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

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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 Page 14 www.dbsvickers.com Refer to important disclosures at the end of this report
Regional Small/Mid Cap Strategy Q2 2008 China Hongxing Sports Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2006A 2007A 2008F 2009F FY Dec 2006A 2007A 2008F 2009F Turnover 1,412 2,046 2,865 3,780 Net Fixed Assets 345 523 817 790 Cost of Goods Sold (891) (1,204) (1,617) (2,096) Invts in Associates & JVs 0 0 0 0 Gross Profit 521 842 1,248 1,684 Other LT Assets 33 32 32 32 Other Opng (Exp)/Inc (277) (372) (644) (842) Cash & ST Invts 549 2,653 1,896 2,402 Operating Profit 243 470 604 842 Other Current Assets 415 857 1,888 2,147 Other Non Opg (Exp)/Inc 0 0 0 0 Total Assets 1,342 4,064 4,633 5,369 Associates & JV Inc 0 0 0 0 Net Interest (Exp)/Inc (8) (20) (1) 2 ST Debt 10 8 0 0 Exceptional Gain/(Loss) 0 0 0 0 Other Current Liab 181 231 386 528 Pre-tax Profit 235 450 603 844 LT Debt 0 0 0 0 Tax (21) (34) (78) (143) Other LT Liabilities 390 271 174 76 Minority Interest 0 0 0 0 Shareholder’s Equity 761 3,554 4,072 4,765 Preference Dividend 0 0 0 0 Minority Interests 0 0 0 0 Net Profit 215 416 525 701 Total Cap. & Liab. 1,342 4,064 4,633 5,369 Net Profit before Except. 215 416 525 701 EBITDA 253 505 660 929 Non-Cash Wkg. Capital 234 626 1,502 1,619 Net Cash/(Debt) 539 2,645 1,896 2,402 Sales Gth (%) 56.9 44.9 40.0 32.0 EBITDA Gth (%) 68.0 99.9 30.6 40.8 Opg Profit Gth (%) 66.3 92.9 28.6 39.4 Net Profit Gth (%) 68.3 94.0 26.0 33.5 Effective Tax Rate (%) 8.8 7.5 13.0 17.0 Cash Flow Statement (RMB m) Rates & Ratio FY Dec 2006A 2007A 2008F 2009F FY Dec 2006A 2007A 2008F 2009F Pre-Tax Profit 235 450 603 844 Gross Margins (%) 36.9 41.1 43.6 44.6 Dep. & Amort. 9 36 56 87 Opg Profit Margin (%) 17.2 23.0 21.1 22.3 Tax Paid (21) (30) (10) (78) Net Profit Margin (%) 15.2 20.4 18.3 18.5 Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 34.9 19.3 13.8 15.9 Chg in Wkg.Cap. (185) (395) (945) (182) ROA (%) 21.6 15.4 12.1 14.0 Other Operating CF 7 23 0 0 ROCE (%) 36.1 20.1 13.8 15.8 Net Operating CF 45 83 (295) 671 Div Payout Ratio (%) 11.2 24.9 20.0 20.0 Capital Exp.(net) (204) (212) (350) (60) Net Interest Cover (x) 29.9 24.0 895.1 NM Other Invts.(net) 0 0 0 0 Asset Turnover (x) 1.4 0.8 0.7 0.8 Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 60.8 70.4 70.7 72.5 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 32.5 33.6 32.4 35.4 Other Investing CF 30 0 0 0 Inventory Turn (avg days) 28.2 30.7 31.2 32.6 Net Investing CF (174) (212) (350) (60) Current Ratio (x) 5.1 14.7 9.8 8.6 Div Paid (24) (80) (104) (105) Quick Ratio (x) 4.6 14.2 9.4 8.2 Chg in Gross Debt (21) (2) (8) 0 Net Debt/Equity (X) CASH CASH CASH CASH Capital Issues 503 2,312 0 0 Capex to Debt (%) 2,043.7 2,654.8 N/A N/A Other Financing CF (48) 2 0 0 N. Cash/(Debt)PS (RMB cts) 27.0 104.1 71.8 87.6 Net Financing CF 409 2,232 (112) (105) Opg CFPS (RMB cts) 11.5 18.8 24.6 31.1 Net Cashflow 280 2,103 (757) 506 Free CFPS (RMB cts) (8.0) (5.1) (24.4) 22.3 Quarterly / Interim Income Statement (RMB m) Segmental Breakdown FY Dec 1Q2007 2Q2007 3Q2007 4Q2007 FY Dec 2006A 2007A 2008F 2009F Turnover 451 447 478 669 Revenues (RMB m) Cost of Goods Sold (260) (261) (269) (415) Shoes 1,063 1,349 1,759 2,232 Gross Profit 191 187 210 254 Apparel 284 598 956 1,339 Other Oper. (Exp)/Inc (100) (81) (104) (83) Accessories 65 99 149 209 Operating Profit 91 106 105 171 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 0 0 0 Total 1,412 2,046 2,865 3,780 Net Interest (Exp)/Inc (6) (7) (6) (4) Gross Profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 Shoes 354 472 651 848 Pre-tax Profit 85 99 99 167 Apparel 136 317 516 723 Tax (6) (9) (8) (10) Accessories 31 53 80 113 Minority Interest 0 0 0 0 Net Profit 79 90 91 157 Net profit bef Except. 79 90 91 157 Total 521 842 1,248 1,684 EBITDA 91 106 105 171 Gross Profit Margins (%) Shoes 33.3 35.0 37.0 38.0 Sales Gth (%) (6.1) (0.9) 6.9 39.8 Apparel 48.0 53.0 54.0 54.0 EBITDA Gth (%) (14.0) 16.5 (0.7) 62.5 Accessories 47.5 53.6 54.0 54.0 Opg Profit Gth (%) (14.0) 16.5 (0.7) 62.5 Net Profit Gth (%) (17.9) 14.3 0.9 72.5 Gross Margins (%) 42.3 41.7 43.8 38.0 Total 36.9 41.1 43.6 44.6 Opg Profit Margins (%) 20.2 23.7 22.0 25.6 Net Profit Margins (%) 17.4 20.1 19.0 23.4 Source: Company, DBS Vickers Page 15
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