China Hongxing is a leading domestic sports brand in China

China Hongxing expects a lacklustre 2009, due to weak demand and inventory issues. It plans to improve the situation by focusing on same-store sales. One of the strategies is to increase the store space (for fitting rooms) to cater for higher sales of sports apparel, which carry higher margins.

China Hongxing is a leading domestic sports brand in China, selling a wide range of sports footwear, apparel and accessories under its brand Erke. Management expects a lacklustre 2009, due to weak demand and inventory issues. The company plans to improve the situation by focusing on same-store sales. One of the strategies is to increase the store space (for fitting rooms) to cater for higher sales of sports apparel, which carry higher margins. Furthermore, Hongxing aims to expand its network and have 4,100 outlets by 2009 (+8%), 4,600 by 2010 (+12%) and 5,400 by 2011 (+17%). In the long term, management targets to have advertising and promotion-to-sales ratio reduced to within 20% while sports apparel to account for 60% of sales. Management remains optimistic that Hongxing will continue to gain market share.

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China Hongxing - Trading Close To Net Cash

Management said that while JF Asset Management (JFAM ) claimed that they faxed the change in their shareholdings in Jan ’08 and Feb ’09, internal checks review that the company did not receive those notifications.

Given that these transactions were quite sometime back, verifications can no longer be made.

Management said that they only received the shareholding changes from JFAM at the end of July ’09 which they subsequently released on 6 Aug ’09.

Management said that they have now strengthened their internal procedures in this respect and will ensure that it will not occur again.

When the media first brought up the discrepancy regarding the change in JFAM ’s shareholding on 24 Aug ’09, instead of reacting negatively to the news, the stock had risen 1 cent to 21 cents and had continued to rise to hit an intra-day high of 26 cents on 30 Aug ’09 before consolidating around the 25 cents level.

This is likely due to the company reporting that they had received RMB888mln worth of new orders at the 2010 Spring/Summer collection trade fair held in Xiamen on 24 Aug ’09 as well. While this represents a 26% yoy decline, it is up from May ’09’s RMB440mln, Mar ’09’s RMB800mln and Oct ’08’s 650mln. Management said then that the orders would have been flattish yoy if not for held back orders and rebates provided to distributors to weather the downturn in 1H 2009.

Management also said then that they were heartened by the recent signs of stabilization and believe that they will start to see more signs of stable performance next year, a reversal from their more pessimistic view since 4Q 2008, after the collapse of Lehman Brothers.

With management’s latest clarifications and strengthened internal controls to ensure that such an event will not recur in future, coupled with almost 90% of its share price being backed by cash & management’s target of collecting the outstanding RMB604.6mln of prepayments by the end of this year, we maintain BUY.

Hongxings Sport - Signs Of Stabilization

The company received RMB888mln worth of new orders at the 2010 Spring/Summer collection trade fair held in Xiamen on 7 Aug ’09.

While this represents a 26% yoy decline, it is up from May ’09’s RMB440mln, Mar ’09’s RMB800mln and Oct ’08’s 650mln.

Going forward, the lower base effect would make yoy comparisons more favourable.

And according to management, it would be comparable yoy instead of the 26% decline if they take into account the orders held back and rebates provided to distributors to weather the downturn in 1H 2009.

While the overall environment remains challenging, management is heartened by the recent signs of stabilization and believe that they will start to see more signs of stable performance next year. This is a change in management’s outlook since the collapse of Lehman Brothers in 4Q ‘08.

With management having delivered on their promises of prepayment & debts collections on time, signs of stabilization in their orders going forward and the stock still trading below its net cash of 19 cents per share (currently at 18.5 cents), we maintain BUY.

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.

China Hongxing : 2Q09: Worse-than-expected Results; Slash Earnings Forecasts : SELL

China Hongxing Sports’ (Hongxing) 2Q09 results came in worse than expected as net profit plunged 60% yoy due to turnover contraction and margin erosion. The outlook remains challenging for 2H09 given slow sales and inventory glut. Maintain SELL.

Sales contraction and margin erosion. The 60% yoy earnings plunge was due to a significant decline in turnover and margin erosion as a result of the slowdown in retail sales and destocking by distributors. In order to help distributors to clear their inventories and compensate them for heavy retail discounting, Hongxing offered bigger wholesale discount to distributors by slashing the average selling prices (ASPs) of its products. In addition, sales volume plummeted as distributors cut orders to destock their inventories.

