KangLi's H1-21 Results Proved A Rebound From COVID-19
- KangLi's H1-21 results proved a rebound from COVID-19, 59% YoY growth in revenue and 26% YoY growth in sales volume.
- KangLi reported an all-time high gross margin of 12.6%. The question is whether it can continue the momentum.
- KangLi's investments in the new factory and product lines will start to pay off in 2022.
KangLi International Holdings Ltd. (6890.HK) is a leading galvanized steel products manufacturer in the home appliance sector in Jiangsu Province, the PRC. KangLi manufactures steel products for home appliances such as dishwashers, refrigerators, and others in the sector. KangLi's major products currently include cold-rolled hard steel coil, hot-dipped unpainted galvanised steel products, and hot-dipped painted galvanised steel products.
According to KangLi's IPO filings in 2017, KangLi ranked third with a market share of 3.9% in the galvanized steel product market in the home appliance sector in the PRC, and ranked 16th with a market share of 0.5% in the galvanized steel product industry in the PRC.
KangLi does not provide products to the end customers, instead it manufactures a variety of products to enable its customers to meet the needs of their customers. Hence it does not directly influence demand from the end customers. To do that, KangLi uses raw materials mainly hot-rolled steel coils, the purchase price of which is affected by policies and the economic situation. KangLi has built a durable business model through 1) 9 to 15 year business relationships with top customers, 2) 6 to 16 years contracts with top suppliers, and 3) 2 to 5 years of relationship with subcontractors who helped supplement their production capacity and minimize transportation costs.
1. KangLi's H1-21 Results proved a rebound from COVID-19; 59% YoY growth in revenue and 26% YoY growth in sales volume
The following table shows KangLi's revenue and sales volume summary for H1 during 2018 to 2021. Versus prior H1, revenue grew by 59% YoY and sales volume increased by 26% YoY, partly due to COVID recovery. Compared to H1-19, the H1-21 results clearly proved a recovery from COVID-19. China Home Appliance Market is forecasted to be more than US$ 130 Billion by the end of year 2026, and the growth rate in 2021 is expected to be high-single digits. In this market, KangLi is driving 26% volume growth, demonstrating its capability of strengthening its market share.
KangLi does not disclose its main customers, but given the long-term relationship it has with existing customers, I would expect the company to continue enjoying baseline growth from existing customers, and incremental growth via new customer acquisition or gaining shares from the market.
2. KangLi reported an all-time high gross margin of 12.6%. The question is whether it can continue the momentum
KangLi's gross margin in H1-21 is 12.6%, 490 bps higher than H1-20, and 541 bps better than H1-19. The momentum is partly driven by KangLi's inventory management during COVID when expecting raw material price increase. The main question here is whether KangLi is able to continue the momentum and whether it can hold intact when price of raw materials continues to climb up.
Hot-rolled steel coils is the major direct raw material for the production. The purchase price of hot-rolled steel coils is affected by policies and economic situation. My take is that KangLi, with ~18 years experience in this space, has mature and robust mechanisms to manage supply risks via long-term contracts, pricing model, and financial hedge through future contracts. KangLi's "cost-plus" pricing model is mainly cost-based with a markup, and this pricing model will ensure KangLi to maintain a decent level of gross margin even if raw materials prices continue to fluctuate. According to the company filing, "the extent of mark-up is determined with reference to, amongst others, the market demand, anticipated market trends, historical sales data, fluctuations of the raw materials price, current number of purchase orders, production capacity, the amount of the customers purchase order, our relationship with the customer and the prices of our competitors' products." With that in mind, I do expect some advantage for KangLi to expand its gross margin over time by providing competitive products and continuing to delight its customers.
The following table shows KangLi's other financial metrics. Net profit margin jumped from 1.7% to 6.5%, in part benefiting from gross margin improvement. Current ratio and gearing ratio appear pretty stable.
3. KangLi's investments in the new factory and product lines will start to pay off in 2022
KangLi is planning to expedite its capacity expansion. According to KangLi, the new factory will be completed by Oct. 2021 with new product lines finishing installation by the end of 2021. The CEO of KangLi, Zhihong Zhang, said "the new factory will propel the company in its mission to provide highly valuable coating products for white goods brands. We are determined to become a leader in the white goods industry."
At this point, I do not have the upside quantified for this development. Overall it will accelerate KangLi's growth.
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