Starts to Ramp up Production at US Plant
The authors are analysts of Shinhan Investment Corp. They can be reached at hyunwook.kim@shinhan.com and yoongu@shinhan.com, respectively. – Ed.
2Q21F sales KRW310.5bn (+38.4% YoY), OP KRW28bn (-2.6% YoY)
Zinus is now expected to report sales of KRW310.5bn (+38.4% YoY) and operating profit of KRW28bn (-2.6% YoY) for 2Q21. We have no worries over sales, but expect the company's COGS ratio to inch up by 2.1%p QoQ to reach 71.4% in 2Q21 due to the increase in container freight rates and raw material prices. As it takes roughly two to three months from raw material procurement to end product sales, earnings impact of the February cold snap in Texas and subsequent hike in raw material prices likely continued through 2Q21.
Zinus is unlikely to book massive unexpected costs in 2Q21 as seen in 4Q20. Container freight rates are still high but rising at a notably slower pace, and the number of container ships anchored off US West Coast ports are declining amid improvement in logistical bottlenecks. We note that Zinus has already moved most of its cargo from ports to its own warehouse.
Earnings to improve in earnest from 2H21
We believe Zinus will see sales increase in steps in 2H21, driven by full-fledged production at the new US plant and improvement in ASP levels. The company started to ramp up production at the US plant in 2Q21 and expects foam mattress output levels to reach 100,000 units per month (around 30% of the output at its Indonesia plant) within 2H21.
Meanwhile, ASP hikes carried out in 2Q21should have positive impact on sales from 2H21. April data on US imports of mattress/bedding products from seven countries slapped with anti-dumping duties shows a significant decline in imports from all countries except Indonesia. Major competitors have moved their production bases out of Southeast Asia to other countries such as Mexico, Taiwan and Spain, leading to an increase in labor costs. Price hikes carried out by rivals to protect margins amid the rise in labor costs have allowed Zinus to raise its product prices as well, likely leading to top-line growth for the company.
In all, we expect profitability to improve in 2H21, backed by: 1) increase in ASP levels; 2) recent downturn in raw material prices; and 3) steadier container freight rates.
Retain BUY and target price of KRW130,000
Our target price for Zinus remains unchanged at KRW130,000, based onthe12-month forward EPS and a target PER of 17.1x (average PER of domestic and overseas peers). We expect 2Q21 earnings results to once again confirm the removal of risks and point toward a visible rebound in 2H21. Despite expectations for stronger earnings, shares continue to trade in a narrow range at a 12-month forward PER of just 12.7x.