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Equity Bottom-Up

Ozner Water International Holding / Equity Bottom-Up

Ozner Water International Holding (2014 HK)

Ozner Water International Holding Ltd. [2014_HK; HK$565 million/US$73 million market cap; HK$1.4 million total average daily value traded] reported a healthy growth in revenues for FY2019. &nbsp;The revenues came in at RMB1717 mn, representing a rise of 4% on a YoY basis. &nbsp;This healthy growth in revenues, considering the subdued economic environment in China in 2019, was a result of the company’s ongoing strategy to focus its attention on the leasing model for commercial users of its water purifiers, versus the direct sales/buy-out model for household users. The growth was attributable to the increase in sale of new water purification machines by 323,000 units for the year, including 185,000 units newly leased machines and 138,000 units sold machines, while the accumulated installation base for leased machines increased to approximately 1,385,000 units.
Ozner Water International Holding Ltd. has announced the termination of the subscription agreement with Haier Electronics due to the practical challenges faced by the company amidst the outbreak of the coronavirus pandemic in China. &nbsp;Since the share price had reacted very negatively immediately after the termination of the deal, we are hopeful it will recover some of the decline.&nbsp; &nbsp;
The company strengthened the segmental strategy of its commercial leasing model, aiming at recurring consumption by stable commercial customers and users with high renewal rates to acquire steady cashflow.&nbsp; The renewal rate was reported to be in excess of 95% for three consecutive years indicating the consistent delivery of quality services and products by the company to its customers. &nbsp;In our recent meeting with management in China they mentioned that the company continues to maintain its strategy to focus more on the sale of the commercial leasing model. The commercial leasing model accounted for over 52% of the total revenues during FY2019 as compared to 46% in the previous year. &nbsp;The revenue performance of the company in particular looks to be commendable in the backdrop of subdued economic growth in China and escalated US-China trade war in 2019.&nbsp; &nbsp;
We believe that from a long-term perspective, the outbreak of coronavirus pandemic would promote health awareness among consumers in the future, leading them to pay more attention to protective products and water and air purification equipment. &nbsp;These products of the company with disinfection functions will aid in prevention of the coronavirus disease and help in maintaining good health for individuals, thereby having a potential positive impact on the long-term development of the business of the company. &nbsp;Given the low penetration and the desire of consumers for a healthy lifestyle, the water purifier industry in China has a long runway for growth and is expected to grow at a significant rate over the next few years. &nbsp;Ozner as the largest manufacturer of water purifiers in China in the commercial sector with an 8% market share, which is higher than the combined market share of the 2nd to 5th ranked companies is well positioned to exhibit steady growth in revenues and profitability going ahead.&nbsp;
Maintain PT to HK$0.80; 207% Upside 
We maintain our 12-month price target at HK$0.80 in view of the recovery in the company’s growth rate in the second half of FY2020.&nbsp; While the change in Ozner’s strategy had slowed down its revenue and earnings growth in the previous periods, an economic recovery in the China in the first half of the FY2020 can bring growth&nbsp; back on track which will accentuate further to benefit the company in the long-term. &nbsp;
