Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...

Regional Small/Mid Cap Strategy Q2 2008
China Hongxing Sports
Bloomberg: CHHS SP | Reuters: CHXS.SI
BUY S$0.58 FSSTI : 3,000.19
Price Target : 12-Month S$ 0.90 (Prev S$ 1.00)
Potential Catalyst: Earnings growth and execution
Analyst
Paul Yong CFA +65 6398 7951
paulyong@dbsvickers.com
Price Relative
1.50
1.30
1.10
0.90
0.70
0.50
0.30
0.10
S$
N ov-05 M ay-06 N ov-06 M ay-07 N ov-07
Relative Index
1019
China Hongxing Sports (LHS) R e la tive FSST I IN D E X (R H S)
Forecasts and Valuation
FY Dec (RMB m) 2006A 2007A 2008F 2009F
Turnover 1,412 2,046 2,865 3,780
EBITDA 253 505 660 929
Pre-tax Profit 235 450 603 844
Net Profit 215 416 525 701
Net Pft (Pre Ex.) 215 416 525 701
EPS (S cts) 2.1 3.2 3.9 5.0
EPS Pre Ex. (S cts) 2.1 3.2 3.9 5.0
EPS Gth Pre Ex (%) 68 53 21 29
Diluted EPS (S cts) 1.8 3.1 3.7 4.9
Net DPS (S cts) 0.2 0.8 0.8 1.0
BV Per Share (S cts) 7.5 27.4 30.2 34.1
PE (X) 27.6 18.0 14.9 11.6
PE Pre Ex. (X) 27.6 18.0 14.9 11.6
P/Cash Flow (X) 26.4 16.6 13.5 10.3
EV/EBITDA (X) 21.3 9.6 9.0 6.1
Net Div Yield (%) 0.4 1.4 1.3 1.7
P/Book Value (X) 7.8 2.1 1.9 1.7
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE (%) 34.9 19.3 13.8 15.9
Consensus EPS (S cts): 3.9 5.4
Sector : Consumer Goods
Principal Business: Designs, manufactures and sells sports shoes,
apparel and accessories in China under the brand Erke.
819
619
419
219
19
Gaining visibility in larger cities
Story: We paid a visit to four of the Group’s specialty
stores in Nanjing city in mid-March, which were opened
over the last 12 months.
Point: We came away from our visit fairly impressed with
two things 1) the quick and highly visible expansion into
Nanjing over the last 12 months and 2) the consistency
and professionalism of the set-up of its fourth generation
stores. As at end Feb, China Hongxing has expanded to at
least 67 points-of-sales in tier 1 cities like Beijing, Tianjin,
Guangzhou and Shanghai whilst also stepping up its
distribution network expansion into tier 2 cities like
Nanjing, Xiamen, Hangzhou etc… CHHS is targeting to
grow its distribution network by at least 600 stores per
annum over 2008 and 2009, with increased focus on tier 1
and tier 2 cities, whilst also updating its older stores into
the highly attractive, fourth generation format. Coupled
with continued investment into A&P activities, we believe
that these expansion plans should help consolidate the
Group’s position as a top 5 domestic sports shoes brand in
China.
Relevance: Adjusting our target valuation multiple to a
20% discount to larger, HK-listed peers, our new 12-
month target price for China Hongxing is S$0.90, based
on 18x FY09 earnings. Even after taking into account the
Group’s aggressive expansion plans for FY08, net cash per
share for end FY08 is projected at a healthy 15 Scts per
share. Reiterate BUY.
At A Glance
Issued Capital (m shrs) 2,540
Mkt. Cap (S$m/US$m) 1,473 / 1,067
Major Shareholders
Wu Rongguang (%) 18.2
Wu Rongzhao (%) 9.1
Wu Hanjie (%) 9.1
Free Float (%) 49.1
Avg. Daily Vol.(‘000) 24,146
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Refer to important disclosures at the end of this report