Omnialuo Wants to Be the Chinese Ralph Lauren

HSBC has published a report looking into consumer spending in China. Despite a slowing economy and the knock-on effects of the disastrous earthquake in Sichuan, real retail sales growth hit a decade record of 15.4% YOY (to about US$100 billion) in July this year. This was up from 14.8% in June, substantially higher than the monthly average of 12.4% for 2007.

The primary reason is the rapid expansion of disposable income (quotes from a Xinhua report):

"With nearly 1,900 US dollars per annum of disposable income for the urban residents and almost 700 US dollars per annum cash income for farmers, Chinese people are upgrading their consumption structure ... They spend more on recreational goods, dine out more frequently, buy cars and go on more holidays, hence the fast rising sales of automobiles, garments, cosmetics and jewellery."

And Chinese consumers are less affected by the current turmoils in the financial markets as less than 5% of the Chinese population are shareholders. As a result, negative wealth effects are limited.

This should bode well for Chinese consumer plays. One company to highlight is Omnialuo (OLOU.OB), a maker, distributor and retailer of quality women's apparel. OLOU recently reported record earnings for Q2 2008, with revenue growing at 98% YOY and net income at 73% YOY. The company's 6-month figures were even more impressive, with growths of 147% and 136% respectively. The company recently announced that it will be participating in the Mercedes Benz Fashion Week in New York this September, further shoring up its goal of becoming "the Chinese brand equivalent of Ralph Lauren, Vera Wang and Anna Sui".

If you find OLOU too expensive (currently trading at over 10x 2008 EPS, according to my estimates), then China Yingxia [CYXI.OB] is definitely worth looking at. CYXI produces traditional medicine and nutriceutical products and has been rapidly expanding its franchise stores all over China. In Q2 alone, it opened 230 stores alone, contributing to approx. 15% of sales. This is in addition to the acquisition of the Chichi Supermarket Chain in Guangzhou. In June, CYXI completed its purchase of a soybean milk manufacturer in Shanghai together with the well-known "Kingland" brand. Further, the company expects to receive its business license to operate in India in late Q3. As a result, international sales should ramp up by the end of the year.

CYXI is projecting a fully-diluted EPS of $0.26 for FY2008. My own estimate is more conservative, at $0.20. Still, even using $0.20, CYXI is currently trading at just 3x 2008 earnings. I think this is a steal, given the company's prospects and rate of expansion. The fact is, I own more shares in CYXI than I do in any other stock. Suffice to say that I am very bullish about this stock in the long term.

My Position: Long CYXI.OB.

Comments

[anonemouse]

From 2007 10K Net Income raised 14.5%, share dilution increased 134%, 2006 EPS was 0.33, 2007 EPS was 0.15. From recent 2Q results share dilution increase 48%, net income in last 3 months of 2007-2008 increased 21%. Diluted EPS dropped 14%.

I don't mind small caps issuing shares to increase shareholder value, but this growth company appears to be doing the age of trick of letting everyone know about their fantastic growth and using their share price as a personal ATM and not returning share hold value. I've been burnt by this before, until the "share-junky" weans themselves off their habit I see no reason to take a chance they will be cured.

Many other under valued better Chinese small caps to invest in, CSR, CFSG, HOGS, FEED etc. If they stop issuing shares like the FED is printing money I leave open the possibility to reconsider...

2008 Aug 27 04:37 PM