HONMA Golf (06858.HK): The undervalued leader in high-end consumption

Over the past three years, the consumer retail sector $HK Retail Stock(20065.HK) has been impacted by the pandemic, unstable geopolitics, and economic downturns. Historical experience shows that during periods of weak consumption, mass-market consumer companies are more vulnerable, while high-end consumption is relatively less affected, such as $Ferrari(RACE.US) in the automotive sector, $Ralph Lauren(RL.US) and $Hermès(HESAY.US) in the apparel sector. Despite the overall weakness in the automotive sector in the first half of 2024, Ferrari's stock price remained relatively high; after varying degrees of decline in 2022, Ralph Lauren and Hermès saw significant recoveries in 2023.

Golf, as a recreational and social sport for the affluent middle class and wealthy, clearly falls into the high-end consumption category, ensuring its defensive strength during economic downturns. This makes it a relatively safe investment target for the next few quarters or even one to two years.

In fact, in the golf industry, there is a low-profile leading company that has consistently enjoyed high gross margins and cash flow, earning it the nickname "cash cow." However, it remains relatively unknown to the general investing public.

This company is—HONMA Golf. $HONMAGOLF(06858.HK)

1 The Low-Profile Leader in Golf

Founded in 1959, HONMA Golf is one of the most prestigious and iconic brands in the golf industry, synonymous with exquisite craftsmanship, unparalleled performance, and product quality. Combining advanced innovation with traditional Japanese craftsmanship, it provides high-end, high-performance golf clubs, balls, apparel, and accessories to golfers worldwide. It is also the only vertically integrated golf company globally, handling product development, production, and sales.

For the fiscal year 2023/24, the company reported revenue of 26,222.9 million yen (equivalent to 182.6 million USD), a slight year-on-year decline due to global economic uncertainty and the group's channel optimization measures.

Golf clubs accounted for nearly 70% of total revenue, the core product. Golf balls and apparel contributed 11.2% and 12%, respectively, while accessories (e.g., bags, gloves) made up 7.2%.

However, the company's unique brand positioning and pricing strategy, along with ongoing channel optimization, led to a 0.4 percentage point increase in gross margin to 51.2%. Net profit growth was even more pronounced, up 48.3% YoY, with net margin rising by 7.4 percentage points. EBITDA also surged 22.0% to 7,285 million yen (50.7 million USD).

Meanwhile, the company's "cash cow" attributes persisted. Operating cash flow for the fiscal year remained robust at 5,416.1 million yen (37.7 million USD), with a six-year CAGR of 18.7%.

Geographically, 35.7% of FY2023/24 revenue came from Japan, 28.6% from China (including Hong Kong and Macau), and 22.8% from South Korea. Combined, these three markets accounted for over 85% of revenue, solidifying Asia (East Asia) as the company's core market.

This year, outbound consumption has become a major factor in China's luxury market cooling. Due to the sharp depreciation of the yen, Chinese tourists' luxury spending in Japan has surged. Thus, despite China's temporary economic slowdown, HONMA's focus on Asia, brand positioning, and golf industry attributes leave ample growth potential in Japan and South Korea.

Japan, the world's second-largest golf equipment market, saw strong demand for the BERES 09 series launched in early 2024, with sales up 19.6% YoY. New putter releases also drove a 97.7% sales increase.

South Korea, the third-largest golf market, has the highest per capita spending on golf equipment and apparel and is the world's largest golf apparel market (valued at ~8.87 billion USD, half the global total). HONMA's upgraded flagship store in Seoul and optimized local channels position it well for new product launches and expansion in the ultra-performance segment.

(HONMA's flagship store in Seoul's Gangnam District)

Driven by young, affluent golfers in Japan and South Korea, FY2025 growth appears imminent.

Despite China's consumption downgrade trend, HONMA achieved strong results in apparel and e-commerce through refined operations. Mainland China apparel revenue grew 23.2% with a 62.0% gross margin. E-commerce sales rose 17.4% due to digital marketing investments and omnichannel strategies.

