Belle of the Chinese Fashion Ball

04/21/2009 9:34 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous of The Silk Road Investor says China’s economy remains one of the few bright spots in a grim global economy, and he likes a fashionable play on its growing consumer spending.

The global rally continues, with the emerging markets outperforming by far. This supports my forecast that the major emerging economies will come out of this crisis in much better shape than many observers thought possible.

China remains for now the major source of good news, most of it focused on the potential of its stimulus package.

For the month of March, new loan issuance reached a record $290 billion. Banks continue to lend, and people seem to be willing to borrow. Chinese consumer balance sheets are generally in good shape.

As a result, domestic car sales in China are estimated at 1.07 million in March, a new record for both monthly and quarterly sales (2.63 million units), continuing the trend of leading the US in units sold. China [may] surpass the US as the biggest auto market (in units sold) in the world in 2009.

Belle International (Hong Kong: 1880), a leading footwear retailer and sportswear distributor and manufacturer in China with more than 8,700 outlets, raised about $1.16 billion through a May 2007 initial public offering. It subsequently acquired a number of footwear and sportswear operations, including FILA, Millie’s, Senda and Mirabell.

Belle [recently] reported a 20% year-over-year increase in earnings on 53% top-line growth.

The footwear operation accounts for 53% of revenue, the remainder coming from the sportswear operation. The sportswear operation is mainly a distribution business for Nike, Adidas, Puma and Converse.

For its core ladies’ footwear unit, Belle aims to expand its store count by 27.5% in 2009, from 5,100 outlets to 6,500. For its sportswear unit, the plan is to increase its store count by 8.7% from 2,870 outlets to 3,120 outlets. Most of the new additions will be for acquired brands and first-tier sportswear brands such as Nike and Adidas. Expect capital expenditures for the year to be much lower than in 2008.

The company has one of the most efficient supply chains in the business. This means a shorter production and delivery cycle and substantially lower inventory costs. Its management team on the national and regional levels is considered top of the line.

Ladies’ fashion is rapidly becoming a big business in China, and given the country’s relatively low per capita consumption, growth potential is substantial.

The major risk for the company is the economic slowdown. But I expect that the Chinese government’s initiatives for boosting the economy will be successful, softening the blow substantially. During the first two months of 2009, same-store sales growth for ladies footwear and sportswear was in the low double digits and low single digits.

For 2009, management’s goal of double-digit growth in footwear sales and margins is realistic, mainly because of space expansion for second- and third-tier brands.

Belle enjoys a strong balance sheet: As of December 31, 2008, it had a net cash position of $363 million. (Belle closed at HK$5.20 Monday—Editor.)

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