985 Million Increased: Acquisition Of Overseas Assets, High Pricing Triggering Market Concerns?

603808.SH recently released the "2019 year non public development line A share plan".

According to the announcement, the company intends to raise no more than 985 million yuan of non-public offering fundraising (including distribution fees), which is used to increase capital for subsidiary Dongming international investment (Hongkong) Co., Ltd. to acquire ADON WORLD SAS 43% equity and supplement liquidity. The issue price is not less than the base price date (the first day of the issuance of the non-public offering issue), and the average price of the stock transaction in the first 20 trading days is 90%.

By acquiring some shares of ADON WORLD SAS, the company will have the 100% global IRO control power of France's brand. IRO, founded in 2005 in Paris, is a French designer brand. Financial data show that IRO brand achieved a 496 million operating income in 1-9 months in 2019, an increase of 12.88% over the same period last year. Among them, China's operating income reached 61 million 521 thousand and 900, an increase of 181.53% over the same period last year.

According to the pricing of the acquisition, the price earnings ratio of the acquired target is close to 30 times, much higher than that of about 12 times. Perhaps it is based on the higher price concerns that after the announcement, the price of song's shares fell for two consecutive days, which was even closer to the lowest position in November 25th.

Looking back at history, it has spent hundreds of millions of dollars to acquire other brands and e-commerce platforms since it was launched in 2015. This has resulted in a high volume of goodwill on the books as well as increasing the company's revenues and profits.

Is the acquisition price reasonable?

According to the letter, ADON WORLD SAS's main business is the brand clothing business of the subsidiary IRO SAS. The price of the 43% stake in Dongming ADON WORLD SAS acquired by the company was priced at 89 million 500 thousand euros, and the price was converted to RMB 698 million 305 thousand and 900 according to the intermediate price of the RMB exchange rate signed on the date of signing the agreement. The estimated value of ADON WORLD SAS 100% stake is about 1 billion 624 million RMB.

According to the financial situation of the ADON WORLD SAS announced in the preannouncement, the net profit of the parent company in 2018 was 54 million 668 thousand and 700, which concluded that the static P / E ratio of the acquisition was close to 30 times.

In contrast, by the end of November 25th, the market value of song's market was 4 billion 366 million, which was less than 12 times that of 2018's net profit to the mother.

In general, higher pricing requires higher performance growth and matching. Can ADON WORLD SAS achieve this goal in the future?

Performance growth slowed, single quarter profit fell 20% over the same period

Its main business is the design, development, production and sale of brand fashion. At present, there are many brand attributes including fashion, tide brand, light luxury, net red and so on, including ELLASSAY, Laur L, Ed Hardy and IRO Paris.

Since its listing in 2015, its revenue increased from 835 million in the year to 2 billion 436 million in 2018, while the net profit from the same period rose from 160 million to 365 million, while the compound growth rate reached 42.89% and 31.64% respectively.

But at the same time, we can see that since 2018, the growth rate of its growth has slowed down significantly. Among them, the growth rate of revenue and net profit in 2018 was 18.66% and 20.74% respectively. The latest three quarterly reports in 2019 show that revenue growth has dropped to 8.57% and net profit to 2.62%. If we look at the third quarter alone, revenue and net profit will decrease by 5.51% and 20.48% respectively.

What is the reason for the slowdown in performance? Can it be reversed in the short term?

Merger effect weakened, core brand sales less than expected

Careful analysis reveals that the weakening of M & A and the slowdown in core brand growth are the main reasons for the high growth of the company.

Over the past few years, through the acquisition of some shares of Tang Li International, Qianhai mountain forest and Bai Qiu network, the company has expanded its brand matrix and accelerated its growth. But as these mergers and acquisitions continue to expand and expand the base, the slowdown in earnings growth is inevitable.

On the other hand, the lack of core brand growth is also an important reason. The latest business data show that ELLASSAY, Ed Hardy and Ed HardyX and IRO (excluding China) had more than 300 million revenue in the first three quarters, forming the main source of revenue. However, from the perspective of revenue growth and gross margin, several brands are facing greater growth pressure.

Among them, revenue accounted for the largest ELLASSAY in the first three quarters of the revenue growth of 4.22%, gross margin fell 1.51%. The revenue of Ed Hardy and Ed HardyX decreased by 17.17% compared with the same period last year, and the gross profit margin dropped by 2.78%.

In contrast, the company hopes to increase its acquisition and access to the world's 100% control IRO brand performance is more prominent, excluding China's revenue grew by 11.27% over the same period, while the Chinese region is a significant increase of 181.53%.

Goodwill risk is worth noting.

Looking back at the capital operation since 2015, the acquisition of assets has increased the growth of the company's performance and accumulated a large amount of goodwill.

Data show that as of June 30, 2019, the company had goodwill account value of about 547 million, mainly from three invested units, including Tang Li International Holdings Limited (107 million), Shanghai Bai Qiu Network Technology Co., Ltd. (251 million) and Shenzhen Qianhai Shanglin Investment Co., Ltd. (189 million).

According to the requirements of accounting standards, goodwill needs to be tested annually. If the test result shows that the recoverable amount of the assets group or asset group combination containing the assessed goodwill is lower than its book value, the corresponding impairment loss will be recognized.

Among these invested enterprises, the assets of Tang Li International Holdings Limited are the brand ownership of Ed Hardy in mainland China and Hong Kong, Macao and Taiwan. As mentioned earlier, the sales of Ed Hardy and Ed HardyX declined by 17.17% in the first three quarters of 2019 compared with the same period last year, and the gross profit margin fell 2.78% year-on-year. (CJT)