Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
CORPORATE DIGEST | 06 APRIL 2010
China Sports – Laying The Footprints To Success
By Ernest Lim
Pursuant to China Sports’ (CSPORT) placement of 120m new shares and its weak 4Q09 results, investors have expressed their displeasure by driving CSPORT share price down 23%, from S$0.175 to S$0.135 since my coverage 2 months ago.
With reference to my previous article (1 Feb 10: China Sports Taps Investors For Cash Twice Within Half A Year – Is It A Buy?), I have pointed out that it is crucial for investors to differentiate between short term (now to 3QFY10) and medium term horizon (4QFY10-FY11) for CSPORT where the growth rates for its top and bottom lines are different. Thus, it did not come as a surprise to me that its 4Q09 results and forward guidance are soft.
In this article, I will first discuss its results and subsequently whether it is still worth a “Buy”.
FY09 – Key takeaways
Based on Table 1 below, 4QFY09 sales and net profit were weaker than 4QFY08 due to weak demand, high distributors’ inventories level and naturally, lower average selling prices (ASP) for its products.
Table 1: Key information at a glance (Source: Company)
*No of shares refer to the actual number of shares as at that period under review and do not refer to weighted average of shares for that period
**SGD / RMB fixed at 4.86.
FY09 revenue increased 2.4% from RMB1.86b to RMB1.90b due mainly to:
a) the upgrade and opening of more of the specialty stores as per Table 2 below.
Table 2: Points of sales for FY08 and FY09 (Source: Company)
*The points of sales were compiled by aggregating the number of sales outlets given by CSPORT distributors. This include YELI specialty stores
b) an 11% increase in sales of YELI apparel and
c) the successful launch of YELI accessories in Aug 08. Accessories’ sales have soared 66% since FY08.
Although CSPORT FY09 results are soft (in line with my expectations), investors have punished the stock severely. Is this still worth a medium term buy? Let’s take a look.
What has not changed?
Inventories – still high
Firstly, the inventories which distributors are carrying are relatively high and according to my estimates, this should resolve by around 4QFY10 amid the large discounts that they are promoting to consumers.
Retail sales continue to improve
China retail sales continue to be strong. Retail sales jumped 17.9% in the first two months as compared to a year earlier. According to China National Commercial Information Center, retail sales are expected to rise to about 19% this year, with urban retail sales increasing at 19.5%. This should provide some support to demand for CSPORT products.
Pro-consumer climate to continue
China’s legislation is likely to place higher priorities to improvements to social security and promotion to more equitable economic development this year. Among other measures, there would likely be a stronger safety net of pension, health care and unemployment benefits. With these measures, consumers would arguably have more disposable income to spend on sportswear.
Increasing awareness in sports
There is no lack of sports activities to increase the PRC consumers’ awareness in sports. Examples of such sports activities include the 2010 Asian Games in Guangzhou and the 2011 World University Games in Shenzhen. Besides these events, there are other big international sports events, such as the FIFA World Cup in South Africa to be held this year. All these activities should spur interest in sports and sportswear.
FIFA world cup event stores – to raise the profile of YELI brand
According to management, CSPORT would be gradually rolling out the FIFA World Cup Event Stores from the middle of April. Although this is unlikely to have significant contribution in the short term, the presence of these stores should raise consumers’ awareness and profile of YELI brand as they are located near or inside YELI stores.
What has deteriorated? - Intense competition ahead
According to management, the issue on inventories is not as problematic as rising competition in the sportswear industry. Competition is increasingly intense as some Chinese sports companies such as Peak Sports were just listed in Hong Kong last year. Flyke International Holdings Ltd has also just listed in Hong Kong last month, raising HKD363.9m. Besides those competitors which went to Hong Kong for listing, there are other peers such as Xidelang which went to list in Malaysia. Thus, there is an influx of competitors which are cash rich. These companies would be eager to put their funds into use by expanding aggressively in China and carrying out large price discounts to gain market share. This would undoubtedly pose competition to CSPORT.
To avoid direct competition with Tier 1 brands which are mostly positioned as performance brands, CSPORT’s management has shrewdly positioned its YELI brand as sports casual wear. Furthermore, management would be conserving cash so as to better compete with them through its on-going efforts in advertising and promotion, improving product design, expanding its distribution network, as well as, collaborating with FIFA to raise YELI profile in China. However, management cautioned that the fruits of such measures take time to materialize. To this aspect, CSPORT has increased its cash buffer over the last half year by raising cash through rights issue and share placement.
Valuations – price downgrade to S$0.185
With reference to Table 3 below, CSPORT, with its medium term growth drivers, is trading at a substantial discount to its peers. I believe CSPORT should be able to trade to around 8.1x FY11F earnings which should translate to a target price of S$0.185. This was lowered from the initial target price of S$0.285 as I have concerns on the possible aggressive expansions and price cuts from CSPORT’s competitors, especially those companies that are armed with cash from initial public offerings. This competition is likely to filter into 2011 where growth may be adversely affected.
View Full-sized Image Table 3: A comparison of CSPORT and its peers (Source: Bloomberg)
Potential upside risks
Upside risks include: a) faster than expected recovery in ASP; b) earlier than expected contribution from FIFA and c) Pro consumer government policies which may cause a re-rating in consumer stocks.
Conclusion – Medium term buy based on current price
Based on the close of S$0.135 on last Monday, there is a 37% upside which warrants a medium term buy (i.e. up to 2 years). For investors who have bought CSPORT at S$0.175 on the day that my first article was published, they should consider holding CSPORT till at least above their cost price, unless they have better alternative uses of their funds.
China Sports International Limited. The Group's principal activities are designing, manufacturing and selling sports fashion footwear and sports fashion apparel under the brand name Yeli. The Group also produces shoes for OEM customers under international labels such as Kappa. The products are sold throughout the PRC and exported through exporters to countries in Europe, the Middle East, South America, Asia and South Africa. The Group operates in the People's Republic of China.
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