2022 performance constrained by tight capacity and higher non-cash costs
? After a meaningful recovery in 2021, Evergreen Products’ operations in 2022F are
expected to be constrained by limited new capacity and higher non-cash costs.
? The Company will optimize its product portfolio by shifting more capacity to higher-margin products.
? The Company is expected to gain market share, given its geographical exposure. We
expect it to resume capacity expansion in 2023 after improving in efficiency in 2021 and
2022.
? Despite a dow nw ard revision in its net profit forecasts for 2022F and 2023F because of
higher-than-expected OPEX, Evergreen Products is back on the growth track and sees
less risk ahead in terms of supply disruptions and slower downstream demand.
? We reiterate our ADD rating with a higher target price of HK$1.27, based on 14x 2022F
PER. Our new target PER is still in line with its historical average.
Strategic location enables the Company to gain market share
Evergreen Products’ major production base is in Bangladesh, which accounted for about
95.2% of revenue in 2021. As at 31 Dec 2021, Evergreen Products had 32,002 workers in
Bangladesh, up from 26,699 workers a year earlier. Evergreen’s production facilities in
Bangladesh enable it to remain competitive with its peers in China. The Company’s
advantages are more prominent given the COVID-19 outbreak and lockdowns in China.
The United States remained Evergreen Products’ principal market in 2021, with its revenue
contribution accounting for 87.6% of the Company’s total revenue, compared to 88.1% in 2020. Since the recovery in 2021, the Company hasn’t seen any slow down in its major
markets, given the pick-up in economic activity in US and other overseas markets,
including the EU and Japan. We expect Evergreen Products to see less risk in terms of
supply disruptions and slower downstream demand compared to its peers in China.
2022F operations to be constrained by tight capacity
The Company’s order inflow remains resilient after a strong 2H21 performance. Despite
the fact that the Bangladesh factory has continually expanded its production capacity to
satisfy strong market demand, volume shipment growth in 2022 is expected to be
constrained by no new capacity expansion in 2021. We believe that Evergreen Products
will optimize its product mix and allocate more capacity to high-end hair-extension
products. Despite limited yoy revenue growth in 2022, w e still expect the Company to
deliver positive yoy gross profit growth because of a more favourable product mix.
Evergreen Products is expected to face higher financial expenses (because of higher
interest rates) and higher non-cash costs in 2022. At a result, w e expect the Company to
report only slight yoy net profit growth in 2022. Everygreen Products intends to continue to
expand its production capacity and increase the scope of its operations in Bangladesh. We
expect the Company to resume capacity expansion in 2023 after improving efficiency in
2021 and 2022. The new capacity is expected to make more meaningful contribution in
Evergreen Products also plans to increase its headcount outside the UPEZ for lower
staff costs to improve overall profitability.
Downward revision of forecasts
We lowered our 2022F and 2023F net profit forecasts by 37.0% and 43.4%, respectively,
to reflect higher non-cash costs and financial expenses. We reiterate our ADD rating, with
a higher target price of HK$1.27, based on 14x 2022F PER. Our new target PER is still in
line with its historical average.