Friday, May 16, 2008

China Hongxing intiation report

Was alerted to China hongxing when I saw a thread in cna forum regarding its excellent results. I did browse through its quarterly results and found it pretty impressive, hence my initiation report on China hongxing.

What impressed me most is the high net margins generated from china hongxing business. They specialised solely on selling sports shoes, apparel and distribution business. The gross margins hovers around 30-40%, which is what I'll expect. But the net margins is around 15-20% for sports shoes. I would have expected a net margins of around 10%, having browsed through a couple of sports shoes company listed here and in HK.

I had such a hard time finding their number of shares because of a few issues:

1. They have convertible shares offering, which makes the number of shares outstanding very messy as they convert at different times

2. They split their shares 5 to 1 (every 1 ordinary shares is split into 5) to increase the liquidity, creating more confusion for me.

This is my compiled data. Note that the EPS is based on basic, non-diluted. The diluted one is too messy for me to keep track. All entries are in RMB ('ooo).

As I mentioned, the net margins is considered high for their business. I read that their sports shoe brand Erke is one of the top sports brand in PRC, so perhaps that accounts for their higher margins. Low debts and having a pretty strong balance sheet, at first glance. The founders own a huge percentage of the shareholdings too.

A few things I don't like about Hongxing:

1. I don't like it when companies split up their shares for more liquidity. Same pie but cut into more pieces only. The management mentioned splitting up the shares for more liquidity. Seems like the management is overly concerned about share price, though this could be a one-off incident and my judgment could be too harsh.

2. ROE is high but not consistent. I have no idea where the next ball park figures for ROE is next year and it keeps me from having a good valuation of Hongxing into the future. But from their latest quarterly results, ROE is around 12% annualised. Earnings are too erratic too.

3. They are listed only in 2005, so the history is a bit too short.

As such, no more investigation into this until perhaps after they stabilized their ROE and earnings per share. I wonder how they will fare once the Beijing Olympics fever fade away. They are trading at around 20x FY07 earnings at a current price of 0.675. Perhaps when the price reaches 0.40 again (around 10x FY07 earnings) then it'll be more realistic.

TA looks poised for another cycle of upsurge though.


Mike Dirnt said...

im vested with China Hongxing :)

there is more to beijing olympics actually. probably you want to read this article:

la papillion said...

Hi Mike,

Yup, I recognised their top brand status in China, hence their high margins. I think they are worth a look again when their EPS and ROE stabilised, and perhaps after Olympics fever die down. At current price, I feel it's a little high, though I'm not sure.

As I mention, possibly 0.4 is a safer entry point.

Who do you think their competitors are?