Weak 4Q08, no dividends. Cacola Furniture International Ltd (Cacola) turned in a dismal set of 4Q08 results with a net loss of RMB11.4m vs. a profit of RMB28.5m a year ago. Revenue declined 12.5% YoY and 18.0% QoQ to RMB129.9m as weak consumer discretionary spending continued to take a toll on the group's sales. The group reported a 14.8% slump in full year earnings to RMB105.0m despite a 16.4% gain in sales to RMB656.9m. The results were way below expectations. A further negative surprise came from the lack of dividends, which we had anticipated given the group's net cash position.

Hit by bad debt. 4Q08 earnings were tainted by a RMB36.2m bad debt provision, excluding which the group would have managed to remain in the black with a RMB24.9m net profit (-12.8% YoY). We suspect that the bad debts arose from defaults among the specialty stores that folded in 4Q08. According to management, fierce competition and weak demand resulted in 22 store closures during the quarter. More shops are expected to fold in 1H09. Cacola has RMB66.6m worth of trade receivables outstanding on its balance sheet, and we think that part of this could come under risk of further defaults as the credit crunch paralyses its distributors.

Margins could come under pressure. Cacola managed to keep its gross profit margin intact in 4Q08 thanks to the stability of raw material costs. Gross profit margin inched up by 0.4ppt YoY and 3.3ppt QoQ to 34.8%. =Nevertheless, margins could come under pressure in FY09 as fierce competition, oversupply and weak demand weighs on selling prices. Further margin compression could arise from rapidly ballooning selling expenses, which soared by 80.7% in FY08 as the group embarked on aggressive advertising and promotional activities.

No catalysts in sight. We note that Cacola trades below its S$0.10/share cash value. However, the group's cash position could continue to deteriorate in FY09 given its weak operating cash flows and continued investing outflows. As such, cash levels may not offer much support to share price. The global recession, weak property markets and subdued consumer discretionary spending are likely to weigh on China's furniture industry. Given the bleak outlook, we do not identify any near term price drivers ahead and are suspending our coverage on the stock.