+ Gross margins improved and to hold steady. 1H18 incorporated the sales of new book publishers. The coming is cautiously ramping up the sales from these new publishers. We believe the company has yet to achieve economies of scale from the new publishers. Despite this, the group has managed to achieve a 45% gross margin from 41%, which suggests further upside to margins. Books account for 70% of total revenue.
+ Strong demand for FaireLeather products. Faire Leather accounted for half a million in revenue in 1H18. Faire Leather was overwhelmed by the demand for their products. This resulted in some supply chain issues and longer fulfilment times. However, the supply constraint should improve in 2H18 and we expect Faire Leather to contribute even more in the future. There was encouraging sales from another crowdfunding launch in Taiwan.
– Revenue weaker than expected. The group was conservative in the inventory levels of their new book publishers. As a result, there was a slowdown in inventory turns. Furthermore, there is also the seasonality of book sales, where 2H is typically stronger.
– Spike in expenses. Selling & distribution expenses increased 52% attributed mainly to the distribution costs from onboarding new book publishers. These costs are associated with expansion of logistics and distribution networks in the UK. We were told that the expansion were required for consolidation of the new books. Admin expenses increased US$0.3m due to the start-up costs relating to the development of the AORA platform and another US$0.2m for a new subsidiary created for the design of more innovative products (e.g. toys and exercise products).
We remain positive for the 2H18, some of the drivers to sales include (i) Book sales are seasonally stronger in August & September; (ii) We expect higher inventory turns from their new publisher customers; (iii) The new collaboration with Beast Kingdom Co Ltd (official licensee for Disney products); (iv) Launch of new innovative products (sold via crowdfunding channels).
Maintained BUY with a lower target price of S$S0.61
We maintained our BUY recommendation with a lower target price of S$0.61. Our lower target price is due to the 18% downward revision of our FY18e earnings.