ZHEJIANG NATURAL OUTDOOR GOODS(605080)：FRONTRUNNER IN OUTDOOR SPORTING GOODS MARKET;NEW CUSTOMERS PRODUCT EXPANSION TO DRIVE GROWTH

　　Investment positives
　　We initiate coverage of Zhejiang Natural Outdoor Goods Inc. (ZNOG) with an OUTPERFORM rating and a target price of Rmb77, implying 22x 2023e P/E.
　　Why an OUTPERFORM rating?
　　Outdoor sporting goods industry to experience solid growth, with concentration ratio steadily rising.
　　Demand: The world’s outdoor sporting goods industry reached about US$100bn in 2020. We believe it will likely maintain solid growth momentum, driven by emerging markets and new product categories.We expect the industry to register an 8% CAGR over 2020-2025. We think thermoplastic polyurethanes (TPU)-made outdoor sporting goods will perform better than other sporting goods.
　　Competitive landscape: Foreign firms entered the outdoor sporting goods industry earlier and have gained a first-mover advantage.However, China has built a strong value chain and domestic firms enjoy production advantages. China’s outdoor sporting goods market has a low concentration ratio, with the top five companies’ combined market share at only 23%. Market leaders such as ZNOG enjoy strong advantages in R&D and customer resources. We think their market share has large upside potential.
　　ZNOG focuses on manufacturing of outdoor sporting products.It has gained core competitive edges thanks to full coverage of the value chain, solid R&D strength and strong customer resources.
　　Full coverage of the value chain: ZNOG covers all of the key　processes regarding TPU-made products, including composite fabric production, product design, and manufacturing. Full coverage of the value chain helps strengthen the firm’s cost advantage and ensures above-peer profitability.
　　Cutting-edge technologies: ZNOG possesses five key technologies that cover TPU fabrics, fabric coating and other areas. It has stronger R&D strengths than many of its peer, in our view. We believe these factors give the company core competitive edges in technologies.
　　Customer resources: ZNOG has built strong relationships with top- tier retailers of outdoor goods such as Decathlon. It has accumulated high-quality customer resources.
　　Solid growth in sales from core products and key customers; further exploration of new products and customers by leveraging technological advantages.
　　Products: TPU-made products continue to replace polyvinyl chloride (PVC)-made ones, thanks to their advantages in elasticity, abrasion resistance and environment friendliness. We think they have a promising future. ZNOG has developed cutting-edge technologies on TPU-made products. The firm’s core business line (i.e. TPU-made mattresses) is experiencing solid growth. In addition, the segments for water sports and inflatable mattresses for household applications grew rapidly in recent years. ZNOG is expanding from TPU-made fabrics into new product categories (e.g. inflatable sofas, waterproof bags and inflatable protective equipment) to search for new earnings growth drivers.
　　Customers: ZNOG further strengthened cooperation with key customers such as Decathlon and Sea to Summit. The number of its key customers increased steadily. ZNOG accounts for a rising share of these customers’ orders, and it continues to acquire new ones by leveraging its strong design and R&D capabilities as well as sound reputation. We think ZNOG has sizable potential to expand its customer base.
　　Production capacity: The company is proactively increasing its production capacity of TPU-made air mattresses and waterproof bags to alleviate pressure on existing production lines. In addition, ZNOG is expanding its global presence by building production facilities overseas.
　　How do we differ from the market? We think the market has　underestimated Chinese firms’ advantages in supply chain and pace of development. In addition, we believe the market has also underestimated ZNOG’s potential to explore new customers and businesses by leveraging its core technological advantages.
　　Potential catalysts: Strong order expansion; breakthroughs in new customers and businesses.
　　Financials and valuation
　　We expect the company’s 2021-2023 EPS to be Rmb2.28, Rmb2.77 and Rmb3.50, implying a 31% CAGR. The stock is trading at 20x 2022e and 16x 2023e P/E. We expect the company to register solid growth in its core business and in sales to key customers, and we think it has the potential to explore new businesses and customers by leveraging advantages in technological R&D and its integrated presence along the full value chain.
　　We initiate coverage with an OUTPERFORM rating and a target price of Rmb77, offering 36% upside and implying 22x 2023e P/E and 0.7x PEG.
　　Risks
　　Demand weakening due to pandemic resurgence; volatile raw material prices and FX rates; overreliance on a single customer.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。