Friday, May 02, 2008

Hongguo - initiating coverage

I'm interested in this Singapore listed China company named Hongguo. Hongguo is a manufacturer and retailer of fashion ladies shoes and clothing, best known for their 'C.banner' and 'E.Blan' lines of ladies shoes. Though I never heard of these 2 brands before, do take note that Hongguo is one of the 2 largest ladies shoe brands in China, with their own manufacturing facilities in Nanjing and Dongguan.

Besides their own well recognised brand in China, they also do contract manufacturing over other brands of shoes. 'Nine west' is one of them. I read that they could be bringing in other brands to expand their portfolio, including international ones like Tommy Hilfiger.

Outlook: Women drive the economy. Looking at how my significant other buys her shoes every month and hearing how other 'more normal' women buy new shoes every week, we could be looking at a fast expanding market. As china get more affluent, we could be looking at a shift in the earning power of women there. Hence in their own market in which they are ranked the top 2, there could be tremendous growth.

Risk: Shoes can be commoditized. Branding plays a good part in holding the pricing and selling power of Hongguo. If that fails, they can only resort to reducing the price of their shoes, will be ultimately erode their margins and earnings.

Ratios: Margins is around 17 to 19% from 2003 to 2007. ROE is around 20-22 for the same period. PE is slightly less than 10 (based on FY07 earnings). Possible bargain in this company.

Need to analyse more in depth, considering this is a china company. Management needs to be scrutinized more carefully than usual.


Alen said...

If I remember correctly, Hongguo is still the no 3 in China. Growth wise have been slow and steady. However, there is still a huge gap to no 1.

la papillion said...

Hi Alen,

I'm glad to see that another person is also following up on Hongguo. We can share notes on it and learn together.

Hongguo is still no 3, yes, you're right. In subsequent posts, I'll compare Hongguo against their 2 competitors, Prime (Daphne) and Belle. Belle has around 6000 plus Points of sales (POS) while Prime Success has around 3000. Hongguo has only 800 plus POS.

Actually the 1Q result of Hongguo is quite in line with what I expect for Hongguo. Gross profit actually increases, which shows that the direct cost of producing the goods dropped. Net margins dropped but gross margins increased - this shows their expansion plans (opening up more stores) is costing their net margins to suffer. Each POS added actually add more revenue and lowers down the total cost - I'll post more data to support this. In time to come, Hongguo should improve their net margins, so I didn't worry excessively on it, though it's still something that must be monitored closely.

Look forward to more discussion with you!