The surprising increase in revenue was mainly attributable to the higher sales volume arising from the upgrade and opening of more specialty stores. However, gross margins narrowed 5ppt due to lower average selling prices.
B/S became even sturdier with healthy operating cash flow of RMB170m received in 1Q09 derived from higher operating profit and faster T/O of working capital. Net cash increased from RMB504m from end FY08 to RMB676m as of end 1Q09, translating into S$21.5cts net cash/share.
Looking ahead, we believe the company's top line can maintain the growth momentum above 25% for the full year with its focus on 2nd to 4th tier cities, leveraging on the popularity of its newly signed pop band Fahrenheit for advertising and promotion campaigns. Meanwhile, we believe margins will remain under pressure due to lower average selling prices and more advertising expenses related to Fahrenheit.
Upgrade to BUY, Price Target S$0.29, based on 5x FY09 P/E and backed by S$21.5cts net cash/share. We've revised up our earnings forecast for FY09 and FY10 by 21% and 25% respectively, to factor in better than expected revenue growth while maintaining assumptions related to margins which were relatively in line with our expectations.
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