• Kim Hin Joo (KHJ)’s proven track record of over 35 years in marketing new-born and parenting products makes it one of the most trusted retail specialists in Malaysia, operating a wide retail network across the country.

• Following a decline in net income to RM5.2m in FY20, we project earnings to grow by 56.5% and 29.0% YoY to RM8.2m and RM10.5m, respectively in FY21-22, underpinned by its outlets expansion and improved consumers’ purchasing power.

• KHJ is valued by pegging its FY21f core EPS of 2.2 sen to 13x PE (c.28% discount to peers’ average of 18.0x), leading to a FV of RM0.28.

Company Background

• Kim Hin Joo (Malaysia) Bhd’s (KHJ) journey of retail business can be traced back to 1986, when KHJ entered into its first exclusive development agreement with Mothercare UK, granting the Group the exclusive rights to open and operate Mothercare outlets and to sell Mothercare products within Malaysia. After the first Mothercare outlet was opened in KL Plaza in 1987, KHJ focused on building solid retail client base and developing relationship with franchisor. It subsequently opened 8 more outlets across Klang Valley as malls sprouting up and demand for its products growing. From 2008 to 2013, KHJ successfully established its distribution business and from 2014 onwards, the Group started to expand its retail business outside of Klang Valley and build its e-commerce channel.

• Currently, KHJ is one of Malaysia’s largest premium baby, children and maternity (BCM) product vendors, offering a wide variety of products ranging from clothing, home & travels products and toys (Fig #2).

• Besides Mothercare, KHJ sourced its products from Early Learning Centre (ELC) originating from the UK. ELC was brought into Malaysia by KHJ in 2010 and all the ELC outlets were operated as a store-in-store (SIS) within Mothercare outlets. Whereas ELC UK was acquired by TEAL Brands Limited in 2019, KHJ’s rights to operate ELC stores and sell ELC products were retained. As a franchisee of Mothercare UK and ELC UK, KHJ’s total purchases from the two brands accounted for over 40.0% of its total purchases.

• However, KHJ’s market share in the toy market is limited as ELC’s educational toys are designed for babies and children aged below six. In June 2020, KHJ opened its first The Entertainer toy stores in Malaysia to offer a comprehensive range of toy offerings which caters to children aged above six. Other than these, KHJ also sources from third-party brands such as Gingersnaps, Tommee Tippee, Mimosa, ELC, Jellycats etc.

• KHJ markets its product offerings via retail and distribution channels, with a bias towards the more profitable retail business whilst constantly looking out for more opportunities to grow its distribution business especially in overseas markets. In FY20, retail segment contributed 81.2% of its total revenue (Fig #3). A summary of both business segments is set out in Fig #4.

• For retail segment, KHJ sells its products through different sales channels which include Mothercare outlets, ELC SIS, The Entertainer outlets, baby expos, Mothercare online store, and NotTooBig online store hosted on Lazada. As at 27 October 2020, it operates 21 Mothercare outlets, 13 ELC SIS and 2 The Entertainer outlets across Malaysia. No outlet was closed down in 2020 albeit foot traffic was significantly reduced in 2020. KHJ runs customer loyalty programme named as VIP Parenting Club to provides member-exclusive discounts as a way to engage and retain existing customers.

• With the changing consumers’ demand, KHJ incorporates the new experiential retail concept into its retail outlets, giving the stores and the brand an edge over its competitors. The first experiential store launched is its revamped Singapore Mothercare flagship store at Harbourfront Centre. To provide consumers with immersive shopping experience, the outlet provides different experience zones such as the inspirational nursery room sets, stroller test tracks, baby wearing zone, and airplane overhead cabins as well as multiple new services including one to one Nursery Advisor service for first-time parents either in physical outlet or via video calls, as well as Sparkle Clean service. As revenue growth was seen, KHJ targets its first experiential outlet in Malaysia in 2QFY21.

