Description

There is a case study one can purchase for a trivial amount from the Asia Case Research Centre that does a good job of summarizing Goldlion's history, but suffice to say the brand once occupied an iconic position as what was the first "foreign" apparel brand to directly enter the local PRC market.  Within this report, Paul Kua, a former executive of Giordano, states "Goldlion was the gold standard of the industry".

Goldlion subsequently hit a rough patch, and in 2001 new management was brought in to rejuvenate the brand.  With respect to the current brand position, I fully realize that wealthy PRC locals prefer European luxury brands, which Goldlion clearly isn't.  I also realize Goldlion might be considered an older brand by some, but nonetheless I will draw upon some independent third party research to suggest that this is indeed still a "brand", e.g. people will pay a premium for an item with the Goldlion logo as compared to lesser known or unbranded merchandise. 

It is also worth nothing that management never took to extreme discounting, such that while the brand may have diminished in popularity over the years, at it's worst it was tarnished and in need of some polish , as opposed to being outright broken.

To argue my case, I will direct readers to a CSFB report (China Consumer Survey 2011, Jan 17 2011) to view unbiased quantitative data with respect to the brand's current positioning.   Within the latest survey, respondents were asked what brand of fashion goods were recently purchased, of which Goldlion ranked 3^rd amongst foreign brands, and 6^th overall when local brands were included.  With respect to intention to buy, the brand ranked fifth amongst foreign brands, and tied for 8^th when local brands were included.

Similarly CLSA has completed several surveys on the industry in which Goldlion has been mentioned, all of which can be found on the CLSA research website if one has access.  One of the more recent CLSA pieces noted that "The general apparel market remains very niche and fragmented with the top 5 brands only accounting for 30% of the brand points.  A majority of the most popular brands are domestic names that operate in the massteige market".  According to the CLSA piece, Goldlion has 6% market share, placing it in a tie for second position.  In another CLSA survey (January 2011) Goldlion ranked 2nd in terms of popularity for luxury shoes, and 8^th for Handbags/Leather Accessories.

As for raw financials, the table below highlights the sales and EBIT for Goldlion's apparel division for the past six year after making an adjustment to deduct corporate overhead:

I think the numbers speak for themselves as to whether the turnaround has been successful.  It should be noted that the vast majority of the sales come from a wholesale PRC biz, but embedded within the above numbers is a licensing division (ultra high margin) as well as sales to HK/Singapore/Malaysia.  The segmented performance can largely be found in the annual report.

Going forward, company aspirations are continued double digit sales growth and to maintain margins around current levels.  As for whether this is a good business, the apparel segment generates both high margins and high ROCE.  Production is outsourced to third party suppliers which makes the company asset light.  Similarly working capital requirements are modest, with accounts payable being greater than AR, and inventory turning over 5.9x a year. 

A sportswear license was recently granted to the licensee that currently produces Goldlion shoes, producing some optionality with respect to future growth.  Maybe this will be big, maybe it won't, but VIC readers are presumably well acquainted with the attractive economics associated with a license business that may grow as a percentage of the sales mix.

I will now ask the reader to think about what type of multiple they would place on the above earnings stream, independent of the fact that peers (Trinity, Evergreen) trade at stupidly high multiples (20x LTM EBIT) that lack any semblance of a margin of safety. If you are using a pre-tax multiple, pls assume a 28% tax rate when considering the appropriate pre-tax multiple.  Please also note the 5 year revenue CAGR of 18%, and EBIT CAGR of 36%.

Now please apply that multiple to 2010 EBIT or any multi-year average you would like from the above data.  Rest assured capex is less than depreciation for the apparel segment, so EBIT is a good proxy for pre-tax cash flow, excluding the modest working capital requirements.

Now add to that figure a value for the company's investment properties, located in PRC and HK, which have a book value of about HKD1.8bn. You can either haircut book or use a cap rate of your choice on NOI of roughly HKD91m. Also note there is another HKD30m from a real estate property that will like be sold this year.

I will also highlight the option value of the Goldlion Centre, which is the company's HK HQ.  The company occupies just a single floor of the seven story building (I've been to the building), with rent for the other six floors already captured in the NOI.  Unfortunately the building does not reside in a central HK neighbourhood, but interestingly the building has strategically noteworthy neighbours in the form of Swire and SHK, two of the larger local property developers.  It is not inconceivable at some point in the future, the HK HQ is sold to one of these parties for a sum that would be well above book / commensurate capped NOI contribution, but that is just a guess on my part.  Pics are available on Google Earth/Google Maps should one want to check out the location.

So now please add the value of the apparel business to the value you have placed on the properties.

Lastly please add cash at year-end of HKD0.93bn to your running total.

For those of you who have not cared to do your own math, I will suggest the following valuation which attempts to lean more towards conservatism than promotion:

Apparel @ 9-10x 2010 EBIT less Corporate (p/e of 12.5 using 28% tax rate) = HKD.324bn x 9/10 = HK2.90  to HKD3.24bn

Investment Properties @ ~80% of book = HKD1.50bn

Cash = HKD0.93bn

This provides a total value of HKD5.33bn or higher.

The market cap is about HKD3.25bn.

This suggests upside of 50%+ to what could arguably be suggested is a non-aggressive approach to valuation (apparel at 9x LTM EBIT, discount to book for inv property, full value for cash).

On a trailing EBIT Multiple, the implied EV for the apparel biz less Corporate as calculated by deducting inv properties (at 80% of book) and cash from the market cap is as follows:

Market cap HKD3.25bn - inv properties HKD1.50bn - cash HKD-0.93bn = EV HKD0.82bn ex inv and cash

2010 EBIT HKD0.324bn (apparel less corporate)

EV/Apparel EBIT = ~2.5x

Regarding capital allocation, the investment properties stem from historical land ownership and Goldlion is not targeting any future developments. The payout ratio is respectable, and the company has raised the dividend seven years in a row, culminating in what is currently a 6.3% dividend yield on a trailing basis.

Rather than invest in US listed Chinese companies that could be frauds, I'd prefer to spend my time on something like this. Goldlion's been public since 1992, the family is the largest shareholder, there is a long history of paying dividends, and the auditor is PWC.  Of course it could be a value trap, but my advice is "Buy it a little well, sell it a little well, collect the dividend". If that is a "trap", so be it.

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