Retail inventory still high. Distributors, by cutting orders in 1H09, saw their unsold inventory level fell slightly from the peak of over five months at the start of 2009 to four-and-a-half months at end-Jun 09 (vs two-and-a-half months last year). However, Hongxing’s inventory days surged from 23 days at end-08 to 40 days at end-Jun 09, due to order cancellations by distributors.

Slash 2009-11 earnings forecasts by 27-28%. Based on the worse-thanexpected 1H09 results for Hongxing, we slash our 2009-11 earnings forecasts by 27-28%. The Group is subject to huge earnings risk due to: a) inventory level is still high and b) intensifying competition in the low-end sportswear segment.

Valuation/Recommendation. Based on our new earnings forecasts, the stock is trading at 10.5x 2009F PE vs 5-6x for S-share consumer stocks. Given the high earnings risk, we maintain SELL rating with a fair price of S$0.10, based on 5.5x 2010F PE.

China Hongxing - Costs hit bottom line

Below. 2Q09 net profit was 50% below our expectation and consensus (-60% yoy to Rmb47.2m) on lower-than-expected GP margins and higher-than-expected costs. As expected, revenue fell 27.2% yoy to Rmb499.0m. GP margins were 35.6% (- 6.3% pts) vs. our forecast of 38.7%. The cost surprise came from advertising and promotion (A&P) expenses related to the ATP Shanghai Masters partnership. A&P rose to 21% of sales from 18.2% yoy. 1H09 net profit was Rmb103.2m (-55.5% yoy) on a revenue decline of 20% to Rmb1,066.7m, accounting for only 27% of our fullyear estimate. Hongxing declared an interim dividend of Rmb1ct. As at end-1H09, Hongxing had a cash hoard of Rmb2.7m.

Expect better 2H. Our FY09 earnings estimate has been cut by 24% to reflect higher advertising and promotion expenses. We expect 2H to be stronger than 1H as we believe the worst is over for the sportswear sector. Based on improving retail sales, we expect Hongxing to be able to cease product discounts to distributors by 3Q09. While demand is recovering gradually, order value could continue to decline yoy at the 1Q10 trade fair which will be held in August, given a record performance a year ago. We expect Hongxing to perform below the industry average due to its weaker brand name and conservatism.

Maintain Neutral. Hongxing’s closest competitor, Anta, is trading at 18.0x CY10 P/E. We believe Hongxing should trade at a discount to Anta, given its smaller size and weaker earnings visibility. Our target price remains S$0.18, still pegged at 6x CY10 P/E, at a discount to its larger peers. Maintain Neutral given the limited upside to our share price.

China Hongxing – Same-store-sales remains weak

CHHS’s 2Q09 net profit of RMB 47m (-60% yoy, -16% qoq) was below expectations. 1H09 net profit only accounted for 29% of our forecast. Earnings disappointment was due to broad-based decline in ASPs and gross margins as a result of product discounts amid weak demand. The group proposed an interim dividend of 1 fen/share.

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.

China Hongxing Sports - Performance worsen further; Cut 2009 profit estimates

Sales contraction and margin erosion slashed profit by 60% yoy, a result of a slowdown in retail sales and de-stocking by distributors. Turnover plunged 27% yoy. To help distributors clear inventories and to compensate for the heavy retail discounting (25% vs 15-20% last year), the Group offered a bigger wholesale discount to distributors (65% off retail price vs 60% last year), which slashed its product ASPs. In addition, sales volume for footwear and accessories plunged as distributors cut orders to destock inventories.

Retail sales of distributors dived. Same-store sales (SSS) growth dived from over 20% last year to 3-4% in 1H09 due to the economic slowdown. Store additions also slowed with points-of-sales (POS) increasing only 21 to 3,845 in 1H09.

Severe margin erosion. Gross margin was only 35.6% for 2Q09 vs 41.9% a year ago and 40.2% in 1Q09 due to lower product ASPs. Coupled with higher SG&A expenses as a percentage of turnover, EBIT margin plunged 9.3ppt yoy to 11.4% in 2Q09.

