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.