Equity Analyst, LightStream Research

Aqila Ali

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

Fourace Industries / Equity Capital Markets

In our earlier reports, we covered <a href="https://www.smartkarma.com/entities/fourace-industries" target="_blank" data-smartkarma-citation="entities:28264:1" rel="noopener">Fourace Industries (FOUR HK)</a>’s background, its business model, growth prospects, the risks it faces in the market, and its financial performance. We concluded that the company’s 30 years of expertise in the business, along with its attractive margins and strategic business plans, make it an attractive business. Customer concentration risk is still our main concern, but as we mentioned, the company’s move to OBM business should negate such concerns.  Fourace revealed that it aims to raise around HKD91.7m or more, offering 312.5 million shares at a price range of HKD 0.4- HKD0.6 per share. This insight covers Fourace’s valuation in relation to its peers. Our views are:<ul>
<li>Most of the peers are still private companies.</li>
<li>We selected a range of companies (OEM/ODMs as well as OBM) that cater to similar products to Fourace and serve similar markets (Japan, US, Europe, China).</li>
<li>Based on double-digit revenue growth (27%) and OPM (17%), the company is likely to trade at an FY2 EV/EBIT and a PE of 8.4x and 16.2x respectively at the high end of the IPO price range. At these multiples, Fourace appears fairly valued in comparison to selected peers.</li>
<li>Fourace also has better fundamentals than its peers and thus, we feel it deserves a slight premium to certain peers.</li>
<li>Moreover, as earnings improve, which is likely as the OBM model is adopted, the company could trade at a higher multiple similar to OBM peers.</li>
</ul>Deal Specifics of Fourace’s Offering<table class="table table-striped"><tbody>
<tr><td colspan="2" style="width: 100.0%;">Details:</td></tr>
<tr>
<td style="width: 33.08%;">Price Determination Date</td>
<td style="width: 66.92%;">September 4th, 2020</td>
</tr>
<tr>
<td style="width: 33.08%;">Announcement of Final Offer Price</td>
<td style="width: 66.92%;">September 14th 2020</td>
</tr>
<tr>
<td style="width: 33.08%;">Expected IPO price per share:  </td>
<td style="width: 66.92%;">Between HKD0.4 and HKD0.6</td>
</tr>
<tr>
<td style="width: 33.08%;">Number of Shares for IPO:</td>
<td style="width: 66.92%;">312,500,000 Shares</td>
</tr>
<tr>
<td style="width: 33.08%;">No. of International Placing Shares</td>
<td style="width: 66.92%;">
 
281,250,000 Shares
</td>
</tr>
<tr>
<td style="width: 33.08%;">No. of HK Offer Shares</td>
<td style="width: 66.92%;"> 31,250,000 Shares</td>
</tr>
<tr>
<td style="width: 33.08%;">IPO base deal size: </td>
<td style="width: 66.92%;">Approx. HKD 91.7m</td>
</tr>
<tr>
<td style="width: 33.08%;">Expected market cap after IPO:</td>
<td style="width: 66.92%;">Between HKD 500m – HKD 750 m</td>
</tr>
<tr>
<td style="width: 33.08%;">Use of Proceeds</td>
<td style="width: 66.92%;">
* HKD49.9m (54.5%) – Expanding and upgrading facilities;
* HKD 22.7m (24.8%) – Research and development;
* HKD 11.9m (11.9%) – Introduction of new products under its own “IHA” brand;
* HKD 3.2m (3.5%) – Sales and marketing;
* HKD 4m (4.3%) – Upgrading IT systems and Design-aided software
</td>
</tr>
</tbody></table>Source: Company Disclosures

In our earlier reports, we covered Fourace Industries (FOUR HK)’s background, its business model, growth prospects, the risks it faces in the market, and its financial performance. We concluded that the company’s 30 years of expertise in the business, along with its attractive margins and strategic business plans, make it an attractive business. Customer concentration risk is still our main concern, but as we mentioned, the company’s move to OBM business should negate such concerns.  Fourace revealed that it aims to raise around HKD91.7m or more, offering 312.5 million shares at a price range of HKD 0.4- HKD0.6 per share. This insight covers Fourace’s valuation in relation to its peers. Our views are:
Most of the peers are still private companies.
We selected a range of companies (OEM/ODMs as well as OBM) that cater to similar products to Fourace and serve similar markets (Japan, US, Europe, China).
Based on double-digit revenue growth (27%) and OPM (17%), the company is likely to trade at an FY2 EV/EBIT and a PE of 8.4x and 16.2x respectively at the high end of the IPO price range. At these multiples, Fourace appears fairly valued in comparison to selected peers.
Fourace also has better fundamentals than its peers and thus, we feel it deserves a slight premium to certain peers.
Moreover, as earnings improve, which is likely as the OBM model is adopted, the company could trade at a higher multiple similar to OBM peers.
Deal Specifics of Fourace’s Offering
Details:

