Sector financial performance:

This company, who primarily licenses the consumer brands that it owns or presents to retailers or manufacturers/distributors, has been grouped into branding apparel sector in clothing industry.

Unfavourable sales climate/slowing down traffic has caused significant decline in sales and closure of stores among retail and wholesale customers of branding management companies in 2016/17. And the impact has apparently been passed to their supplier of apparels, while one year delayed, as ways such as low renew rate of licensing agreement, increasing write-off of existing agreement, or decreasing royalty revenue related to brand products sales. As data indicated, the comparable royalty/licensing presented an average 6-8% annual decline since 2017.

As sales decreased, companies’ margins also fell significantly. The current typical operating margin of companies is in the range of -4% and 50% with a mean (27%). And while increasing acquisitions, companies are facing large decrease in cash flow generated by their brands in the past several years due to increasing financing costs and shrinking margins.

According our analysis, companies’ enterprise price/EBI ratios are about 11-15 with interest/EBI ratios of 50%.  Enterprise Price / Sales: 2.9 and stock price / sales: 0.6.

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Company performance:

This company expanded significantly in the past several years through aggressive acquisitions.

The first six months of fiscal 2019 compared with the same period of 2018(ended 20180630)

The net licensing revenues of this company decreased about 1.5% primarily attributable to changes in revenue recognition.

The fiscal 2018 compared with the 2017(20171231)

The net licensing revenues of this company increased about 8% primarily attributable to acquisition.

The first six months of fiscal 2018 compared with the same period of 2017

The net licensing revenues of this company increased about 20% primarily attributable to acquisition and increase in certain brands.

Fiscal 2017 compared with 2016

The net licensing revenues of this company increased about 76% primarily attributable to acquisitions.

Fiscal 2016compared with 2015

The net licensing revenues of this company increased about 111% primarily attributable to acquisitions.

This company’ operating margin was about 50% in 2017 up from about 29% of fiscal 2014 as a result of aggressive expansion and, as indicated by increase in cash flow per share after acquisitions, the increase in cash flow resulted from acquisition offset the increased costs of financing of acquisition including interest expenses and dilution of shares. The margin continued to be improved in 2018 (about 55%) as a result of continuing effort to cut costs.

Stock price

This stock currently has an enterprise price/EBI ratio of about 11($1.8). We think that its stock is being relatively undervalued considering the fact its increasing cash flow justified those acquisitions.