Retail inventory still high. By cutting orders in 1H09, distributors’ inventory dippedfrom a peak of over five months at the beginning of the year to fourand- a-half months as at end-Jun 09 (vs two-and-a-half months last year).

However, inventory at the Group surged from 23 days at end-08 to 34 days at end-Mar 09 and 40 days at end-Jun 09 due to order cancellations by distributors.

Collection of lease prepayment from distributors. The Group got back over Rmb550m of lease prepayment from distributors in 1H09. The balance of prepaid lease for distributors declined to Rmb605m at end-Jun 09 from Rmb1.1b at end-08.

Cut 2009-11 net profit forecasts by 27-28%. With much worse-thanexpected 1H09 results, we slash our 2009-11 net profit estimates by 27-28%.

This implies a 53% yoy earnings decline for 2009 and 6-7% yoy growth in 2010-11. While we anticipate Hongxing to resume profit growth since 2010, the Group is subject to huge earnings risk due to the still high inventory level and intensifying competition in the low-end sportswear segment.

Uncertain top-line growth. The Group has just completed the trade fair for 1Q10. Management guided a negative growth in orderbook and did not give guidance for 2010 turnover growth.

Sustained margin pressure. With more low-end sportswear companies getting listed recently, store openings are accelerating and competition intensifying. Together with the still high industry-wide inventory level, the Group may need to provide large wholesale discounts to distributors or raise advertising and promotional expenses.

Further investment in distribution network is probable. Instead of raising dividend payout, the Group intends to invest more on distribution network, such as paying the lease prepayment for distributors, buy stakes in distributors and launch M&As.

Based on our new earnings forecasts, the stock is trading at 10.5x 2009F PE vs 5-6x for S-shares consumer stocks. Given the high earnings risk, we maintain SELL with a fair price of S$0.10 based on 5.5x 2010F PE.

China Hongxing Sports: Disappointing Earnings

1H09 earnings down 56% y-o-y, with revenue falling 20% y-o-y. The decrease in the top line was attributed to weak consumer demand and the de-stocking process in the distribution channels. Although the Group continued to expand its distribution network to 3,845 POS, sales per store dropped 28%. We believe increased competition and heavier discounting also contributed to this.

Margins compressed mainly by advertising expenses. Gross margin decreased slightly from 41% in 1H08 to 38% in 1H09, whilst operating margin dropped significantly from 20% in 1H08 to 11% in 1H09, mainly due to the scaled up advertising and promotional activities.

B/S remained strong, supported by robust cash flow. Net cash per share further increased to S$0.20, fueled by robust operating cash inflow of RMB707m in 1H09.

Downgrade to HOLD, TP S$0.21, based on 8x FY10 P/E. We slashed our earnings estimates by 30% for FY09 and FY10 on lower revenue and margin assumptions. We believe the market will continue to rate CHHS below its HK-listed peers, as the company seems to be lagging behind its peers in terms of its operating performance and profitability. This set of disappointing results also raises questions about CHHS’ competitiveness in an increasingly crowded market.

China Hongxing Sports - Signs of a reversal in operating figures; upgrade to Buy

Recent operating figures show encouraging signs -- a reversal in the SSS trend and an improvement in the macro environment. CHHS is trading at a 64% discount within the sportswear sector, a wider-than-average discount to its peers. We expect this valuation gap to narrow in the near term on signs of improved operating conditions. We revise our earnings estimates for the next two years on expected improved operating conditions. Upgrade to Buy and raise TP to S$0.22.

The sportswear industry is showing signs of improved operating conditions with better SSS in May compared to April and cutbacks on product discounts at the retail level. The SSS trend has reversed and demonstrates improved operating performance at the distributor level.

Prepayments from distributors have been reduced by a third from RMB900m and appear on track for repayment by the end of the year. We believe that conditions could continue to recover in 2H. Signs of an improvement in the cash conversion cycle, higher operating cash flows, and continued repayments from its distributors could be key catalysts for the stock to rerate. The stock is currently trading at a 19% discount to assessed net cash per share of S$0.17.

We raise our earnings by 36% and 57% in FY10-11E and our target price from S$0.18 to S$0.22 on our DCF analysis (COE at 14.5% and TG of 2%). Risks include: 1) intense competition in the sportswear industry leading to a price war; 2) a slowdown in consumer spending; and 3) risks from changes in fashion.

