Lilang (1234.HK)              BUY (TP: HK$10.00 (Under review))

60% profit growth anticipated for 1H 10e

Lilang is due to announce its FY10 interim results on Aug 23. We anticipate the bottom line to be up by 60%, reaching Rmb143m. Our estimate for the top line is Rmb882m, a 47% yoy growth, backed by reported 25% yoy growth in orders for the spring/summer collection. And orders from distributors usually account for 85% of total achieved sales. We expect high double-digit ASP hike and a 25% volume growth for 1H 10e. We project gross margin to surge to 32.6% in 1H 10e from 29.5% in 1H 09 due primarily to ASP increase. We also expect operating margin to remain stable. We currently anticipate bottom line for 2H 10e to rise by 24.5% to Rmb274m, but chances are good that the company would outperform our estimate, as the recently reported orders growth for the autumn/winter collections had exceeded our projected 20%, and reached 33% instead. The stock now trades at 22x FY10e p/e and at 16x FY11e p/e. We reiterate our BUY rating but put our current target price of HK$10.00 under review. We believe there is room for us to lift profit projection and target price and would like to do that after the interim results. Our current target price still provides a 16% upside.

We believe our 2H 10e estimate will be surpassed. Lilang has reported a 33% yoy orders growth for 2010 winter collection last month, which outperformed with our estimated 20% top line growth for 2H 10e. ASP of apparel products recorded double-digit growth, better than our estimate of single digit increase. Sales of the winter collection used to account for more than 30% of the whole year’s sales, and 2H historically accounted for 2/3 of the total yearly sales. As such, we believe our currently projected 38% bottom line growth for FY10e would be surpassed. As the interim results are due soon, we put our profit model under review and will update it after the interim results announcement.

Reiterate BUY and target price of HK$10.00. The stock now trades at 22x FY10e p/e and at 16x FY11e p/e. On an ex-cash basis, it is even more affordable at 19x for FY10e and 13x for FY11e. We reiterate our BUY rating and target price of HK$10.00, which is under review. Our current target price still provides a potential 16% upside.