AUSSINO GROUP

I would like to dedicate the following write-up to my friend who is moving to Australia soon with his wife. We have been friends for more than 10 years. Gosh.... think i will miss his laughter, jokes and passion for sports. Nevertheless, I sincerely wish the couple all the best in their future endeavors. Do keep in contact, for I will be seriously considering a trip to Down Under in the not too distant future.

Without futher delay, lets take a look at the following company.

BASIC INFORMATION
Company Name: Aussino Group Ltd
Stock Price: 0.355 (as at 7th June 07)
Currency: Singapore Dollar
Stock Exchange: SGX
Industry: Home Furnishing & fashion products

OVERVIEW
Aussino Group is a knowledge-based group involved in the design, product development, distribution and retailing of soft home fashion furnishings and fashion products. Their business strategy is to focus on the value-added front end (design & development) of the product life cycle and its distribution aspect. In this way, the need for constant capital expenditure on the manufacturing machinery is removed. Aussino's merchandise is available through more than 8,000 retail outlets worldwide. It has a wide range of in-house branded soft home furnishing products including "Royal Symphony", "Inspire", "Sino" and "Aussino" brands, which are targeted at the middle and middle-upper market. Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". All new AUSSINO and SINO collections are coordinated and manufactured in our network of 38 factories, coupled with products imported from Europe and U.S.A.

INVESTMENT MERITS
(i) Nature of business
As a designer and supplier of home furnishing products, the fortune of Aussino is closely tied to the growth in home sales around the world. For the past few years, we can see that property prices are on the uptrend in many parts of the world.
Home furnishings retailers benefit in several ways from the sale of new and existing homes. When existing homes change hands, remodeling and customization often follows, which can drive the sales of construction-related supplies to professionals, as well as to do-it-yourself homeowners. Additionally, as consumers furnish their residences, they often purchase new supplies.

(ii) Excellent long term earnings and profitability
For the last 5 years, Aussino’s revenue has grown by a CAGR of 22.7% and net profit before tax has also grown at a rate of 10.1%. The net profit growth (excluding other income) in FY2006 increases by 12.5% over FY2005. Similarly, its net profit margin grew from 7.9% in FY2005 to 8.6% in FY2006. The context in which the foregoing is achieved is commendable as the home furnishing industry is highly competitive.

(iii) Superb balance sheet and copious cash flows
The balance sheet is fundamentally strong. It has low debt and a net cash position (cash – total debt) of about $9million (3.7cents per share). In addition, Aussino has been able to manage its capital expenditure with internally generated cash flow. In fact, its cash flows have remained healthy despite the need to spend $3-4 million yearly for expansion purposes. For the record, the free cash flow generated in FY2006 was $12 million (FY2005: $5.8 million).

(iv) Consistent dividend policy
Its management has also been willing to fork out any excess cash to reward shareholders. Over the past 5 financial years, shareholders have been consistently rewarded with increasing dividend payments. The total amount of dividend paid-out so far was $15 million.

(v) Competent Management & Large Insider Ownership
Mr Anthony Lim has more than 15 years of experience in the retail, wholesale, export and import business. He founded the Group in 1991 and has identified business opportunities for the Group. Mr Anthony Lim expanded the Group's businesses to markets in U.S.A., Australia, Canada, China, Singapore and Malaysia. He continues to provide strategic direction and expertise to bring the Group forward to its next phase of expansion growth.

Currently, the insiders are holding more than 50% of the shares. As such, we can safely say that the interest of the top management and the minority shareholders are aligned.
So far over the years, there was no issuance of new shares and share options. This means that there is no dilution of shareholders’ stake. I take this to be a good sign that the company is able to move forward using its own resources and there is no excess compensation in the form of share options.

One foreign fund manager, Arisaig Partners (BVI) Limited has found this company to be attractive enough to take up a significant stake (14.27%) in it.

(vi) Diversification
In order to diversify its exposure beyond the home furnishing business, Aussino also distributes ladies' fashion apparel under its in-house brand "Sino". For the last financial year, this business contributed 8.8% of the group’s revenue.
Aussino is also the exclusive distributor in China of a range of luxury ladies' and men's bags and accessories under the Calvin Klein, Gianfranco Ferre and Krizia international fashion labels.

VALUATION
Aussino is now trading at less than 8x historical earnings and it is even cheaper when the stock price and earnings are adjusted for cash (about 10.27% of its market capitalization is cash.). Over the last five FYs, Aussino’s EPS have grown by a CAGR of 12.3%.
Given its management excellent trade record in execution and in enhancing shareholder’s equity (FY06: ROE, ex cash is 34%, rising from 32.5%), Aussino is likely to continue on its growth path. A key contributor for its growth going forward would be its business in emerging markets like China, Middle East and Vietnam.

To supplement the above, a discounted cash flow analysis was performed. A conservative growth rate of 5% over the next ten years was modeled. The analysis also incorporated an estimated capital expenditure of $3.5 million every year. The discount rate used was 8% per year and the terminal value after 10 years is assumed to be zero. This yielded an intrinsic value of $0.45 per share; a margin of safety of 25% from current prices.
From the above calculations, we can conclude that Aussino is likely to be a growth stock trading at value prices, bearing in mind that its IPO price was $0.88.

RISKS
(i) Possible price competition
(ii) Increase in raw material prices
(ii) High risk when expanding to new markets

DRIVERS
• Attractive valuation and rock solid balance sheet
• Consistent top line and bottom line growth since listing
• Mutual fund managers are starting to take notice of the company
• Favorable future trends:
- The aging of the population, as well as recent concerns over geopolitical instability, has led consumers to curb travel to a certain extent and concentrate on their homes. As a result, consumers are spending more on outfitting their homes with new furniture, fixtures, and appliances. They are also remodeling entire rooms and adding amenities. This effect is known as the “nesting” trend that sociologists have seen over the last several years.
- The focus of both retailers and consumers is away from formal furnishings such as china and crystal, and toward more casual, soft lifestyle-oriented furnishings.