China Hongxing: 2Q10 results. Revenue +3.6% yoy to RMB 517m, was disappointing, as weaker domestic demand and lower ASP offset growth in retail network. Net profit dropped 59% to RMB 19.3m, driven by lower gross margins due to higher discounting and poorer product mix. The group sold more lower-margin sports shoes and less higher-margin apparel compared to last year...
In our view, the big jump in inventory (+70% yoy) and trade receivables (+85% yoy) compared to sales growth, suggests that near term outlook is tepid at best. Going forward, mgt is “cautiously optimistic about the overall economic environment”, and expects to see gradual recovery in consumer demand over next 12 mths. If this scenario plays out, then we should see an increase in ASP and gross margins in subsequent earnings results. Company declared interim dividend of RMB 0.01/sh, unchanged yoy
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