Profits Sprout Anew at Evergreen, as Wig Maker Eyes Virtual Hair

Key Takeaways:

• Wig maker Evergreen Products returned to profitability last year on strong sales growth due to prolonged hair salon closures
• Company’s 2021 sales were more than 50% higher than pre-pandemic levels, but its stock is relatively undervalued compared to peers

By Doug Young

After taking a haircut in 2020 at the start of the pandemic, a Hong Kong company has found regeneration in a post-pandemic renaissance for the decidedly traditional manufacturing field of wigs, hair extensions and other forms of hair. That’s the message coming from the latest annual results of Evergreen Products Group Ltd.(1962.HK), which sprouted not only strong growth in 2021, but also a return to profitability.

Let’s face it, wigs and the cliché wig shops that peddle them are hardly as sexy as e-commerce and artificial intelligence that dominate the consumer product headlines vying for investor attention. That may explain why Evergreen looks quite undervalued, even after last year’s big growth spurt that took its business to well above pre-pandemic levels. But growth is growth, and the company seems to have plenty of that lately.

Despite its low-tech credentials, Evergreen is actually quite cutting-edge when it comes to going with the latest business flows. The company itself is more than 50 years old and squarely rooted in Hong Kong, though it only listed there in 2017. But faced with growing costs in its former China manufacturing base, it has moved its main production to Bangladesh.

That actually turned out to be a good move not only to lower costs, but also due to a friendly business environment that has seen relatively few Covid-related work disruptions over the past two years, the company said in its annual results on March 28. By comparison, companies producing from its former China base are having to grapple with frequent disruptions caused by the country’s strict Covid control measures, which is culminating now with the complete lockdown of Shanghai.

What’s more, the mass closure of barber shops and hair salons actually worked to Evergreen’s advantage by boosting demand for wigs, hair extensions and other hair products that could be purchased without a visit to a brick-and-mortar salon.

“The lockdown implementation, the capacity restrictions and the social-distancing measures and masking in countries all over the world has played a significant role in paving a way to escalate the consumption rate,” Evergreen said in the report. “This resulted in a strong consumption of the braid products since the second half of 2020 and throughout the rest of the year.”

That strong consumption shows up in the company’s top-line revenue, which rose 35.6% last year to HK$1.2 billion ($153 million). It’s also noteworthy that the company’s latest revenue is up sharply from the HK$777 million it posted in 2019, the last year before the pandemic.

For anyone who wants to know how its latest revenue breaks down, the big majority 85% comes from wigs and hair accessories. Interestingly, those products carry the lowest gross margin among its three main product groups at 19.3%, while the fattest margins come from Halloween hair products whose overall margins are far thicker at 33.5%.   

The company’s overall gross margin rose to 20.6% last year from 17.2% in 2020, as it kept its costs well under control. All that shows up on the bottom line, with the company swinging back to a profit of HK$57 million last year from a HK$18 million loss in 2020.

One of the report’s few slightly worrisome signals shows Evergreen’s overdue receivables at the end of 2021 rose to HK$22 million from HK$14.6 million a year earlier, showing more of its customers may be having difficulty paying their bills, though the amounts are still a small fraction of its overall revenue. Another point for investors to note is the company’s reliance on a small number of customers for nearly two-thirds of its sales last year, which owes to the relatively limited field of buyers for such a highly specialized market.

Virtual hair

While the results were quite upbeat, Evergreen’s stock barely budged the day of the announcement, though it did get a 5% bump after the company released a positive profit alert back in January. The stock is roughly unchanged from a year ago, though it has more than doubled from an all-time low reached last July as it was becoming clear the pandemic wouldn’t necessarily end so quickly with the rollout of vaccines.

In terms of valuation, the company is clearly neglected when compared with the handful of its other publicly traded peers. Evergreen currently trades at a price-to-earnings (P/E) ratio of 14, which looks relatively solid for this kind of more traditional company, until one sees that Indian peer Godrej (GODREJCP.BO) and Chinese rival Henan Rebecca Hair Products (600439.SS) trade at much higher multiples of 46 and 44, respectively. The split is similar for price-to-sales (P/S) ratios, with Evergreen’s lowly 0.65 ratio a fraction of Godrej’s 6.9 and Henan Rebecca’s 2.2.

Evergreen gets the lion’s share of its revenue – 88% to be precise – from North America, where such products are particularly popular among the African American community. That looks like a relatively solid bet, since North American accounts for 40% of the global market for wigs and hair accessories, according to ReportLinker, which estimates that regional market will be worth $2 billion in annual sales by 2026.

So clearly there’s plenty of room for growth for Evergreen, whose current share of the global market stands at about 6.7%. But perhaps the heavy reliance on North America, combined with the previously mentioned reliance on a small number of customers, are weighing on investors’ minds.

In a bid to diversify its offerings, the company is making an interesting virtual hair play into the B2C market with the support of a technical partner called Shadow Factory. The pair first announced their collaboration in 2020, saying they would work together to develop virtual wigs targeted at digital natives who “are online all the time and experience the world through a mobile-first lens.”

It issued an update last year saying it was also working on a 2C platform that would allow people to try on wigs virtually before buying them. There wasn’t any mention of the digital developments in the latest results, but an app called Wigyouup that’s come out of the collaboration is now available on the Apple app store.

At the end of the day, Evergreen looks quite healthy and also quite undervalued. Perhaps that’s partly due to being in a very low-tech space and its heavy reliance on just a few customers. The move into virtual hair looks quite intriguing and could help to diversify its revenue streams, showing this neglected traditional-industry stock is trying doll itself up – if investors would only notice.