Hong Kong Cinderella

03/16/2010 12:22 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

Women's shoe seller Belle International has moved smartly higher yet has more room to run, writes Yiannis G. Mostrous in The Silk Road Investor.

Belle International Holdings (Hong Kong: 1880) has produced a total return of 181% percent since I recommended it in early 2009. (The stock is up 82% since a follow-up report was excerpted here last April—Editor.) The company is what many novice investors would call “unexciting” because it makes and distributes women’s shoes. My assessment: Buy the stock during periods of weakness because Belle’s long-term potential is solid.

Belle has a 20% market share in ladies’ footwear in China. It owns and operates 9,500 retail outlets on the mainland, as well as 215 outlets in Hong Kong, Macau, and Taiwan. Belle’s portfolio [also] includes higher-end, licensed brands such as Clarks, Geox, Hush Puppies, and BCBG.

Belle had to hold back on new shoe orders in the last part of 2008 to cope with the slowdown in the Chinese economy. This shift made inventory levels manageable during the global downturn. Belle is now ready to boost order sizes from manufacturers in time for the second quarter.

Management expects demand to be strong and sales to continue to increase. In the wake of 10% same-store sales growth in the fourth quarter, this forecast doesn’t seem too ambitious. Management also expects to increase selling space by 10% in 2010, after adding 117 new stores during the last quarter of 2009.

Belle, also one of the largest sportswear retailers in China, is the country’s [number one and number two] distributor of Adidas and Nike products. Management is upbeat about the company’s high-end sportswear sales for 2010, an encouraging reversal after a turbulent period for international sport brands in 2008-2009. As usually happens in countries that host the Olympics, Belle had to offer extremely aggressive discounts to move inventory after demand waned following the 2008 Beijing Games.

The company has been further hampered by its failed acquisition of Fila, which it sold after failing to restructure the brand and devise an effective marketing strategy. Management, however, has dealt with these setbacks adroitly, rapidly closing down unprofitable stores and working down excess inventories.

Belle is scheduled to report full-year 2009 results on March 24th; expectations are for a profit of US$350 million, more than 20% above 2008’s total.

Economic growth in China remains solid, and Belle’s strategic direction puts it in line to benefit. Sales are on track to post 20% annual growth for the next two to three years. Operating profit will also rise, as less discounting will be required in a healthier economic environment.

Belle has US$586 million in net cash. Because of its solid profitability and relatively low capital expenditure requirements, a dividend increase may also be in the cards. Buy Belle International under HK$10. [Shares closed at HK$9.56 in Hong Kong Tuesday, and the stock yielded 0.7%—Editor.]

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