China Sportswear Industry Diverging Fortunes In 2009

Li Ning, Anta and China Dongxiang, China Hongxing’s bigger sportswear competitors in China recently reported that based on trade fairs conducted so far this year, they are expecting sales growth of between 22-24% for 2009.

In contrast, China Hongxing disclosed in their 1Q ‘09 results release that based on their trade fairs conducted so far, sales orders are expected to decline between 10-20% for 2009. China Hongxing’s management explained that the order decline reflects weak consumer sentiments due to the global financial crisis as well as higher than expected inventories in the channels (distributors have 4-5 months worth of inventories versus the usual 2-3 months).

Based on the above indicative order flows for 2009, it suggests that China Hongxing is losing market share to its bigger competitors in China.

Bloomberg consensus estimates are expecting Anta and Li Ning to grow 2009 profits by 22% to RMB1.094bln and RMB877mln respectively while China Dongxiang’s profit is expected to increase 14% to RMB1.4bln, putting their respective PEs at 17x, 20x and 16x and PEGs at 0.8x, 0.9x and 1.1x.

China Hongxing’s 2009 expected net profit on the other hand is expected to decline 25% to RMB335mln, putting its forward PE at 8x, but with no meaningful PEG as earnings growth is negative. Based on the historical trading range, China Hongxing’s PE at about half that of its bigger peers is in line (for example, in 2006 Li Ning’s average PE was 40x while Anta’s 2007 average PE was also 40x against China Hongxing’s 20x and in 2008 Anta and Li Ning’s PE fell to an average of 10x against China Hongxing’s 5x).

A new sportswear company (361) is looking to list in Hong Kong at an estimated 2009 PE of only 4x as its 2009 profit of RMB500mln is expected to decline 44% from 2008’s RMB890mln. (China Hongxing’s 2009 profit is expected to decline 25% to RMB335mln).

While we maintain our HOLD recommendation, we would also be monitoring closely China Hongxing’s collections from their distributors (prepayments of RMB940mln and receivables of RMB387mln as at Mar ’09).

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