波司登 Bosideng (3998)

Bosideng is China's leading down apparel (羽绒服) manufacturer in China. It went IPO in Hong Kong in Oct 2007, traded at $3.50 at that time and has since declined to current share price of $0.76. I would recommend this stock because:

Business

+ Market leader with 40% market share, way higher than the #2 player

+ Streamlining operations by folding unprofitable outlets, as well as improving product mix and increasing average selling price by 5-6%... with raw material prices coming down, margins should improve though sales could moderately decline

+ Leveraging the Bosideng brand to move into non-down apparel and looking at M&A opportunities

Valuation

+ Strong balance sheet, with net cash of $4.5Bn or $0.58 per share

+ Trading at 5x P/E vs 5-10x for comps Giordano, Texwinca and Ports Design. On first glance, Bosideng doesn't look that cheap, but given Bosideng has a lot of cash on hand, its ex-cash P/E (which I believe is the right methodology to look at this stock) is only 1x, far cheaper than its comps

Financials

+ EPS is expected to be largely stable at $0.16-0.20 range for next two years, though estimates could come down somewhat due to challenging economic environment, but probably not significantly

+ Op Cashflow turned positive in the first half of the current fiscal year

+ Results announced for first half of current fiscal year seemed poor but if one looks more closely, the results are not really as bad, as a lot of items were non-recurring and Apr-Sep'08 were warm months which are traditionally weak for down apparel sales obvious so financials were skewed to the downside because of fixed costs... the financials should "normalize" in the second half of current fiscal year, and should provide stimulus to stock price when announced (May-Jun 2009 time frame)

Technical

+ Management aggressively buying back shares from open market ($240MM from Apr-Jun 2008, or 2.8% of total shares outstanding), and they plan to spend another $500MM buying back shares… shows that the management believes shares are undervalued, and provides buying support for share price

I would rate this stock as medium risk / high potential return. Key risks include deterioration of financials (significant decline in sales and margins) and governance. But again, given net cash of $0.58 per share, downside is 25%, assuming floor price is net cash level. Assuming EPS of $0.12 (to be conservative, analyst consensus estimate is $0.16) and ex-cash P/E of 5x, the shares should be worth $1.20, which represents upside of 55%.

----------------------------------------

I'd like to note that, while my portfolio performance of +44% since its inception on Dec-1-2008 (vs +7% for Hang Seng Index in the same period) is good, it doesn't mean that much because the time period is very short. Also, I would also like to emphasize the importance of doing your own homework before investing.