Investor interest remained keen at our ‘Pulse of Asia’ Conference. China Hongxing had the opportunity to meet up with over 30 fund managers and buy-side analysts, with a packed group presentation meeting, to provide an update on their business.
Earnings growth intact. China Hongxing maintained its optimism that it should continue to see firm top line growth, driven by its aggressive store expansion plan to open 600 POS per year in FY09 and FY10, which will bring the number of stores from c. 3,850 by end FY08 to 5,050 by end FY10. At the same time, the Group believes that with a fast-growing segment of middle class consumers and affordability of its products versus international brand names, that it can continue to capture more market share. Hence, we maintain our projections that earnings of CHHS can grow at a CAGR of almost 20% between FY08 and FY10, from 3.8 Scts to 5.4 Scts, driven mainly by its expanding store network.
RMB1.0b+ prepayment expected to be duly collected. The prepayment paid by CHHS on behalf of distributors to secure prime locations for new stores would be completely collected by early 2010. So far, there has been no delay or default of distributors’ repayment. The management has no plan to carry out such scheme again in future.
Margins sustainable. The company’s overall gross margin should also improve in the long term, driven by a better sales mix from the higher-margin apparel and accessories segments. Since A&P budget is pegged to revenue and there’s not much debt, the operating margin and net margins are also expected to improve over time.
Attractive Valuation. Valuations are undemanding at 4.7x FY09 and only 4.0x FY10 earnings, which is significantly under the peers’ average about 7.3x FY09. Maintain Buy, with our target price at S$.032, pegged at 7.0x PER09, backed by S$0.17 of net cash/share.
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