China Hongxing Sports Ltd.
Running quick, growing fast; A new BUY
Initiating coverage; BUY with PO of S$1.45
We initiate coverage on China Hongxing with a Buy and price objective of S$1.45. Our PO suggests 30% upside for a stock with exposure to China's growing sportswear sector and projected EPS CAGR of 50% over FY06-09.
PRC sportswear market to grow at CAGR of 22%
China’s sportswear market is estimated to grow from US$4bn to >US$12bn from 2006-12, representing a CAGR of 22% over the next six years. This is consistent with Hongxing’s belief that rising disposable income and greater awareness of
sports will drive demand growth for its products.
Room for further margin expansion
We project Hongxing’s gross margins to expand from 37% (FY06) to 44% (FY09) through higher ASPs and better sales mix with increased contribution from highermargin apparels. Management also plans to reduce outsourcing to achieve cost
savings and may consider acquisition of an apparel production facility in future.
EPS CAGR of 50% over FY06-09E
Hongxing’s 1H07 earnings grew 110%yoy to RMB169mn while gross margin improved from 34% to 42% driven by higher selling prices. With its accelerated expansion in retail network, we are projecting EPS CAGR of 50% over the next
three years, which implies declining PE from 38xFY07E to 19xFY09E earnings. We expect a strong set of 3Q07 numbers, which could be a near-term catalyst.
Risks to growth and our PO
Risks are i) lower than expected sales growth, ii) costs inflation, iii) disruption in production; iv) potential counterfeit; v) distributor defaulting on rental repayment.