The stock currently trades at 6x EV/EBITDA on our FY2020 EBITDA estimate and 10x P/E on our FY2020 earnings estimate. &nbsp;
Our 12-month DCF-based price target on the stock is HKD0.80 per share, which represents an upside of about 207% over the current stock price. &nbsp;
Our price target represents a multiple of 5x/4x on our FY2020/FY2021 EBITDA estimates, in-line with the valuation of its peers.&nbsp;
Profit Declines, Economic Recovery in China Should change Dynamics 
The company reported a net loss of RMB585 mn for the FY2019 as compared to a profit of RMB134.3 mn for the FY2018 on account of disposal of revenue generating assets, disposal of inventories, impairment of trade and other receivables, impairment on fund investments and impairment of financial assets.
As the economic environment became worse in China during 2019, water purifier machines were returned to the company from the customers, which was an indicator that there was a risk of loss of water purifier machines (assets) of the company. &nbsp;As a result, the company counted the number of water purifier machines before 31st December 2019 and identified that 53,000 machines were lost as a result.&nbsp; This amounted to a loss of RMB143.8 mn, which increased by 1,534.1% YoY. &nbsp;We believe that after the economic environment becomes favorable in China, growth in profitability would resume its normal course for the company. &nbsp;Revenue growth for the company, especially in the water purifier business, is also expected to be faster after an economic recovery, as China’s underpenetrated water purifier industry has huge scope to grow for a long time to come.&nbsp;
Strategy Continues to Focus on Commercial Leasing Model of Water Purifiers
During the year, the company recorded an increase in the accumulated number of installation of leased water purifiers from approximately 1,360,000 units as FY2018 to 1,385,000 units as of FY2019. The company also had a total of 185,000 units of new water purifiers for leasing during the year. &nbsp;Among them, 159,000 commercial water purifiers for leasing were newly installed with a year-on-year decrease of 17.2%. &nbsp;The business segment recorded revenues of approximately RMB714.3 mn, representing a year-on-year increase of 15.7%. 26,000 household water purifiers were newly installed, and the business segment recorded revenues of approximately RMB173.1 mn, representing a year-on-year increase of 7.0%. &nbsp;The business segment recorded revenues of approximately RMB1,169.4 mn, representing a year-on-year increase of 1.8%. &nbsp;The growth under the deteriorating business environment was encouraging and indicated the market confidence in the brand of ‘‘Ozner Water’’.&nbsp;
The proportion of revenue from the business segment of commercial leasing model within the business as a whole increased from approximately 47.6% as of FY2018 to approximately 51.7% FY2019, demonstrating that the Company shifted its strategic focus to commercial leasing model. &nbsp;The rationale behind this strategy as compared to the buy-out model is that the commercial leasing model with a 95%+ renewal rate provides a more sustainable source of recurring income. Second, this also helps the company to achieve substantial cost savings by cutting down the higher resources required by the commercial buy-out model both in terms of selling and advertising expenses as well as employee costs. &nbsp;We believe that Ozner will benefit due to its strategy in the long-term as it will help the company to achieve a steady stream of recurring income due to the high renewal rate and lower cost structure of the commercial leasing model.
For further details and financial model, please see our attached Earnings Update Report.

