The author is an analyst of NH Investment and Securities. He can be reached at email@example.com. -- Ed.
On Mar 17, in the wake of a class action lawsuit being filed against Zinus by US consumers, the mattress maker’s share price fell to its lower limit of W48,000, before closing at W59,000 (-13.87%).
The plaintiffs, who filed the same lawsuit against a number of distributors, including Zinus, Amazon, eBay, Target, Wal-Mart, and Wayfair, claim that upon removing the cover of their mattress, they were exposed to glass fibers, in turn leading to a number of health issues (such as skin irritations and respiratory problems) and property damage.
We note that glass fibers are a non-combustible material commonly used in mattresses for fire retardant purposes, and that the material complies with American mattress fire/flame prevention regulations. According to a 2017 survey by American mattress reviewer Honest Mattress Reviews, 80% of the mattresses it reviews use glass fibers. The issue of glass fibers has been raised before and appears frequently in Amazon reviews/Q&As for most mattress companies, including Zinus. We also point out that other mattress players have experienced similar lawsuits in the past, and that no defects were found in the related products. Specifically, in these cases, it was noted that if consumers follow the “Do not remove the cover” warning attached to the mattresses, there would be no issue of glass fiber exposure, and for that reason, there is no fundamental defect with the mattresses.
Zinus has sought legal counsel in the US, and believes that it is highly likely to defeat the case. In the worst-case scenario, the punitive compensation sought by the plaintiff will most likely be covered by the firm’s product liability insurance. While the issue has yet to receive much media attention, should it garner greater interest, most mattress companies are likely to be affected. For this reason, we believe that Zinus’s market share will remain intact. Also, if industry growth slows, we believe that mattresses manufacturers can adopt alternative fire/flame prevention materials to glass fibers.
Meanwhile, as a leading player in the global online mattress industry, Zinus is to benefit from the ongoing diversification of its product and regional portfolios. Multiple favorable consumer reviews gathered through its well-established operating history provide Zinus with a competitive edge over latecomers to the online segment. We view the firm’s strong mid/long-term earnings growth potential as warranting investor attention.
Dominant market force thanks development of world’s first mattress-in-a-box technology
Enjoying operating cost advantages in terms of logistics and distribution, online mattress players boast high-price competitiveness. As a result, the US online mattress market showed 40% y-y sales growth in 2018, a pattern that we expect to repeat worldwide. In line with this trend, Zinus is currently expanding its market regions to include not only North America, but also Australia, Northeast Asia, Europe, and Southeast Asia. It is also broadening its product range, diversifying out from its existing mattress and bedroom furniture to include living room, kitchen, and office furniture.
Favorable consumer reviews gathered through its well-established operating history provide Zinus with a competitive edge over latecomers to the online segment. In the online market, multiple positive reviews verify the quality of the company’s products, a key factor which directly translates into higher sales. In addition, a virtuous cycle is created for well-selling products whereby margins are widened via distributors’ direct purchases. In contrast, market latecomers must lay out heavy marketing expenditure in order to expose their products.
Also positive, by operating its own production facilities, Zinus has achieved vertical integration. With most online players relying on OEM production, many products tend to be similar. This lack of product differentiation leads to intense marketing competition, leaving most operators in the red. However, as the developer of the world’s first mattress-in-a-box technology, Zinus boasts differentiated products as it controls its own production, and at the same time, it has secured price competitiveness and robust margins by being free of high marketing costs.
Main investment points: 1) valuation merit; and 2) high mid/long-term earnings growth potential
In 1Q20, the Covid-19 outbreak has been harming the online mattress business environment, including disrupting production and dampening demand. But, we believe that Zinus will gradually emerge from this situation led by higher production yields at its Indonesian plants and the strong cost-competitiveness of its products.
We view Zinus as being excessively undervalued in light of: 1) expectations that the global online mattress market will expand steadily going forward; and 2) its eye-catching valuation merit (the shares are currently trading at a 2020E P/E of 9.4x, vs the global average of 12.5x); 3) the fact that it boast the highest number of positive reviews among competitors; 4) its in-house production and profit-generating capabilities; and 5) its superior margins. Accordingly, we view the firm’s strong mid/long-term earnings growth potential as warranting attention.