CGS-CIMB came away from investor tour for DXN Holdings Bhd in China, with the conclusion that the group has strategic readiness for future growth, given that the strategic location of its Chinese base as well as sound expansion plan.
Thus, the research house reiterates ADD rating, with an unchanged GGM-based TP of 85 sen (FY26F ROE of 27%, COE of 12% and 4% long-term growth).
“We believe DXN’s current valuation is undemanding at 8.5x CY24F P/E, with 38% discount to its overall peers’ 10-year average mean, given its superior scale economies and margins driving a strong 3-year EPS CAGR of 15% (FY23- 26F), while offering attractive dividend yields of 5-6%,” it said in its Company Note today (Dec 7).
CGS-CIMB said DXN’s manufacturing and cultivation facilities in Ningxia, China (DXN Ningxia) is a strategic location that would help drive the next leg of growth.
“As a key raw material such as Spirulina and Mycelium production base and an export hub, DXN Ningxia houses its largest Spirulina farm (60% capacity for export) and its manufactured own products are already exported to up to 20 operating countries (with 30 more in the pipeline), according to management.
“In addition to generous subsidies and incentives from the local government, DXN Ningxia has access to cheap raw materials and a favourable climate for its Spirulina farming yields.
“Its customised equipment for mass production of Mycelium liquid spawn, which is the key to its cultivation and biotechnology innovations to advance its Mycelium variant could help to boost yields and operational efficiency, in our view.
“While the facility is not operating at full capacity, we believe this represents a strategic readiness for future growth phases and would drive
margin expansion once it scales up (FY24-26F GP margin: 83%),” it said.
CGS-CIMB said the group’s management said DXN established its presence in China in 2015 with an aim to secure a local direct-selling licence, which has stringent requirements, including at least 3 years of track record of domestic trading business.
“DXN China is currently in its third year and it expects to file the licence application in the next 2-3 years,” it said.
According to TMO Group, which is a global ecommerce agency, the size of China’s direct sales market is expected to exceed RM200 billion in 2023F.
“Meanwhile, with the completion of its liquid beverage factory in July 2023, DXN Ningxia has started to produce its high-margin ready-to-drink health product series to venture into China’s fast-moving consumer goods market in 2024F.
“Management said it is launching in Hangzhou, Chengdu and Xinyang cities as a means to build initial brand awareness and subsequently export to its other operating countries,” the research house added.
Re-rating catalysts for CGS-CIMB’s call are higher membership growth and margin expansion while the key downside risks are adverse regulatory changes affecting sales and profit repatriation, and weaker consumer sentiment.
