Cabbeen Fashion Limited

Cabbeen (‘company’) is a China-based designer of apparel for men, women, and children. Its own brands are designed in its four workshops around the world, and production is outsourced to independent manufacturers throughout China.

The company primarily serves tier two and tier three Chinese cities through a distribution network totaling 831 retail stores. It generates revenues via online sales (~49% of revenues), wholesale distributors (20%), consignment distributors (31%), and a self-operated store.

The business is currently facing headwinds as a result of repeated covid lockdowns in mainland China, which is dampening demand and leading to curtailment of physical store investments and purchase orders. Management have indicated declines in net profits of over 50% compared to FY21 (see below) due to partial suspension of the company’s logistics centre and physical stores in various cities in China.

Such a business is also expected to face issues of rapid inventory obsolescence due to fickle tastes and changes in fashion. The financial track record, however, is reasonably stable.

It reported FY21 revenues of 1.4b rmb (FY20: 1.8b), ebitda of 264m (FY20: 298m) and net profits of 169m (FY20: 195m).

The primary reason for declines in revenues and profits compared to FY20 is the reduction in manufacturing of PPE masks, which was discontinued in 2021 due to thinning margins.

The balance sheet reveals net cash of 286m, net current assets of 939m (incl 103m of investment properties leased out), and net tangible equity of 1.4b. There are investments and loans to a loss-making associate, however, totaling 117m – apparently for construction of office premises in Guangzhou.

The market cap currently stands at under 980m, which is under 6x FY21 earnings and mostly backed by net current assets alone.

Dividend payouts have been consistent and high, amounting to 77m in FY21, which was over 40% of net profits, and yielded ~8% at market. In addition, the largest shareholder had purchased stock as recently as March at prices much higher than today.

Management expects higher revenues and earnings from online sales (including TikTok) as Chinese millennials continue to favor homegrown brands. The track record doesn’t warrant undue skepticism. Further, the current valuation of the equity is close to its likely minimum liquidation value, and appears to sell for considerably below its worth to a private owner.