China Zaino’s FY08 net profit grew 34.8% yoy to $417m. Net profit exceeded our expectations due to a $8.2m surge in other operating income in 4Q08 that comprised of a $7.5m write-back of allowance of trade receivables. Excluding other operating income, FY08 net profit was within our expectations. Advertising efforts led to higher ASPs and sales volume for backpacks, while its luggage products enjoy strong demand.

The luggage segment is the revenue booster as evident in the spike of its revenue contribution from 6% to 32% within a year. Going forward, the luggage segment will continue to be a major growth driver as demand escalates. Besides travelers, there are rising demand for luggage products from students and production workers in the PRC. The group was upbeat to triple its luggage sales to 10m by 2011.

Earnings momentum in FY09 is likely to slow as the group aligns growth with the distributors by maintaining the same number of retail concessionary outlets at 3250. Moreover, continual efforts to invest in A&P and higher tax rates are likely to weigh on net margins. A&P expenditure will remain high as the group plans to spend another RMB 100m on TV and billboard advertisements to upkeep its brand awareness in FY09.

While the group stays cautious on the challenging retail environment in 2009, it will focus on strengthening its branding and infrastructure. Close to half of its cash of RMB800m will be used for A&P and construction of a new production plant which is slated to be completed by 1H10. By then, it plans to resume retail network expansion in FY10 to meet the enlarged production capacity. This includes expanding into Fujian by opening 150 to 160 self-operated stores.

We have cut our earnings estimates for the next 2 years by about 20% to reflect slower expansion and lower annual production capacity. The board has proposes a dividend of RMB 8.8 cents or S1.97 cents per share which implies an attractive dividend yield of 12%. Going forward, they stay committed in a dividend payout of 20%. The group’s market dominance in PRC backpacks, coupled with its fast growing luggage products will continue to generate steady income streams. Maintain Buy.