The group’s same-store-sales were down approximately 11% yoy in 1Q09 and it continues to observe weak same-store-sales. Adding to the weak outlook was the poor showing of its recent trade fair orders in May where orders decline 14.5% to RMB 440m. Despite orders worth RMB 2.5bn to be delivered by Sep 2009, revenue recognition could be much smaller as the orders will be repriced at lower ex-factory prices, while some orders delivery will be delayed to avoid inventory pile up.
With inventory piling up at the distributors front from an average of 2-3 months to 4-5 months, the group has to continue with its product discounts to its distributors to sustain their retail business. In general, the group will reduce its ex-factory price from 40% of retail price to 35%. The on-going product discounts will continue to compress its margins.
Costly A&P against falling revenues led to net margin compression. Selling and distribution costs, which largely comprise of A&P surged to 30% of revenue from 20% a year ago. With a 5-year sponsorship deal to be the official apparel sponsor and partner of the Shanghai Masters ATP1000 games, A&P will continue to weigh on the group’s bottomline.
We have lowered our FY09 earnings estimates by 7% to reflect the weaker revenue and high operating expenses. Risks on deteriorating earnings fundamentals and defaults on advances to its distributors (~RMB 940m) prevail amid weak demand. Although the group may consider resuming dividends payout, we doubt it will be enticing given its weak earnings and need for working capital support. Reiterate Sell at a target price of $0.16 pegged to its net cash per share. Facing rising challenges in its core business, Chin Hongxing may not benefit from the expected cyclical recovery in the China consumer market.
Sponsored Links
No comments:
Post a Comment