Investment Merits

• Established brand positioning and growing loyal customer base

• Engaging marketing initiatives and innovative new product line

• Potential margin expansion from higher ASP

• Undemanding valuation of 8x FY24F (Jun) P/E, supported by  attractive dividend yields

Company Profile

Bonia Corp is a house of luxury lifestyle brands founded in 1974,  defined by its quality craftsmanship. It is involved in the design,  manufacturing, marketing, distribution, and retailing of bags,  accessories, footwear, watches, eyewear, and more through its own  brands and licensed brands. Its own brands include Bonia and Braun  Buffel, while licensed brands include Renoma, Valentino Rudy, and  Santa Barbara Polo & Racquet Club.

Highlights

Established brand positioning and growing loyal customer base. We understand that the change in leadership has brought a renewed  focus on rebuilding the brand equity of Bonia and Braun Buffel. Its  ramp-up in marketing efforts – especially within the digital space  through collaboration with Key Opinion Leaders (KOLs) – has allowed it  to boost brand awareness, enhance credibility, and gain brand appeal.  Going forward, Bonia aims to replicate these effective brand-building  exercises for its other three licensed brands – Renoma, Valentino Rudy,  and Santa Barbara Polo & Racquet Club. We also gathered that its  customer age group has come down to the 25-35 range. This  demographic tends to have a higher propensity to spend on luxury  items, which will drive long-term performance for the group.

Launching of new product lines to drive sales growth. Bonia’s  positioning of offering high-quality luxury goods at significantly lower  price point than Western luxury labels – with an estimated basket size  of c.MYR1000 – puts the brand in a unique category of its own. We  gathered that the group is launching its new full product line for fall and  winter 2023, that includes ready-to-wear items. With more frequent  product launches that cater to modern trends, the group is wellpositioned to stimulate consumer spending and drive its sales growth.  Moving forward, Bonia plans to open or relocate stores to more  strategic locations with attractive designs to attract consumer footfall.

Potential margin expansion from higher ASPs. We gathered that  Bonia hiked its ASPs by c.5% in 1QFY23 and 2QFY23 to pass on the  increase in certain input costs – this could lead to further improvement  in its GP margins. Nevertheless, management said it has decided to  halt ASP hikes in the near term to gauge consumer response. Note that  Bonia’s GP margin rose to 60.8% (+4.4ppts YoY) in 2QFY23.

Undemanding valuations. Bonia is trading at 8x FY24F (Jun) P/E,  which is significantly below the industry average of c.18x. We think the  low valuation is attractive, given its 3-year earnings CAGR of 14.1%  (FY22-25F). We believe the market has not fully priced in Bonia’s  elevated earning base yet, which we think is sustainable – driven by its  improving brand equity, increase in ASPs, effective marketing  engagements, and innovative product launches.

Company Report Card

Results highlights. Bonia recorded 1H23 revenue of MYR203.9m  (+40.6% YoY) thanks to the resumption of store operations upon the  economic reopening, whilst 1H22 was at a low base, affected by  lockdowns. 2Q23 revenue grew to MYR112.1m (+9.7% YoY, +22.2%  QoQ) driven by strong consumer spending amidst the year-end  seasonality and festivities. Consequently, Bonia recorded core earnings  of MYR19.0m (+52.5% YoY, +24.8% QoQ). Strong net cash position. The group has a healthy balance sheet with  net cash of MYR42.2m or MYR0.21 per share as at 2Q21. We expect  the company to stay in a net cash position for FY23-25F. ROE. The group’s ROE has been improving since FY20, from 3.2% to  10.5% in FY22. We expect ROE to improve on better earnings  expectations ahead.

Dividends. Bonia recently adopted a dividend policy of paying out at  least 30% of earnings. For FY22, the group declared a DPS of 19 sen,  implying a dividend payout ratio of 95.7% for its shareholders.  Management indicated that any surplus cash will also be paid out as  dividends, provided there are no other potential investments in capex or  M&A. Assuming the dividend payout ratio is at c.50% of PAT, we are  looking at FY23-25F DPS of 13-15 sen, implying c.6% yield at the  current price.

Management. Dato’ Sri Daniel Chiang Fong Seng was appointed to the  board in 2014, and holds the position of Group Executive Director.  Having joined the group in 2008, his responsibilities include business  development, strategic planning, and R&D. Chiang Sang Sem, the  founder of Bonia, was appointed to the board in 1994, and is the  Executive Chairman. His involvement in the leather industry spans over  45 years, and he is responsible for Bonia’s overall business  development and strategic plans and policies.

Investment Case

Fair value. Ascribing a P/E range of 12-13x (close to its 5-year mean)  to its FY24F (Jun) EPS, we derive a fair value range of MYR3.25-3.52.  We believe Bonia’s current valuation of 8x is unjustified, given its 3-year  earnings CAGR of 14.1% (FY22-25F), driven by its ASP hikes and  innovative product launches, and backed by its strong brand equity and  sizeable loyal customer base. A dividend yield of c.6% is another plus  point.

Key risks include higher-than-expected operating costs, weak  consumer sentiment, and competition.

Source: RHB Securities Research - 16 May 2023