China Hong   

Redeemable Convertible Preference Shares

Any advice?

 

Anyone knws wat happen to this stock...sudden increase in volume?

 

Just announce to split shares for a par value of 10hkg cents to 2hkg cents. Another booster. Not vested

 

China Hongxing Sports soared to an all-time high of $3.14, after the sports shoes maker's quarterly profit more than doubled. It reported Q4 net profit of 100 million yuan.



CIMB raised its target price for the stock to $3.50 from $2.15 "on increasing confidence in Hongxing's brand equity and execution", and reiterated its "outperform" rating in a note to clients.

 

It has become the official sportswear sponsor for the North Korean national team in the Beijing 2008 Olympic Games. It has also tied up a 2-year sponsorship deal with the North Korean women's football team.

 

On steep uptrend now. It has broken upper bollinger band and will likely continue going up.

 

DBSV has initiated coverage with a "buy" rating and a target price of $2.20.



"We like China Hongxing as a direct play on China's growing consumption spending and also its strengthening position as one of China's leading sports goods brand," DBS said in a note to clients.



China Hongxing will be a key beneficiary of the 2008 Olympics in Beijing, it said, noting that the company has been increasing its production capacity and distribution network in the lead up to the event. Given that China Hongxing's growth profile is as equally compelling as that of Hong Kong-listed Li Ning, DBS said China Hongxing's valuations should come closer to that of Li Ning's, which is trading at over 30x prospective 2007 earnings. DBS' price target for China Hongxing of $2.20 is equivalent 15x prospective 2007 earnings.

 

Significant growth in a traditionally soft quarter was due to strong demand for athletic footwear, supported by retail store expansion (from 1700 to over 2500) and an aggressive marketing campaign, boosted by gross margin gain (to a record high of 38.6%). If not for RCPS financing costs (interest amortisation of RMB7m+RMB4m dividend) and one-time professional fees (RMB5m), growth would have been even higher. Note: All non-cash charges related to the RCPS issue can be added back to net profit to meet the RCPS NPAT target.



It attributes the gross margin gain of more than 3% points qoq to higher selling prices, suggesting a further improvement will be forthcoming in Q406 as the new Phase 1 capacity of an additional 5.6m pairs of shoes, which began production in Aug, will ease the current dependence (30-35% of sales) on sub-contracting. In-house manufacturing has an 8% point margin advantage over subcontracting.



Despite the rapid growth, cashflow and balance sheet show no signs of strain. Inventory days was 23, similar to Q305. According to management, all of its receivables are currently at less than 30 days. Further, sales & distribution costs remained at about 18% of sales despite extensive advertising and promotional campaigns during the World Cup and the RMB40m sponsorship of the Erke Cup tennis tournament.



KE are raising their 2006 forecast (before RCPS financing costs and issue expenses) by 8%. However, to be conservative,their fair valuation is based on EPS adjusted for RCPS financing costs such as amortisation of interest and financing cost. KE revised upward its price target to $2.12 (based on 19x 2007 EPS after adjusting for the RCPS financing costs. In comparison, HK peer are trading at 22-28x EPS.).

 

Consensus is expecting full year ending Dec 2006

net profit to come in around RMB183mln, implying

4Q2006 net profit of RMB68mln. This is in line

with last year?s breakdown where 4Q2005 net profit

represented 36% of full year profit. Next year,

consensus is expecting profit to grow 68% to

RMB307mln, reflecting the new capacity for shoes

as well as new product launches (apparels and

accessories). Based on consensus estimates, forward

PE is 20x while prospective PE is 12x. Investors

would thus have to take a longer-term investment

view for this stock.

 

Looks to be on downtrend now. 

 

KE has upgraded its target price to $2.01, saying it expects the company to deliver stronger earnings next year on the back of improving margins.



China Hongxing has been able to improve selling prices of its shoes by an average of 6-7% with new and innovative designs, KE said in a note to clients.



KE said margins should also improve once capacity utilization at China Hongxing's new manufacturing facility ramps up towards year-end, reducing the company's dependence on subcontractors.



The brokerage expects China Hongxing's net profit to rise from RMB127.5m in 2005 to 183.7m this year, 306.4m next year and 426.3m in 2008.

 

It is said to have met fund managers today and yesterday.

 

KE has a price target of $1.83.



Li Ning, the Nike of China, posted a 66% surge in H106 profit growth on a 24% rise in sales. In the last year, Li Ning's profits have raced ahead of revenue (H205 revenue rose 24%, while net profit jumped 61%) - a testament to the growing pricing power of its brand. CHHS also reported a 40% jump in H106 net profit although margins fell on higher subcontracting costs.



Results indicate China Hongxing's superior value There are many positive data points in Li Ning's results for CHHS, which has the potential to grow at the same pace as Li Ning, but trading at half the PE. At $1.54, CHHS's PE of 19x and 12x 2006-07 earnings for a 3-year EPS CAGR of 28% is very attractive compared to Li Ning's 3-year CAGR of 35% but much more expensive 36x PE and 27x earnings.



Robust market demand lifting all boats Li Ning enjoyed particularly robust growth rates of 30-50% yoy in the Central (Hunan, Jiangxi), Southern (Guangdong), South-western (Sichuan) and North-eastern (Heilongjiang, Liaoning and Jilin) parts of China, provinces that CHHS is also strong in. As CHHS also enjoyed strong growth in these provinces in H106, this suggests a still-growing market that is lifting all boats.



More trade shows will raise earnings visibility. In response to the strong market demand, CHHS plans to increase the frequency of its trade shows from two a year to four, with wider ranges of footwear, apparel and accessories. As management normally provides orderbook progress post-shows, we expect earnings visibility to be enhanced, which will drive continued PE re-ratings.



There's plenty of room for margin upside for CHHS. While CHHS's H106 gross margin was 34%, it has plenty of potential to catch up with Li Ning's 50%. Reducing the reliance on subcontractors (currently at a third of sales) will improve gross margin by eight percentage points. Raising the average retail price of its products (RMB200-300 versus Li Ning's RMB300-500) could further boost CHHS's earnings.

 

Forgot to mention the writeup below is extracted from my blog http://kelongstocks.blogspot.com Please remember to "reward" if you like the writeup. thanks!

 

Fundamental analysis (update) China Hongxing has just announced issue of 80m redeemable convertible preference shares (RCPS) at $1.25 each to US fund management group OCH-ZIFF Capital Management Group and CIM VII Limited. This will raise S$100m and enable the company to increase production capacity by 52%. If China Hongxing meets its profit target for FY08, then the RCPS will be converted to ordinary shares at $1.25. Target EPS for 2007 and 2008, assuming full conversion of RCPS, are 12.5 Singapore cents and 16.7 Singapore cents, implying forward P/Es of 10.9x and 8.2x respectively. That would mean substantial upside if China Hongxing is pegged at 12x to 14x forward P/E for 2007, fundamental price target would be $1.50 to $1.75. Technical Analysis (update) China Hongxing is in uptrend channel channel. Breakout above $1.40 looks imminent given positive news (above). .........continued at my blog