• Besides, KHJ collaborates with ecommerce platform to support its omnichannel strategy, aiming to provide customers with a seamless customer experience. It plans to expand to Shopee in 2021 following its recent listing on Lazada. While slowly tapping into the e-commerce market, brick-and-mortar stores remain as KHJ’s main sales channel. In 2019, it carries 230 brands along with 5 consignment brands of Clothing, Home & Travel products and toys at Mothercare outlets and ELC SIS; among which 111 brands are hosted at its Mothercare online store. On the other hand, KHJ limits its products at NotTooBig online store to only Home & Travel products from third-party suppliers. KHJ competes at the e-commerce market on non-price base measures to avoid any price war which may potentially cause a damage to its brand image in the market.

• For distribution business, KHJ distributes third-party branded Home & Travel products mainly to specialty stores, department stores, hypermarkets, pharmacies, confinement centres and online stores, via outright sales on purchase order or in consignment basis for department stores such as AEON. As a distributor, KHJ takes advantage of the bulk discount pricing when a minimum order is reached. Customers are required to sell KHJ’s products based on its prescribed list, and to obtain KHJ’s approval prior to conducting any promotional discounts on the products.
   
• In 2018, the top five customers for its distribution segment include Manjaku Baby Centre Sdn Bhd, Tesco Stores (M) Sdn Bhd, Global Outsource, Able Potential Sdn Bhd and AEON Co. (M) Bhd. As none of the customers contributes more than 2.0% to its total revenue over the past years, KHJ is not dependent on any single customer. As at 31 December 2019, KHJ distributes 23 brands throughout Malaysia and other countries such as Brunei, Hong Kong, Singapore, and Thailand.

Industry Overview

Malaysia’s baby, children and maternity product industry outlook

• BCM products industry typically grows in tandem with growing population and increasing affluence of the population. In 2019, Malaysia’s population grew by 0.4% (live births in 2019: 487,957), albeit at a slower pace as compared to 1.4% in 2016 (Fig #5). In the same period, Malaysia’s median monthly household disposable income which grew 13.4% to RM5,116, in line with increasing number of mothering age women joining the workforce. From 2016 to 2019, female labour force participation rate rose 1.3% to 55.6%.

• According to the Department of Statistics, Malaysia’s population is estimated to hit 36.0m by the year of 2025, out of which 22.6% will be represented by newborns, infants and children; while according to Worldbank, Malaysia is expected to transit from an upper-middle income economy to a high-income economy by 2024. Larger population and higher disposable income are expected to boost the demand for basic necessities and non-essential products, thereby increasing parents’ propensity to spend more on BCM products.

• Besides, rising education levels among parents coupled with availability of product information across various media that promotes transparency in the industry have led to growing demand for high quality and safe BCM products in Malaysia. Parents are also becoming more knowledgeable about the diverse range of products in the market with increasing array of products and services catered for babies and growing children being offered. This points to increasing demand for high quality imported products that meet international safety standards. According to the industry overview of the BCM product industry in Malaysia prepared by Smith Zander International Sdn Bhd, the imports of BCM products rose from RM638.7m in 2015 to RM926.2m in 2018 at a CAGR of 13.2%.
   
• In recent years, the availability of different distribution channels in Malaysia such as retail stores, online platforms and expo help promoting the retail sales of BCM products. Online platforms serve as the most potential channel in terms of sales growth. Its growing popularity can be represented by the increased percentage of individuals purchasing goods and services via internet from 16.1% in 2015 to 24.8% in 2018. Meanwhile, physical retail stores remain as the preference for Malaysians. From 2015 to 2018, Malaysia’s retail sales grew at a CAGR of 10.4% to RM499.9bn, while e-commerce sales increased at a CAGR of 21.6% to RM11.5bn. As BCM product industry in Malaysia is fragmented with a large number of individuals as well as locally or foreign incorporated entities carrying homegrown or imported brands, increasing sales channels could bring more competitors into the industry to compete within same pool of consumers.

