Sanfo Outdoor: Low Price Reserve, Insufficient Future Profitability

February 5, 2015, Beijing

The second version of the declaration submitted by the Limited by Share Ltd (hereinafter referred to as "Sanfo outdoor") is submitted in April 30, 2014.

The prospectus shows that Sanfo outdoor intends to issue RMB ordinary shares no more than 17 million shares, raising 200 million yuan for the purpose of "marketing network construction", "information system upgrading and pformation" and "supplementary fund liquidity".

The reporter found that in the case of inventory ratio far higher than peers, Sanfo's outdoor inventory turnover rate is far less than that of comparable listed companies, and the company's inventory depreciation allowance is also obviously insufficient.

In the context of cold business, slow revenue growth and declining net asset yields, Sanfo's outdoor profitability is worrying.

Inadequate provision for depreciation

Sanfo outdoor is an outdoor product company which sells outdoor products and sells outdoor retail chain products.

The company specializes in outdoor outdoor products, outdoor products, outdoor clothing, outdoor shoes and socks and outdoor equipment. The main products are mainly professional outdoor products and public outdoor products. The three main categories are outdoor clothing, outdoor footwear and outdoor equipment.

In Sanfo's outdoors balance sheet, the company's inventory is particularly noticeable.

Prospectus shows that in 2011-2014 years, the total assets of Sanfo outdoors were 161 million yuan, 208 million yuan, 231 million yuan and 252 million yuan respectively.

In the same period, the amount of goods stored in the company was 105 million yuan, 115 million yuan, 132 million yuan and 132 million yuan respectively, accounting for 65.19%, 55.42%, 57.12% and 52.38% of total assets respectively.

In the A-share market, Pathfinder (300005.SZ) is more similar to Sanfo outdoor than A.

Data show that, in the past 2011-2013 years, the total assets of the Pathfinder were 845 million yuan, 1 billion 86 million yuan and 1 billion 489 million yuan respectively, while the merchandise inventory value of the same period was 180 million yuan, 164 million yuan and 291 million yuan respectively, and the inventory accounted for 21.05%, 15.06% and 19.57% respectively, much lower than that of Sanfo outdoor.

Although Sanfo outdoor explains that the company is a channel retailer for outdoor goods retail chain, most of the real estate used for lease is obtained through leasing. Therefore, compared with the Pathfinder, the company has a smaller amount of illiquid assets.

However, after excluding illiquid assets, the inventories of 2011-2013 years' inventories accounted for 30.84%, 20.15% and 25.05% of current assets respectively, still lower than Sanfo outdoor.

Not only that, Sanfo's outdoors inventory turnover is also far from the Pathfinder.

Prospectus shows that in 2011-2013 years, Sanfo's outdoors inventory turnover rate was 1.47, 1.30 and 1.37 times, while the same period Pathfinder's inventory turnover rate was 2.96, 3.18 and 3.17 times respectively.

In addition, the reporter also found that Sanfo outdoor inventory inventory preparation is obviously insufficient.

The prospectus shows that in 2011-2013 years, the amount of Sanfo's outdoor inventory depreciation was 35 thousand yuan, 1 million 77 thousand and 800 yuan and 1 million 471 thousand and 800 yuan respectively, the proportion being 0.03%, 0.93% and 1.4% respectively, while the amount of allowance for inventory depreciation in the same period was 24 million 939 thousand and 500 yuan, 24 million 113 thousand and 700 yuan and 42 million 32 thousand and 100 yuan respectively, and the respective ratios were 12.3%, 12.3% and 12.3%.

At the same time, the storage age of Sanfo's outdoor merchandise shows that as of December 31, 2014, the merchandise value of Sanfo's outdoor warehouse aged more than 3 years was 19 million 260 thousand and 200 yuan, accounting for 14.54%; the merchandise value of 2-3 years was 29 million 965 thousand and 300 yuan, accounting for 22.63%; 1-2 years, the commodity value of the warehouse age was 30 million 104 thousand and 700 yuan, accounting for 22.73%;

Therefore, according to the ratio of the inventor's inventory depreciation, Sanfo's outdoor inventory allowance should exceed 10 million yuan.

Sanfo's outdoors explanation is that the products of the company over 3 years old are mainly outdoor equipment products. Most of these products are durable and professional outdoor products. The age of the products has little effect on the net realizable value of the products. The sales volume of some products in the company's sales is stable throughout the year. Winter goods such as down garments can not only be used for daily cold protection, but also can be used in mountains, snowy mountains and extremely cold areas. Therefore, such goods still have large sales volume in spring and summer, and the prices will not be reduced. Therefore, there is no over season of such goods.

And summer commodities (such as spring and summer T-shirts, shorts, sandals, etc.), because their own low prices, the proportion of the company's stock is smaller, and the next year can still be sold, so there is generally no price decline.

Revenue growth depends on State-owned Enterprises

As a retail enterprise, Sanfo outdoor customers should be more dispersed.

