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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Li & Fung - 1H09: cost cutting spurred profit, too much growth is priced in

1H09 results came in better than our estimates due to cost saving, but worse than market expectation as a result of drop in turnover, with net profit up 13% yoy to HK$1.4b. Valuation is too expensive. Maintain SELL with fair price of HK$18.8 based on 18x 2010F PE.
1H09 results came in better than our estimates due to cost saving, but worse than market expectation as a result of drop in turnover, with net profit up 13% yoy to HK$1.4b. The earnings growth was solely attributable to cost cutting. Due to dilution from the two share placements in Sep 08 and May 09 respectively, EPS only grew 6% yoy.

Despite its numerous M&As and outsourcing deals, turnover unexpectedly dipped 2% yoy to HK$46.3b in 1H09, mainly due to insolvency of its customers, order cuts and price deflation. Ytd, 10 customers of L&F have already filed for bankruptcy, compared to six for 2008. Besides, existing customers cut their orders for destocking purpose, as most of them saw a double-digit sales decline.

SG&A as a percentage of turnover dropped to 8% in 1H09 from 8.3% a year ago, due to the Group’s cost cutting measures. As such, EBIT margin rose 32bp yoy to 3.6% in 1H09. For 2009, the Group targets to reduce its operating expenses by US$100m or 10% of the 2008 cost base (excluding acquisitions).

Effective tax rate fell to 5.9% in 1H09 from 8.6% a year ago, due to tax management. Combined with an improvement in EBIT margin, it boosted net margin by 40bp yoy to 3.0% during the period.

Based on the larger than expected cost savings and lower effective tax rate, we raise our EPS forecasts for 2009, 2010 and 2011 to HK$0.88, HK$1.04 and HK$1.23 respectively. Our expected 27% EPS growth in 2009 is solely based on acquisitions (or outsourcing deals), operating cost savings, as well as tax expenses. The benefit will fade from 2010 onwards. We anticipate an 18% EPS growth for 2010-11 to factor in the new outsourcing deals, like Talbots.

Raffles Education - Victim Of Negative Media Report.

Raffles Education (RE) said that a website in China known as China’s 21 st Century Herald had on 25 Aug’09 published a speculative report indicating that a number of teachers in its 100%-owned China unit Oriental University City (OUC) have false accreditations.

RE said that while it is not the company’s policy to comment on speculative reports, management have decided to advise its shareholders and the investing public that the media report contains a number of inaccuracies and misleading facts and figures. Their 2 colleges at OUC are bona fide schools with all the requisite approvals and permits in place.

Management also cautioned against the wilful circulation of the media report and reproduction of the untruths and misleading facts and figures. And that it would not hesitate to seek legal redress against anyone found doing this.

The date of the negative media report was coincidentally released on the same day that RE released its full year ended June’09 resultswhere its performance came in below market expectations due to higher than expected costs, slower than expected student growth rate and start up costs of new colleges. This had resulted in a few downgrades and target price reductions by analysts.

At the same time, technically the stock breached its short term uptrend in place since Mar’09.

Since 3Q ended Mar’09, the company had stopped its usual quarterly dividend payment. At 50.5 cents this morning, market cap is S$1.324bln, trailing PE is 26x, price to sales is 6.5x and price to book is 2.5x.