China Tracker - Details for Deer Consumer Products (DEER)

 Deer Consumer Products
 Analyst Coverage
2011-05-24BMO CapitalDowngradeMarket Perform$10.00
2011-04-27Global HunterReiterationBuy$12.00
2011-04-14Global HunterReiterationBuy$12.00
 

Deer has been under significant pressure in recent weeks as numerous accusations have been made against the company from several sources. The company has since responded with blanket lawsuits and an investigation into those responsible for the allegations. We note that we have not underwritten the company nor do we have a vested interest in the outcome of the company. The sole purpose of this note is to share the findings from our recent diligence trip. While the allegations are broad ranging, our intention is to address what we feel are the most significant accusations -- the potential misappropriation of funds relating to the Wuhu land rights acquisition. Though these accusations have evolved and softened over time as additional information has emerged, we still felt it necessary to address this issue first. The purpose of this note is simply to present our findings after having spent two days in Wuhu in an effort to gather factual information related to this transaction.

2011-03-31Rodman & RenshawDowngradeTerminatedn/a
 

Effective immediately, we are terminating coverage of Deer Consumer Products to allocate resources more efficiently within our coverage universe. We are restructuring our coverage along key consumer/retail verticals in which U.S.-listed Chinese companies have a more significant presence. Effective upon the termination of coverage, any of our prior financial projections on this stock should not be relied upon.

Our last rating on DEER shares was 'Market Outperform.' Our previous 12-month price target of $13 was based on ~12x our prior 2011 EPS estimate of $1.05, compared to the blended 2011 P/E average of 13.5x for U.S.-listed U.S. and emerging markets consumer electronics manufacturers and distributors. The key opportunity, challenge, and point of controversy for Deer are its penetration into the domestic China markets, both for its private label and Deer-branded products.

2011-01-27Global HunterReiterationBuy$18.00
 

Recent earnings reports from Jarden (JAH – not rated) and Haier Group (the parent of Qingdao Haier 600690.SH and Haier Electronics 1169.HK – not rated) indicate that demand across the consumer appliance segment remains strong, both internationally and in domestic China. Additionally, the National Bureau of Statistics (NBS) reported that retail sales in China grew 18.4% in 2010, a clear indication that the burgeoning domestic Chinese consumer story remains quite healthy. The global consumer space has rebounded significantly over the past 18-24 months, during which time DEER has grown its business from a low-cost private-label manufacturer into an international supplier with a strong brand in domestic China. Revenue and earnings have increased by 97.2% and 109.4%, respectively. We expect trends to have continued through Q4 and we look forward to the conference call for an update on the Gome and Sunning store roll outs as well as any developments in the private-label business and an update on 2011 guidance.

2010-11-11Global HunterReiterationBuy$18.00
 

DEER reported record Q3 results, beating consensus estimates and raising its full year guidance. The outperformance in the quarter was balanced as growth in branded domestic sales as well as private label international markets significantly improved. The company's roll out of its domestic China platform and further penetration of key retail relationships is on track and management expects to reach 1,500 stores by year end, which should contribute ~50% to 2011 revenues, generating further margin expansion. International sales also showed strong growth in the Asian, South American and European markets. Management provideed an update on the new Anhui facilities, which they think could add ~$250MM in revenue capacity while serving as the production center for the domestic China operations when it comes on line in 2011. Given the outperformance in the quarter and the improved outlook, we have raised our FY2010 and FY2011 estimates and increased our price target from $14 to $18. We believe that yesterday's "sell the news" market action provides an excellent entry point and we continue to view DEER as a compelling pure play on domestic Chinese consumer trends and an attractive stock on both an absolute and relative value basis.

Strong Q3; domestic roll out on track. Deer Consumer Products reported Q3 FY2010 results ahead of our and consensus estimates on both top and bottom line. The company reported sales of $55.3MM, a 108% Y/Y increase from $26.5MM reported in Q3 FY2009. This was substantially above our and consensus estimates of $45.2MM and $46MM, respectively. Robust growth in the top line was primarily attributable to the company's continuing aggressive expansion into the China domestic market, as well as further penetration in the Asian, South American and European markets. Domestic sales grew 708% Y/Y and 105% sequentially to $23.3MM, corresponding to 42.2% of total revenues. This is the result of DEER's strategic roll out of the domestic China platform and further penetration of key domestic retail relationships. By the end of Q3, DEER's products were selling in 230 Gome, 730 Sunning and 150 other domestic retail stores, with management expecting to reach 1,500 stores in aggregate by year end. Specifically, the company plans to be in 500 Gome and ~800 Sunning stores by year end. Deer is also ramping up sales in Wal-Mart stores in Guangdong Province as well as other prominent national electric appliance retailers since they began offering branded products in Q1 of this year.