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).

China Hongxing - A mid-end sportswear brand

Company Overview — China Hongxing said the inventory burden has started to ease recently and the SSS growth also improved to 13% in the first two weeks of May-09 from 3% in Apr. Mgmt aims to maintain its discount to distributor at35-36% this year and expects footwear gross margin to improve on lower rawmaterial costs. China Hongxing has net-cash of Rmb2,259m (S$476m), representing 87% of market cap. The stock currently trades on 6x 2010 PER, with 15% earnings growth in 2010 based on consensus estimates.

Business Strategy — Retail network expansion; Strengthen brand equity through advertising and promotion. Expand and enhance product offering.

Industry Overview — China sportswear market has doubled to Rmb41bn from 2003-07, according to Euromonitior.

Competitive Analysis — The sportswear market in China is largely dominated by a few international brands and national domestic brands. The key competitors of China Hongxing are Anta, Xtep, 361, PEAK, and Jordan, etc.

Recent Results — Despite Q109 order book was up 46% year-on-year, total revenue in Q109 was down 12% and earnings declined 51%. No dividend was declared for 1Q09 and there is no fixed payout policy.

Strengths — Large distribution network in China. Good recognition of its core Erke brand in the low-end segment. Strong balance sheet.
Weaknesses — Sportswear market in China is competitive and distributors are bargaining for more support. Sportswear goods are sensitive to economic cycle.

Hongxing - Weaker same-store-sales and order book

CHHS’s 1Q09 net profit fell by 51% yoy to RMB 56m. Earnings disappointed due to weaker-than-expected revenue and high A&P expenditure. Revenue weakness was evident in the sports footwear (-32%) and sports accessories (-74%), which saw declining volumes and ASPs. Point of sales decreased from 3824 to 3785 as there were more store closures versus store additions during the quarter.

The group’s same-store-sales were down approximately 11% yoy in 1Q09 and it continues to observe weak same-store-sales. Adding to the weak outlook was the poor showing of its recent trade fair orders in May where orders decline 14.5% to RMB 440m. Despite orders worth RMB 2.5bn to be delivered by Sep 2009, revenue recognition could be much smaller as the orders will be repriced at lower ex-factory prices, while some orders delivery will be delayed to avoid inventory pile up.

With inventory piling up at the distributors front from an average of 2-3 months to 4-5 months, the group has to continue with its product discounts to its distributors to sustain their retail business. In general, the group will reduce its ex-factory price from 40% of retail price to 35%. The on-going product discounts will continue to compress its margins.

Costly A&P against falling revenues led to net margin compression. Selling and distribution costs, which largely comprise of A&P surged to 30% of revenue from 20% a year ago. With a 5-year sponsorship deal to be the official apparel sponsor and partner of the Shanghai Masters ATP1000 games, A&P will continue to weigh on the group’s bottomline.

We have lowered our FY09 earnings estimates by 7% to reflect the weaker revenue and high operating expenses. Risks on deteriorating earnings fundamentals and defaults on advances to its distributors (~RMB 940m) prevail amid weak demand. Although the group may consider resuming dividends payout, we doubt it will be enticing given its weak earnings and need for working capital support. Reiterate Sell at a target price of $0.16 pegged to its net cash per share. Facing rising challenges in its core business, Chin Hongxing may not benefit from the expected cyclical recovery in the China consumer market.

China Hongxing Sports - Inventory build-up at distributors

Hongxing's 1Q09 net profit (13% of our FY09 forecast) was 52% below our expectation and consensus on higher-than-expected selling & distribution expenses. We expect further declines in volume and ex-factory ASPs due to high inventory levels at distributors. We have cut our FY09 earnings estimate by 12.5% in view of the higher A&P expenses in 1Q09. On the other hand, our target price has been raised to S$0.18 from S$0.10, now pegged at 6x CY10 P/E (previously at a 40% discount to cash) in light of increased market risk appetite. Maintain Neutral given the limited upside to our share price.

As warned by management 1Q ‘09 net profit plunged 51% yoy and 49% qoq to RMB56mln on the back of 13% yoy and 34% qoq decline in sales to RMB568mln. Gross profit margin was steady at 40%.

