Sunday, November 16, 2008

Hongguo 3Q results

Hongguo released its 3Q08 results last Fri. It wasn't doing exceptionally well, but given the current state of matter, I think it's quite alright. Let's just do a quick one here.

Here's my thoughts on the statements:

1. Looking at the 3Q to 3Q results, revenue increased which is followed by an increase in both gross profit and net profit in absolute terms. However, gross and net margins fell slightly.

The increase in revenues comes from the increase in more stores (150 in total) selling both the main C.Banner brand and E.Blan. However, JUC outlets decreased by 10 in the 3Q. The Naturalizer brand also starting contributing a little to the revenue. Cost increases as there are more outlets opened, bringing down the net profits. It's good to know that the management decided to limit the expansion of more outlets in the midst of this financial crisis. It's a more prudent way of doing business.

2. A little worried about their net margins, which is declining for a few quarters. I believe their 2nd and 4th quarter is their better quarters in terms of revenue and profit. Take a look at their quarter to quarter figures.

One thing for sure is that their net margins are sliding down. SDA/revenue is getting higher too, which the management always attribute to the expansion in new outlets. So far, their expansion do not require taking any long term debts, which is safe in this kind of credit crisis. At least I know they are less likely to blow up!

3. Here's their current ratio, total debt/equity, ROE and EPS figures.

Current ratio is still alright, but there is an increase in the total debt/equity ratio. The increase in debt is due solely to an increase in short term liabilities. Two figures stand out strongly from the current liabilities section of the balance sheet : Short term loan of 40.9 mil RMB and increase in trade payables from 64 mil RMB to 104 mil RMB. Seems like they are squeezing their creditors more tightly by paying them slower. There are not increase in trade receivables though.

4. As for cash flow, there is a few things to take note of. There was around 20 mil RMB that others need to repay Hongguo. This is partly offset by the 30 mil RMB that Hongguo owed others. Overall, cash generation from operations is +ve, but after taking into account tax, it went to -ve but is generally in a better state than 3Q07. There is an increase in short term loans of 40.9 mil RMB which is mentioned earlier in the balance sheet - but there are no mention of what the loan is used for. It made up 16.7% of the total debt (they have no long term debts), so it's not a major problem. Cash flow should improve more as they plan to limit the expansion of their core retail outlets (I take it that they mean C.Banner and E.blan brands) to 150 by end of FY08. The management mentioned that they would be the productivity and the profitability of their outlets - which I think is a good move. Fight, consolidate THEN advance, that's the way of the infantry.

5. Breakdown of revenue:

C.Banner --- 56.4%
E.Blan ---- 9.6%
Contract manufacturing --- 26.2%
JUC --- 6.1%
Naturalizer footwear --- 1.7%

There is more closure of JUC to the tune of 10 more outlets. I think they are slowly divesting out from that. Another point to take note is the huge increase in the contract manufacturing segment. Compare this to 2Q revenue breakdown:

C.Banner --- 62.2%
E.Blan ---- 9.2%
Contract manufacturing --- 17.0%
JUC --- 6.9%
Naturalizer footwear --- 1.7%

Contract manufacturing is of lower margins than their in-house shoe brand, so I would expect the net margins to drop further. No more plans to expand their production capacity for their contract manufacturing. Management had stated that they wanted a revenue mix of OEM : Retail of 80:20, so that's what we should be looking at.

Value to price comparison:

Annualised EPS for FY08 is SGD $0.0606. On last count, the EPS I calculated was $0.06252. Last close is SGD $0.180 per share. This represents a PE ratio of 3x. To hell with historical PE, haha! The lowest PE was around 5x, but I think it broke all record now.

Applying Graham's strict (current assets - total liabilties)/shares outstanding, we get SGD $0.223 per share. Using NAV [(total assets - total liabilites)/shares], we get SGD 0.307 per share. Based on FY07 dividend, divided yield is around 7.8%.