Apparel: China Dongxiang (3818.HK) - "Flat SSS in Oct; 31% 2Q09 Order G addition, economic, believe, weather, number

yangho

Key Points: 
◆       Flat SSS in October, good 2Q09 order growth. Dongxiang recorded flat SSS in October, but 2Q09 order growth is 31%, a good number and second only to Li Ning among sports operators. We believe that, in addition to the impact of the economic downturn, weather was a big influence on Dongxiang’s October sales.
◆       Future earnings are highly likely to meet our expectation. For 2009/2010, we assume revenue growth of 30%/20% and earning growth of 27%/18% for the PRC business, and SSS growth of greater than 4%. 11ppt of the 41% top line growth is likely to come from the acquisition of the overseas business (Table 1). If the company manages to record 2009 SSS growth higher than our assumed 4%, net profit growth could exceed 30%.
◆       BUY maintained on the company’s clear positioning, long-term prospects and low valuation.
1)       Dongxiang has established a good brand image in the fashion sports market and differentiated itself from major functional sports brands such as Li Ning, Nike and Adidas.
2)       The company is very likely to meet our 09/10 earnings forecast and we believe it could outperform in the next economic up-cycle.
3)       Dongxiang is now trading at just 9.7x 2009E EPS. Growth and fundamentals are weaker than Li Ning, but better than those of Belle, Anta, Xtep and Ports.
◆       Pair Trading:  long Li Ning, short Dongxiang, Belle, Anta, Xtep or Ports. Short term, Dongxiang is less defensive than Li Ning as it focuses more on fashion goods and apparel. Li Ning’s October sales performance is outstanding, making it a good long choice against other apparel brand operators.
 [attach]9850[/attach]