Koda Ltd - CIMB Research 2018-03-23: Furnishing Homes In China

Koda Ltd - CIMB Research 2018-03-23: Furnishing Homes In China KODA LTD BJZ.SI

Koda Ltd - Furnishing Homes In China

  • Founded in 1972, Koda is an original design manufacturer for home furniture.
  • It owns the Commune retail brand and has 43 stores in China. Its modern designer furniture appeals to the younger generation in China.
  • Koda plans to double the number of its outlets in China to 100 by 2020, with the help of IE Singapore and intends to equip its stores with Virtual Reality capabilities.
  • Its net margin expanded from 0.9% in FY15 to 10.0% in 1HFY18 due to higher sales contribution from Commune and improved supply chain efficiency.
  • Koda is trading at 9.0x CY17 P/E, below regional furniture retailers’ average of 14.3x, based on Bloomberg consensus estimates.

Home-grown furniture maker with over 40 years of experience 

  • Founded in 1972 by Koh Teng Kwee, Koda went public in 2001. The group specialises in household furniture as an original equipment manufacturer (OEM) and original design manufacturer (ODM), exporting furniture products to more than 50 countries currently. 
  • Its furniture design and lifestyle arm, Commune, had 43 stores in China and eight outlets in Singapore, Malaysia and Australia as at end-Dec 2017.

Multiplying the “Commune” brand stores via dealership model 

  • The group’s retail business started in 2011, with the opening of the first Commune outlet in Singapore. 
  • In 2014, Koda opened its first overseas Commune outlet in China and quickly expanded its number of stores through a dealership model – providing dealers with intellectual property, technology and supplying its ODM products at wholesale prices without charging royalty fees. Commune’s target audience is the younger generation who have a preference for modern designer furniture.

Doubling capacity in China with VR shopping capabilities 

  • Koda aims to double the number of Commune brand stores in China by 2020 to 100 outlets. It plans to partner up with trade development agency, International Enterprise (IE) Singapore, to tap into China’s growing market via an omni-channel model – integrating Commune’s online and offline presence through data analytics and business intelligence tools. 
  • The group also intends to equip its stores in China with Virtual Reality (VR) capabilities, to enhance customers’ shopping experience.

Net margin continues to expand amidst retail transformation 

  • Koda’s net profit grew 147% y-o-y to S$4.1m in FY17 due to higher revenue contribution from the Commune retail and distribution business, which commands higher operating margins than the OEM/ODM manufacturing segment, as well as improved supply chain efficiency. 
  • Koda registered net margins of 8.2% in FY17 and 10.0% in 1HFY18, to the low 0.9% in FY15. Koda’s retail and distribution business turned profitable in FY17, with operating profit of S$0.8m (FY16: S$0.2m in operating losses).

CY17 P/E valuation at 37% discount to regional peers 

  • The stock is trading at 9.0x CY17 P/E, based on an issued share capital of 82.36m ordinary shares (ex-treasury shares). Koda issued 1-for-1 bonus shares in Nov 2017 and 0.26m new shares under the Performance Share Plan in Dec 2017. 
  • Koda’s CY17 P/E multiple represents a 37% discount to regional furniture retailers’ average P/E of 14.3x. As at end-Dec 2017, Koda was in a net cash position of S$7.6m, representing 25% of shareholders’ equity.

Tapping on China’s growing market 

Aims to double number of outlets in China in three years 

  • Commune’s sales in China reached close to S$7m in 2017, representing 64% of Commune’s total sales. Commune also has presence in Australia, Malaysia and Singapore, with China being its key market. According to the Hong Kong Trade Development Council, furniture sales grew to about S$174.5bn in 2016.
  • Commune stated that its goal is to open more than 100 outlets in China by 2020, under its collaboration with International Enterprise (IE) Singapore, a statutory board under the Ministry of Trade and Industry that facilitates the overseas growth of Singapore-based companies and promotes international trade. 
  • The furniture retailer also intends to work with IE Singapore to expand into Indonesia, Taiwan and Thailand, while supporting the development of a digital platform to complement Commune’s physical presence.

Virtual reality could reshape shopping habits 

  • A 2017 survey by Worldpay Research, which queried more than 16,000 consumers across eight markets (including China, Japan and Australia in Asia Pacific) revealed that 84% of the respondents in China believe virtual reality/augmented reality (VR/AR) is the future of shopping. IKEA (Unlisted) and Alibaba (BABA US, Not Rated) are among the retailers that are embracing VR/AR technology and have adopted it on their retail platforms.
  • Koda plans to equip its Commune China stores with VR capabilities, which would enable in-house designers to turn a customer’s floorplan into a VR environment and offer recommendations on design concept in order to boost sales and improve customer retention. As at end-Dec 2017, only eight Commune stores in China and all four outlets in Singapore were equipped with VR capabilities.

Net margin expanded by 730bp over FY15-17 

  • The group’s net profit grew from US$0.4m in FY15 to US$4.1m in FY17, and net margin expanded from 0.9% in FY15 to 8.2% in FY17. Koda’s gross margin expanded from 23.9% in FY15 to 32.2% in FY17 thanks to improved supply chain efficiency and higher sales from Commune.

Target Price: N/A

Colin TAN CIMB Research | http://research.itradecimb.com/ 2018-03-23
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* This Eyes On the Ground report represents a preliminary assessment of the subject company, and does not represent initiation into CGS-CIMB's coverage universe. It does not carry investment ratings and CGS-CIMB does not commit to regular updates on an ongoing basis.