Important disclaimer: Maxwell International is 7.

2%-
owned by OSKTV. PP10551/09/2011(028936)
28 December 2010

MALAYSIA EQUITY
Investment Research
Daily
IPO Note
The Research Team
+60 (3) 9207 7620
Research2@my.oskgroup.com Maxwell International
Maximising All Options
NOT RATED Maxwell is an OEM and ODM company involved in manufacturing and designing
sports shoes and casual sports shoes for the domestic and export markets. As a
Target RM0.82
IPO Price RM0.54 testament of its product quality, Maxwell manufactures for global brands such as
Yonex, Diadora, Kappa, Brooks and Fila. We expect the company, which has chalked
Enlarged Share Capital up impressive revenue and earnings CAGR of 60% and 72.6% over the past 4 years,
400m shares to achieve FY10/11 net profit of RM65.8m and RM71.5m respectively. We value
Maxwell at RM0.82 based on 5xFY10 EPS.
Indicative Listing Date
6 January 2011
OEM focus. Although the group has its own brand, Sodeng, it is putting the branding
Listing Sought initiative on hold given the strong competition and focus on OEM. We believe the OEM
Main Board business is more resilient compared to OBM as the lower orders from a weaker brand
owner would be buffered by a higher volume of orders from a strengthening brand.
Major Shareholders (post- IPO)
Li Kwai Chun 54.6
Furthermore, brand owners which outsource their production to third parties usually own
OSKTV 7.2 leading brands that are less susceptible to changes in consumer demand.

Contracts with global brands. As an OEM player, Maxwell spends less on advertising
IPO Details Shares (m)
Public Issue and promotion expenses and hence could channel more funds for design and development
Malaysian Public
20.0
(D&D) purposes, which is important in ensuring the group’s competitiveness. Its
(Balloting) commitment to D&D and high quality has helped Maxwell to secure contracts from leading
Private placement 43.75
brands such as Yonex, Diadora, Kappa, Brooks and Fila. In FY09, approximately 53.2% of
Existing Shares 336.25 Maxwell’s sales were derived from repeat customers, which reinforce its reputation for good
Total 400.00
services and product quality.

Utilisation of Proceeds
Capital Expenditure
Increase product D&D
efforts and expansion of
product range
Working capital
Estimated listing expenses
Total
RMm Expanding capacity. The group intends to acquire 4 more new production lines to
12 increase its annual production capacity from 8m pairs currently to 16m pairs. Maxwell plans
6 to build a new factory at an estimated cost at RMB75m. The group will also upgrade its
existing production facilities, invest in D&D to enhance its product’ quality and range, as
9.675 well as expand its sales force to boost sales by penetrating more new markets.
6.75
34.425
Fair value at RM0.82. Maxwell has been recording impressive revenue and earnings
CAGR of 60% and 72.6% over the past 4 years, driven mainly by court shoes, higher sales
volume and selling prices. Based on its latest results, we expect Maxwell to achieve
FY10/11 net profits of RM65.8m and RM71.5m respectively. We value the stock at 5xFY10
EPS, translating into a fair value of RM0.82. The group recommended a dividend payout of
no less than 20% for FY10/11, which translates into a dividend yield of 5.4%-5.9%.

FYE Dec (RMm) FY07 FY08 FY09 FY10 f FY11f

Revenue 143.5 218.1 301.0 315.5 343.0
Net Profit 25.1 41.7 61.2 65.8 71.5
% chg y-o-y 110.8 66.0 46.9 7.4 8.7
Consensus
EPS (sen) 6.3 10.4 15.3 16.4 17.9
DPS (sen) 2.9 3.2
Dividend yield (%) 5.4 5.9
ROE (%) 78.0 45.0 40.2 18.8 17.1
ROA (%) 24.6 28.1 31.6 17.1 15.7
PER (x) 8.6 5.2 3.5 3.3 3.0
BV/share (RM) 0.07 0.21 0.34 0.78 0.93
P/BV (x) 7.6 2.6 1.6 0.7 0.6

OSK Research | See important disclosures at the end of this report 1

OSK Research

IPO Details

Maxwell International Holdings (Maxwell) is seeking a listing with an enlarged share capital of 400.0m
shares of RM0.54 each on the Bursa main market. Based on the IPO price of RM0.54 per share, the
company is listing with a market capitalization of RM216.0m and 3.5xPE (based on a trailing 12-month
EPS). It expects to raise gross proceeds of about RM34.4m from the Public Issue, with the bulk of the
proceeds, i.e. some 35%, to be used for capital expenditure, 17.45% for design and development (D&D)
and the balance for working capital and listing expenses.