Ozner Water International Holding Ltd. [2014_HK; HK$565 million/US$73 million market cap; HK$1.4 million total average daily value traded] reported a healthy growth in revenues for FY2019. &nbsp;The revenues came in at RMB1717 mn, representing a rise of 4% on a YoY basis. &nbsp;This healthy growth in revenues, considering the subdued economic environment in China in 2019, was a result of the company’s ongoing strategy to focus its attention on the leasing model for commercial users of its water purifiers, versus the direct sales/buy-out model for household users. The growth was attributable to the increase in sale of new water purification machines by 323,000 units for the year, including 185,000 units newly leased machines and 138,000 units sold machines, while the accumulated installation base for leased machines increased to approximately 1,385,000 units.
Ozner Water International Holding Ltd. has announced the termination of the subscription agreement with Haier Electronics due to the practical challenges faced by the company amidst the outbreak of the coronavirus pandemic in China. &nbsp;Since the share price had reacted very negatively immediately after the termination of the deal, we are hopeful it will recover some of the decline.&nbsp; &nbsp;
The company strengthened the segmental strategy of its commercial leasing model, aiming at recurring consumption by stable commercial customers and users with high renewal rates to acquire steady cashflow.&nbsp; The renewal rate was reported to be in excess of 95% for three consecutive years indicating the consistent delivery of quality services and products by the company to its customers. &nbsp;In our recent meeting with management in China they mentioned that the company continues to maintain its strategy to focus more on the sale of the commercial leasing model. The commercial leasing model accounted for over 52% of the total revenues during FY2019 as compared to 46% in the previous year. &nbsp;The revenue performance of the company in particular looks to be commendable in the backdrop of subdued economic growth in China and escalated US-China trade war in 2019.&nbsp; &nbsp;
We believe that from a long-term perspective, the outbreak of coronavirus pandemic would promote health awareness among consumers in the future, leading them to pay more attention to protective products and water and air purification equipment. &nbsp;These products of the company with disinfection functions will aid in prevention of the coronavirus disease and help in maintaining good health for individuals, thereby having a potential positive impact on the long-term development of the business of the company. &nbsp;Given the low penetration and the desire of consumers for a healthy lifestyle, the water purifier industry in China has a long runway for growth and is expected to grow at a significant rate over the next few years. &nbsp;Ozner as the largest manufacturer of water purifiers in China in the commercial sector with an 8% market share, which is higher than the combined market share of the 2nd to 5th ranked companies is well positioned to exhibit steady growth in revenues and profitability going ahead.&nbsp;
Maintain PT to HK$0.80; 207% Upside 
We maintain our 12-month price target at HK$0.80 in view of the recovery in the company’s growth rate in the second half of FY2020.&nbsp; While the change in Ozner’s strategy had slowed down its revenue and earnings growth in the previous periods, an economic recovery in the China in the first half of the FY2020 can bring growth&nbsp; back on track which will accentuate further to benefit the company in the long-term. &nbsp;
The stock currently trades at 6x EV/EBITDA on our FY2020 EBITDA estimate and 10x P/E on our FY2020 earnings estimate. &nbsp;
Our 12-month DCF-based price target on the stock is HKD0.80 per share, which represents an upside of about 207% over the current stock price. &nbsp;
Our price target represents a multiple of 5x/4x on our FY2020/FY2021 EBITDA estimates, in-line with the valuation of its peers.&nbsp;
Profit Declines, Economic Recovery in China Should change Dynamics 
The company reported a net loss of RMB585 mn for the FY2019 as compared to a profit of RMB134.3 mn for the FY2018 on account of disposal of revenue generating assets, disposal of inventories, impairment of trade and other receivables, impairment on fund investments and impairment of financial assets.
As the economic environment became worse in China during 2019, water purifier machines were returned to the company from the customers, which was an indicator that there was a risk of loss of water purifier machines (assets) of the company. &nbsp;As a result, the company counted the number of water purifier machines before 31st December 2019 and identified that 53,000 machines were lost as a result.&nbsp; This amounted to a loss of RMB143.8 mn, which increased by 1,534.1% YoY. &nbsp;We believe that after the economic environment becomes favorable in China, growth in profitability would resume its normal course for the company. &nbsp;Revenue growth for the company, especially in the water purifier business, is also expected to be faster after an economic recovery, as China’s underpenetrated water purifier industry has huge scope to grow for a long time to come.&nbsp;
Strategy Continues to Focus on Commercial Leasing Model of Water Purifiers
During the year, the company recorded an increase in the accumulated number of installation of leased water purifiers from approximately 1,360,000 units as FY2018 to 1,385,000 units as of FY2019. The company also had a total of 185,000 units of new water purifiers for leasing during the year. &nbsp;Among them, 159,000 commercial water purifiers for leasing were newly installed with a year-on-year decrease of 17.2%. &nbsp;The business segment recorded revenues of approximately RMB714.3 mn, representing a year-on-year increase of 15.7%. 26,000 household water purifiers were newly installed, and the business segment recorded revenues of approximately RMB173.1 mn, representing a year-on-year increase of 7.0%. &nbsp;The business segment recorded revenues of approximately RMB1,169.4 mn, representing a year-on-year increase of 1.8%. &nbsp;The growth under the deteriorating business environment was encouraging and indicated the market confidence in the brand of ‘‘Ozner Water’’.&nbsp;
The proportion of revenue from the business segment of commercial leasing model within the business as a whole increased from approximately 47.6% as of FY2018 to approximately 51.7% FY2019, demonstrating that the Company shifted its strategic focus to commercial leasing model. &nbsp;The rationale behind this strategy as compared to the buy-out model is that the commercial leasing model with a 95%+ renewal rate provides a more sustainable source of recurring income. Second, this also helps the company to achieve substantial cost savings by cutting down the higher resources required by the commercial buy-out model both in terms of selling and advertising expenses as well as employee costs. &nbsp;We believe that Ozner will benefit due to its strategy in the long-term as it will help the company to achieve a steady stream of recurring income due to the high renewal rate and lower cost structure of the commercial leasing model.
For further details and financial model, please see our attached Earnings Update Report.

Ozner: Maintain Strategy, 10 P/E, 6x EV/EBITDA - Earnings Update