China Sportswear - Valuation gap should narrow

A compare and contrast of listed China sportswear companies. SG-listed China Hongxing and China Sports are generally smaller than the HK-listed peers, especially the latter, whereas China Hongxing is still relatively on par with the 2nd liners in HK such as Anta, Xtep and Dongxiang, in terms of market share, profitability, and number of stores.

Wide valuation range for companies in different market positions. Market leader Li Ning is trading at around 19x earnings whilst China Sports, which is amongst the smaller regional players, is trading at less than 4x earnings. 2nd liners in HK usually trade around 12-16x FY09 P/E, corresponding to their respective market shares and profitability. CHHS is trading at 7x earnings, substantially lower than its more comparable peers listed in HK.

Reiterate BUY for Li Ning for its premier status and CSPORT on cheap valuations. We continue to like Li Ning for its leading market position, strong brand equity, consistent track record and high ROE. We re-iterate BUY on CSPORT for its cheap valuation, which is now trading below its S$21.5cts net cash/share.

Upgrade CHHS to BUY, TP S$0.26, based on 10x FY09 P/E. CHHS’ valuation discount to its closest peer – Anta in terms of P/E shot up from its usually range of 20-40% to as high as 82% in Mar’09, due to other s-chips’ accounting issues or margin calls. The counter is now trading at 0.6x P/B and 7.2x FY09 P/E at S$19cts, 56% discount to Anta’s 16.2x, which we think is too wide, especially considering its net cash/share of S$17.6cts by 1Q09. Even at the higher end of its discount range of 40% or 10x FY09 PER, our target price for CHHS at S$0.26 still has >35% Upside.

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