China Hongxing Sports (BR9.SG)

One of my reader has requested me to comment on China Hongxing Sports (BR9.SG) and its short-term and long-term prospects. Please note that the following should be purely used as reference purposes. I am only going to touch on the key pros and cons of this investment idea. Readers are encouraged to make their own judgements, and in the event of any damages arising from the recommendations, I shall not bear any liabilities or responsibilities.

Please also note that some of the information below are obtained from public sources such as the company's website, public reference materials, etc.

Background:

The Group is principally engaged in the design, manufacture and sale of sports shoes, sports apparel and sports accessories in China. It principally targets the youth market and the mid-range market segment of the sporting goods industry in China.

The Group manufactures its sports footwear at its production facilities in Quanzhou City, China and has a current annual production capacity of approximately 17.9 million pairs of sports footwear. It has plans to boost total capacity to 23.9 million pairs. The manufacture of sports apparel, sports accessories and a portion of its sports footwear are subcontracted to selected contract manufacturers who meet the quality and design requirements of the Group.

Pros:

1. Definitely a growth stock with a compelling story. Rides on the Olympic 2008 consumer sports frenzy. IPO price of $0.40 on Nov 2005 and it is at least a 5-bagger now if stock is held since then.

2. One of the leading consumer sports brand with growing market share trailing that of big boys like Li Ning and Anta.

3. Rising net margins from 9 months ended FY06 of 12.75% to 9 months ended FY07 of 18.85%, as a result of more footwear manufactured in-house.

4. Very low interest-bearing loans. Loans stood at 10 rmb mil as of FY07Q3.

5. Management has been delivering their promises till date and have been utilising the shareholders' funds efficiently. With the recent share placements, management has put forth many future plans which adds visibility to shareholders. They intend to further expand the sales and distribution network, advertise more aggressively, renovate and relocate older stores, establish 4 logistics centres and expand in-house production capacity.

Cons:

1. Noticed that the operating cashflow is always lagging behind the net profits by quite a gap. Not too sure why is this so, is this a trait of sports companies? If operating cashflow continues to deteriorate from net profit, it might signal that the company might not be reporting its profits reliably.

2. Branding is a very crucial asset to the company. Due to the short operating history, if negative news break out regarding the quality of the brand, stock prices will plummet. Advertising expenses will continue to climb in order to build brand recognition, though management assures to keep the expenses under 20% of revenue.

3. Company keeps increasing ASP to maintain/improve margins, which might result in smaller competitors producing counterfeit products and thereby losing sales.

4. Aggressive future plans, which gives rise to execution risks. But recent management share purchases in the public re-affirms management confidence in the company's prospects.

China Hongxing has been falling due to the recent correction and is currently trading around 68 cents. I will classify this company as a high-risk & high-return company. It has high volatility from a short-term perspective and this should be on the list of many traders.

I have previously profited from this company, though I am not vested at the moment. From a long-term perspective, this company is a viable purchase. This counter is definitely not for the faint-hearted.