NVC Lighting recorded total revenues of $256 million and $306 million in 2008 and 2009, respectively. Net profit for 2008 and 2009 was $18.1 million and $14.7 million, respectively. The fair value change expenses associated with preferred stocks and stock options significantly affect the net profit for the two financial years 2008 and 2009, and there will be no further changes in fair value in 2010. We expect Ray's total revenue and profit to increase by 64.69% and 238% in fiscal year 2010 to $503 million and $43.3 million, respectively. Production is expected to rise further, and the company plans to produce 200 million sets of energy-saving lamps throughout the year.
When the share of global energy-saving products is expected to reach 55.4% in 2014, compared with only 35.5% in 2007; we can see that Raytheon has a strong development potential, because its products are energy-efficient production.
The offer price ranges from HK$2.03 to $2.90. In 2010, the industry average P/E ratio is expected to be between 15 and 26 times. Based on the company's revenue as of the end of 2009, the Group is the largest lighting brand in the country; therefore, we expect Raytheon's 2010 P/E ratio to be 25 times, slightly higher than market expectations. The 12-month target price is HK$3.34.
Company Profile NVC Lighting (hereinafter referred to as the Group) was established in 1998. Based on the company's revenue in 2009, the Group ranked second among all lighting product suppliers in China. The Group focuses on energy-efficient products and designs, manufactures and sells lamps, electric lamps (the largest energy-saving lamp manufacturer in China in 2008) and electronic lighting products.
The Group mainly promoted its own branded products, while the original design and manufacturing* export brands accounted for 8.3%, 24.7% and 37.4% of the total revenue in the three years from 2007 to 2009, respectively. Raytheon brand products are sold to professional and retail end customers. The group is the largest domestic lighting product supplier for the 2008 Beijing Olympics.
The Group's products are available in 40 countries, domestically and globally, while the United States is the Group's largest export market for the 2008 and 2009 financial years, accounting for 5.3% and 12.1% of total revenue, respectively. The Group expects to further benefit from the improvement of the US economy. As of the end of 2009, the Group had 36 regional exclusive distributors and 2,461 outlets covering 31 cities.
Industry Overview Global and China's demand for electric light products is expected to grow at a compound annual growth of 4.6% and 8.1% from 2007 to 2014, respectively. The high growth rate of China's demand is mainly driven by China's expected consumption growth. China's global market share is expected to rise from 15.4% in 2007 to 21% in 2014. However, China's lighting industry is highly fragmented, with the first three domestic brands accounting for only 2.5% of total sales.
Energy-Efficient Products: A New Market Trend As people around the world are increasingly concerned about environmental protection and are looking for new ways to control energy consumption, demand for energy-efficient products is expected to increase by about 20% from 2007 to 2014.
The global government has begun to implement measures to eliminate traditional incandescent bulbs and replace them with energy-saving fluorescent bulbs.
Because the Group is China's largest manufacturer of energy-saving lamps, and its long-term strategy is to strengthen the Group's market leadership in energy-saving products and establish a “green†image, we believe that the Group will benefit from this global trend in the long run.
Performance Review The Group has three business segments, namely lighting products, lighting products and lighting electronics.
We note that the total revenue share and gross profit margin of the electric light products business increased the most during the period. The revenue of energy-saving products has a compound annual growth rate of 17.03% over the past three years. We believe that this structural change will benefit the Group in the long-term, as global energy-saving products are expected to rise to 55.4% compared to total lighting products, which is higher than 35.5% in 2007.
When the revenue of energy-saving products jumped 3.8 times in the past three years, the income of non-energy-saving products increased by 49% during the same period. We also foresee the Group's product portfolio transformation: from about 60% of traditional products in 2007 to 60% of energy-saving business segments in 2009.
Group Prospects and Comparative Advantages 1. Market Leadership of Energy-Efficient Products – In 2009, 60.1% of total revenue came from energy-saving products, with a CAGR of 94.1% from 2007 to 2009. 2008 China's largest energy-saving lamps, T4/T5 brackets*, and electronic ballast manufacturers. *T4/T5 bracket is a complete lighting device, belonging to energy-saving equipment
2. Brand Acceptance – The Group is the largest domestic lighting product supplier for the 2008 Beijing Olympic Games, and has contracts for the Guangzhou 2010 Asian Games and the 2010 Shanghai World Expo.
3. Broad distribution network - The Group has 36 regional exclusive distributors and 2,461 NVC branches.
4. Purchase Sunny (energy-saving light bulb manufacturer) and Shanghai Arcata (leading manufacturer of electronic ballasts) to strengthen the vertical integration of the group, so that pricing power and gross profit margin are better.
The valuation offer price ranges from HK$2.03 to $2.90. We expect Ray's Lighting to have a higher growth rate (64.49%) than its peers in FY2010. There will be a significant improvement in profit margins, and there will be no more changes in the fair value of preferred stocks in 2010. In 2010, the industry average P/E ratio is expected to be between 15 and 26 times. We expect Ray's Lighting's 2010 P/E ratio to be 25x, slightly higher than market data. The 12-month target price is HK$3.38.
Risk Analysis 1. Mainly relying on a single brand NVC: If the brand image is not successfully promoted, it will negatively affect the growth prospects of the group.
2. High concentration of distributors: Poor relationship with distributors may damage the Group's operating performance.
3. The number of ODM customers is limited: some of them are competitors.
4. The market is fiercely competitive: if it is unable to maintain competitiveness, it will lose market share.
5. Fluctuations in the RMB exchange rate may negatively affect performance results and financial status as products are sold to overseas markets.
6. Very dependent on the real estate industry
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