Wednesday, May 28, 2008

Brief review on China Hongxing

China Hongxing share price has been sold down lately. Let me do a short fundamental and technical analysis on this stock.

Fundamental Analysis
The business of this company is very simple to understand as it is engaged in the design, manufacture and sale of sports shoes, sports apparel and sports accessories in China.

Many people are blinded to the fact that China Hongxing will benefit only from the Beijing Olympics. It is not true as there are other major sporting events coming up in China like the 2010 Asian Games in Guangzhou. Also China Hongxing has so much to benefit from its country fast growing population and with a population rich in talented sporting individuals.

Even though still profitable, their first quarter financial result was less impressive and that could be a reason why this stock is sold down. Nevertheless the result shows significant increase from the same quarter in the previous year. Turnover and gross profit increased by 43.7% and 34.9% respectively. Year on year, turnover and gross profit increased by 44.9% and 61.6%.

Pre-tax profit margin is considered good comparing with world’s top sporting brand like Nike which has a pre-tax profit margin of 14%. China Hongxing has a historical pre-tax profit margin of 10.5%, 14.4%, 14.9%, 17.3%, 16.7% and 22.0% for the year of 2002, 2003, 2004, 2005, 2006 and 2007 respectively. The increasing margin shows improved efficiency in carrying out their business.

RMB’ million1Q FY20081Q FY2007ChangeFY2008FY2007Change
Gross profit257,763191,13234.9%841,701520,72861.6%
Gross margin39.70%42.30%-2.6%41.14%36.89%4.2%
Pre-tax profit120,07284,52942.0%450,080235,31691.3%
Pre-tax profit margin18.50%18.70%-0.2%22.00%16.67%5.3%
Net profit114,23178,77445.0%416,413214,63094.0%
Net profit margin17.60%17.40%0.2%20.35%15.20%5.1%

The company also has a healthy balance sheet. Its high current ratio of 15.74 and low debt to equity ratio of 0.14 ensure the company free of financial troubles.

RMB’ 0001Q FY20084Q FY2007
Non-current assets554,122554,310
Current assets3,599,8053,510,016
Total assets4,153,9274,064,326
Total equity3,651,2823,553,691
Current liabilities228,622239,341
Non-current liabilities274,023271,494
Total liabilities502,645510,635
Total equity and liabilities4,153,9274,064,326

Based on closing price of $0.61, its price to earnings (PE) and price to book (PTB) ratios are at 15.256 and 2.571 respectively. Take note the ratios are on the high side at first glance. But if you compare the current PE with its 52 weeks low and 52 weeks high (10.873 and 46.556), you can see that the PE is nearer to low level.

Technical Analysis

China Hongxing chart

From the chart with a closing price of $0.595, it is touching the lower Bollinger band. Taking a high of $0.75 on 28th Apr and a low of $0.405 on 20th Mar, the price has just broken the 38.2% Fibonacci retracement level of $0.618. The next support level could be at 50% and 61.8% Fibonacci retracement levels of $0.578 and $0.537 respectively before attempting to rebound from there.

14 days Stochastic has just entered oversold region while the 14 days RSI is yet to enter oversold region. There is no sign of reversal from MACD histogram suggesting that more downside is possible.

In my opinion, it is a good chance for medium to long term investors to pick up or accumulate this stock at a lower price of $0.537 to $0.618. Short term trader may want to wait for an oversold RSI signal or positive divergence in MACD histogram.

There are many positive calls from various analysts that you may be interested to read at. You can download the compilation from the link that I have attached.


la papillion said...

Hi mike,

I agree that hongxing has its own branding powers, that's why it can command a rather high net margins.

I've got a few pointers to comment

1. Hongxing is listed on nov14, 2005, so the data earlier than 2005 is not really comparable. I usually take the years from listing onwards for analysis.

2. Why take pretax margin? any particular reasons?

3. ROE dropped quite substantially in 2007. Do you know why?

4. Do you know what's their earnings per share? I find it very difficult to calculate because their outstanding shares is diluted by a 5 to 1 split. This, together with convertible shares offering, makes it very difficult for me.

5. You might want to calculate their expenses per points of sales (POS), revenue/POS, profits/POS to see if opening more shops is better for them, and what's their average figures per POS. I find it quite useful for such business.