However, due to aggressive promotional activities, selling and distribution expenses rose 33% yoy and 31% qoq to RMB171mln, dragging down operating margin to only 11.4% versus 19.2% last year and 16% last quarter. If not for a forex gain of RMB16.4mln, bottomline would have been worse.

One positive aspect is that management delivered on their promise to collect prepayments of RMB219.2mln during the quarter, reducing their prepayments to RMB939.9mln as well as collectingRMB91mln worth of receivables, thereby generating operating cash flows of RMB303mln. We would continue to monitor prepayment and receivable collections as the consumer sentiments deteriorate in China.

Financial position remains robust with cash of RMB2.265bln versus little debts, but until management start to buy back shares or restart their dividend payments, the market would likely pay little regard to their cash holdings.

Looking ahead, management maintained their Feb ’09 cautious guidance and expect the near term market conditions to remain challenging as the weak economic climate continues to negatively impact consumer demand.

At 21 cents a share, market cap is $588mln with 77% of it represented by cash, trailing PE is 7.5x, price to sales is 1x and price to book is 0.7x. Our last call in Feb ’09 was HOLD when the stock was at 18 cents, but with the stock having rebounded by 282% (to 21 cents currently) from its Mar ’09 low (of 5.5 cents) and coming close to the upper end (about 25 cents) of its 9 month trading range, we would be looking to sell on further strength.

Technically buy China Sport, Oceanus, Hongxing Sports

China Sports International (CSPORT SP; S$0.10) – BUY

• The stock appears to have built a base above its 30-day SMA and look poised for a move upwards. It could climb to test its last support-turned-resistance at S$0.12-0.13.

• Daily MACD continued to edge higher and so is its RSI. A rise in volume is likely to lend the bulls a hand in lifting the stock.

• Aggressive investors may want to buy now with a stop placed below its 30-day SMA at S$0.085.

China-Sports International Limited is principally engaged in the design, manufacture and sale of sports fashion footwear and the design and sale of sports fashion apparel under their YELl brand.

Oceanus (OCNUS SP; S$0.145) – BUY

• The stock broke out above its resistance trend line on strong volume. More upside is likely to follow in the coming days as buyers pour in.

• Both indicators continue to edge higher. Any weakness towards the support at S$0.12-0.13 is a good level to get in.

• As the momentum is still on the rise, the stock is likely to test the upper resistance at S$0.16-0.165 next. The breakout above this resistance could see the stock climb to try to take out the strong resistance at S$0.195.

Oceanus is a marine aquaculture specialist focusing on large scale; land based industrialised production and sale of premium quality Japanese Abalones. Its principal activities are the research and development, breeding, intensive production and sale of this luxury product.

China Hongxing Sports (CHHS SP; S$0.125) – BUY

• The stock has broken out of its downtrend channel and also its 30-day SMA. There is a good chance that the stock could see a strong run to close the gap at S$0.135-0.14. S$0.155 is the next target if this gap is filled.

• Both indicators are positive at the moment, supporting the view for higher prices ahead. The bullish divergence on its MACD is also a positive sign.

• Buy now with a stop loss place below the trend line at S$0.095.

China Hongxing manufactures its sports footwear at its production facilities in Quanzhou City, China and has a current annual production capacity of approximately 17.9m pairs of sports footwear. The manufacture of sports apparel, sports accessories and a portion of its sports footwear are subcontracted to selected contract manufacturers who meet the quality and design requirements of the Group.

China Hongxing – Feb trade fair sparks the beginning of earnings downtrend

Following the recent luncheon with China Hongxing, we got a sense that the business is facing mounting pressure in a difficult operating environment. The IR addressed key concerns with regards to the huge idling cash pile, stressing that the management is being prudent to set aside hefty working capital needs. As a form of assurance, she presented the bank statements issued by HSBC and China Construction Bank.

The group’s latest trade fair in February garnered RMB 800m worth of orders (-20% yoy). Total orders received for 9M09 have grown by approximately 9% yoy. Rising sales volumes of apparels (+12%) were insufficient to offset a 19% volume decline for sports footwear. The ASPs have also fallen due to the swift towards low-pricing items.

