Economists and investors alike are paying less attention to US housing market data released each month, as the various agencies responsible for its release continue to post routinely positive results. House prices are rising, new home sales are up by the highest month-over-month percentage since the downturn, and a range of government policies aimed at helping first time buyers onto the property ladder are proving effective. Furthermore, this is a global trend. Global house prices rose a collective 2.4% during the year to June 2013, which may seem low but represents the highest rate of growth for three years. With this resurgence comes an investment opportunity in a growing company in an industry set to benefit from increased housing demand, the furniture and fittings industry. This company is Nova Lifestyle, Inc. (STVS).
Nova Lifestyle introduction
Headquartered in California, Nova Lifestyle is a U.S. based global designer, distributor and manufacturer of modern lifestyle furniture. The company manufactures and sells its products to customers all over world, but primarily in the US, China and Europe.
Nova Lifestyle is a holding company that operates through US domestic and international wholly owned subsidiaries. At present, these subsidiaries are Nova Dongguan, Nova Macao, Nova Museum, Bright Swallow and Diamond Bar.
To understand the company's chain of operations, let us consider a manufactured piece of furniture and its relationship with each subsidiary separately.
The Nova Dongguan subsidiary is the hub of the company's operations in China and indeed the world. Located in the Guangdong Province, the Nova Dongguan controls the marketing and retail of Nova Lifestyle products to outlets across Asia. From its manufacturing facility, Nova Dongguan also controls the design and production side of the business. This facility manufactures the majority of the furniture and fittings sold by Nova Lifestyle across the globe.
From Nova Dongguan, a piece of furniture takes one of two paths. The first is that of domestic retail in China. Nova Dongguan sells the finished product to wholesalers, retailers and Nova Lifestyle branded franchises across the PRC. These outlets then sell the product to middle to high-end consumers.
The second path involves Nova Macau. Nova Macau, based in Macau, focuses on the importing and exporting the products manufactured in the Nova Dongguan facility. Nova Macau is solely responsible for this side of Nova Lifestyle's operations, exporting to the US and other international markets. Nova Macau exports and distributes furniture to a range of high profile furniture retailers in the US, including Berkshire Hathaway's (BRK-A) Nebraska Furniture Mart, Living Spaces and Rooms to Go. The company distributes to an equal caliber of retailers in Europe, including John Lewis, Leekes and Ikea.
Nova lifestyle acquired Bright Swallow in April this year. Bright Swallow is an established furniture distribution company with a global client base, including over 200 Canadian locations owned and operated by furniture retailer, The Brick Ltd. Originally based in Zhejiang Province, Nova Lifestyle relocated Bright Swallow to Macau, and this year integrated its import and export operations with that of Nova Macau.
Nova Lifestyle markets and sells its products, along with third party manufactured products, in the US via its wholly owned subsidiary Diamond Bar. Based in California, Diamond Bar retails Nova Lifestyle products under its Diamond Sofa brand.
Finally, Nova Museum does not contribute to Nova Lifestyle's bottom line. Instead it is a not-for-profit museum set up by Nova Lifestyle to promote the history and social trends of furniture in the PRC.
A look at Nova Lifestyle's financials illustrates the company's potential. Annual revenue grew from $28.8M in 2010 to $43.1M in 2011 and $66.2M in 2012. Gross profit echoed this growth, rising from $7.5M in 2010 to 12.1M in 2011 and 14.7M in 2012. Net income grew from $4.2M in 2011 to $5.3M in 2011 and $5.4M in 2012.
A look at quarterly reporting shows a similar trend. Revenues rose from $14.9M during the three months ended March 31, to $19.1M during the three months ended June 30. For the same periods, gross profit grew from $3.2M to $3.8M, and net income from $1.17M to $1.18M.
The quarterly increase in revenue came from a combination of higher sales volumes and higher sales prices, albeit with lower profit margins than previous quarters.
Analysts expect the worth of the global furniture and fittings industry to reach $436B by 2015. A number of factors position Nova Lifestyle to take advantage of this growth.
The first of these is its established position in the US, Canadian, European and Chinese markets. In the US, the company's Diamond Sofa brand sells products to a number of stores ranked in the top 100 furniture companies in the U.S. It has product showrooms in both Las Vegas, Nevada and High Point, North Carolina. Nova Lifestyle also intends to drive internet sales growth through the brand, a rapidly expanding retail opportunity across all industries.
In China, the company generates the approximately 18% of its Nova Lifestyle branded revenue from franchisees across the country. Independent owners operate the franchises and purchase products directly from Nova Dongguan for branded resale. There are currently close to 100 Nova Lifestyle franchised outlets across China, and the company expects to grow this to over 200 over the next few years. As in the US, Nova Lifestyle also intends to focus on rapidly expanding internet sales in China.
Another area of growth focus is a purchasing agreement with IKEA. The company is currently in Phase three of purchasing agreement with the industry giant, and completed the construction of a 162,000-plus square foot manufacturing facility located adjacent to its Nova Dongguan facility. Under the terms of the agreement, Nova Lifestyle reported it anticipates $20M to $25M in revenues from the added production.
Since July, the company's stock has traded in a relatively tight range between $4.00 and $4.50. A potentially high impact catalysts that could serve to fuel the stock's breakout from this range is the pending NASDAQ uplisting. Nova Lifestyle is currently listed as over-the-counter but, on August 13, the company announced it has filed a listing application with NASDAQ on August 5. If NASDAQ approves the listing, Nova Lifestyle stock will become newly eligible for institutional ownership. This should draw attention towards the stock and could drive an upside revaluation.
One of the main risks involved with Nova Lifestyle stock is rooted in the fact that the company relies on the distribution of products manufactured outside the US. Not only does this expose the company to exchange rate fluctuations, it also exposes it to the usual international supply chain problems.
In addition to this, the fact that the manufacturing facility is based in China adds an extra element of political and economic risk to which facilities in most democratically led countries would not be subject.
Finally, the potential for growth in the industry is directly linked to a global economic recovery and the resulting housing market growth. While there are signs that the housing market is recovering, buyer confidence remains far from its pre-2008 levels. If sentiment turns negative and the market reverses, demand for Nova Lifestyle's products will likely decline.
All said, Nova Lifestyle is a company that could be well positioned to take advantage of the improving global housing markets. The growing middle class in China coupled with the government policies driving first time buyer demand in the US and Europe should see consumer demand for the products that Nova Lifestyle manufactures. In turn, the company's already established and growing distribution channels should mean it can service this demand. In doing so, revenues should increase, and in turn, the company's market valuation.