Hongguo FY08 Q1 result

Figures are provided for Q1

Revenue +27.32%
Gross profit +34.38%
Selling and distribution cost +66.09%
Net profit +16.06% at 34m RMB

If not the substantial higher selling and distribution cost, this would be another good quarter. Compare to last full year result, it is showing sign of escalation. It is not discussed in the result announcement that what is the significant contributor to this cost increase. Are they promoting the brand more aggressively or the rising inflation in China significantly lift the cost?

Cashflow remain strong, but trade receivable increased. Gross margin increased to 41.61% which generally signal the brand position. The group expansion strategies have remained the same
1)Retail store expansion
2)Multi brand strategy

It is yet to see whether the cost would go out of control. Looking at the Q1 growth percentage of 16%, let's assume full year would be at the same rate. The forecast EPS would be 0.32 RMB. Today it closed at 0.52, which means trading at forward PE of 8. Still consider cheap, but I would rather wait to see the cost trend. However, if the general market improves, it might still fly.

My china friend said he saw mainly Daphne stores in the cities he visited. Hongguo still has a lot of catch up to do.

***Updated 30 Apr 2008

Some comments from analyst.

DBS:

Maintain BUY, TP S$0.94 based on 12x FY09 PER.

DMG:

The Group’s strategy for growth is to continue expanding its sales network. Hongguo plans to set up 200 new outlets for C.Banner and E.Blan, and 40 new outlets for Naturalizer by 4Q08. Coupled with a stronger design capability and greater production capacity, revenue is expected to continue to grow. We maintain our BUY recommendation for a target price of S$0.60.

Westcomb:

Maintain BUY with target price of S$0.82 – HGUO is currently trading at S$0.52, a historical FY07 P/E of 9.6x. We consider HGUO to be relatively undervalued as compared to peers China Hongxing Sports Ltd (CHHS:SP; P/E of 16.7x) and Li Ning Co. Ltd (2331:HK; P/E of 45.3x).