Price Determination Date
September 4th, 2020


Announcement of Final Offer Price
September 14th 2020


Expected IPO price per share:  
Between HKD0.4 and HKD0.6


Number of Shares for IPO:
312,500,000 Shares


No. of International Placing Shares

 
281,250,000 Shares



No. of HK Offer Shares
 31,250,000 Shares


IPO base deal size: 
Approx. HKD 91.7m


Expected market cap after IPO:
Between HKD 500m – HKD 750 m


Use of Proceeds

* HKD49.9m (54.5%) – Expanding and upgrading facilities;
* HKD 22.7m (24.8%) – Research and development;
* HKD 11.9m (11.9%) – Introduction of new products under its own “IHA” brand;
* HKD 3.2m (3.5%) – Sales and marketing;
* HKD 4m (4.3%) – Upgrading IT systems and Design-aided software


Source: Company Disclosures

Fourace IPO (Valuation): Attractive Earnings Profile and Valuation Relative to Peers

Electrical appliance maker Fourace Industries filed a PHIP on the Hong Kong stock exchange last month after an initial IPO filing in August last year. In our previous insight ( <a href="https://www.smartkarma.com/insights/fourace-ipo-over-30-years-of-expertise-electrifies-its-business" target="_blank" data-smartkarma-citation="insights:31836" rel="noopener">Fourace IPO: Over 30 Years of Expertise Electrifies Its Business)</a>, we analysed the industry and the company’s business model. In this insight, we look at the financials and analyse whether the company’s double-digit growth rates (revenue CAGR of 16%) and margins (three-year average of 14.2%) are sustainable.
We believe that the company offers more positives than negatives, despite its customer concentration risk. We go through the details below.

Electrical appliance maker Fourace Industries filed a PHIP on the Hong Kong stock exchange last month after an initial IPO filing in August last year. In our previous insight ( Fourace IPO: Over 30 Years of Expertise Electrifies Its Business), we analysed the industry and the company’s business model. In this insight, we look at the financials and analyse whether the company’s double-digit growth rates (revenue CAGR of 16%) and margins (three-year average of 14.2%) are sustainable.
We believe that the company offers more positives than negatives, despite its customer concentration risk. We go through the details below.

Fourace IPO: Attractive Margins, Positive Cash Generation, and a Strategic Business Plan

<a href="https://www.smartkarma.com/entities/fourace-industries" target="_blank" data-smartkarma-citation="entities:28264:1" rel="noopener">Fourace Industries (FOUR HK)</a>, an electrical appliance maker has filed for an IPO in Hong Kong to fund the expansion of its business. The company primarily operates as a personal care and lifestyle electrical appliance OEM/ODM service provider. We analysed the company, its business model and the industry it operates in, and the following are the key points we would like to highlight:
<ul>
<li>Despite operating in a fragmented personal care electrical appliances market with only around 1% market share, Fourace has still been able to deliver double-digit growth rates in its top line over the past three years while generating mid-teens operating margins. The company would be one of the few players in the industry to go public (most of its competitors are still private companies) and as such offers something a little unique.</li>
<li>The Lifestyle segment, a relatively small segment, for now, could be a long-term growth driver for Fourace given the evolving trend of smart homes</li>
<li>Fourace’s move into OBM business indicates that the company is moving to monetise the strong technical expertise it has secured and its intent to serve a greater share of the market.</li>
<li>The inability to secure a diversified customer base for so long is our key concern for the company. In addition, its significant exposure to the US market makes Fourace highly vulnerable to uncertainties involving the US-China trade war</li>
</ul>

Fourace Industries (FOUR HK), an electrical appliance maker has filed for an IPO in Hong Kong to fund the expansion of its business. The company primarily operates as a personal care and lifestyle electrical appliance OEM/ODM service provider. We analysed the company, its business model and the industry it operates in, and the following are the key points we would like to highlight:

Despite operating in a fragmented personal care electrical appliances market with only around 1% market share, Fourace has still been able to deliver double-digit growth rates in its top line over the past three years while generating mid-teens operating margins. The company would be one of the few players in the industry to go public (most of its competitors are still private companies) and as such offers something a little unique.
The Lifestyle segment, a relatively small segment, for now, could be a long-term growth driver for Fourace given the evolving trend of smart homes
Fourace’s move into OBM business indicates that the company is moving to monetise the strong technical expertise it has secured and its intent to serve a greater share of the market.
The inability to secure a diversified customer base for so long is our key concern for the company. In addition, its significant exposure to the US market makes Fourace highly vulnerable to uncertainties involving the US-China trade war


Fourace IPO: Over 30 Years of Expertise Electrifies Its Business

Hong Kong

Fourace Industries Group Holdings Limited manufactures and sells electrical appliances. The Company produces and sells personal care electrical appliances, lifestyle electrical appliances, and other products. Fourace Industries Group Holdings markets its products worldwide.

Fourace Industries (1455 HK)

Fourace IPO (Valuation): Attractive Earnings Profile and Valuation Relative to Peers

In our earlier reports, we covered Fourace’s background, its business model, growth prospects, the risks it faces in the market, and its financial...

Aqila Ali

Fourace IPO: Attractive Margins, Positive Cash Generation, and a Strategic Business Plan

Electrical appliance maker Fourace Industries filed a PHIP on the Hong Kong stock exchange last month after an initial IPO filing in August last...

Aqila Ali

Fourace IPO: Over 30 Years of Expertise Electrifies Its Business

Fourace Industries (FOUR HK), an electrical appliance maker has filed for an IPO in Hong Kong to fund the expansion of its business. The company...

Aqila Ali