Figure 1: Indicative timetable

Events Tentative dates

Issuance of prospectus/Opening of the application for the 21 Dec 2010
initial public offering (IPO)
Closing of the application for the IPO 28 Dec 2010
Balloting of applications for the issue shares 30 Dec 2010
Allotment of issue shares to successful applicants 4 Jan 2011
Listing date 6 Jan 2011

Source: Prospectus

Figure 2: Issued and paid-up capital

Number of shares (RM m)

Authorised share capital 1,250.0
Issued and paid-up as at the date of the 336.25
prospectus
To be issued and credited pursuant to the 63.75
public issue
Enlarged issued and fully paid-up share 400.0
capital upon listing

Source: Prospectus

Figure 3: Utilisation of proceeds

Amount (RM m)
Expansion of production capacity and 12.0
upgrading of existing production facilities
Increase our product design and development 6.0
efforts and expansion of product range
Working capital purposes 9.675
Estimated listing expenses 6.75
Gross proceeds 34.425

Source: Prospectus

OSK Research | See important disclosures at the end of this report 2

OSK Research
COMPANY BACKGROUND

Maxwell is an OEM and ODM manufacturing company involved in manufacturing and designing sports
shoes and casual sports shoes for the domestic and export markets. It makes leading brands such as
Yonex, Diadora, Kappa, Brooks and Fila. The group’s business was founded in 1999 when Chun Hing
Industrial Ltd, which is owned by Chairman Li Kwai Chun and her husband Li Chun Tak, set up Zhenxing
Shoes in Zhushuxia Industrial Zone, Jinjiang City, Fujian province, PRC. Through Mrs Li’s well established
relationships with various footwear trading houses and brand distributors, Maxwell managed to secure
sports shoe orders, starting business with a single production line and an annual production capacity of
approximately 1m pairs of sports shoes. Today, with the increasing orders as the group manufactures for
more customers, the company’s production capacity was ramped up to 11.2m pairs as of FY09.

Figure 4: Group structure

Maxwell

100%

Zhenxing
Shoes

Source: Prospectus

Figure 5: History

1999  Established Zhenxing shoes

 Started with one production line with annual production capacity of
circa 1m pairs of sports shoes
 Set up design and development department
 Secured contract to produce shoes for US sports brand Riddell

nd
2000 Added 2 production line to expand production capacity
 Secured contract for US Polo
2002  Secured contract with another US brand – Fubu
2005  Secured contracts with Japanese brands Mizuno and Yonex
2006  Added 3rd production line
 Secured contract with Kappa
2008  Became member under SATRA
 Attained ISO9001: 2000 status
 Added 4th production line
 Secured contracts with US and Italian sports brand Brooks and
Diadora respectively
2009  Awarded Quanzhou Famous Trademark
2010  Secured contract with Italian brand Fila

Source: Prospectus

OSK Research | See important disclosures at the end of this report 3

OSK Research
The Management / shareholders

Mrs Li Kwai Chun – Executive Director and Chairman. Post IPO, Maxwell will be 54.6% owned by
Executive Director and Chairman Mrs Li Kwai Chun. Mrs Li set up Chun Hing Industry (Hong Kong) Co.
Ltd to engage in the business of trading footwear, textile and chemical in 1994, and hence has more than
10 years of experience in the business of trading footwear. In March 2004, Mrs Li was appointed Vice-
Chairman of Fujian Fynex Textile Science and Technology Co. Ltd, which is a company listed on the
Shanghai Stock Exchange.

