With reference to the half-year financial statement announced on 5th Aug 08 by China Hongx, following is a brief summary of the result.
1. Turnover for 1H FY08 up 48.4% to RMB 1.334b as compared to 1H FY07 of RMB 898.9m.
2. Cost of Sales for 1H FY08 up 51.4% to RMB 788.7m as compared to 1H FY07 of RMB 521m.
3. Gross Profit for 1H FY08 up 44.2% to RMB 545.1m as compared to 1H FY07 of RMB 377.9m.
4. Gross Profit Margin for 1H FY08 dropped 1.1ppt to 40.9% as compared to 1H FY07 of 42%.
5. Net Profit for 1H FY08 up 37.5% to RMB 232.2m as compared to 1H FY07 of RMB 168.8m.
6. Cash flow for 1H FY08 was RMB 2.202b as compared to 1H FY07 of RMB 415.5m.
7. EPS for 1H FY08 was 9.14 RMB cents as compared to 1H FY07 of 8.44 RMB cents.
8. NAV for 1H FY08 was 110.06 RMB cents as compared to 1H FY07 of 113.83 RMB cents
China Hongx revenue increased 48.4% mainly due to improvements in sales from an increase in demand for its branded products and an expanded network of approx 3,648 retail outlets. China Hongx's success in improving its product mix to higher-margin products, its ability in raising its selling prices, and in generating greater visibility with its target market through extensive advertising and promotion activities and high profile sponsorships also contributed to the strong 1H FY08 performance. China Hongx's revenue growth in all 3 business segments of footwear, apparel and accessories which increased by 28.6%, 84.1% and 132.4% respectively in 1H FY08 as compared with 1H FY07. China Hongx drop in gross profit margin was mainly due to the discounts of approx RMB 78m provided to distributors and retailers.
In response to China Hongx 1H FY08 result, the followings are the view from analysts.
1. CIMB-GK downgraded to neutral, cut target price from $0.86 to $0.53
Based on 1h FY08 EPS of 9.14 RMB cents, assuming China Hongx is able to maintain its current performance for the rest of FY08, FY08 EPS could be projected to be 18.28 RMB cents ( 3.565 S cents ) conversatively. At the close price of $0.465 on 8th Aug 08, this translates to 12.7x FY08 PE. Personally, China Hongx could be fully valued at 15x FY08 PE for FY08, which translates to $0.55 unless it could turn in an even stronger perfomance in the second half of FY08. A stronger perfomance would required stronger consumer spending in China despite the rising inflation.
Below is a list of valuation for China Hongx based on a conservative estimate of FY08 EPS of 18.28 RMB cents.
15x PE -- $0.55
14x PE -- $0.515
13x PE -- $0.475
12x PE -- $0.44
11x PE -- $0.405
10x PE -- $0.365
9x PE -- $0.33
8x PE -- $0.295
7x PE -- $0.255
6x PE -- $0.22
5x PE -- $0.185
Investors who are keen on China Hongx probably could start to look at it at valuation of 10x PE or less as this gives at least 50% upside with a fair value at 15x PE.
