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.

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Li Heng - Prospects Are Looking Brighter

The key message during the plant visit last week was that 3Q ‘09 bottom-line is expected to continue to recover from 2Q ‘09 (RMB38mln), 1Q ‘09 (RMB10.2mln) as well as 4Q ‘08’s (loss of RMB8.7mln) depressed levels, but still not enough to reach 3Q ‘08’s high base of RMB 259mln.

We estimate 3Q ‘09 bottom-line to recover 32% qoq to RMB50mln (no forex gain included versus forex gain of RMB13mln in 2Q ‘09).

This in turn reflects sales volume remaining steady as new local customer additions (+17 yoy to 195) help to offset weakness from export customers, while average selling prices recover 27% sequentially on the back of stronger demand as well as higher raw material costs.

While raw material prices are also expected to increase, fortunately, the company buys 2 months worth of inventories, hence will benefit from the lag effect of lower cost inventories.

As a result, gross profit margin is expected to recover from 2Q ‘09’s 10.6% to about 15% in 3Q ‘09, but still down from 3Q ‘08’s 31%. (Gross margin was 9.2% in 4Q ‘08 and 12.9% in 1Q ‘09).

The new polyamide chip plant which is used to produce part of their raw materials is expected to help them improve overall margins by 2-3% points when it ramps to full utilization in 1H 2010. The cost of the plant is about RMB571mln with depreciation per year estimated to be between RMB55-60mln (to start accounting for depreciation in 4Q ‘09).

Due to improved prospects, management has restarted their previously stalled expansion plans, targeting to add 70,000 mt of new production capacity by 1H 2010, increasing total production capacity from 167,000 mt to 237,000 mt.

The capex cost of RMB200mln is not a problem with the company’s net cash holdings of close to RMB1bln. Management said that they will maintain their at least 20% payout ratio at the end of the financial year.

The number of analysts visiting the company’s plant is down significantly from the one organized in early 2008, likely reflecting the company’s dismay operating performance and problems associated with S-Chips in general. However, we believe that as the company continues to deliver on their improving bottom-line performance, successfully executes its expansion plans and delivers on their dividend promises, investor interest will return.

While the stock has risen 19% since our upgrade last week, we still see upside potential given its improving prospects (especially with easier yoy comparisons due to low base effect from 4Q ‘08 onwards) and 0.7x price to book despite improving bottom-line and ROE performance, hence maintain BUY. (Founder and Chairman Chen Jianlong owns 42.7% of the company, CEO Chen Feng owns 10.32% while David Loh of UOB owns 10.47%).

China Fishery: Conservation of quota to 4Q

2Q09 net profit up 6.6% YoY to US$25.1m despite fall in revenue. This is in line with our expectations. However, growth in net profit was due to cost savings. Revenue on the other hand fell 21.7% YoY to US$107.4m due to a 30.6% (US$32.5m) YoY fall in 2Q09 trawling operations revenue. We raise FY09 net profit by 11.1% to US$117.4m. Target price is raised from S$1.20 to S$1.38. BUY maintained.

2Q09 trawling revenue fell as a result of conserving fishing quota to 4Q09. Reason for this allocation includes higher operational efficiency as they even out their vessel utilisation. They also hope to benefit from higher fish and fish roe prices towards the end of the year as the economy picks up.
Operating cost decreased 30.9% YoY to US$66.1m in 2Q09, due to the introduction of the ITQ system in Peru since Apr 09, allowing them to operate more efficiently. Lower fuel costs also contributed to the decline. Selling expenses declined 29.0% YoY in line with lower sales volume, hence net margins increased to 23.4% in 2Q09 compared to 17.1% in 2Q08.

FY09 net profit forecast raised. We have increased FY09 North Pacific trawling ASP from US$1,750/MT previously to US$1,850/MT due to better than expected ASP in 1H09 (US$1,884/MT). This is partially off-set by a US$9m increase in selling expenses forecast for FY09, as 1H09 selling expenses of US$14.7m turned out higher than expected. Our FY10 net profit has been lowered to US$162.4m from US$169.2m, due to increased FY10 selling expenses.

Target price is raised from S$1.20 to S$1.38. We raise our target price to S$1.38 from a previous S$1.20 based on 5.1x FY10 P/E, which is derived from peer Pacific Andes’ FY11 P/E of 5.1x. We note that since 2007, China Fishery has been consistently trading at a premium to Pacific Andes, with a P/E average of 11.7x versus Pacific Andes’ P/E average of 7.1x. However, our valuation is more conservative as we consider the Group’s inexperience in South Pacific fishing, as well as possible disruptions to their fishmeal operations due to a severe El Nino.