China Hongxing - A mid-end sportswear brand

Company Overview — China Hongxing said the inventory burden has started to ease recently and the SSS growth also improved to 13% in the first two weeks of May-09 from 3% in Apr. Mgmt aims to maintain its discount to distributor at35-36% this year and expects footwear gross margin to improve on lower rawmaterial costs. China Hongxing has net-cash of Rmb2,259m (S$476m), representing 87% of market cap. The stock currently trades on 6x 2010 PER, with 15% earnings growth in 2010 based on consensus estimates.

Business Strategy — Retail network expansion; Strengthen brand equity through advertising and promotion. Expand and enhance product offering.

Industry Overview — China sportswear market has doubled to Rmb41bn from 2003-07, according to Euromonitior.

Competitive Analysis — The sportswear market in China is largely dominated by a few international brands and national domestic brands. The key competitors of China Hongxing are Anta, Xtep, 361, PEAK, and Jordan, etc.

Recent Results — Despite Q109 order book was up 46% year-on-year, total revenue in Q109 was down 12% and earnings declined 51%. No dividend was declared for 1Q09 and there is no fixed payout policy.

Strengths — Large distribution network in China. Good recognition of its core Erke brand in the low-end segment. Strong balance sheet.
Weaknesses — Sportswear market in China is competitive and distributors are bargaining for more support. Sportswear goods are sensitive to economic cycle.

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