Giordano's worse-than-expected first quarter 2009 results reflected continued consumer confidence in the company's sales market. However, we believe Giordano will also improve its performance in the coming quarters with cost savings, gradual consumer spending recovery and product adjustments. We continue to recommend the purchase of Giordano, with a target price of RMB1.89, equivalent to 12.4x FY09E P / E. Its 2010E P / E will fall to 8.6x if its earnings have recovered significantly, as we expected. Giordano's sales in the mainland market accounted for 40% of the company's total sales in the first quarter of 2009 fell 4%. Its mainland market sales in April decreased by about 5% from the same period of last year, and in May it started to improve to a level on a year-on-year basis. As most of Giordano's sales in the Mainland come from tier-one cities in southern China and the coastal areas, the performance of the mainland's foreign trade has been sluggish and the sales in the mainland market also bear the brunt of the global financial crisis. However, the company's business is continuing to expand to tier 2 and tier 3 cities and has enjoyed a balanced development in the mainland market. Its long-term overall growth should also be more sustainable. In Hong Kong's business, market sales were hit hard by the global financial turmoil and the new influenza. In the first quarter of 2009, Giordano recorded a 11% YoY decline in sales in Hong Kong, but a slight increase of more than 10% YoY in April and May. In April and May, Giordano's business performance in Taiwan and Singapore remained sluggish, both down more than 20% and down 16% and 24% respectively in 1Q09. The overall retail and distribution turnover in the first two months of 2009 decreased by about 15% from the same period last year as the sales in the markets outside the Mainland registered a double-digit decrease. Giordano's gross profit margin for the first quarter of 2009 decreased 4.7pps YoY to 44.8% while its gross profit margin is expected to improve from the second quarter of 2009 as it strives to reduce outsourced production costs and limit sales discount . Giordano's fiscal position for the first quarter of 2009 continued to be steady, with net cash of 567 million yuan, or 0.38 yuan per share. The company also tightened its working capital requirement to maintain its 2008 inventory turnover day at around 25 days.
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