February 2008 from the merger of
three companies: American Standard Americas, Crane Plumbing, and Eljer. American
Standard is a leading North American manufacturer of bath and kitchen products. The
company participates in all key product categories including bathroom and kitchen
faucets, fixtures and furniture. The company leads the market in toilets and is ranked
second in bathroom fixtures in the US and overall category leadership in Canada, the
Dominican Republic and Mexico. Products are marketed under brand names such as
American Standard, Porcher and Jado. Crane Plumbing manufactures and distributes
plumbing fixtures and specialty plumbing products in the US and Canada under the
Crane Plumbing, Fiat, Showerite, Universal-Rundle and Sanymetal brand names.
Products are sold to over 3,000 plumbing wholesale outlets and 4,000 retail stores
including Lowe’s, Home Depot and Menard’s. Eljer manufactures and markets
vitreous china fixtures, cast iron sinks, whirlpool tubs, and other related plumbing
products for the kitchen and bathroom. Products are distributed through a network of
wholesale distributors, hardware stores and do-it-yourself home centers serving
residential, commercial construction, remodeling and repair markets in both the U.S.
and Canada.
Roca
Roca is the world leader in bathroom business, operating in over 135 markets. Its
Roca Ceramica is dedicated to the production and commercialization of floor and wall
tilings. Originated from Spain and fully owned by Spanish, the company has shown
extraordinary international expansion in recent years based on the acquisition of
companies in the sanitary ware sector around the world.
Roca continues to consolidate its presence in the BRIC countries (Brazil, Russia,
India and China) and other markets. It targets mid-end customers with products
ranging from RMB1,000 to RMB3,000 and automatic toilets up to RMB30,000.
HCG
HCG is a multinational company that provides quality bathroom fixtures. It was
founded by Hocheng Chiu in Taiwan in 1931. With 81 years of experience in bathroom
fixtures, HCG provides quality products with seamless integration of design and
functionality, making it the leader in the sanitary fixture industry. HCG is one of the top
ten among the global sanitary fixture sector.
HCG entered the mainland market twenty years ago with a focus on the China market,
and continues to expand its capacity to become the top five sanitary brand in
mainland. The company has four branches with over 200 dealers and 600 distributors
in China. HCG currently exports to more than 60 countries in Europe, US, Asia, the
Middle East with a stable and strong export market. HCG targets mid-to-high end
customers with products price ranging from RMB1,000 to RMB10,000.
28
Bolina (1190 HK)
20 September 2012
Leading domestic players:
Arrow 箭牌卫浴
Arrow was established in Shanghai about 15 years ago. The product line includes
bathroom cabinets, PVC bathroom cabinets, bathtub, Jacuzzi and other bathroom
accessories. Arrow has 45 sales points in Shanghai and seven channels such as
Redstar Macalline to target mass market customers. Price ranges from RMB600 to
RMB5,000.
Annwa 安华
Annwa is a Canadian-Chinese JV based in Fo Shan with up to 2,000 different
products. Annwa has an annual output of 3.5m products and 5,000 employees. It is
one of the biggest ceramic sanitary ware companies in China. Price ranges from
RMB1,000 to 3,000 targeting mass market customers.
Micawa 美加华
Micawa is one of the large-scale ceramic sanitary ware manufacturers in China,
based in Fo Shan with annual production output up to 3m pieces. Micawa targets
mass market customers with price range from RMB1,000 to 2,000.
Huida 惠达
Established in Tang Shan in 1982, Huida has an annual output of 9m pieces of
sanitary products. Huida targets the mass market with price range from RMB500 to
RMB2,000.
Swell 四维
Swell was established in 1952 in Chongqing, China. Swell has five sub-companies
with an annual output of 2m pieces. It targets the mass market customers with product
price ranging from RMB500 to RMB2,000.
29
Bolina (1190 HK)
20 September 2012
Appendix 2: Company background
Bolina started its business in March 2002 as a sanitary ware manufacturer through its
operating subsidiary, Zhangzhou Wanjia, which was established by the company
chairman Mr. Xiao. He was the deputy chairman of Double Rhomb and successfully
bid for the tender to operate a factory dispatched from Double Rhomb. He then invited
his previous subordinates at Double Rhomb and his friends to manage the business
together. The owner of the factory leased the premises and production facilities and
licensed the trade marks “Bolina” and “Bolina Italiana” to Zhangzhou Wanjia. In 2008,
Wanjia Factory No.2 was set up and operated under Zhangzhou Wanjia on leased
premises. To satisfy the market demand, Zhangzhou Wanhui was established on
24 March 2005 by Ms. Ye, Mr. Xiao’s spouse, Mr. Lu, Mr. Jiang Desheng, Mr. Fu
Guohua and Mr. Chen Zhiqiang, all of whom were employees of Zhanghzou Wanjia
and are also independent third parties. In 2006, Zhangzhou Wanhui established the
Wanhui factory. The initial phase of its business development focused on OEM
production orders for international brands. Leveraging its experience in ODM and
OEM ceramic sanitary ware market, the company launched the Bolina brand and its
retail strategy in 2008, targeting the mid-to-high end of the domestic market with a
focus on attractive sanitary wares with strong functionality. Bolina was listed on 13th
July 2012 issuing 210m or 21% of the enlarged share capital, at an offering price of
HK2.15 per share, raising HK$397m from the listing.
Key milestones
 Established Zhangzhou Wanjia
and commenced production at
Wanjia Factory No.1, starting
its OEM/ODM business
2002
 Established Fujian Wanrong
 Expanded distribution network to 52
distributors and 9 sub-distributors
2005
2008
 Zhangzhou Wanhui was awarded Partner in Business-American
Standard brands by American Standard
 Registered trademarks “Bolina” and “Bolina Italiana” and launched
retail and brand strategy in full swing
 Bolina brand products were named as the 2008 Beijing Olympic
Games recommended building engineering materials and equipment
 Formed strategic alliance with Red Star
Macalline
 Formed strategic alliance with Jinsheng
 Formed strategic alliance with Onelink
 Further enhanced distribution network
to 158 distributors and 47 subdistributors with 321 POS
2009
 Commenced mass production at
Wanjia Fctory No.2
 Established Dongshan Wanxing
 Further enhanced distribution
network to 70 distributors and 19
sub-distributors with 126 POS
2010
2011
 Further enhanced distribution
network to 170 distributors
and 44 sub-distributors with
359 POS
Shareholding structure
Mr. Xiao Zhiyong
59%
Public
41%
Bolinda Holdings
(1190 HK)
30
2012
Bolina (1190 HK)
20 September 2012
Executive directors

