China Hongxing Sports Ltd Off 31%; Margin Calls and A slower rhythm

We caught up with Hongxing's management recently to gain clarity on the company's outlook for 2009 and forward strategy. Although volume growth has been robust so far, we expect future volumes to fall as distributors attempt to sell off their old stock. We see signs of a slowdown with inventory levels increasing at both the retail and distributor levels and lower same-store sales growth post-Chinese New Year, We remain Neutral on the stock with our target price unchanged at S$0.20, based on 6x CY10 P/E.

China Hongxing Sports down 31.0% at record low of S$0.10 in heavy volume. Traders, analysts suspect margin calls, say ongoing disappointment over recent 4Q08 results also likely weighing. "It''s likely to be on margin call. Most of those SMEs like to use their shares as collateral to finance some of their operations. But in a market like this, leveraging just doesn''t work," says dealer. "The company is not paying a final dividend, which has made some investors worry about their cash position," says analyst at bank-backed brokerage; adds weakness may also be due to investors offloading some convertible preference shares issued by company few years back to raise funds for expansion; "looking at their latest balance sheet, some holders of the company''s RCPS (redeemable convertible preference shares) may have converted into ordinary shares. There''s no restriction on these newly converted shares from being sold." When contacted, Hongxing spokesperson says not aware of reason for sharp share price fall; "there''s nothing company-specific. We are not aware of what''s happening." Orderbook quotes suggest stock may find bottom at S$0.08.

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