Investment merits

Wide outlets network and increasing sales channels

• As at 27 October 2020, KHJ operates 21 Mothercare outlets, 13 ELC SIS and 2 The Entertainer outlets nationwide, with 2 Mothercare, 1 ELC and 2 The Entertainer outlets opened in 2020. With its flagship store in Johor contributed positively to its revenue growth in the Southern region, KHJ plans to open 2 to 3 new outlets in the next two years. It has received enquiries from mall operators to set-up outlets in Ipoh, Melaka and Miri. Whereas KHJ’s focus on retail outlets expansion is in line with Malaysians’ preference to purchase BCM products at retail stores, the Group also increasing its online sales platform to complement the traditional brick and mortar retail business.

Expansion of toys range

• KHJ has signed a development agreement with The Entertainer UK in September 2019 to sell a broad range of toys through the opening of The Entertainer outlets in Malaysia. Toys segment contributed only less than 8% of KHJ’s total revenue in FY17-19, the increasing revenue from toys over the past three years indicates the importance of the segment (Fig #6). Also, toys constitute approximately 68.9% of the imported BCM products market in Malaysia. The expansion allows KHJ to offer a range of toys for children aged above six, which is not a market catered by ELC. With plans to open 2 to 3 outlets over the next two years, KHJ expects the diversification of toys to double its customer base.

Exclusive rights to Mothercare, ELC and The Entertainer in Malaysia

• The exclusive rights to operate Mothercare, ELC and The Entertainer outlets and sell their products in Malaysia have granted KHJ a competitive advantage. When the brands came into mind, they are often associated with choice, quality and safety with their long establishment in the UK. Leveraging on the brands’ heritage and recognition, KHJ has a proven track record in retail and distribution of BCM products for the past 35 years. On top of that, as KHJ is also allowed to sell third-party brands in the outlets, the wide arrays of products offered by KHJ makes it an outstanding BCM products vendor in Malaysia.

Financials

• KHJ’s revenue registered at RM80.4m, a decline of 20.7% from the record high of RM101.4m in FY19. This is largely owing to continued social distancing measures that have resulted in periods of outlets closures and decreased foot traffic in the shopping malls, coupled with lockdowns that has disrupted its value chains. Rise in sales through online platform was insufficient to cover the loss of store sales. On a bright side, no outlet was closed down during the period. KHJ has successfully opened its first The Entertainer outlet in Sunway Pyramid Mall as well as its first Mothercare, ELC and The Entertainer outlet in East Coast Mall in Kuantan.

• Its core net profit has dropped by 48.6% in FY20 to RM5.2m mainly due to the decline in revenue. Meanwhile, the decrease in core net profit of 13.9% in FY19 was dragged by the impact from MFRS 16 accounting changes relating to leases which had been applied on 1 January 2019. The Group is required to recognise depreciation of right-of-use assets and interest on lease liabilities in the statement of profit or loss and other comprehensive income following the application.

• However, given the recovering consumer sentiment and purchasing power of the people, we are projecting the core net profit to increase by 56.5% in FY21, despite the reintroduction of MCO (1Q21) to curb the outbreak of Covid-19 pandemic. Also, following the arrival of Covid-19 vaccine and the rollout of vaccination programme, we believe KHJ’s business will recover further when the MCO is lifted, which may increase the footfall to their shopping outlets.

• Moving into FY22, we believe both KHJ’s top and bottom line will recover to pre Covid level, rising 23.6% and 29.0% respectively with higher percentage of the population being vaccinated and rebound of economic activities. Meanwhile, the expansion of retail outlets to different regions of the country coupled with its recent diversification into retailing toys with its partnership with Entertainer UK will also be the key drivers for its future business growth.

Valuation

• At RM0.255, KHJ’s forward PE valuation stands at 11.9x, based on our estimated FY21 EPS of 2.2 sen. We arrived our fair value of RM0.28 (9.8% upside from its current price) by assigning a target PE of 13x to its FY21f EPS. The assigned target PE is discount of approximately 28.0% to the retail peers average PE listed on Bursa Malaysia at 18.0x due to the smaller market capitalisation of KHJ. Business model wise, Asia Brands Bhd, Padini Holdings Bhd and AEON Co. (M) Bhd market wider range of products, while KHJ sells only baby, children and maternity products.

Source: Mplus Research - 10 Mar 2021