Background: Incorporated in 1977, Heng Long is one of the world’s five top-tier tanneries of crocodilian leather. Its activities involve sourcing, tanning and processing raw crocodilian skins into crust and high-end finished crocodilian leather. The group delivers to an impressive global list of top luxury conglomerates such as LVMH, Prada, Rolex and Franck Muller.
Recent development: Management said that its substantial shareholders have been approached with a non-binding expression of interest which might well turn into an offer for the entire firm. With three out of five of the top-tier crocodile tanneries already acquired by Hermes and Gucci, it is only a matter of time that Heng Long will be next, given its unique position as the sole supplier in Asia.
Our view:
Affluent consumers emerging in Asia. During the global financial crisis, Heng Long was aided by the growing wealth in China and Russia looking to purchase lower-grade crocodile skins, yet still wanting to enjoy the status they reflect. With Asian consumer demand on the rise, management plans to double its production capacity of 281,000 skins pa.
Why it is an attractive takeover target. The demand for crocodile skin is severely limited by supply due to the scarcity of crocodile farming accompanied with regulations imposed by global environmental agencies (CITES.) The entry barriers to this business are especially high, not least because of the specific climate that is required to breed crocodiles. In order to have control of the supply, luxury brands would likely want to secure their upstream peers.
Scarcity premium. Heng Long holds the pricing power over the supply of crocodile skins, validating its success on never marking down a loss quarter ever. This is in turn reflected in its premium valuation with the stock currently trading at historical PER of 22.1x
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