New ratings boot up Yue Yuen's value

By Stephanie Wong  |   2008-6-25  |     NEWSPAPER EDITION

YUE Yuen Industrial (Holdings) Ltd, the world's largest maker of sports shoes, rose the most in almost three weeks after Morgan Stanley and Citigroup Inc upgraded its shares on profit increases.

The Hong Kong-based company rose 2.6 percent to close at HK$20.20 (US$2.58) in Hong Kong trading yesterday, trimming this year's decline to 28 percent.

Morgan Stanley raised its rating for the company, which makes footwear for brands including Nike and Adidas, to "overweight" from "equal-weight" while Citigroup raised it to "buy" from "sell," Bloomberg News reported.

Morgan Stanley based the upgrade on Yue Yuen's first-half profit of US$209.3 million, an increase of 23.4 percent from a year earlier and 12 percent above the bank's estimate. Concerns over potential gross margin erosion have been eased, it said.

"With gross margin improving in the two past consecutive quarters amidst rising production costs, the concern should be somewhat addressed, in our view. Valuation looks attractive," Morgan Stanley analysts Dennis Tao, Angela Moh and Nancy Lin wrote in a report released yesterday.

Citigroup analyst Eddie Lau said he raised his rating on Yue Yuen because "manufacturing margins have held up better than expected" as the company confirmed orders from new customers and added 32 production lines to a total of 430.

However, Citigroup lowered its target price to HK$22.5 from HK$24.4 to "further reflect potential demand and margin risks."