Since our last article on Man Wah Holdings (MW) back in issue 338, the PRC-based producer of the award-winning “Cheers” brand of motion sofas has expanded its business footprints in PRC with the Rmb83m acquisition of Famous Bedding and has continued to deliver in its latest 1H09 results with a strong net profit growth of 35.9% to HK$118.2m despite the ongoing global economic malaise. The company is also the largest by market capitalisation among its peers on the SGX, with $103.3m as of 18 November, 2008. Hot on the heels of the company, we attempt to find out the reasons behind its continued success in the furniture manufacturing business.

3 Key Reasons
1. Strong brand value: In September 2007, MW became one of the only eight PRC sofa manufacturers to receive the prestigious China Top Brand 2007 Award from the PRC government for its Cheers brand. Past recipients of the award include renowned names such as Haier and China Mengniu. This has elevated MW’s position as a leading sofa brand and aided in catapulting its 1H09 revenue growth to 40.7% y-o-y.

As consumers in PRC become more affluent and brand-conscious, MW has found its Cheers brand to be in the market’s favour and thus enabling it to enjoy a high profit margin through the sales of its mid to high-end sofas. In the wake of some retailers in PRC slashing their sofa selling prices to adjust to the current downturn, CFO Francis Lee commented that the management does not expect to follow suit due to a few reasons. One of which he cited was the brand value that the company needed to preserve.

2. Reliable distribution network: In US, the majority of its established clientele base are from the top 100 largest US furniture retailers (ranked by leading trade publication “Furniture Today”). This has helped to minimize the company’s risk of suffering defaults in payments as well as any sudden cancellations of orders. Lee stated that there has been no cancellation of orders from their customers to date. On the contrary, he added that the credit crunch has in fact given the company an extra edge in dealing with the retailers whom have exhibited greater caution by opting to buy only from reputable companies that they trust. Smaller manufacturers which might be financially unsound are turned away by them for fear of the loss of their deposits.

To further profitability growth, MW has enhanced its supply chain management through direct sales to its large US retailers instead of via intermediary distributors, which could otherwise add on burden to its distribution expenses.

3. Simple business model: MW’s business depends heavily on the sale of its sofa, which forms a whopping 94.3% of its total 1H09 revenues. Sales of other furniture made up the remaining 5.7%. To expand its revenue, the company simply has to sell either more (increase in quantity of sofas sold) or higher (raise selling prices).

The beauty of this model lies in the combination of MW to the business environment it operates in. Given its strong cash balance of HK$60.8m, production capability upgrade to 500,000 sofa sets per annum, and command of brand value-induced higher profit margin when tapping extensively into the expanding PRC middle-class consumer market, MW seems to have all the right reasons to do potentially well.

Peers Outperformed

In terms of the latest net profit growth, MW has outperformed most of its peers whom have posted net losses instead. MW has somehow come through unscathed. Lee declined to give a forecast view of the management on its near-term outlook. However, he remarked that the company does not foresee major problems within the short term. Daiwa Securities has issued a buy call on the company with a target price of $0.29. The stock is currently on a rebound after bottoming out at $0.105 in late October 2008. It remains to be seen if MW has the clout to cushion off the full impact of the current economic crisis.