Mr XIe Zhen’an – Executive Director and CEO. Mr Xie is responsible for overseeing the overall
operations. He has been the General Manager of Zhenxing Shoes since inception in June 1999 and is
responsible for the production, quality assurance and sales and marketing of sports shoes. Before joining
Maxwell, he was self employed in the business of trading apparel, footwear and headwear. Mr Xie
graduated from Quanzhou Overseas Chinese University in July 1988 with a Diploma in Economic
Management.

Figure 6: Shareholders

Substantial shareholders/promoters Shareholding (%)*

 Li Kwai Chun 54.6
 OSK Labuan SB 7.9
 OSK Technology Ventures SB 7.2

Non-substantial shareholders
 EV Capital Private Limited 3.1
 Tembusu Growth Fund Limited 2.7
 Equity Ventures International 1.6
 Others 7.0

*Shares to be placed under moratorium for a period of 6 months from date of listing
Source: Prospectus

OSK Research | See important disclosures at the end of this report 4

OSK Research
Industry Overview

A highly competitive industry. The shoe industry is highly fragmented. In Jinjiang, Fujian province itself,
there are approximately 3,000 shoe manufacturers ranging from cottage industries focused on handmade
shoes on a small scale to large manufacturers having many automated production lines that produce a
few million pairs of shoes annually. Of the 3,000 footwear manufacturers, some 80% are considered small
scale manufacturers, most of which are small scale footwear manufacturers undertaking OEM while the
remaining 20% are considered medium to large scale manufacturers, of which 10% undertake a
combination of both OEM and OBM. In the sports shoes segment, players comprise OBM, contract
manufacturers for third party brand owners and a combination of both. Some of the OBM players are Li
Ning, Anta Sports, Xtep International, China Sports, Xidelang and Xingquan. Aside from Maxwell,
companies which are undertaking manufacturing of sports shoes for third party brand names include Yue
Yuen, Poh Chen, Chanrong – all of which are Nike contract manufacturers.

Maxwell commands 0.1%-1% of China’s footwear market. In 2009, based on Maxwell’s production
output of 6.2m pairs of sports shoes, the group commanded 0.1% and 0.3% of the footwear and
rubber/plastic shoes industry respectively. While this represents a small market share, note that the
footwear industry covers all types of footwear while Maxwell only produces sports shoes.

Signs of weakening consumer sports shoe demand? Li Ning reported weak 2Q2011 trade fair
numbers with orders declining 6% y-o-y, representing the worst 2Q2011 among its Hong Kong listed
sportswear peers, which reported about >20% y-o-y growth. While this raises concerns on the prospects
of the China shoe industry, based on the order book value reported by other sportswear companies, we
note that the weak order book registered by Li Ning is company specific rather than industry wide. Li
Ning’s weak order book was due to the: (i) higher wholesale discount, (ii) consolidation of low-efficiency
sub-distributors, and (iii) lower sales volume due to its brand revitalization since July 2010.

Figure 7: Companies’ order book value y-o-y growth (%)

Company Order book value y-o-y growth (%)

1Q11 2Q11
Li Ning 12 -6
Anta 23 21
0
361 20 20
Xtep 23 25
Peal 24 25

Source: Companies

OSK Research | See important disclosures at the end of this report 5

OSK Research
KEY HIGHLIGHTS

OEM the more resilient business model. Although Maxwell has its own brand, Sodeng, the group
decided to put its branding initiative on hold in view of strong competition from established local brand
names and focus on OEM. While OBM usually commands higher margin and bargaining power through
an integrated business model, we think that the OEM business is more resilient than OBM since the
lower volume from a weakening brand may be buffered by the higher volume from a strengthening brand
owner. Furthermore, brand owners who outsource the production to third parties are usually leading
brand owners which are less susceptible to change in consumer demand.

