Dapai Analysis – Part 3

Thus far, we looked at the overview of the business and the cash generating ability of the business. Now, I will delve into the qualitative part of the company and also address the future growth avenues of the company.

Qualitative analysis

Economic moat: I would not say the economic moat of Dapai is wide but rather satisfactory. It is the No.1 backpack company in China with 35.8% market share. The 2nd company, Jinhou, is very close with around 30% market share. The competition is quite intense in this business.

Competitive strengths and advantages:

  • Leading brand and good branding
  • Sponsors for big competitions such as Beijing Olympics
  • Large market share of 35.8%
  • Market survey shows that Dapai is a market leader
  • Able to leverage on Tian Liang and gradually raise ASP to increase profits
  • Huge cash hoard
  • Lots of FCF generated

Insider buying and/or share buybacks: Cheng Xizhong, Executive Chairman and founder, has 53.65% stake in the company. The company has not done any share buybacks till date. I feel that it should as it’s stock is grossly undervalued.

Is management transparent, honest and competent?: Yes, I have confidence in the management. On 12th Oct 2010, the company released a profit warning statement saying that the next quarter net profit will take a suffering as the luggage segment is facing some supply issues. They had sub-contracted all their luggage manufacturing to a number of suppliers, of whom two major suppliers were unable to meet the orders due to their labour shortage problems. As a result, Dapai’s luggage sales had been adversely affected. The company has concluded that to prevent such problems in the future, it will build a new luggage manufacturing plant. This shows that the management is transparent and honest instead of sweeping the problem under the carpet. Also, on 22nd Oct, it released a statement saying they have acquired a land for luggage manufacturing facility and the facility will be completed by 4QFY2011/1QFY2012. Once complete, the factory will produce four million pieces of luggage per year. This shows competence of management and they have resolved the issue swiftly.

Also, in May 2010, the management thought of doing a share placement exercise. However, the shareholder’s went against this plan at the AGM. Even though, Chen Xizhong has the majority share of the company, he didn’t use his power to override the decision of the minority.  He listened to the shareholder’s and didn’t undertake the share placement. This shows that the company has the interest of the shareholder’s at heart.

Future growth
  • Plans to dual list in another exchange
  • New factory to be built to make luggages
  • Total of 500 new stores to be opened by end of the year
  • Company to leverage on the internet for online shopping (http://dapai.taobao.com/). Revenues set to increase once this kicks off in full force
  • Company is looking into acquiring an international brand
  • China consumerism and travel will go up with the economy picking up

What I don’t like about this business? Highly competitive and fragmented. Thus, high MOS demanded (another MOS: current price below NAV)

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5 thoughts on “Dapai Analysis – Part 3

  1. Hi,

    WRT management, I did some reading on the share placement you mentioned. Just to clarify, the shareholder’s objection was to the resolution granting the directors power to issue new shares on a “non pro-rata” basis (by placement) at a discount of up to 20%.
    The placement did go through at a 10% discount in the end.

    Insider Buying (old news from last year)
    You might be interested to know that on 30 April 2009, Chairman Chen Xizhong raised his stake in the company from 50.8% to 72.2%, by buying 202 million ordinary shares at 18 cents apiece. Only to resell 25 million shares at 24 cents apiece and another 150 million shares at 23 cents each one month later on 27 May 2009.

    What do you make of this?

    Also, on Nov 11 2009, the company issued a press release stating that it will open 500 new DAPAI retail outlets. I do not know if this has come to fruition or if they refer to the same 500 new stores you mentioned in this post? Perhaps you can share with us how the plans have played out, if you have the info? Is expansion their only strategy?

    Rgds,
    Wee~

  2. Hi Wee,

    Yes, the company did a share placement in the end. It did so with lots of cash and negligible debt on hand. I wondered why did the company do a share placement when it doesn’t need to.

    Maybe I’m breaking one of the major rules of value investing: If in doubt, never invest. And Warren Buffett biggest rule: Rule 1: Never lose money; Rule 2: Never forget Rule 1. By investing in such companies, I might be losing money unnecessarily. Maybe it’s time to divest?

  3. No, not vested.

    I was glancing through it some time back. The numbers look good. But with the amount of cash the company has, I don’t understand the need to do placement, or dual list?

    Plus I don’t like the nature of the product, as in consumers won’t normally have a need for multiple luggages/ bags. What will happen when demand wanes? Explore new markets, while sales in existing ones slump?

    Well, just my two cents worth.

    Rgds,
    Wee~

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