6. There's a lot of big companies vying in this sportswear segment. Belle and prime success is just two of the largest listed in HK. It'll be interesting to see how the margins work out.

7. Do you know what's the average selling price (ASP)of Erke shoes? It's important to see which segment of the sportswear china hongxing is targeting.

Mike Dirnt said...

Hi LP,

wah you really got so many questions. makes me ponder for awhile. lol i learn as i try to answer them. but im afraid i may not be able to answer all correctly :)

1)yes you are right. i have overlooked its listing date. basically i got all the profit for 2002 to 2007 from DBS Vickers and compute the margin in excel.

2) i was searching for profit margin of Nike from google and the first result was from forbes financial website which only shows pre-tax profit margin. so i use this margin as a basis of comparison. by the way, there is a correction. Nike pre-tax margin is 14% not 18%.

3)yes i noticed the large reduction in ROE. i did not get to show the balance sheet for the whole year of 2007 and 2006 in my blog. Total equity were at 3.5B and 0.7B RMB respectively. if you go into detail, there is an issue of new shares on placement around 3Q2007. so that eplains the reduction in ROE. probably need to give a few quarters before the ROE recovers higher if earnings increase.

4) mathematically if stock split of 5 is to 1, the EPS is reduced by 5 times as shares is increased by 5 times. so the EPS looks smaller but if you compute PE, P is divided by 5 times as well thus making PE unaffected right?

But you are asking about EPS. So if you open income statement from DBS Vickers(i think you have Vickers right?) for CHX and select interim, you notice diluted NORMALIZED EPS. so i believe the normalized has taken into effect your concern?

5) wow let me find out more about this thing. something new that i have heard. havent check on investopedia though, do you have a good reference?

6) frankly speaking i did not do a fair comparison of CHX with the other same niche of companies. i got vested interest more due to its TA.

7) i did asked my China friend. what is the top sports brand in China? he said Li-ning. Then i asked how is erke. He said oh this brand quite popular among teenagers and slightly cheaply priced than Li-ning. :)

la papillion said...

Hi mike,

Thks for your reply. I believe we learn together through such discussions.

1. Usually i compute all the stuff myself since my definition might not be the same as the one computed by others. Okay, now i know where you got your source.

2. In my opinion, nike might not be exactly a competitor brand. This kind of things depend a lot on the average selling price (ASP). If nike sells at 150-200 range and erke sells at 80-150, i would say erke has its own niche. But i'm just quoting the figures as an example, as I didn't know the exact ASP.

Nike the company definitely isn't a competitor to chinahongxing. Is Li-Ning listed? There are many companies who are the sole distributor for famous brands, so these are the real competitors. You must really check out Belle, listed in HK, they distribute nike, adidas (their first tier sportswear brands), Reebok, Puma, Kappa, Mizuno, Converse, Li Ning, Fila (second tier). Prime success is also a worthy competitor company who is rapidly expanding their adidas points of sales (POS).

From their net margins/gross margins, I say hongxing is not too bad, can stand its own grounds. But here's the stinger: hongxing is pretty new in this area (only 2 years of history since listed). ROE/gross/net is all not stabilised. So the question i'm asking is, are they going to make it in the future? can't ans.

This article places nike and adidas, Li ning and anta as the top few brands, making up nearly 78% of market.

How did erke fare?

3. Theoretically PE won't change. But when psychology comes in, PE might be higher. It's just my general feeling.

Normalised should mean that it's accounted for. But it's very confusing. The reports from hongxing also normalised their previous years earnings, which I do not understand.

Not sure about ROE drop. Suggest you find out more though.

5. This analysis on POS is my own invention, so couldn't be found anyway.

This is from my blog:

Did you notice that for Prime success, the more POS they open, the less revenue they earn per POS? That's something to think about in terms of future growth.

Mike Dirnt said...

1) usually i got the data from Vickers or financial report straight away. but you know if you really want to compute yourself, its a bit tedious so i have to rely on Vickers. i try not to rely on so many sources of data, as the more sources the more confused you get and thus undermine your research. guess have to have a little bit of faith on Vickers or Reuters data.

i will reply the others later