Lower revenue from 2Q. The group's 1HFY12 results came in below our expectation. Revenue was only a tick higher by 0.5% y-o-y due to weaker performance from the TPR (-14.7%) and MD1 (-9.3%) segments although this was partially mitigated by strong growth in RB (+15.2%) and MD2 (+4.3%) products. RB and MD2 sales volume remained upbeat, growing by a decent 7.7% and 1.6% y-o-y respectively while sales of TPR and MD1 shoe soles contracted by 16.4% and 10.8% y-o-y respectively. The change in sales mix was mainly due to market trends and demand. The company's production capacity currently stands at 45m pairs per annum while its utilization rate is 77.5%. Vis-''-vis 1QFY12, the revenue and earnings were lower by 2.2% and 7.5% q-o-q.

Margin weakens. Gross profit margin decreased by 2.1% to 27.7% y-o-y despite a slight increase in the average selling price of the company's products from RMB20.83 to RMB21.5, no thanks to higher production cost arising from higher labour and overhead costs. Likewise, EBIT margin shrank from 25.6% to 23.3% y-o-y.

Maintain BUY. Judging from the weaker-than-expected revenue for 2Q as well as the thinning margins, we are revising downwards our FY12 and FY13 earnings by 21.2% and 27% respectively. The dip in 2Q revenue was mainly due to lower orders due to more rigorous client screening by the company in order to prevent bad debts. We expect the group's revenue to normalize around 4Q and the full year performance to be generally slower compared with last year. Maintain BUY, with a revised FV of RM0.70, based on 5x FY12 EPS.

Source: OSK