Figure 8: OEM and OBM brands

OEM brands
Riddell
US Polo
Fubu
Mizuno
Yonex
Kappa
Brooks
Diadora
Fila

Own brand
Sodeng

Source: Prospectus, OSK

In-house D&D raises the bar. Also, as an OEM player, Maxwell spends less on advertising and
promotion expenses and hence could channel more funds towards design and development (D&D)
purposes, which is important in ensuring the group’s competitiveness. In view of this, Maxwell places
strong emphasis on product D&D and develops ~1,000 new product designs per annum. The group also
introduces various functions and features in the sports shoes produced.

Figure 9: D&D expenses and number of sports shoe designs created

FY06 FY07 FY08 FY09 1HFY10

D&D expenses (RM) 162,748 180,166 675,477 517,536 247,064
% of revenue (%) 0.2 0.1 0.3 0.2 0.2
Number of D&D staff 14 14 35 27 30
Number of designers 3 3 5 5 5

Number of designs created by product categories

Court sports shoes 873 896 839 1005 471
Casual/leisure sports 45 38 152 143 76
shoes
Running shoes - - 11 23 7
Total 918 934 1002 1171 554

Number of designs commercially produced by product categories

Court sports shoes 532 662 735 825 394
Casual/leisure sports 16 20 142 105 61
shoes
Running shoes - - 9 12 4
Total 548 682 886 942 459

Source: Prospectus, OSK

OSK Research | See important disclosures at the end of this report 6

OSK Research
Gaining competitive edge through product quality. The ability to secure contracts from leading
brands such as Yonex, Diadora, Kappa, Brooks and Fila is testament to the quality of its products. In
fact, Maxwell conducts quality checks on all the products manufactured and oversees the implementation
of the quality controls at every process. As Maxwell also outsources to third parties due to capacity
constraints, to ensure the quality of its outsourced products, the group also sends personnel to conduct
on-site factory inspection on the appointed external contract manufacturers. As another demonstration of
its commitment towards continuous product quality improvement, the group joined a leading research
and technology centre for consumer and industrial products, Satra Technology Centre Ltd, in March
2008.

Product quality, strong D&D and timely delivery equals long-term contracts. While Maxwell does
not sign long-term contracts with its customers, the group has established a good track record and strong
relationships with its customers. In FY09, approximately 53.2% of Maxwell’s sales were from repeat
customers. This, we believe, is due to its consistent product quality, strong D&D capabilities and timely
delivery, which has also helped it to secure more OEM contracts from various brand owners over the
past few years. We also note that due to rigid outsourcing requirements such as product quality and
trustworthiness of the OEM manufacturers, it is unlikely that customers would switch from one OEM to
another OEM manufacturer without serious consideration. Having said that, the loss of a major customer
would affect Maxwell severely given that its top 8 customers account for 43.8% of the group’s 1HFY10
sales.

OSK Research | See important disclosures at the end of this report 7

OSK Research
Future plans

Production capacity expansion. Currently, Maxwell has the capacity to produce up to 8m pairs of sports
shoes per year at its manufacturing facilities in Zhushuxia Industrial Zone, Jinjiang City, Fujian Province.
The group intends to acquire 4 more new production lines to increase its annual production capacity to
16m pairs. Aside from producing in-house, for which the production utilization rate has not reached
maximum, the group also outsources to third parties in order to secure capacity during the peak season.
While the details of its development master plan to centralize have yet to be finalized, Maxwell plans to
build a new factory with an estimated production floor area of approximately 50,000 sq m estimated to
cost RMB75m. The group also plans to upgrade its existing production facilities and will utilize
approximately RM12m of the net IPO proceeds for the expansion.

Figure 10: Production capacity and utilization rate

FY06 FY07 FY08 FY09

Production capacity (m pairs) 4 6 4 8
Output (m pairs) 3.0 6.1 5.7 6.2
Utilization rate (%) 75.0 99.5 81.8 77.3

Outsourced production 1.0 1.9 4.4 5.0

Total 4.0 8.0 10.1 11.2

Source: OSK, Bloomberg. MAA

Strengthening D&D capabilities; expanding product range. Apart from expanding its production
capacity, Maxwell will use RM6m of the net IPO proceeds to increase its product quality and range. In
order to increase its competitiveness, the group plans to increase the number of product designs from the
current average of 1,000 designs per annum to approximately 1,500 designs per annum.

