• What's new – We are upgrading Belle (1880.HK) from Sell (3L) to Buy (1L) with
  a new target price of HK$3.70 on favorable risk-reward after the stock
  corrected 56% in past 3 months. With a strong multi-brand portfolio, effective
  supply chain mgmt, and sound financial position, we believe Belle will continue
  to achieve steady earnings growth driven by retail expansion and integration
  with the acquired businesses. We are maintaining our Buy rating on Daphne
  (0210.HK) but lowering our TP to HK$2.40 to reflect slower earnings growth.
  We downgrade Hongguo (HGUO.SI) to Sell (3H) on high earnings risks.
• Scaling back expansion – Belle and Daphne have indicated recent sales were
  weak and they are becoming cautious on their expansion plans. Guidance on
  both same-store-sales (SSS) growth and store addition is conservative. We have
  slashed our SSS growth assumption for Belle and Daphne for the next two years
  from 8% to 3%. And our store addition assumptions are at the low end of mgmt
  guidance. We cut 2009E earnings for Belle, Daphne, and Hongguo by 11-48%.
• Margin risk – Belle and Daphne should be least vulnerable to margin erosion
  given their stronger brand positioning and better supply chain management.
  We think Hongguo will face the biggest margin pressure given its high inventory
  and less competitive brand portfolio.
• Balance sheet – Ladies footwear retailers in China are generally financially
  healthy, with positive free cash flow and/or low/no gearing. As of June-08, Belle
  had net cash of Rmb2,294m, Daphne had a small net gearing of 3%, and
  Hongguo had net cash of Rmb67m.