Major Risks Removed
The authors are analysts of Shinhan Investment Corp. They can be reached at hyunwook.kim@shinhan.com and yoongu@shinhan.com, respectively. – Ed.
Initiate coverage with BUY for a target price of KRW130,000
We initiate coverage of Zinus with BUY for a target price of KRW130,000. Since the company's IPO in 2019, the stock has continued to trade in a narrow band due to a string of negatives including a fiberglass class-action lawsuit, rise in logistics costs from the COVID-19 pandemic, and hike in raw material costs from the cold snap in Texas. Shares are now trading at a 12-month forward PER of 12.9x, nearing the bottom PER of 12.2x recorded amid heightened risks in 2020. Zinus has remained undervalued vs. overseas peers, despite its stronger top-line growth potential and higher operating margins. Given the recent removal of major risks, we now believe the stock deserves to trade at higher valuations in reflection of bright earnings forecasts.
Steep growth expected in 2021 on strong online sales in the US
Zinus focuses on the production of mattresses and bedroom furniture for sales through online channels in the US. In 2020, the company secured 80% of sales through online channels and 90% of the total in the US market. Online sales have been visibly expanding in the US market over the past few years, driven by market penetration of several new lower-end brands.
We forecast the company's sales at KRW1.3tr (+36% YoY) and operating profit at KRW149.3bn (+72% YoY) for 2021. Quarterly sales should come in higher in the second half of the year, backed by online market growth and strong seasonality as well as the ramp-up of the new US plant in 2H21. Zinus stands to benefit from heavier anti-dumping duties slapped on overseas rivals, with added advantages expected as it starts to produce mattresses out of the new US production plant. Operating profit should sharply improve YoY on base effect created from high logistics costs incurred in 2020.
Investment points: Removal of risks, impact of diversification
Investment points are as follows. First, US anti-dumping risks are now removed with significantly smaller duties placed on mattresses imported from Indonesia, Zinus's main production base, compared with the other six countries. We believe Zinus will be able to expand its market share in the US vs. rivals slapped with heavier anti-dumping duties, with an added boost expected from the addition of a new production plant in the US. Second, concerns over costs have eased with the pandemic-triggered increase in raw material and logistics costs remaining a burden but one-offs that led to sluggish 4Q20 results now mostly removed. Third, the company is seeing rapid growth in sales outside of its main US market, as well as outside of its mainstay mattress products. Earnings contribution from new markets and products has yet to reach significant levels, but diversification efforts are helping to improve the company's growth potential and earnings stability.