XDL ... Apr11

Mercury Securities Sdn Bhd

BACKGROUND
XiDeLang Holdings Limited (XDL) was incorporated in Bermuda under the Bermuda Companies Act in April 2009 as an exempted company limited by shares. In August 2009, the company was registered in Malaysia as a foreign company.
XDL’s history can be traced back to 1993 when HongPeng Footwear started the production and marketing of sports shoes in Jinjiang City, Fujian Province, China. XDL was subsequently listed on in November 2009. The group was the third shoe-sector manufacturer from China (PRC) to list on Bursa Malaysia.

“Sport shoes, apparels and accessories”
The group is principally involved in design, manufacturing and marketing of sport shoes, as well as design and marketing of sports apparel, accessories and equipment. The group’s business and manufacturing premises are located in Jinjiang City, Fujian Province in China.

Currently, XiDeLang management team is led by Mr Ding Peng Peng (MD/CEO) and Ms Ding Li Hong (Executive Chairman). They were the founders of HongPeng Footwear back in 1993, and as such have around 18 years of experience in the shoe industry. Ms Ding is particularly active in various Chamber of Commerce and Footwear Association while Mr Ding is also involved in a local Chamber of Commerce.

The “XiDeLang” brand of sports shoes was launched in 1993. Since then, the brand has established a reputation synonymous with trendy, innovative, and quality sports shoes, apparel, accessories and equipment. Over the years, the group had been awarded numerous titles and recognitions, such as “Fujian Famous Brand”, “Well-known Mark of China” and Number 1 spot for “Jinjiang Top 10 Most Growth for Sports & Leisure Brand”.

“Various awards received”
XiDeLang Sports Group was established in 1995 as the owner of XDL’s proprietary “XiDeLang” brand. The primary focus of this company is in brand management and product development. A broad range of shoes were developed, for activities such as skateboarding, running, basketball and tennis.
In 1996, HongPeng (Fujian) was established to undertake the manufacturing of sports shoes. Meanwhile, HongPeng Footwear continued its production of sports shoes, with a focus on overseas markets.

The group’s in-house team develop about 2000 shoe designs each year, of which around 500 designs are commercialized. Currently, the product range also includes designs meant for hiking, trekking and casual-wear shoes.

“Expansion into Sports Apparels / Accessories”
In 2005/2006, the group established a complementary line of sports apparel and accessories to leverage on its XiDeLang brand name and extensive distribution network. The group had successfully launched its range of sports apparel and accessories in 2007 while production was outsourced to third party manufacturers.
“Engaged Brand Ambassador”

In 2007, XiDeLang engaged a China artiste named Zhang Jie as its brand ambassador. Zhang Jie is a singer and actor with a strong following from the youth segment. This is based on the group’s strategy to market to the “youth market” of consumers between the ages 15-35.

“Extensive Distribution Network”
At the point of listing, XiDeLang had an extensive distribution network of around 2300 retail locations around China, of which around 1320 are concept stores. The group’s products are retailed across 25 provinces and municipalities in China via 32 distributors/retailers.

The group’s annual manufacturing output has grown from 1.6 million pairs of sports shoes in 1995 to 4.4 million pairs in 2008. The group also actively outsource a portion of its production requirements.

PERFORMANCE – FY10
XDL recorded revenue of RM125.6 million and RM465.1 million respectively, for its 4Q/FY10 and FY10 results. This represented a y-o-y increase of 63.0% and 20.8% respectively.
“Strong y-o-y performance”

The group’s net profit after tax (NPAT) for 4Q/FY10 and FY10 was RM20.3 million and RM79.3 million respectively, which was an increase of 103.8% and 16.3% respectively.
The group’s positive performance during its FY10 was largely boosted by the improvement in sales of both its HongPeng (Fujian) and HongPeng Footwear subsidiaries.

This was due to increased brand awareness as a result of the group’s intense A&P (advertising and promotion) efforts. In addition, the group’s continuous research and development (R&D) assist in keeping the group abreast of the rapidly changing fashion trends and consumer taste, with new models being launched periodically. Furthermore, there was strong consumer demand in both the PRC and overseas markets.

XDL recorded roughly the same level of revenue during both its 4Q/FY10 and 3Q/FY10. However, the group’s net profit after tax for 4Q/FY10 had dropped by 7.3% as compared to 3Q/FY10. This decrease was mainly due to the lower gross profit achieved during 4Q/FY10. The lower gross profit was due to the higher usage of raw materials, which is typical for autumn/winter shoes and apparels.

VALUATION / CONCLUSION
“Final dividends proposed”
XDL’s Board of Directors had declared a tax exempt final dividend of 1.0 sen per share for its FY10 ended 31st December 2010. Earlier on, the group had paid out an interim dividend of 1.5 sen tax exempt for its FY10. XDL first declared dividends in its FY10 (the group’s first post-listing dividends), as no dividends were declared for its FY09.

The group’s future dividends would be determined by the performance of the group. During the IPO, the group’s management had stated their desire to endeavour to pay out up to 30% of its annual net earnings as dividends. However, as the group’s dividend payout ratio was not that high in its FY10, we expect that the group’s dividend payout ratio to be within the 10-20% range of its annual net earnings for its FY11.

With an adjusted beta (correlation factor) of 0.70 to the KLCI, XDL (-10.99% YTD) has underperformed the KLCI (+0.13% YTD) this year. Market conditions have also been volatile lately, impacted by the recent political uprisings in the Middle East/North Africa, sovereign debt issues in Europe and a major earthquake in Japan. As XDL is not an especially large market-cap stock, this may put a dampener on its market visibility and trading volume.

“Buy Call”
Based on our forecast of XDL’s FY11 EPS and a prudent estimated P/E of 3 times (within its historical range), we set a FY11-end Target Price (TP) of RM0.66. This TP offers a 64.1% upside from its current market price. Our TP for XDL reflects a P/BV of 0.85 times over its FY11F BV/share. Meanwhile, the Regional Footwear sector’s average P/E and P/BV is 16.2 times and 1.96 times, respectively.