BELLE International: Give "Buy" Rating

BELLE International (1880.HK) announced its performance in 2007. Its turnover increased by 87.1% to 11 billion 670 million yuan (RMB), up from 96% yuan to 2 billion 480 million yuan compared with the same period last year. The profit and loss of the company's shareholders increased by 102.76% to 1 billion 980 million yuan, or 0.25 yuan per share, slightly higher than we expected in 2007.

We expect the company's turnover in 2008 -2010 to be 18 billion 450 million yuan, 24 billion 880 million yuan and 31 billion 340 million yuan respectively, with net profit of 2 billion 260 million yuan, 3 billion 10 million yuan and 3 billion 520 million yuan respectively.

Sports brand business dragged down overall gross margin.

Since 2006, BELLE has launched the agency brand business, which accounts for only 35% of gross profit margin, up from 38% in 2006 to 47%, dragging down the overall gross margin of the company by 5.5 percentage points to 50.6% in 2006.

For a single business, the gross profit margin of footwear business increased by 0.8% in 2007 compared with the same period last year, and the gross profit margin of sportswear business increased by 1.2% over the same period last year.

The efficiency of inventory and working capital management is improved.

BELLE stock liquidity increased, accounts receivable cash flow maintained a relatively good level, in which inventory turnover days decreased by 22.6 days to 121.8 days in 2007, the average accounts receivable days decreased by 2 days to 34.9 days.

The cost control is effective.

In terms of cost control, the growth rate of sales and distribution expenses and general and administrative expenses of BELLE is lower than that of turnover. In the face of the pressure of future manpower cost growth, BELLE will take advantage of the income gap in China and surplus labor force to control the cost growth in a relatively low range.

In 2007, BELLE's same store sales increased by nearly 20%, mainly due to the increase in sales and average selling price. It is expected that the company will continue to grow at the same store sales rate of not less than 20% in the future.

Sales network expansion is in line with expectations.

By the end of 2007, BELLE had 6090 Lining brand stores, an increase of 72.2% over the same period last year. With the acquisition of stores, we expect to reach 7880, an increase of 105.9% over the same period, excluding the acquisition brands. It is estimated that BELLE will maintain 2200 or so stores expansion every year from 2008 to 2010.

Footwear business and sports agency, two pieces of cake are bigger and stronger.

The footwear business occupies a leading position. BELLE brand determines its main position as an international brand name, a Chinese middle and top grade brand and a mid end brand product with an average selling price of $60-300, depending on the price of the product.

These three markets are also the most potential for growth.

At present, through a series of acquisitions in 2007, BELLE has the majority of the brands in the 3 positioning markets.

In the future, BELLE will continue to expand its share in these 3 positioning markets through its own growth and extensive acquisitions.

Footwear is a fashionable product. Most consumers follow the latest styles. Therefore, the renewal of products is very important to the sales of enterprises. BELLE's vertically integrated quick response business model helps to adjust the product series in time according to market conditions. When other brands without their own manufacturing need 9 months' advance ordering, BELLE needs 3 months to order the flexibility to better win the market.

Sports brand agents, front-line and second-line brands are in full swing.

And footwear brands pay more attention to fashion. Sports brands emphasize functionality.

While acting as a first-line brand, BELLE also acts as a second tier sports brand to promote sales with more functional products.

With the international brand distribution agreement signed in 1 or 2 years, because BELLE is the largest agent of Nike and Adidas in China, with a proportion of about 25-30%, the risk of being unlicensed is very small.

Give "buy" investment rating.

We are optimistic about the promotion of BELLE footwear business after a series of acquisitions and integration. There will also be a substantial increase in the sports apparel business. We expect the company's turnover in 2008 -2010 to be 18 billion 450 million yuan, 24 billion 880 million yuan and 31 billion 340 million yuan respectively, with net profit of 2 billion 260 million yuan, 3 billion 10 million yuan and 3 billion 520 million yuan respectively, and the diluted earnings per share were 0.29 yuan, 0.38 yuan and 0.44 yuan, maintaining the target price of 13.5 Hong Kong dollars, and the investment rating was "buying".