Capitalizing on the international opportunity: Asia, South American and European markets. The company's export sales grew 34.9% Y/Y to $31.9MM in Q3, compared to $23.7MM during the same quarter last year. Sales in Asia came in at $9.3MM, a 293% increase over the same quarter last year, while sales in South America grew by 116% Y/Y to $8.3MM and sales in the Middle East increased 54% to $5.5MM. Strong growth in Asian and South American sales was largely due to emerging wealth in those regions and smaller impact from the recent financial crisis. Sales in Europe grew 43% Y/Y to $4.7MM as a result of increasing market share, while sales in US came down to $2.4MM on slower than anticipated economic recovery. We expect international sales to remain a revenue driver going forward. To that end, DEER recently signed a small contract with Hamilton Beach to sell 500k units of a single blender SKU, which should contribute $4MM to revenue. Management is confident that this is the initial step in what could be a much larger relationship. In addition, the company is currently working with Tesco to further penetrate PRC adjacent regions and diversify its customer base and management is confident in gaining share given the cultural similarities. Also of note is the fact that management mentioned an expanding realtionship with Jarden (JAH) and briefly mentioned two large private label deals that they expect from new customers - these issues had not been previously disclosed and we assume they would have a material impact on the current business; as such we will look to hear more on this in the near future.

Expanding gross margin on growing branded domestic sales and economies of scale. Deer showed an over 650bps gross margin expansion in Q3 FY2010 to 28.7% from the same period in 2009 driven by increased sales in the China domestic market, where the company is able to generate substantially higher margins, as well as greater manufacturing efficiencies stemming from economies of scale. In dollar terms, gross profit grew 170% Y/Y to $15.8MM. SG&A expenses increased by $2.8MM Y/Y, from $1.4MM in Q3 FY09 to $4.2MM in Q3 FY2010, primarily as a result of higher sales. The company reported operating income of $11.6MM, above our estimate of $7.7MM, which corresponded to 159% Y/Y growth and 21% operating margin. 

2010-11-04Rodman & RenshawReiterationOutperform$13.00
 

We are expecting Deer Consumer Products to report 3Q10 EPS of $0.21 vs. the consensus of $0.22 and vs. $0.18 LY. We anticipate Deer to beat our and consensus 3Q10 EPS estimates. Based off of our conservative $0.21 EPS estimate, we are assuming 72.0% YoY growth in sales to $45.7MM, with export revenues accounting for 60% of the total, with the remaining 40% attributable to domestic sales. After making a challenging entry into Gome, we expect more of the future growth to come from third-party distributors, which alleviates Deer's working capital needs (note that Gome requires 180-day payment terms) and diversifies the company's revenue base. The gross margin is anticipated to expand to 29.1% vs. 22.1% LY due to the higher penetration of higher gross margin (40% vs. 20%) of Deer-labeled products over their private-label counterparts. Selling expenses will likely increase significantly in the back half of 2H10 given Deer's marketing campaign for its branded goods - we have modeled in $3.7MM (8.0% of sales) for 3Q10 vs. $1.8MM for 2Q10. This results in an operating margin of 18.2% vs. 16.9% LY. We are maintaining our 12-month Price Target of $13, which applies a nearly 14x P/E to our 2011 EPS estimate of $0.96. Deer stock was bid up into earnings and traded off of solid results in 2Q10. That said, given the high-quality of the investor pool that Deer met with on its roadshow in the second half of September, and that we have noted a number of high-quality institutional investors enter into the name in 3Q10, it is possible for Deer to sustain its current momentum and move closer to our $13 Price Target following 3Q10 results.

2010-08-11Rodman & RenshawReiterationOutperform$13.00
 

DEER is trading at 11.1x our 2010 EPS estimate of $0.77 vs. 12.8x for its peers (a blended average of its U.S. and China peers weighted by expected 2010 revenue mix). We like Deer as a globally diversified growth story, supported by the long-term secular growth in China and other emerging markets, combined with the recovery of U.S. and Europe from the financial crisis. We believe 2H10 will be a critical juncture from which large-scale domestic product reception can be gauged, given the company’s planned marketing events in these two quarters. However, given that valuations in the Chinese appliance sector have pulled back significantly since we transferred coverage in April 2010, we are moving our 12-month PT down to $13 from $16 in sympathy, which assumes over 13x our 2011 EPS estimate of $0.96. That said, we believe that DEER shares should trade higher as the company establishes itself as a more sizeable small appliance player in China, as it expands through both major retailers in tier 1 and 2 cities, and as inroads into regional retailers materialize into additional sales.

