3Q09 exceeded expectations. Man Wah Holdings Ltd's (MWH) 3Q09 results exceeded our expectations with net profit growing 14.7% YoY to HK$56.2m on the back of a 29.9% growth in revenue to HK$522.3m. EPS came in at 8.43 HK cents vs. 7.35 HK cents a year ago. On a sequential basis, this represented a mild 1.0% growth in earnings accompanied by a 7.0% growth in sales. Excluding one-off gains, we estimate that earnings would have grown by a smaller 10.2% YoY. No dividends have been declared for the quarter.

Europe was the key sales driver. MWH continued to post robust growth across almost all its geographical segments, with Europe leading the way with a 65.4% YoY growth in sales. North America and China similarly performed well with sales growth of around 32%. China's sales growth was partly bolstered by the opening of 22 new Cheers stores during the quarter. Management intends to continue its retail expansion plans, albeit on a more cautious note, as the retail climate grows increasingly uncertain.

Watch out for declining ASP. Average selling prices (ASP) were flattish during the quarter, implying that volume growth was the group's key sales driver. Management warned of declining ASP in the coming quarters as intense competition and weak consumer spending have warranted extended periods of promotional discounts, and this could potentially hurt revenue if volume growth does not catch up with price declines.

Margins steady. 3Q09 gross profit margin held steady at 31.5% (vs. 31.1% in 3Q08), while net profit margin contracted by a slight 1.4ppt to 10.8%. Going forward, management is confident of maintaining its profit margins, given that declining raw materials cost will offset the fall in ASP. It has already seen a drop in raw materials cost, as reflected in the lower inventory levels in its balance sheet. Inventories fell from HK$220.4m in Mar 08 to HK$159.7m in Dec 08.

No concrete acquisition plans, for now. Shareholders have voted against the acquisition of Famous Bedding due to its hefty price tag. While this acquisition has been abandoned for now, management indicated that they are on a continuous lookout for viable acquisitions. Moving forward, weak consumer discretionary spending globally brought on by the current recessionary environment and a lackluster property market could weigh on its outlook. We see no major share price drivers ahead and are suspending coverage on the stock.