China Zaino - 2Q09: Disappointing results but signs of recovery emerging

Signs of recovery are emerging despite the lower-than-expected results, suggesting the worst is over. Growth will be driven by its enhanced market leader position and continuing healthy financials. Maintain BUY.

2Q09 sales dropped 8.9% yoy with net profit contracting to a record -34% yoy on the back of lower consumer spending amid the economic downturn and a higher base last year. However, there are good signs emerging: a) under a tough environment, 1H09 sales increased 4.7%, suggesting the company has been able to maintain its market share, and b) then luggage segment reported good sales, indicating the company’s efforts to enter a new market so as to offer a better product mix has worked well.

We believe the stock might come under selling pressure today as the results came in lower than expected. But we recommend investors take advantage of price weakness before the market gradually realises that the worst is over,underpinned by a continuing recovery in the economy which will lead to an increase in consumer spending in 2H09. Also, management has guided that net margin has touched its base line and they are not going to compensate further for higher sales volume as its market leader position has been enhanced in the downturn and its product mix has been structurally adjusted.

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