Increase sales and marketing activities. Other than improving basic communication tools such its
website, Maxwell will expand its sales force to enhance sales by penetrating more new markets. To reach
out to potential customers more effectively, the group also intends to participate in more transnational
trade fairs such as the Haerbin border trade fair and other international trade fairs in Russia and Europe.
While there are no concrete plans yet, Maxwell intends to expand its business through acquisitions, joint
ventures or form strategic alliances with other companies should opportunities arise.

OSK Research | See important disclosures at the end of this report 8

OSK Research
Financials

Higher selling prices and sales boost revenue. Maxwell has been recording an impressive top line
CAGR of 60% over the past 3 years, fuelled by higher production volume and selling prices. Court shoes,
which account for 89% of FY09 revenue, are the main products driving revenue growth, followed by
casual/leisure and running shoes, which contributed 9.7% and 1.3% of FY09 sales respectively. Backed
by the group’s strong D&D capabilities as well as growing demand for different varieties of sports shoes,
Maxwell started producing running shoes in FY08. By geography, the bulk of the revenue is generated
from the domestic market. In fact, the domestic market contribution has increased from 80.3% in FY06 to
96.9% in FY09 as more foreign shoe related companies set up office in PRC and hence Maxwell is able
to sell its products directly to these foreign customers in the domestic market rather than exporting the
products to overseas for them. This bodes well for Maxwell as it reduces the group’s exposure to foreign
currency risk.

We are forecasting for the group to achieve sales of RM315.5m and RM343.0m for FY10 and FY11
respectively, which takes into account the increasing sales arising from the existing capacity and the
higher selling price. As the construction of new plants would only be completed in 2012, a substantial
increase in sales, if any, would only be felt after 2 years. In 1HFY10, while Maxwell reported an 8.9% and
5.7% y-o-y growth in top and bottom line in terms of RMB respectively, due to the strengthening of RM
against CNY, revenue in terms of RM was flat y-o-y while net profit dipped 2.7% y-o-y. Excluding partial
payment of listing expenses as well as non-statutory audit fees amounting to RMB1.6m, its net profit in
terms of RMB and RM grew by 8.5% and -0.2% respectively.

Figure 11: Revenue (RM m) Figure 12: Average selling prices and
production volume
60.0 12.0
400.0

Average selling price (RM)

50.0 10.0

Production volume (m)

343.0
350.0
315.5 40.0 8.0
301.0
300.0
30.0 6.0
250.0
218.1 20.0 4.0
200.0
10.0 2.0
143.5
150.0
0.0 0.0
100.0 73.5 FY06 FY07 FY08 FY09
50.0
Average selling prices (RMB) Average selling prices (RM)
0.0 Production volume (m)
2006 2007 2008 2009 2010f 2011f

Source : Prospectus Source : Prospectus

Figure 13: Revenue breakdown by Figure 14: Revenue breakdown by product

geography category
100.0% 1.1% 1.3%
2.8% 2.2%
100%
90% 95.0%
80% 9.7%
70% 14.4%
90.0%
60%
50% 96.9% 97.2% 97.8%
88.2% 92.0%
40% 80.3% 85.0%
30% 89.0%
20% 80.0% 84.6%
10%
0% 75.0%
FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09

Domestic Asia America Europe Africa Court shoes Casual/leisure shoes Running shoes

