In the first three quarters of 2008, the company realized operating revenue of Rmb19.1bn (+30% yoy); net profit attributable to parent underwent a deficit of Rmb100mn, with the year-on-year loss reduced and EPS was Rmb-0.14. In Q3 2008, operating revenue rose by 41% yoy; net profit attributable to parent lost Rmb200mn and EPS was Rmb-0.28.
2008 Beijing Olympic Games was just held in Q3 2008; as its sponsor, the company won great acclaims from friends home and abroad in this period, which contributed to a year-on-year rise of 41% in operating revenue. Meanwhile, owing to sales growth in products with fairly high added value such as Jindian series, gross margin reached up to 28% (+3ppt yoy). In the period under view, the company substantially increased its advertisement and marketing cost and Q3 2008 sales expenses stood at Rmb2bn (+85% yoy). In our opinion, sharp expenses growth mainly led to the deficit in Q1-Q3 2008. Moreover, due to melamine event, the company drew falling price reserves of Rmb126mn for some stocks.
In Q3 2008, the company paid Rmb70mn for equity incentive expenses. If influences of drawing equity incentive expenses on net profit attributable to parent excluded, Q1-Q3 EPS was Rmb0.24 while Q3 2008 EPS Rmb-0.20.
Affected by melamine event, Q4 2008 sales will see obvious fall, while selling expenses will remain quite high. Expenses from product recalls and returns will be drawn in Q4 2008, with the earning forecast pessimistic. Thus, we lower the 2008-2010E EPS to Rmb-0.25, Rmb0.36 and Rmb0.54, representing P/E ratio of -28x, 20x and 13x, and thus down regulate the rating to “Neutral”.