PP 7767/09/2010(025354)

Malaysia RHB Research

Institute Sdn Bhd
A member of the
New Listing RHB Banking Group
Company No: 233327 -M

K-Star Sports Ltd 2 June 2010

MARKET DATELINE

Issue Price : RM2.15

Public Issue Of 15.2m Shares To The Malaysian Public and
Fair Value : RM2.38
Selected Investors

Table 1: Investment Statistics Bloomberg Ticker: KSTR MK

Pre-tax Net EPS Net
FYE Turnover Profit Profit EPS Growth PER P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (RMm) (sen) (%) (x) (x) (%) (%) (%)
2009 294.5 61.3 45.5 51.3 96.1 4.6 1.3 net cash 27.7 -
2010f 337.5 70.6 52.9 59.6 16.2 4.0 1.0 net cash 26.3 3.0
2011f 425.2 93.3 69.9 78.8 32.1 3.0 0.8 net cash 26.4 4.0
2012f 459.3 98.4 73.8 83.1 5.6 2.9 0.6 net cash 22.3 4.5
Valuations based on estimated fair value of RM2.38/share

Issued capital (m shares) 88.8 (RM1.00par) Market capitalisation (RMm) 211.3

X Background. K-Star Sports Limited’s (“K-Star”) primary focus is on the LISTING DETAILS
production of shoe soles and handmade canvas footwear, both of which are Listing Sought Main Market of
under its proprietary brands and OEM/ODM brands. K-Star today have four Bursa Malaysia
production lines that are capable of manufacturing more than 700-800 Listing Date 4 June 2010
models of sports shoes annually and are currently running at an average Public Issue 15.2m shares
including:
capacity utilisation rate of approximately 95.9%. The company has around
- 3.3m to public;
769 retail outlets, 53 specialty shops and 716 shops across 18 provinces and
and
3 municipalities in the People’s Republic of China (“PRC”). - 11.9m private
X Future plans. The future plans for K-Star are as follows: placement

1) Expansion of its retail networks. The company intends to increase

the number of retail points to 860, including 73 specialty stores by end- MAJOR SHAREHOLDERS
2010. Chan Kai Fly 58.4%
2) Expansion in its production facilities and capacity. K-Star plans to
expand their production facilities by installing two additional production
lines by 2011, which will increase their annual production capacity to
approximately 6m pairs (from 4m pairs currently). Total estimated capex MANAGEMENT FORECAST

is about RM9m. FY10

Revenue (RMm) NA
3) Expansion in its product range. The company plans to expand its
Net Profit (RMm) NA
business to the sports apparel segment in 2H2010.
Net EPS (sen) NA
X Forecasts. We project K-Star to post FY10-12 revenue CAGR of 10.8%, Net PER (x) NA
driven by: 1) the company’s capacity expansion plan; and 2) rising brand
awareness due to the increasing number of points of sales across China. We
have, however, projected FY10-12 net profit CAGR of 11.7% as a result of
margin expansion (FY10-12 EBITDA margin assumptions of 21.4-22.0%
against FY09 EBITDA margin of 21.5%) following the introduction of sports
apparels in 2HFY10, which typically enjoy higher margins than sports shoes.
As for dividends, we have assumed FY10-12 annual gross dividend per share
of 7.2-10.8 sen, which translates to gross yields and net payout ratio of 3.0-
4.5% (based on fair value) and 9.0-9.8% respectively.
X Valuations. For comparison purposes, we have selected a combination of
companies that have similar business division and produce goods related to
K-Star’s portfolio of products. By applying a 60% discount to the FY10 sector David Chong, CFA
average of 10.4x, we derive a target PER of 4x. We have applied the (603) 92802179
discount to reflect its smaller size, i.e. revenue and capacity. Ascribing a david.chong@rhb.com.my
target CY10 PER of 4x, we derive a fair value of RM2.38 for K-Star.

Please read important disclosures at the end of this report.

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 2 June 2010

X Background. The history of K-star can be traced back to 1988, when its Executive Chairman and CEO, Mr
Ding Jianping established the Village Community Enterprise Fujian, Jinjiang City, Jiangtou to manufacture
handmade sports footwear products. Initially, this was a relatively small operation with approximately 30
personnel. Four years later, Mr. Ding established Fujian Dixing (of which K-Star owns 100%), to primarily
focus on producing shoe soles and handmade canvas footwear under its proprietary brands. K-Star has four
production lines currently that are capable of manufacturing more than 700-800 models of sports shoes
annually and are currently running at an average capacity utilisation rate of approximately 95.9%. The
company has around 769 retail outlets, 53 specialty shops and 716 shops across 18 provinces and 3
municipalities in the PRC. K-Star also sells its footwear to countries like Russia, Ukraine, Belarus, The Czech
Republic, Poland, Finland, Romania and Hungary. Apart from its own proprietary brands, the company is also
an Original Equipment Manufacturer (“OEM”) and Own Design Manufacturer (“ODM”) for a local PRC sports
footwear brand called ‘Double Star’ as well as international brands such as Umbro, Kappa, Conguro, and Le
Coq Sportif. The company is currently operating in Jinjiang City, Fujian Province, which is China’s sports shoe
manufacturing capital and one of the world’s largest sports shoe manufacturing centres.

