Sunday, February 28, 2010

XDL - Turtle bought 5,000 shares

XDL, XiDeLang, is a Chinese shoe maker based in Jinjang. The company went public in KLSE November 2009 but unfortunately from the day the company went public shareholders lost almost 50% within four months.

The company looks OKAY fundamentally. The management has been working hard to build a brand in a very competitive sport shoes market. There are at least 3,000 competitors in Jinjian alone. China shoe market is huge 10 billion pairs a year and has been growing at 10% plus a year. XDL has only a very small market share 0.04%.

The management has been focusing on brand building to maintain profitability. They spent quite decent amount of advertising, advertising cost is 1-2% to revenue. You can see that they reaped quite a number of recognitions in the industry. The profitability has been improving over years, they raised price last year to recover higher costs but benefits went straight to bottom lines. See how their gross margin improved from 23% to 30% over last 4 years. Action like this is a bit unusual in Asian management but I like it - business is about making money and not showing off how big your empire is.

The second thing to survive in China is extensive network to reach the customers. They have build close to about 2,000 plus retail and concept stores in major cities in China.

From sectoral comparison purpose, one of the smaller one listed in SGX is China Hongxing. The recent sell down on S Chip stocks due very bad reputations(a number of companies involved in scandals). Despite of the bad names, the company is selling for 5 times earning. The bigger ones listed in Hong Kong are enjoying much better appreciation, sector as a whole selling for 14 PE.

If we look at XDL financial, they are selling for 2.35 times earning based on 2009 results. They dropped a bomb last month reported 34% declined revenue QoQ. The management explained it was Q3 '09 sales in that quarter was abnormal due to "big scale product viewing event". If we take the latest Q4 '09 results EPS will come in around .12, selling for 3.3 times earning.

In view of that, Turtle bought 5,000 shares @ 0.40 of XDL for Turtle Portfolio last Thursday.

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