Brokers' Take

Sino-Environment Technology
June 5 close: $1.65
UBS Investment Research, June 4

$149 million convertible bond with equity swap: Sino-Environment is issuing $149 million of 4 per cent coupon convertible bonds with $2.19 conversion price, maturing in July 2013 with an investor put date in July 2010.

Sino-Env will use $67 million to enter an equity swap at $1.8276, while $76 million is earmarked for capital expenditure, working capital and M&A activities. We think that the downside, apart from dilution, is the risk from the periodic swap settlement.

We question the need for the convertible bonds, since Sino-Env's 648 million yuan (S$128 million) net cash is sufficient for its current expansion plans.

For de-nitrogenation Sino-Env will spend 265 million yuan for its facility, working capital for three desulfurisation projects should soak up 150 million yuan, and the remaining cash coupled with bank borrowings can be used for acquiring the new dust elimination company and the remaining 40 per cent of Weidong.

We think this could be a prelude to announcements that may be related to:
1) major desulfurisation and de-nitrogenation M&As; and
2) large desulfurisation project wins. Taking the long position on the swap also suggests that management is very confident of positive share price performance, in our view.

Valuation: We are reviewing our estimates. Our 12-month TP of $1.96 is based on discounted cashflow and assumes 10 per cent cost of equity and 2.5 per cent terminal growth.
BUY


China Hongxing Sports
June 5 close: $0.57
Kim Eng Research, June 4

SUCCEEDING at home and abroad: We recently received questions from clients about:
1) whether higher export sales in Q1 2008 suggest less management focus on the domestic market; and
2) whether higher overheads related to current ongoing programmes for store upgrading (revenue discounts) and store lease advance programmes will be temporary or permanent.

What's all the fuss about exports? Export mix in Q1 2008 was higher at 20 per cent of total sales compared to 12 per cent in 2007. The reasons for this are: 1) seasonality, 2) more apparel sales versus previous years, and 3) new overseas markets (eg Brazil, Vietnam, Ecuador, etc). Amidst this, domestic sales still reassuringly grew more than 35 per cent y-o-y.

Domestic sales should accelerate in H2 2008 and reduce the export mix: The higher exports certainly do not mean management is paying less attention to the domestic market, as can be seen from the higher spending on advertising & promotions this year (20 per cent versus 15 per cent in 2007). However, exports serve as a useful valve to keep capacity fully utilised and are opportunistically channelled to demand hotspots.

Vitally, export margins exceed domestic margins due to zero advertising & promotional costs. Also, as export markets are price-takers, we do not expect average selling price growth, currently projected at 5-6 per cent in 2008, to be capped at anything less.

Expansion-related overheads are temporary: China Hongxing currently has two store-related incentive programmes: a one billion yuan (S$197 million) disbursement programme to secure the leases of premium locations for mid-sized stores (100-200 sq m versus the average of 67 sq m), which they aim to complete before August 2008 (499 million yuan already disbursed); and
a 200 million yuan sales discount programme to incentivise distributors to upgrade older stores, which will end in Q1 2009. Normally, distributors are required to self-fund store upgrades every three years, but the current round is ahead of schedule.

Already seeing positive returns: China Hongxing aims to have 420 mid-sized stores opened by August 2008 (183 opened as at end-Q1 2008). Normally, it takes about six months for each store to reach six million to eight million yuan in revenue per annum, which will allow each store to be self-sustaining.

So far, the trend has been encouraging, with some stores reaching the targeted revenue within 4-5 months. We expect the revenue impact of the expanded floor space to be felt more in H2 2008, as the new stores will need to stock up on inventory. We are maintaining our 'buy' recommendation, with a TP of $0.87.

BUY