2010-07-15Rodman & RenshawReiterationOutperform$16.00
 

We are reiterating our 2Q10 and 2010 EPS estimates of $0.13 and $0.77. The current share price reflects skepticism towards the level of domestic sales that can be achieved this year, in our view. We agree that revenues from Gome and Suning were originally anticipated to account for ~$45MM of 2010 domestic sales, and that there could be a shortfall. That said, through the company's gauge of current order flows and customer intent, management appears to be confident that Deer can achieve ~$63MM in domestic sales in 2010 by growing its presence in regional retailers through distributors. Note that combined Gome and SuNing market share is estimated at ~17% of total 2009 household appliance retail sales in China. While a quick ramp up in these two retailers would inevitably give a manufacturer instant presence in tier 1 and 2 cities, we note that gaining retail shelf space through distributors is also achievable given that Deer is still building on a relatively small revenue base compared to China's vast $90BN household electrical appliance market at the retail level. We believe DEER shares deserve to trade closer to its peers if the company can provide investors more visibility into its 2010 guidance of $160MM revenue and $26MM net income, especially details into how it can successfully execute on the domestic China opportunity on a longer-term basis.

2010-05-18Rodman & RenshawReiterationOutperform$16.00
 

We have adjusted our 2010 revenue and net income inline with guidance, with the upward revisions coming from 2H10, where we had previously been more conservative on international revenues. While our 2Q10 EPS estimate remains at $0.13, we have tweaked up our 3Q10 and 4Q10 EPS estimates by a penny to $0.23 (from $0.22 previously and vs. $0.18 LY) and $0.29 (from $0.28 and vs. $0.26 LY). As a result, our 2010 EPS moves to $0.77 from $0.75 previously, and our 2011 EPS goes to $0.96 from $0.94.

2010-05-10Rodman & RenshawReiterationOutperform$16.00
 

Deer maintained its full-year 2010 guidance of $155MM revenues and $24MM net income, which implies 91% YoY growth in topline and 94% YoY growth in net income, and nearly 280 bps in net margin expansion to 15.5%. We believe 2010 guidance appears a tad conservative given the encouraging pipeline in domestic contracts, but we are maintaining our 2010 EPS estimate of $0.71 (vs. $0.53 last year) given that it is still early in the year.

2010-04-22Dahlman RoseReiterationOutperform$16.00
 

We are maintaining our Market Outperform / Speculative Risk Rating and 12-month Price Target of $16. In conjunction, we are tweaking our 2010 EPS estimate to $0.71 from $0.73 previously (vs. $0.53 last year) due to higher marketing expenses associated with raising the recognition of the Deer brand in China. We are also introducing our 2011 EPS of $0.94, reflecting roughly 32.6% EPS growth YoY.

2010-03-22Rodman & RenshawReiterationOutperform$16.00
2010-02-08Rodman & RenshawReiterationOutperform$16.00
2010-01-11BMO Capital MarketsInitiationOutperform$15.00
2009-12-21William BlairInitiationOutperformn/a
DEER
Retail/Consumer
SCORE
11
UNDER REVIEW
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SAFETY/RISK SCORE
EXTREME RISK
DETAILS: Safety/Risk Model for DEER
Current Price:  $0.01
F10k Day (2009-07-21): -99.91%$5.55
2009 Close: -99.96%$11.31
2010 Close: -99.96%$10.99
2011 Close: -99.89%$4.27
High (2012-02-02): -99.91%$5.10
Low (2012-08-07): -99.77%$2.11
Exchange: PNK
Market Capitalization: 0.17 mill
Total Shares: 33.59 mill
Float: n/a
Avg Volume: 474.10 k
Short Interest: 2.74 mill
Short Ratio: 15.52%5.8 d
Last Quarter: 2011-03-31
Revenue (MRQ): 34.68 mill
Net Income (MRQ): 5.79 mill
Op. Cash Flow (MRQ): -10.87 mill
all financial data provided without warranty