International Housewares Retail (1373 HK)
Hong Kong discount retailer at half the global peer group multiple
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International Housewares Retail (1373 HK - US$268 million) (“IH Retail”) is a Hong Kong-based discount retailer of housewares goods.
It was started in the 1990s by two talented Hong Kong entrepreneurs and has now grown to a network of 380 stores across Hong Kong, Macau, Singapore and several other countries.
The stores mostly operate under the “Japan Home Centre” brand name. The products are exceedingly cheap, closer to dollar store pricing than anything else.
IH Retail can achieve these low prices by cutting out the middlemen. Today, over 40% of the products are private label goods, and the rest are branded products meant to entice customers to come to the stores. Their low prices explain why the company has achieved a 5% same-store sales growth － year in, year out.
Growth in the store count has been tepid at around 2% per year. The Hong Kong government’s housing plans will be the biggest growth driver. Suppose the government follows through on its plan to build affordable housing for millions of people in the New Territories. In that case, IH Retail can capitalise on this construction by expanding its store network.
IH Retail’s profits will likely drop now that Hong Kong is healing from the COVID-19 pandemic. It has earned excess profits in the past three years by selling face masks and rapid antigen test kits. Its high-margin e-commerce sales boomed. And it also benefitted from government subsidies in Hong Kong and Singapore. Those will not recur. So profit margins will have to come down a bit.
Still, IH Retail appears to be a well-run company. Even before COVID-19, it earned a return on equity of nearly 20%. And capital returns have been generous, with an 85% dividend payout ratio and recurring share buybacks.
At a forward-looking 7% operating margin, you’re looking at a P/E ratio of 11.1x on 2025 numbers. For reference, the global peer group trades around twice that P/E multiple. And the dividend yield is likely to be around 8% per year, adding to the total return.
This low valuation multiple could explain why IH Retail’s two co-founders keep buying shares in the open market close to the current share price.
There are not many obvious red flags — just some minor related party transactions concerning office space rentals.
The real risk is the short-term drop in profits that will likely play out in the next year or so as Hong Kong recovers from COVID-19. But beyond that, IH Retail is likely to continue growing steadily.
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