Despite a 20% same-store-sales growth in Jan 09, the combined same-store-sales for Jan and Feb were a mere 5-6%, suggesting that Feb’s same-store-sales growth was already in the red. Declining same-store-sales undermine operating efficiencies and will lead to rapid cash depletion. Besides, the group will likely continue its product discount program which will erode its gross margins. Orders delivery will also be delayed as a form of inventory control. This will further dampen topline.

Huge working capital will deplete the excess cash rapidly. Dwindling demand from mass market due to rising job losses could stretch its inventory days by 2 to 3 months. After which worsen credit terms will follow. CHHS also do not rule out rising difficulties in repayment from distributors and provisions will have to be made. We estimate that such working capital needs could potentially amount to RMB 958m. This will deplete its net cash by 49%, reducing its net cash per share to 8 cents.

We have lowered our earnings estimates for FY09/10 by 16-21% to reflect topline weakness. The beginning of earnings deterioration coupled with overhang from the conversion of the remaining RCPS could impede any potential re-rating. Although the group is considering paying dividends, we doubt it will be enticing given the huge working capital needs. We are downgrading the stock to a Sell and revised our new target price to 8 cents (peg to the net cash per share after adjustment for potential working capital needs).

China Sports, Hongxing, Zaino - ALL SELL

China Sports International (CSPORT SP; S$0.075) – SELL

• The stock broke below its October lows of S$0.12 (now the resistance) last month and has been falling ever since to current levels. It hit an all time low of S$0.07 last week and that is the immediate support at the moment.

• Daily MACD has confirmed its positive cross but the momentum is weak while RSI is slowly edging lower. Note that the RSI is no longer oversold now, which suggests that there is room on the downside from here.

• Since there are still no signs of a bottom yet, the stock remains a sell on strength. Upside resistance at S$0.085-0.09 (gap) and S$0.10. If the S$0.07 support gives way, it could ease further to S$0.05-0.055 next.

China-Sports International Limited is principally engaged in the design, manufacture and sale of sports fashion footwear and the design and sale of sports fashion apparel under their YELl brand.

China Zaino International (CZAI SP; S$0.125) – SELL

• The stock fell below its S$0.16 support (its Oct lows) and this is a bearish sign. The bulls tried to push it back above but there were sellers waiting. Maintain sell on strength call.

• The RSI has just moved into the oversold position. Expect more downside before a rebound sets in. Support is at S$0.11, followed by S$0.09.

• Unless it can close back above the S$0.16 resistance, we continue to expect more downside pressure on the stock as its weekly indicators are bearish. The immediate resistance is at S$0.145.

China Zaino International Ltd and its subsidiaries (the "Group") are involved in the design, development, manufacture and distribution of backpacks and luggage under their "DAPAI" brand.

China Hongxing Sports (CHHS SP; S$0.095) – SELL

• The stock is still in its downtrend channel. The selling does not appear to have eased. Another retest of the S$0.07 and S$0.055 support is likely. If these levels do not break, then a double bottom could take form.

• Indicators are marginally positive at the moment but the RSI is no longer oversold. Again there are no bullish divergences here on both indicators.

• It is best to stand aside for now and maintain our sell on rebound call for now.

Until there is a double bottom formed or a breakout above its 30-day SMA resistance at S$0.13, we would then change our bearish view to a bullish one. China Hongxing is principally engaged in the design, manufacture and sale of sports shoes, sports apparel and sports accessories in China. It principally targets the youth market and the mid-range market segment of the sporting goods industry in China.

China Hongxing - Secured five-year sponsorship deal to be offical apparel partner of ATP1000 Master Series

The group secured approximately RMB 800m worth of orders at the 2009 Autumn/Winter Collection Trade Fairs held in Tianjin and Xiamen at the end of February. This was a 20% decrease from a year ago. Judging from the last three trade fairs held, the total orders received for the first nine months of 2009 would have grown by approximately 9% from the previous corresponding period.

China Hongxing’s February trade fair attracted 2,500 participants. The trade fair showcased approximately 240 new footwear models and approximately 600 apparels and accessories designs. The apparels and accessories accounted for the bulk of the orders (approximately 55%), while footwear accounted 45% of the orders.

