YOONG Onn Corp makes its debut on the Bursa Malaysia Main Market this morning. The company has come far from its humble start as a home linen trading and retailing company way back in the 1960s. It began small-scale manufacturing in the mid-70s and launched its first home brand in 1982.

Today, Yoong Onn is the leading integrated manufacturer and distributor of home linen and bedding accessories in the country, with an estimated 22% share of the domestic home linen and homeware industry.

One-stop centre for home linen and homeware
Yoong Onn operates a one-stop supply centre for home linen and homeware.

The bulk of its products are designed in-house, although the company also supplements its range of offerings with purchases from international design houses. Currently, there are 14 homegrown brand names under its stable, including popular brand names like Novelle, Jean Perry, Firenze, Diana and Louis Casa. Yoong Onn also manufactures and distributes 3rd party brands such as "Loony Tunes".

Bedding products — such as bed linen, bed sheets, pillow covers, quilt covers, pillows, bolsters, quilts, comforters, mattress protectors and cushions — remain the mainstay of Yoong Onn's business, accounting for about 78% of the company's sales in FYJune09. The company also manufactures and retails bath linen, curtains and cushion covers.

In addition, it also sells a wide range of homeware such as rugs, carpets, floor mates, fleece blankets, bedroom slippers and tableware. These products are sourced externally to complement its manufactured product range.

Extensive distribution network to capture diverse customers
Over the years, the company has successfully cultivated an extensive distribution and retail channel. This includes wholly owned retail outlets as well as 3rd party retail outlets, both local and overseas.

Currently, the company has 13 fully-owned retail outlets located in the Klang Valley, Penang and Johor. The Home's Harmony outlets are located in major shopping malls and cater to the mid-to-premium market segment while the Home's Warehouse outlets, situated in hypermarkets, target the mid-range customers. Its flagship Home's Harmony is a 13,600-sq ft outlet in the popular suburban mall, 1-Utama.

Yoong Onn also has a dealer owned and operated outlet in Kuching and approximately 76 3rd party retail locations. The latter consists, primarily, of sales counters at major department stores, hypermarkets and specialty stores including Jusco, Sogo, Isetan, Parkson, Metrojaya, The Store and Tesco. AEON is the company's single largest customer, accounting for about 23.9% of sales in FY09.

Products sold at its own retail outlets and 3rd party outlets vary in terms of brands, range, designs and colours so as to minimise cannibalisation.

Export is also an important part of the company's business, accounting for about 21% of sales in the last financial year. Its biggest markets are Singapore and Taiwan, which accounted for 14.3% and 4.8% of total sales, respectively.

Apart from the retail end, Yoong Onn also serves institutional customers, manufacturing customised products for hotels, resorts, hospitals, military accommodation, cruise ships, etc.

It also manufactures products for customers under their own brand names such as Dunlopillo, Orthorest and Giant (in Singapore).

Strong earnings track record
The company has established a solid business and financial track record over the past 43 years.

Sales grew at an annual compounded rate of roughly 17.4% from FY05-FY09. Sales at 3rd party retail locations, in particular, registered very strong growth — of almost 30% per annum — over the same period. This is attributed to the rapid expansion in shopping malls and rise in consumer spending.

Meanwhile, operating margins have been on a gradual rise, thanks to better sales mix and increasing economies of scale. Net profit expanded from RM5.8 million in FY05 to RM13.9 million in the last financial year, translating into annual compounded growth of roughly 24.4%.

Committed to a growth strategy
Yoong Onn remains committed to a growth strategy for the foreseeable future — and plans to widen its product range, add new outlets as well as tap new export markets.

Over the course of the 12 months, the company intends to launch a new collection of bed linen as well as window blinds. Also on the drawing board are plans for two Home's Harmony outlets and at least eight additional 3rd party retail outlets.

At the moment, Yoong Onn exports to nine countries. It hopes to penetrate new export markets including dealership/distributorship arrangements in countries like Vietnam, Indonesia and the Philippines. Most recently, the company made its first shipment to Japan.

The company is upbeat that it would be able to maintain a double-digit pace of growth going forward.

Strong balance sheet and prospect of fairly good yields
Yoong Onn is in a net cast position — of about RM12.8 million — after taking into account the RM18.7 million in net proceeds from the initial public offer. (The IPO was priced at 88 sen per share) Its founders, the Chew family, will remain firmly in the driving seat with a 52.5% stake in the company after the IPO.

The strong balance sheet will support its expansion plans. Capital expenditure is estimated at about RM6 million for the next two years.

Based on the expected cashflow from operations, we believe the company will, at the same time, be able to sustain a fairly good dividend payout. Management indicated a payout of about one-third of annual net profit.

Fair value estimated at RM1.03-RM1.28
The company made net profit of RM3.2 million in 1QFY10. We expect profits to be stronger in 2Q-3QFY10, boosted by the year-end holiday and festive seasons. Based on our estimated earnings of roughly RM15.4 million or 12.8 sen per share for FY2010, the stock would be fairly valued around RM1.03-RM1.28.

However, investor interest and sentiment has weakened somewhat of late, compared to 2Q-3Q09. Hence, the stock could trade near the lower end of our price range in the near term. Investors are likely to monitor Yoong Onn's financial performance in the coming quarters before gradually rerating the stock higher.

At our estimated share price range, investors will earn fairly decent net yields of between 2.9% and 3.6% based on our assumption of five sen per share dividends for the current financial year.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.