Honma Golf :Leading global golf brand on sale

Fastest listed global golf club brand

Honma is the largest premium golf club brand with 22.6% marketshare and the 6th largest golf club brand overall with 5.7% marketshare globally. Honma is the fastest growing listed golf club brand with16.8% CAGR in revenue during 2013-2016 compared to other listedpeers Callaway/Acushnet with 1.1%/2.1% CAGR respectively overthe same period. According to consensus, Honma is expected tooutgrow its peers with 12.9% CAGR revenue growth during2016-2018 compared to 1.8% for Acushnet and 9.5% for Callawayduring the same period. The main growth drivers for Honma includingthe launch of new cost performace product lines, penetrate intodifferent markets and increasing proportion of non-golf club products.

High growth due to launch of cost performance golf clubs

Honma’s sales used to concentrate on the Beres series which is highpriced golf clubs for mid ethusiast. Since 2013, Honma has launchednew series aimed at the mid/low price market whose buyers look forcost perfomance. As such, the mid/low price series consisted of TourWorld; Be Zeal, G1X sales grew by CAGR 42% during 2014-2016,and accounted for 30% of total Honma revenue in 1H17, up from 17%in FY14. The launch of lower price, cost performing products has alsoexpanded its new addressable market worth of US$2,145m in 2015,which is 15 times larger than its old high priced target market, suchnew addressable market is expected to top US$2,414m in 2019.

Honma is expanding its non-golf club businesses as balls, appareland accessories only accounted for 16% of its total sales compared to39% for Callaway and 73% for Acushnet, so there is huge market forgrowth and management is targeting Honma to achieve similar salesproportion as Callaway in 3-5 years time.

Re-acceleration in 3Q17 sales growth bodes well for 2H17 results1H17 sales growth was only 3.4% yoy due to temporary reduction ininventory by sole distributor in Korea, cleaned up of old distributors inthe US and earlier launch of new product series caused discount ofold inventories. 3Q17 results indicated worst is over with sales growthof 15.2% yoy. We believe this should bodes well from 2H17 results.

Honma is trading at 12.0x FY18 Mar PE, which is substantially lowerthan Callaway at 38x and Acushnet at 15x forward PE, and Honmaoffers higher growth potential. We believe the large valuation gap isunjustified. Our target price for Honma is HK$10.60, which is set at18.5x FY18 PE, 30% discount to the average PE of Callaway andAcushnet.