Description

I - Summary
II - Description
III - Investment thesis
IV - Investment points
V - Risks
VI - Reason for price/value discrepancy

I - Summary

The Nature Holdings ("Nature") is a recently IPOed apparel/lifestyle brands company based in Korea. Nature trades at around 10x TTM P/E and 6x TTM EV/EBITDA, despite growing its sales and net profit at 64% CAGR and 111% CAGR, respectively for the last 4 years. We believe the company is severely undervalued and offers many additional upside optionalities with potentials for significant fundamental improvements and multiples rerating.

II - Description

Nature is an asset-light clothing brands company that outsources its production (Vietnam) while focusing on design, marketing, and distribution. Its key brand is National Geographic ("NatGeo"), under the license agreement with Disney (previously with Fox before Disney's acquisition). NatGeo in Korea alone generated more than 90% of Nature's '20 sales and EBITDA, so the company can be rightfully called a "one-brand in one country" company, which we believe to be a part of the reason for its undervaluation. Other brands/projects Nature is nurturing are: NFL, NatGeo Kids, and international expansion of NatGeo through its partnership with Disney.

Nature's close peers are:

• F&F (14x TTM EV/EBITDA): a very similar business model, designing and manufacturing licensed apparels like Discovery (occupying the same market as NatGeo) and Major League Baseball.

• SJ Group (10x TTM EV/EBITDA): also a similar business model, its core brand is Kangol (licensed), with few other insignificant in-house brands.
  
  

III - Investment thesis

• Nature is already undervalued on the basis of its very predictable/stable growth business: NatGeo Korea fashion business.
   

• Multiple call options for free including new brands like NFL, NatGeo Kids and other NatGeo peripherals, and last but not least, NatGeo international expansion.
   

• Nature is already exporting its NatGeo clothing and accessories to EU and the U.S. (started around end '20) through Disney partnership. Disney is in the process of helping Nature to find high quality JV partners/distributors in China, Japan, Australiz/NZ, and India for further international expansion.
   

• We are quite confident about the management and company's founder/CEO Kim. His skin in the game is real and we heard good things about him from industry experts and early investors.
  
   

 IV - Investment points

• The value of NatGeo Korea fashion business:
  NatGeo Korea fashion business already generates over KRW270bn sales and KRW55bn EBITDA. Multiplying by the average peer multiple of 11.1x EV/EBITDA, the value of this business would already be higher than the current enterprise value (KRW361bn) at KRW610bn (70% upside). NatGeo's close comparable (in terms of pricing, target market, and brand perception) is Discovery (under Nature's peer, F&F), which generated ~KRW360bn in '20. We believe the life-time value of NatGeo is going to be much higher than Discovery (also confirmed by unbiased industry experts), so that tells us that the NatGeo Korea fashion business has ample room for further growth (Discovery grew its sales for 8 years at the CAGR of 40%). Additionally, the business grew 24% in sales and ~40% in EBITDA even during the stressful time of COVID-19 disruptions in Korea (albeit at a less severe scale than the U.S. or EU, but the consumer sentiment was quite downbeat as you can see from our COMPS analysis chart where all Nature's competitors saw sales going down). With the expected SSSG rebound with the reopening of the Korean economy, we expect '21 sales and EBITDA is going to be significantly better than '20's.
   

• Call options:
  Nature is looking to develop a second successful brand. NFL is a second licensed brand similar to MLB of F&F that could be another cornerstone of Nature's earnings in a few years. NatGeo Kids is another segment of company growing rapidly (a triple digit growth in '20 yoy). International expansion through Disney (and the company told us that Disney Asia HQ reached out to Nature first with the idea of international expansion rather than Nature reaching out to them) is quite promising as Disney is very active in helping Nature succeed. Overall, if any of these call options get to the "strike price", the stock is an easy double (because the relatively stable/predictable NatGeo Korea fashion business is already worth much more than the price Mr. Market gives to Nature).
   

• The management:
  Founder/CEO Kim has gone through multiple business hardship over the years. He is not a typical Korean founder/CEO in the sense that he isn't coming from the best universities in Korea (and Korea being crazy about educational references). However, from talking to his friends, early investors, and industry contacts, we learned that the guy is extremely ambitious and unlikely to stop before he succeeds with another brand or the international expansion. Therefore we are betting on the fact that at least one of the call options described above is going to hit the strike price. Talking about the skin in the game, CEO Kim holds ~40% of the company. It was very encouraging that he went into a voluntary 2-year lock up period (KOSDAQ where Nature listed requires only 6 months lock-up period at the minimum so the 2-year lock up period is completely voluntary) which we believe to be an indication that the CEO is with the shareholders for the long term and that he is confident about his businesses. We spoke to people around his circle and confirmed that most of the CEO Kim's net worth is held in Nature's shares. Last but not least, the CEO and his family (teenager kids) have bought the stock multiple times since the listing.
   

 
V - Risks

• Fad risk: The biggest risk is that the success of NatGeo is a fad and is going to be short-lived. We believe this is not the case based on the precedent of Discovery under F&F (very similar brand positioning and business model) has done very well over several years, showing yoy growth consistently. The industry experts we talked to also saw little risk of NatGeo being a short-term fad, as the brand identity (backed by National Geographic) is solid and Korean consumers seem to love its positioning (eco-friendly, explorations, and nature inspired).
   

• License risk: This was one of the key risks when we started studying the company. Now the risk is almost gone as Disney just signed a 6-years license extension with Nature. If you look at other licensees of Disney's IPs (think toy makers like Mattel) they rarely get a LT license contract like this (on average 3-5 years). 6-years extension shows Disney's commitment to work with Nature. Another evidence backing Disney's ongoing support for Nature is the fact that they reached out to Nature first for the international expansion plan.

VI - Reason for price/value discrepancy

We spoke to early investors and learned that the company was awful at managing shareholders' expectations. They gave out far-fetched guidance for '20 when it was extremely hard to forecast the operations due to COVID-19 disruptions. Therefore, they lowered their guidance multiple times which disappointed the early investors. It didn't help that the company IPOed very recently, which means investors' trust level started with the low base. We recognize the aggressive guidance is not great. In the company's defense, after speaking to the company, they were so used to high growth (like we said 4-yr sales CAGR of 64%), that they thought they could meet the high guidance. Overall, we believe the company learned its lessons (they don't give out rash guidance any more) and investor's trust in this company will build up over time.

Then there is the fact that the company is not covered well. Only one broker has a target price and the coverage is very scant. On top of this, some of the misconceived risks mentioned above (fad and license) make investors uncomfortable investing into this company. If NatGeo and other call options work as we expect, the company will not only improve its fundamentals (earnings) but the multiple expansion will follow as well.

Catalyst

Announcement of China partnership/other international expansion becoming more concrete.

2021 earnings show sustained growth in NatGeo Korea business.

Any of the options (NFL, new brands, NatGeo Kids) show success.