China Hongxing Sports - order book off to a weak start

Aug09 order book had declined by 26% YoY to RMB887.5m. This came in slightly below our expectations. Compared to its last two trade fairs (Feb09: -20% and May09: -15%), the decline was more pronounced due to the high base effect from the Beijing Olympics last year. We are beginning to see signs of stabilization and order book is improving. Compared to the autumn/winter trade fair held in Feb09, orders would have increased by 11.0%. We also saw an improvement in sales mix towards higher margin apparel and accessories, making up 48.8% of the order book with footwear accounting for rest.

Outlook mixed. The company continues to lag behind its peers in terms of operating performance and profitability. This could be attributed to the higher inventory levels at its distributors, slower store expansion and products discounts/ rebates provided to distributors to help weather the downturn in the 1H09. We expect short-term weakness in the share price due to the disappointing Aug09 order book.

Key catalysts to rerate the stock. We would watch for key catalysts to turn more positive on the stock such as: 1) improvement in operating environment such as higher SSS and lower inventory levels at its distributors, 2) carrying out share buybacks in the 3Q, and 3) potential M&A opportunities to expand its product range. Maintain Hold.

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