Source : Prospectus Source : Prospectus

Figure 15: 1HFY09 versus 1HFY10

1HFY09 1HFY10 1HFY09 1HFY10

RMB (m) RM (m)
Revenue 282.3 307.4 148.3 148.5
Net profit 58.6 62.0 30.8 29.9

Source: Prospectus

OSK Research | See important disclosures at the end of this report 9

OSK Research
Widening margins. Maxwell commands strong margins, with its gross profit and EBIT margin hovering
at 26.3% to 29.7% and 23.8% to 27.5% respectively. The wide and improving margins are mainly
attributed to the improvement in average selling prices, introduction of new designs that command higher
margins, economies of scale and a well-managed cost structure. Although production cost is on the rise
due to increasing oil prices and labour cost, Maxwell has so far been able to pass on the costs to its
customers. Vis-à-vis 1HFY09, EBIT margin in 1HFY10 was lower by 0.7% pts due to slightly lower gross
profit margin and partial payment of listing expenses as well as non-statutory audit fees amounting to
RMB1.6m. Excluding partial payment of listing expenses as well as non-statutory audit fees amounting to
RMB1.6m, its 1HFY10 EBIT margin came in at 27.7% versus 27.2%. In tandem with the improvement in
margins in the past 4 years, its net profit CAGR grew 72.6% versus its revenue CAGR of 60.0% from
2006 to 2009.

Figure 16: Margins (%) Figure 17: Net profit (RM m)

35.0% 80
71.3
30.0% 70 65.6
61.2
25.0% 60

20.0% 50
41.7
15.0% 40

10.0% 30 25.1

5.0% 20
11.9
0.0% 10
2006 2007 2008 2009 2010f 2011f
0
Gross profit EBIT Net profit 2006 2007 2008 2009 2010f 2011f

Source : Prospectus Source : Prospectus

Healthy balance sheet and strong free cash flow. Maxwell had a strong balance sheet with net cash of
RM53.3m as of FY09 and a free cash flow of RM24.2m as of 1HFY10. Its quality earnings give Maxwell
more room for M&As as well as enable it to distribute dividends.

OSK Research | See important disclosures at the end of this report 10

OSK Research

Recommendation

Fair value at RM0.82. We value Maxwell at 5x FY10 EPS, which translates into a fair value of RM0.82.
While there is no dividend policy, the group intends to recommend and distribute dividends of no less than
20% of its net profit for FY10 and FY11. These translate into a dividend yield of 5.4%-5.9% based on the
IPO price of RM0.54.

Figure 18: Maxwell and peers’ revenue, net profit and PE ratio

Revenue Net profit PE (x)

(RM m) (RM m)
China Hongxing 1030.6 67.6 17.2
China sports 982.2 63.2 3.7
Hongguo 550.4 41.1 -
Xingquan 543.3 94.6 3.7
XIdelang 384.9 68.2 1.7
K-Star 294.5 45.5 1.0
Maxwell 301.0 61.2 3.3

Source: Prospectus

OSK Research | See important disclosures at the end of this report 11

OSK Research

EARNINGS FORECAST

FYE Dec (RMm) FY07 FY08 FY09 FY10f FY11f

Turnover 143.5 218.1 301.0 315.5 343.0
EBIT 35.2 56.4 82.7 87.7 95.3
PBT 34.6 55.9 82.3 87.7 95.3
Net Profit 25.1 41.7 61.2 65.8 71.5
EPS (sen) 6.3 10.4 15.3 16.4 17.9
DPS (sen) 2.9 3.2

Margin
EBIT (%) 24.5 25.9 27.5 27.8 27.8
PBT (%) 24.1 25.7 27.3 27.8 27.8
Net Profit (%) 17.5 19.1 20.3 20.8 20.8

ROE (%) 78.0 45.0 40.2 18.8 17.1

ROA (%) 24.6 28.1 31.6 17.1 15.7

Balance Sheet
Fixed Assets 26.4 33.0 31.4 29.4 52.4
Current Assets 73.3 112.6 160.2 353.3 400.2
Total Assets 102.0 148.0 193.9 385.1 455.0
Current Liabilities 69.8 55.4 41.5 35.9 37.5
Net Current Assets 32.2 92.7 152.4 349.2 417.5
LT Liabilities 0.0 0.0 0.0 0.0 0.0
Shareholders Funds 32.2 92.7 152.4 349.2 417.5
Net Gearing (%) 14.2% Net cash Net cash Net cash Net cash

OSK Research | See important disclosures at the end of this report 12

OSK Research

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated (NR): Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed
will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or
financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment
decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest
and/or underwriting commitments in the securities mentioned.

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(A wholly-owned subsidiary of OSK Investment Bank Berhad)

Chris Eng

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OSK Research | See important disclosures at the end of this report 13