Mr. Xiao Zhiyong, age 46, is the chairman, chief executive officer, and an
executive director of Bolina. He is also one of the co-founders of the group. He
is responsible for overall management, strategic planning and business
development of the group. Mr. Xiao has over 26 years of experience in the
ceramics and sanitary ware products industries. Prior to the establishment of
the group, Mr. Xiao served as technician, engineer, and deputy director of
various companies, including Zhangzhou Construction Ceramics Factory and
Double Rhomb. Mr. Xiao is a controlling shareholder and the spouse of Ms. Ye.

Ms. Ye Xiaohong, age 41, is an executive director of the company. She is
responsible for the group’s finance and administrative management. Ms. Ye has
over 21 years of experience in the finance and accounting profession. She
joined group in 2003 and since January 2007, Ms. Ye has been the chief audit
supervisor of Zhangzhou Wanjia. Ms. Ye is the spouse of Mr. Xiao.

Mr. Yang Qingyun, age 41, is an executive director of the company, responsible
for the group’s overall operation. Mr. Yang joined the group in 2006 and since
then, he has served as assistant manager, manager of the finance department
and assistant general manager of Zhangzhou Wanhui. Prior to joining the group,
Mr. Yang held positions as an accounting supervisor in several companies
including Saint Source Webbing Co., Ltd., Changtai Jugao Crafts Company and
Changtai Jingmei Stationery Company.

Mr. Lu Jianqing, age 43, is an executive director of the company. Mr. Lu has
over 21 years of experience in the ceramics and sanitary ware products
industries and is primarily responsible for the research and development of the
products of the group. Mr. Lu was appointed in 2002 and was manager of the
technology department of Zhangzhou Wanhui in 2008. Prior to that, Mr. Lu has
worked as a technician in various companies such as the Zhangzhou
Construction Ceramics, Zhangzhou Ceramics Research Institute.
Independent non-executive directors
31

Mr. Tong Jifeng, age 53, is an independent non-executive director of the
company. Mr. Tong is currently working for China Building Materials Academy
as assistant to the president and manager of the enterprise development
department. Mr. Tong has more than 29 years of experience in the ceramics and
building materials industries. He was employed as engineer and manager by
the Xianyang Research and Design Institute of Ceramics, China Building
Materials Academy, China National Building Materials Group. Mr. Tong currently
holds office as a member in several committees including Science and
Education Committee of China Building Material Federation, China Silicate
Society for the standing committee and Professional Committee of Building and
Sanitary Ceramics.

