Ginko:Reduce,China plant gets green light to restart production

China plant received approval to resume production: On 24 May, Jiangsu Foodand Drug (JSFDA) posted on its website that Ginko’s subsidiary, Jiangsu Horien, hasbeen given the green light to resume production after the company submitted all themissing production documents and satisfactorily met the authority’s requirements. Inall, the Jiangsu Horien plant has been shut for nearly 30 days. The approval toresume production is one month earlier than management’s guidance and ourexpectation. Nevertheless, as per management’s guidance, in the near term we stillexpect Ginko’s monthly revenue to be impacted. Ginko indicated that internetspeculation has damaged its brand image. As such, it could take time to regainconsumer confidence.

    Short-term uncertainty removed but long-term issues still linger: Longer term,investors’ concerns on Ginko persist due to its high AR and inventory days, severecompetition in e-commerce channels, and margin pressure from the mix shift of longtermwear to short-term disposable products. In 1Q17, Ginko reported AR days of272, improving from 1Q16’s 282 days. However, its inventory days still edged up to301 vs. 1Q16’s 274.

    Japan penetration not likely to contribute meaningfully in the short term: Ginkolaunched its colour lens products in Japan in April under the “Luena” brand. Theproduct is currently distributed through Japanese online contact lens retailers “MoreContact” and “QUEEN EYES”. Our market research suggests that Luena is priced atthe mid-to-high end price range vs. other brands. This is in line with management’sguidance that it does not intend to use a low-price strategy for its foray into Japan. Asa new brand in the highly competitive Japanese market, we believe Ginko will needto promote it by spending aggressively on advertising Therefore, we do not expectany meaningful contribution to earnings.

    Valuation and risks: We have raised our 2017-18 forecasts by 3% to reflect the earlierthan expected production restart. We had previously assumed a TWD30m loss due to theshutdown. We raise our target price to TWD220 from TWD212. This is still based on 14x(1std below the five-year trading average) our 12-month forward EPS estimate. Webelieve execution risk, lingering working capital issues, and slowing growth momentumwill drive a further de-rating of the shares, hence we retain our Reduce rating. Upsiderisks include: (1) stronger-than-expected sales growth for high-end MIT products; (2)stronger-than-expected sales in Japan and Southeast Asia; and (3) structural AR dayimprovement by more effective AR collection.