Tuesday, 19 August 2008

China Sports International 2008 Q2 result

It is interesting to evaluate other sports player result also. Following is the China Sports International result for Q2.

Revenue +50%
Cost of sales +49.9% (in sync with revenue)
Selling and distribution expense +281.5%
Administrative expense +387.3%
Profit before tax increased only 25.7% as a result of high expenses incurred. The group is probably trying to put resource to grow faster.
Group has no debt

Look at cashflow statement, profit before tax +25.7%
Net cash generated from operation 123,932k RMB.
Minimum cash used in investing and financing activities
Cash at end of period 535,293k RMB. Strong cash position would allow them to grow aggresively.
Q2 EPS number fall from 9.92cts to 8.7cts. But this should not be a cause of concern, since company is newly listed and this is calculated using pre-invitation shares.

Revenue increase is evident. The cash raised during IPO was put into work and allow faster growth. The widen distribution network also contribute to the significant increase of operating expenses. This is normal. The rise of average selling price is a good sign the brand is gaining traction. OEM business seems to be getting the margin squeeze. Building own brand is the way to go.

The group believe that the Beijing Olympic would raise the sports awareness and contribute to long term growth of sports sector. This might be true, but we are not sure whether there is olympics overhang. Since the group was doing OEM for Kappa, they are into the fashion sports segment currently. I once read few reports about the fashion sports niche which Kappa is doing really well. People treat sports shoe as part of the fashion. The group is focusing on this niche but is really a small player in this aspect, although story looks promising. The tie up with sohu and CCTV might further raise the brand awareness. In overall, the prospect looks bright, but bear in mind of their size.

Looking at current market condition, everything is cheap. Investor can afford to cherry pick good deal. Let's assume this quarter of EPS 8.7cts is consistent across all quarters – 34.8cts RMB. This translate to 7.15cts SGD. At today closing of 0.32, it selling at PE of 4.47 only! What a steal. However, keep in mind the current market sentiment, china share situation and the inflation environment, one might choose to go in or wait for a while.

Sunday, 10 August 2008

Not all is lost

It is kind of scary to look at the share price nowadays. If you bother to look at your share holding everyday, it is emotional challenging to look at the paper lost that you have right now. The stock once being a darling is fallen hard everyday.

But not all is lost, if you still hold till now, there is no strong reason for you to let go. Unless you found a better opportunity. The bear is surprisingly long, but bear in mind that on long term, the economy is growing. Stock price would trend upwards. Now is only the speed bump. Once we get over the crisis, market should stage a great rebound.

We saw many earning downgrade and true enough, some companies did suffer from the credit crunch and high inflation. But without going through the bear to correct the excess, we risk another dot com bubble burst. So, just hang on.

What can be done now is
(1) Hold on tight
(2) Identify great stock selling at fire sales price

Even you are not a great stock picker, go for the big cap/blue chip. The reward should compensate for the nights of sleep that you lost. Look at the company factor and invest with a long term view, as the great stock investors have done, it should be alright.

Saturday, 9 August 2008

Celestial Nutrifood 2008 Q2 result

Soy bean price has risen a lot together with other commodity price. Let's look at how Celestial is doing.

Sales +37.1%
Cost of sales +46.5%
Gross profit +22.2% (cost increase faster than sales)
Distribution and Administrative expenses +53.8% and +44.3% respectively
Income tax +50%
Net profit +11.7% (clearly the high cost and tax weight the profit down)
Cashflow before working capital change +14.7% (the business is generating strong cash)
EPS increase slightly to 0.17 RMB

When we look at the sales mix, the industrial product sales grow faster. Gross profit margin dropped because of the higher raw material price and change of sales mix. Group has put in measure to mitigate the cost pressure. Selling price of most health food and beverage increased more than 20%, yet it still achieve growth, this might signal better pricing power.

There is increased plant utilisation of industrial protein business. Biochemical feedstuff and lecithin business also achieved strong growth. The component of cost increase include advertising and promotion, transportation and other distribution expense. The intense competition could be another reason. The administrative expense include donation to Sichuan earthquake, otherwise it would be lower. Increase in income tax also erode the earning.

The directors believed high raw material cost continue be a concern. The group is to launch four new health food and beverage in 2008.

The group continue to grow despite rising raw material cost. They also managed to increase price without affect the sales severely. Overall, it is a good result. Since the price of commodity is on down trend now, there is high change Celestial would do even better in the coming quarter. It does look interesting at this level.

Wednesday, 6 August 2008

China Hongxing 2008 Q2 result

The quarterly reporting season is back. It is number crunching time.

Revenue +53.1%
Gross profit +53.8
Selling and distribution expense +83% (so high)
Income tax +108%
Profit for shareholder +31% (obviously the cost and tax weight the profit down)

Bank balance 2,201,588k RMB vs current liabilities 227,954k RMB (more than enough to cover the liabilities)
There is an increasing cashflow to 150,676k RMB. But after adjusting receivables, there is net cash outflow from operating activities. Not a big problem, since company has so much cash.
EPS increased to 4.37 RMB cent, growth of 8.7%

Apparel and accessories sales is catching up. There is a decrease of gross margin. Expenses increased in line with outlet expansion and promotion activities. The environment is still favourable for sporting goods, but the group is mindful of the inflation situation which could affect the raw material price.

The growth is still on track, strong growth is still expected. I am assuming they would continue to growth at the 30% rate per year. However, inflation has indeed caught up with many China companies now. I still prefer company with strong brand like hongxing. There is the only way to mitigate the cost pressure. They are having some Olympic advertising, hopefully it would raise further awareness on the group's product. The sporting good bull seems to still going strong.

Consider the quarterly earning of 4.37 cents. Full year EPS should be 17.48 cents, which is 3.51 SGD cents. At today's closing of 0.49, it is selling at forecast PE of 13.9. If the earning accelerated, we are looking at even lower PE. I think it is quite reasonable for a company with high growth. If we compare the expected growth rate of 30% against this PE, it is really cheap. Of course, the market is going through the PE compression. To invest or not, depends on whether you are taking long term view of the business.

Monday, 4 August 2008

Hongguo 2008 Q2 result

Hongguo just released the Q2 result of the year.

Revenue +13% to 188,128k RMB
Cost of sales only increased 6%
Gross profit +23%
But the selling and distribution cost +34% and administrative expense +18%
As the result, profit for quarter only +4%
Cashflow remain healthy but after consider the working capital, cashflow is negative
EPS only increased 4% to 7.03 RMB cents

Gross margin improved from 41.6% to 45.2% implying stronger brand value. Due to the expansion and hiring of staff, the cost escalated. The result is quite a disappointment from me, since the EPS growth is only 4%. Although this looks like one off expense resultant from the expansion strategy. But the high inflation in China might have already caught many companies in surprise.

Company is to continue with the retail expansion and might introduce a new brand. Assuming the cost would stable in the second half of the year. Assume quarterly earning does not grow much, full year EPS is 4 x 7.03 cents = RMB 28 cents = SGD 5.6 cents. Currently, it is selling at 0.36, which means PE of 6. Still a buy. When the market recover, the stock you bought at this kind of depressed level should give a good return.