By sales channel, direct sales contributed 41.8% of revenue, while third-party channels accounted for 58.2%. Direct stores performed exceptionally well, with revenue up 7.2% to 10,952.2 million yen and gross margin rising 7.0 percentage points to 56.8%, above the company average.

In summary, FY2023/24 saw slight revenue declines but significant improvements in gross profit, net profit, EBITDA, and operating cash flow. Japan and Mainland China performed well, with direct stores outperforming third-party channels.

This reflects the company's strategy of strengthening "internal capabilities" to counter external uncertainties. These measures are expected to drive higher growth and healthier finances. So, what specific strategies has HONMA adopted?

2 Combining Direct and Third-Party, Online and Offline Channels

Despite the digital economy's impact, HONMA continues to open offline direct stores. These serve as brand touchpoints and offer superior profit margins and pricing control. Among major golf companies, HONMA has the most direct stores.

As of March 31, 2024, the group operated 95 HONMA-branded direct stores in Asia, a net increase of five. It plans to further update store designs, displays, and consumer experiences to unify brand image.

(HONMA's flagship store in Shanghai's Xintiandi)

Third-party retail and wholesale revenue fell 20.8% YoY due to strategic channel realignment. Optimization in Europe and the U.S. is complete, while Japan, South Korea, and China (including Hong Kong and Macau) are ongoing.

Online, HONMA built a dynamic digital ecosystem, key to its growth strategy. Creative marketing content is regularly posted on official websites and social media (Instagram, Facebook, WeChat, Xiaohongshu, Weibo). Collaborations with pro golfers and influencers enhance brand awareness globally. Rich online content drives traffic to stores and improves conversion rates.

These efforts paid off: FY2023/24 e-commerce revenue grew 17.4%, with improved organic traffic, user engagement, and conversion rates.

Lastly, HONMA consistently hosts customer events, crucial for brand awareness and engagement. These events, held at golf courses with professional club fitters and sales staff, target ultra-high-end and performance-focused customers, blending brand experience with sales.

FY2023/24 saw 3,564 customer events globally. Though the total number dipped, average participation and conversion rates improved.

3 Focusing on Ultra-High-End and Ultra-Performance Segments

HONMA's two "trump cards" are the BERES series (for affluent, passionate golfers) and the TOUR WORLD family (for performance-focused players).

With the 2024 launches of BERES 09 and BeZEAL 3, BERES series sales in Japan rose 19.6% YoY, while BeZEAL sales surged 6x in multiple regions, reaffirming HONMA's brand strength and unique positioning.

HONMA also actively expands into golf-adjacent markets like apparel, offering three precisely targeted product lines for high-end functionality and fashion.

FY2023/24 apparel revenue grew 4.9% to 3,157.5 million yen, with gross margin up 16.8 percentage points to 43.5%. Despite weak consumer sentiment in Mainland China, apparel revenue rose 23.2% with a 62.0% gross margin.

HONMA's product strategy is clear: focus on ultra-high-end and ultra-performance segments, offering a full range of golf products for on- and off-course needs.

4 Conclusion

Currently, HONMA trades at HKD 3.29/share on the Hong Kong stock market, with a market cap of HKD 1.99 billion and a P/E of 10x.

Investors familiar with valuations will note the disconnect: a luxury leader with 50% gross margins should command at least 30x P/E in the U.S. Even in niche sectors like golf, 10x seems excessively low.

Two factors explain this: (1) weak liquidity in Hong Kong's market, exacerbated by the U.S. rate hike cycle, and (2) limited public awareness of HONMA despite its leadership in high-end golf.

The first issue may ease as the U.S. begins rate cuts, while the second requires better investor education. Once addressed, HONMA's valuation re-rating could begin.

In short, quality stocks won't stay undervalued forever—a universal truth in any market.