China HongXing

At China Hongxing, prepayments, deposits and other receivables increased from RMB0.3b in FY07 to RMB1.2b in FY08. The bulk of this amount were advances to distributors to facilitate the setting up of approximately 358 (FY07: 100) new stores in 21 (FY07: 20) provinces/cities during the year. While the Company was able to collect back the advances made in FY07, economic conditions have clearly changed and this form of ‘vendor financing’ (though already flagged to the investing public), may be giving institutional investors’ the cold feet, having learnt the dangers of vendor financing during the Internet bubble in the US. China Hongxing’s share price could rebound though on short covering and traders should take their profit. Fundamentally, we have a Neutral call with a target price of S$0.20. Given fears that the current crisis could yield another China Aviation style shock, traders are reminded to be nimble with their trades.