China Sports International Ltd- Capitalising on fragmentation

Summary: China Sports International (Csports) posted good FY07 results yesterday, with topline growing 74.9% YoY to RMB1.2b and net profit accelerating 111% YoY to RMB155.1m. Csports stuck to its strategy on addressing the mid-tier markets through increased advertising and stayed out of the competitive high- and low-end markets. Although selling & distribution costs and admin expenses rose much faster than we forecasted, this secured better brand equity which in turn produced better ASPs and margins. Though a relatively new entrant in the market, it continues to be able to command exclusivity with its distributors, sell products on a non-consignment basis and strictly regulate product prices by the distributors. Our adjusted numbers factor the better sales in the future but are mitigated by the faster-than-expected rise in marketing expenses. Along with volatile market conditions, peer valuations have also been lowered. We now peg Csports at 18x FY08 PER (prev. 20x) with a fair value of S$2.04 (prev. S$2.48). Csports still trades at a 37% discount to its Asian sports peers' FY08 PER. Maintain BUY with 56% upside.