Tuesday, August 11, 2009

Hongguo - Hold by DBS Vickers (6 Aug 09)

At a Glance
• 1H09 results in line with expectations, with earnings
down 39% y-o-y
• Margins compressed due to promotional discounts
• No interim dividend
• Maintain HOLD, TP revised to S$0.28

Comment on Results
HGUO’s 1H09 results came in line with our expectations. Revenue
increased 19% y-o-y in 1H09, while earnings fell 39% y-o-y, which
reflects lower margins due to higher product discounts.
The Group continued to expand its distribution network of its key
brands, namely, C. Banner and E. Blan. Both brands realized robust
revenue growth in 1H09, driven by product discounts and
expansion of distribution networks, while gross margins were
compressed by lower selling prices and greater promotional

B/S remained sturdy with net cash/share increasing to c. S9cts by
end 1H09, driven by healthy operating cash flow of RMB82m in
1H09. The Group has no major capex in near future.

Looking forward, we expect HGUO will continue to offer product
discounts for the rest of the year, in order to achieve revenue
growth and lower its inventory level. Therefore, for full year 2009,
we still project 18% growth in revenue but 35% decrease in net
profit, due to lower margins.

Maintain HOLD, TP revised to S$0.28, based on 6x FY10 P/E, which
is in line with our valuation for small cap consumer goods s-chips.
Potential catalyst would be strong growth of China’s domestic
consumption in 2H09.

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