Mr. Leung Ka Man, age 45, is an independent non-executive director of the
company. Mr. Leung is currently the managing director and the deputy head of
investment division of Cinda International Capital Ltd., which is a wholly-owned
subsidiary of Cinda International Holdings Ltd. (Stock code: 0111 HK). Mr.
Leung has been in the investment banking profession for over 20 years. He has
worked at BOCI Capital, Anglo Chinese Corporate Finance, ICEA Capital
Limited and ICBC International Capital Limited.
Bolina (1190 HK)
20 September 2012
Senior management
32

Mr. Yuen Chi Wai, Stanley, age 35, joined the group in May 2011 and serves as
the chief financial officer as well as the company secretary, responsible for the
supervision of financial management, investor relations and company
secretarial matters. Mr. Yuen has over 13 years of experience in auditing,
corporate internal control, as well as financial and risk management. Prior to
joining the group, Mr. Yuen had been an auditor in various international
accounting firms with substantial working experience in Hong Kong, Beijing and
Shenzhen.

Mr. Zhao Chongkang, age 53, is deputy general manager of the company,
responsible for the overall management as well as the production operation of
the group. Mr. Zhao joined the group in 2007 and he has been deputy general
manager of Zhangzhou Wanhui since. Mr. Zhao has about 30 years of
experience in the ceramics and sanitary ware industries. Since 1982, Mr. Zhao
has worked for several ceramics factories and companies including the Hunan
Ceramics Factory, Hunan Construction Ceramics Company and China Jiuzhou
Porcelain Capital Sanitary Ware Factory and Chaozhou Xianghua Donglong
Ceramic Co., Limited.

Mr. Chen Zhiqiang, age 41, is deputy general manager of the company. Mr.
Chen joined the group since its establishment and has been deputy general
manager of Zhangzhou Wanjia and assistant to general manager of Zhangzhou
Wanhui since 2009. Before joining the group, Mr. Chen worked for Double
Rhomb and Baosheng Zhangzhou Construction Ceramics Limited.

Mr. Zhu Jiaqin, age 43, is a deputy general manager of the company. Since
joining the group in 2002, Mr. Zhu has served as manager of the product
development department and production department and deputy general
manager of Zhangzhou Wanjia, and finally manager of the production
department of Zhangzhou Wanhui. Mr. Zhu has 14 years of experience in the
ceramics and sanitary ware industries and had worked for the Hunan
Construction Ceramics Factory, China Jiuzhou Sanitary Ware Factory and
Huida Ceramic Group Co., Ltd.
Bolina (1190 HK)
20 September 2012
Appendix 3: Production process
Major raw materials used in the production of Bolina’s ceramic products are feldspar
(长石), sericite (绢云母) and clay (粘土). The key production process for ceramic
products involves the following steps.
1.
Dry materials are first weighed, milled and then mixed with water to form a clay
mixture known as “slip” which is injected into a plaster mould where the
products are casted.
2.
After casting, the products are manually trimmed, dried by heat and sprayed
with a glaze composed of feldspar (长石), silica (石英), dolomite (白云石),
calcium carbonate (碳酸钙), zirconium silicate (硅酸锆), zinc oxide (氧化锌) and
kaolin (高岭土), which gives the ceramic its color.
3.
After glazing, the products are loaded onto a cart and put through a kiln for firing.
After firing, the products are inspected and then put through a water test.
4.
Finished products that have passed inspection and the testing process are then
packed and shipped.
Production process
Weigh raw materials in
accordance with predetermined formula
Mix plaster powder with
water and apply it to product
mould
Prepare glaze by mixing its
raw materials
Mill and mix dry materials
with water to form slip
Dry up to form plaster
moulds
Removal of impurities
Inject slip into plaster moulds
to cast the product
Manually trim and dry the
product after casting
Apply glaze to give the
product its colour
Fire product in a kiln
Inspect the product after
firing
Water testing
Packaging and shipment
33
Bolina (1190 HK)
20 September 2012
Rating definitions
Outperform (O) – expected return > 10% over the next twelve months
Neutral (N) – expected return between -10% and 10% over the next twelve months
Underperform (U) – expected return < -10% over the next twelve months
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and (iii) they receive no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations
made by them. The authors of this report further confirm that (i) neither they nor their respective associate(s) (as defined in the Code of Conduct issued by the Hong Kong
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associate(s) has any financial interests in the securities covered in this report.
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Bolina (1190 HK)

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