China shoe maker sale

Today DBS Vicker issued the following report.

Attractive Value Emerging For SChip Shoe Brands

S-Chip Sports Shoes plays have slipped more than their HK counterparts. China Hongxing and China Sports International have lost 59% and 55% of their share value respectively from their respective peaks over the last 12 months. This is in contrast to HK peers such as Li Ning, Anta Sports and Dongxiang, which have seen their share price decline by between 29% and 50% from their peaks. In terms of valuations, China Hongxing and China Sports International are trading at 15x and 7x FY08 earnings respectively compared to HK peers that are trading at 18x – 30x FY08 PER.

Hongguo has performed relatively in-line with HK peers. Hongguo’s share price has fallen by about 64% from its peak, compared to 62% for Prime Success and 47% for Belle. In terms of valuations, Hongguo is trading at c. 8x FY08 PER, versus 13x FY08 for Prime Success and 23x for Belle.

Growth remains intact whilst valuations are now much more attractive for S-Chip Shoe Brands. We continue to be positive on the consumer goods sector in China, especially for companies with strong branding power, such as China Hongxing and Hongguo, which are able to raise their prices to pass on higher material and labour costs. Latest figures also show that retail sales in China in the month of February grew by 20.2% yoy, continuing the strong double-digit growth momentum over the last few years. In the meantime, valuations for the S-Chip shoe brands have become very attractive, trading at single digit to low teens current PERs, compared to more than double of that 6 months ago and relative to EPS CAGR of 20% or more for the sector

Target prices adjusted and BUY calls re-iterated. We maintain our BUY call for China Hongxing, with target price adjusted to S$0.90 based on 18x FY09 earnings. We have also included our Nanjing store visit notes in our update piece for China Hongxing. For China Sports, we have adjusted our target price to S$1.77, based on 10x FY09 PER and also maintain our BUY recommendation for this stock. For Hongguo, our target price is adjusted to S$0.94, based on 12x FY09 earnings and our update note also talks about a recent visit to their stores in
Nanjing.

>> For the past few years, the shoe makers have been growing pretty well. China Hongxing is expanding at a fast pace, Hongguo is slow and steady and China Sport is the new kid on the block. I am still very confident in the China consumer sector, especially the shoes. Unlikely the food sector, they seems to enjoy better pricing power and growth. I always like the lady shoe market, if you look at how many pairs of shoe a woman would buy a year. Surprisingly, sport shoe is even hotter.

It is yet to be seen the recent inflation would hit the consumer on shoe buying. But, consider long term, I would think they might be the best bet.