However, reporters found that in 2013, Sanfo's first outdoor customer was China Mobile Communications Group Sichuan Limited (hereinafter referred to as "Sichuan mobile"), with a sales amount of 21 million 47 thousand and 100 yuan, accounting for 7.37% of revenue. The second largest customer of the company was CNNC Operation Management Co., Ltd. (hereinafter referred to as "CNN operation"), the sales amount was 10 million 238 thousand yuan, accounting for 3.58% of revenue, and the two companies totals 31 million 285 thousand and 100 yuan.

In 2012, the first big customer of Sanfo outdoor was China Telecom group. The purchase amount was 1 million 337 thousand and 800 yuan, accounting for only 0.56% of the revenue. The Sichuan mobile and CNNC were not listed among the top five customers.

In the 2012-2013 year, Sanfo's outdoor revenue reached 243 million yuan and 289 million yuan respectively, with an increase of 46 million 237 thousand yuan in business revenue, an increase of 19% over the same period last year.

This means that 67% of the company's revenue growth in 2013 came from the two companies. After excluding the revenues generated by the two companies, Sanfo's outdoor revenue growth will drop to 6.15%.

The problem is more than that.

According to the prospectus, Sichuan Mobile's purchase of goods, 17 million 865 thousand and 100 yuan is used for outdoor shoes procurement.

Reporter survey found that Sanfo outdoor sales

It is mainly divided into two kinds of cross-country running shoes and walking shoes, of which the average selling price of cross-country running shoes is about 600 yuan / double; the average selling price of hiking shoes brand is about 2000 yuan / double.

As we all know, Sichuan mobile is a wholly owned subsidiary of Chellona Mobile Communications Corporation Cmcc, and the nature of the company belongs to state-owned enterprises.

According to relevant data, in 2012, the number of employees in Sichuan mobile was about 25 thousand. A rough calculation shows that the purchase amount of Sichuan mobile can almost buy a pair of cross-country running shoes for every company employee, even if it is purchased at the price of 2000 yuan / double.

The number of purchases will also cover more than 1/3 employees. The welfare benefits of Sichuan mobile seem to be much better than that of the market.

In addition to Sichuan mobile, the operation of the CNNC is also a state-owned enterprise.

China Nuclear operation is a wholly owned subsidiary of China nuclear industry group, with more than 3600 employees, and is responsible for managing nuclear power units.

In the prospectus, Sanfo outdoor did not disclose the type of goods purchased by the central bank, but the amount of procurement in the nuclear operation seems to be less than the number of companies.

Future profitability

In addition to the above problems, Sanfo's outdoor profitability in the future is also worrying.

According to statistics of China Textile Association outdoor products branch (COCA), in 2000-2013 years, the total retail sales of outdoor products in China increased at an average annual rate of 45.62%. In 2013, the total retail sales of outdoor products reached 18 billion 50 million yuan in the Chinese market.

However, the prospectus shows that in 2012 and 2013, the proportion of Sanfo's outdoor revenue growth was 11.9% and 19.03% respectively, much lower than the average growth rate of the industry.

In 2014, Sanfo outdoor revenue only achieved a single digit growth. The company achieved operating income of 304 million yuan, an increase of only 5.16% over the same period. At the same time, the company realized net profit of 27 million 851 thousand yuan, down 14.53% compared to the same period last year.

Not only that, Sanfo's outdoors net assets yield is also declining year by year.

Prospectus shows that from 2011 to 2013, Sanfo's outdoor weighted average return on net assets was 31.98%, 20.44% and 19.61% respectively.

Although the company explained that the decline in net asset yield was due to the increase in fixed assets purchased by International Building in 2013 in Changchun International Building.

But the fact is that in 2014, Sanfo's outdoor weighted average return on net assets continued to decline, only 14.44%.

Compared with the increase in fixed assets, Sanfo's outdoor store expansion seems to attract more attention.

In the 2010-2014 years, the number of Sanfo outdoor stores increased year by year, but the profit growth of enterprises was relatively slow.

In 2009, the number of Sanfo outdoor stores was only 18. In 2010, Sanfo outdoor opened 8 stores in Chengdu, Shenzhen, Shenyang, Changchun and other cities.

As of December 31, 2014, Sanfo outdoor has opened 34 stores in 12 cities across the country.

However, rapid expansion of stores did not bring about a rapid increase in profits.

The prospectus shows that there are 10 stores in the 34 outdoor shops of Sanfo, but in the remaining 24 stores, there are 9 stores with a net profit of less than 200 thousand yuan.

In addition, Sanfo's dependence on state-owned enterprises seems to be growing.

The latest version of the prospectus shows that in 2014, the top five customers of Sanfo outdoors were PetroChina Co Ltd North China Petrochemical Company, China Mobile Communications Group Hebei branch Tangshan branch, State Grid Zhejiang Pujiang county power supply company, Beijing Stomatological Hospital affiliated to Beijing Stomatological Hospital, and Chengdu Hydropower Survey and Design Institute Limited of China hydroelectric consultancy group. The purchase amount was 3 million 417 thousand and 100 yuan, 2 million 720 thousand yuan, 1 million 407 thousand and 800 yuan, 1 million 143 thousand and 600 yuan and 1 million 36 thousand and 500 yuan, respectively, totaling 9 million 725 thousand yuan, accounting for 62.09% of the new income of that year.

Meanwhile, the reporter noted that in December 2014