At group level, same-store-sales continued to slide in 2Q09. Although the management indicated slight recovery from July, there are no signs of stability as yet. Gross margin hit record low of 35.4% led by falling ASPs and gross profits across all product segments. Its high-margin apparel products were the weakest segment in 2Q due to lower ASPs.
While earnings suffered, the group’s efforts in managing its inventories and cash flows led to strengthening financial position and improvement in cash conversion days. Net cash rose to RMB 2.7bn or 19.8 cts/share. The group plans to utilise its cash for share buybacks in 3Q09, while keeping to an annual dividend payout of 20-30%. It will also invest in their store network to foster expansion and keep an eye on M&A opportunities.
The management reckons its gross margins have bottomed along with easing inventory levels from the peak of 5 months in Feb to 3.5 months at the distributors end. Product discounts are expected to stop by Oct if demand continues to improve. Over the long term, gross margins could revert back to 43%. Further, concerns on the advances to its distributors are alleviating with the bulk of outstanding (~60%) collected.
We have cut our FY09 and FY10 earnings estimates by 24% and 19% respectively on the weak results. We now pegged the stock to 8x FY10 PER at 50% discount to its HK peers (pegged at cash previously). The group’s aggressive store expansion (3845 POS), and active A&P bodes well for its earnings momentum as the economy recovers. Key risks are competition and inefficient utilisation of its cash pile. Upgrade to BUY.
Sponsored Links
No comments:
Post a Comment