The group also announced that it has officially signed a five year sponsorship deal with the Shanghai Master Series Organising Committee (SMSOC) to be the official apparel partner for the Association of Tennis Professionals (ATP) 1000 Master Series tournament, which will be hosted in Shanghai starting 2009. Besides being the official apparel sponsor, China Hongxing will also work closely with ATP officials to conduct research and develop Erke-branded products. China Hong will also work closely with SMSOC to organise a series of tennis tournament-related activities and programmes.

According to the Chairman, Mr Wu Rongguang, the ATP1000 Master series is highly prestigious and will bring the world’s top tennis players to China, giving people the opportunity to discover and appreciate world-class tennis. China Hongxing’s collaboration with ATP is a testament to the strength and prominence of Erke as a leading tennis brand in China.

The Shanghai ATP 100 Masters tournaments will be held around October each year where total prize awards for all 5 years will total more than US$20m, making it Asia’s highest prized tennis tournaments and only second globally to the four Grand Slam tennis tournaments. The 2009 ATP1000 Shanghai Masters tournament will be held between 11 – 18 October, which is slated to attract more than 80 top global tennis players with 99 exciting matches to be played. The Group believes that this sponsorship with the Shanghai ATP1000 Master Series will reinforce the Group’s efforts in building its brand image and further enhance its brand visibility in the PRC

S-Shares Results Review Summary and Outlook

In summary, two-thirds of the S-share companies under review saw their earnings rose for 2008, although most of the growth came during the first half of 2008.

Discretionary consumer companies saw significant demand slowdown in the second half of 2008, which became even more apparent in the 4th quarter. Companies either faced a slowing of revenue growth (like China Hongxing) or had to sacrifice lower margins (Hongguo and China Sports) to maintain sales growth via product discounts or by keeping ASPs low.

Meanwhile, the earnings outlook for discretionary consumer companies is fairly muted. We expect companies to continue spending on A&P to maintain their brand visibility, whilst also likely to embark on discounts either directly or indirectly to consumers to induce spending, which would pressure margins.

Consumer staple companies like Pacific Andes, China Fish, and Celestial NutriFoods were less affected. While companies under this segment also saw a slowdown in second half of 2008, impact was less significant. We still saw a 7% and 19% growth for China Fishery and Celestial NutriFoods respectively. Raffles Education continued to deliver robust growth largely on operating efficiency.

Going forward, we believe the impact of a slowdown in consumer sentiment will impact more on branded staple food like Celestial NutriFoods.

Shipyards like Cosco and Yangzijiang were hit by provisions. In view of the deteriorating conditions for shipping industry, the shipyards have prudently made higher provisions for doubtful debts and cost overrun in 4Q08. In line with its profit guidance, Cosco plunged into losses of S$24m in 4Q08, due mainly to provisions for inventory write-downs, doubtful debts and cost overrun at its shipbuilding division. Yangzijiang’s FY08 earnings fell short of our estimate by 5%, blames on a provision of RMB200m. Stripping this out, its bottomline would have come in 5% above our expectation.

China Hongxing Sports Ltd Off 31%; Margin Calls and A slower rhythm

We caught up with Hongxing's management recently to gain clarity on the company's outlook for 2009 and forward strategy. Although volume growth has been robust so far, we expect future volumes to fall as distributors attempt to sell off their old stock. We see signs of a slowdown with inventory levels increasing at both the retail and distributor levels and lower same-store sales growth post-Chinese New Year, We remain Neutral on the stock with our target price unchanged at S$0.20, based on 6x CY10 P/E.

China Hongxing Sports down 31.0% at record low of S$0.10 in heavy volume. Traders, analysts suspect margin calls, say ongoing disappointment over recent 4Q08 results also likely weighing. "It''s likely to be on margin call. Most of those SMEs like to use their shares as collateral to finance some of their operations. But in a market like this, leveraging just doesn''t work," says dealer. "The company is not paying a final dividend, which has made some investors worry about their cash position," says analyst at bank-backed brokerage; adds weakness may also be due to investors offloading some convertible preference shares issued by company few years back to raise funds for expansion; "looking at their latest balance sheet, some holders of the company''s RCPS (redeemable convertible preference shares) may have converted into ordinary shares. There''s no restriction on these newly converted shares from being sold." When contacted, Hongxing spokesperson says not aware of reason for sharp share price fall; "there''s nothing company-specific. We are not aware of what''s happening." Orderbook quotes suggest stock may find bottom at S$0.08.