Hongguo FY08 financial result review

Hongguo just release the FY08 financial result. Let's look at whether the consumer spending is slowing down and what are the challenges ahead.

All amount in RMB ,000

Revenue + 19.6%
Cost of sales +21.9%
Selling and distribution expense +35.6%
Loss in joint venture +595% (6,247)
Profit of the year -3.39%

Cash and equivalent 115,376
FD 24,793
Inventories 343,805 (quite a lot)
Amount repayable in a year 65,801 (cash on hand should be able to service this)

Profit before income tax 126,099 (Cashflow quite flat)
Operating cashflow before working capital 156,575
Net cash from operating activities 33,589 (less than last FY)
Cash after adjust investing and financing 115,376

EPS 26.82 RMB cts (a drop compare to last year 27.76)

The revenue continue to grow, as the group open more store. However, the cost is running ahead of the sales. Gross profit margin drop from 40.6% to 39.4%, reverse the past year trend. The reality bites now, as consumer cut back spending, and more promotion activities is being carried out. If not the JV loss, the group might post slight profit growth. Quarter 4 figure got hit after more tax provision is provided. Cashflow wise, the group is generating enough cash for the debt repayment, this should not be a cause of concern.

As highlighted in the financial statement, China retail sector suffered as a result of financial crisis. The group would continue the outlet expansion to drive growth. No dividend is being declared. This seems to be a common practice now among small cap, since they want to conserve the cash for uncertainties ahead.

The result has broken the previous multi year growth trend. The group is not doing too bad, consider the current economy climate, they only suffered a small reduction in profit. I think the retail segment is still quite resilient. But prepare for another year of negative growth. If the EPS decline by 10% for FY09, it would be 24 RMB cts (5.4 SGD cts). At last done price of 0.16, the stock is selling at PE 2.96 which is really amazing.

However, don't forget, the earning now is uncertain. So, the conventional valuation technique like PE is not really working in this kind of environment. It also shows sign of time, when in bear market, cheap would go cheaper. Keep a close watch on it, whether earning would deteriorate more?

The China stimuli package should drive up the demand in coming year. Let's wait and see.