Friday, May 30, 2008

Review on China Hongxing - Part 2

In my previous article on China Hongxing, there is a point raised by La Papillion. He recommended me to include Points of Sales (POS) in the analysis of retail business like China Hongxing.

Basically POS means physical locations at which products are sold to customers. Therefore if you were to factor revenue, net income and expenses by POS, you can deduce whether an expansion or increase in the number of shops is justifiable. In other words, it also measures business efficiency in selling products through retail outlets.

Since China Hongxing is listed from 2005, I decided to tabulate data of revenue per POS, net income per POS and Selling General Admin (SGA) expenses per POS for year 2005 to 2007. A few points can be deduced from the table.

Year2005200620072005/2006 Change2006/2007 Change
Revenue (RMB’ million)$302.4 $1,411.7 $2,046.2 366.83%44.95%
Net Income (RMB’ million)$45.9 $214.6 $416.5 367.54%94.08%
Points of sales21062600320023.46%23.08%
Revenue per POS (RMB’ million)$0.144 $0.543 $0.639 278.13%17.77%
Net Income per POS (RMB’ million)$0.022 $0.083 $0.130 278.71%57.69%
SGA expenses (RMB’ million)$51.0$278.3$372.5445.69%33.85%
SGA expenses per POS (RMB’ million)$0.024 $0.107 $0.116 342.01%8.75%

Firstly, there is evidence that an increased in POS resulted in increase of revenue per POS and net income per POS. However there seems to be saturation in the increase of net income per POS from 2006 to 2007. POS grew by about 23% in both 2005 to 2006 and 2006 to 2007 but net income per POS growth was slower in 2006 to 2007 than in 2005 to 2006.

In my opinion, SGA expenses per POS should remain unchanged or slightly increased even though you increase in the number of POS. China Hongxing SGA expenses per POS did not exhibit this characteristic as the value grew 342.01% and 8.75% in 2005 to 2006 and 2006 to 2007 respectively. On the positive side, business efficiency seems to improve for 2006 to 2007 as the change was only 8.75%.

Due to a short listing span of China Hongxing in SGX, there isn’t a concrete conclusion to arrive at for this company based on the POS analysis. In a general conclusion, I would say the management has done a good job in reducing SGA expenses as evident from the paragraph above and in the first part of the review where the company manages to achieve higher net profit margin year after year.

Actually it will be good if you can see a comparison of the net income per POS against the other competitors of China Hongxing which are Li-Ning and Anta. I did not manage to include them in this article. However I have attached a table of POS analysis for Hongguo, Prime Success and Belle which are Chinese companies listed in SGX and HK markets. They are not direct competitors but they are in the same retail industry like China Hongxing. If you are interested you may visit La Papilliion article on Hongguo.

POS analysis for Hongguo, Prime Success and Belle
Table courtesy of La Papillion

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