Chart 1 : Revenue Breakdown Between Proprietary Chart 2 : Revenue Breakdown By Geographical Region
Brand and OEM/ODM Brand For FY09 For FY09

Overseas-
OEM /ODM OEM /ODM
B rand B rand
26%
13%

Overseas-
P ro prietary
B rand
14%

P RC- P RC-
OEM /ODM P ro prietary
P ro prietary
B rand B rand B rand
74% 10% 63%

Source: Prospectus Source: Prospectus

X Major customers and suppliers. For its proprietary brand sold in PRC and overseas, K-Star markets its
products through its distributors and retailers while its ODM/OEM brands are to local and international
customers. Meanwhile, K-Star’s major raw materials consist of leather and shoe soles.

Table 2 : Top customers accounted for 10% Table 3: Breakdown of cost of sales
or more of K-Star’s purchases
% of total % of total cost of
Suppliers purchases for Details sales for FY09
FY09

Jinjiang Xing An Leather Industry Co., Ltd 3.8 Raw materials 83.3
Fujian Jinjiang Chendai Jiangtou Maotai Direct labour 6.4
Xiangshuo 1.3
Shenghui (Fujian) Shoe Material Co., Ltd 2.4 Subcontracting costs 9.7
Quanzhou Chaoshengda Sports Co., Ltd 4.5 Manufacturing overheads 0.6

12.0 100.0
Source: Prospectus Source: Prospectus

K-STAR 2 SPORTS LTD

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X Industry overview. According to the market research report by Converging Knowledge Pte Ltd, the size of
China’s sportswear industry has been growing at a CAGR of 22.3% for the period from 2006. In 2006, the
market size was about US$4bn, where it reached approximately US$6bn in 2008. This would mean that K-
Star held a market share of approximately 2% of China’s sportswear industry, based on its revenue of
US$73.4m in 2008.

According to the same report, the rise in disposable income of the Chinese population has changed the
consumption patterns of households, as seen in the PRC’s sportwear industry. The annual apparel and
footwear consumption per household in the PRC has increased by 80.4% over a six-year period from 2000 to
2006. The report also suggests that PRC’s sportswear market could grow by an estimated 11.7-15.8% yoy,
driven by: 1) the Chinese government’s efforts in promoting healthy lifestyles among the Chinese population
via active education and promotion of healthy living benefits; 2) major sporting events; and 3) increasing
level of disposable income.

Chart 3. Past Performance of The PRC’s Sportswear Industry Chart 4. Market Share of Sportswear Brand in PRC
2007
US$ bn

7.00

6.00

5.00

4.00 Internatio nal

Do mestic
48%
3.00 52%

2.00

1.00

0.00
2006 2007 2008

Source: Company data Source: Company data

X Strengths. The main strengths are: 1) consumer play into China’s growing economy with the population now
geared towards healthy lifestyles; and 2) strategic location in Jinjiang City, China, which is one of the largest
sports-footwear manufacturing capitals of the world.

♦ Risk factors. We see the following key risk factors:

• Dependence on China’s consumer spending. Given that K-Star’s end users are predominantly
domestic, any slowdown in the economy would affect consumer spending in China and consequently, the
sportswear industry in China; and

• Execution risk from its capacity expansion. Any delays in K-Star’s expansion plans would dampen the
company’s future earnings growth.

♦ Future plans. The future plans for K-Star are as follows:

• Expansion of its retail network. Currently, K-Star’s products are retailed by over 769 retail points over
18 provinces and 3 municipalities. The company intends to expand their market presence and distribution
network in the PRC by increasing its market share in its existing markets as well as entering into new
geographical markets, particularly in the second and third-tier cities in the PRC. The company plans to
increase their retail points to 860, including 73 specialty stores, by end-2010.

• Expansion of its production facilities and capacity. K-Star has plans to expand their production
facilities by installing two additional production lines by 2011. With these two additional production lines,
the company’s sports fashion footwear production capacity will be increased to approximately 6m pairs
p.a. (from 4m pairs p.a. currently). Capex for the new production lines is estimated to be approximately
RM9m.

• Expansion in its product range. In order to complement K-Star’s existing product range, the company
intends to expand its business to the sports apparel segment in the 2H2010. The company plans to
outsource the production of sports apparel initially to external contract manufacturers and intends to
eventually set up own production facilities by 2012.

K-STAR 3 SPORTS LTD

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♦ Listing and offer proceeds. The total proceeds from the public issue will amount to RM32.9m and would be
utilised as per Table 4.

Table 4. Utilisation Of Proceeds

Estimated timeframe for utilisation

Details upon listing RMm

Expansion of production capacity Within 18 months 9.0

Expansion of sales and marketing network Within 12 months 5.0

Branding and advertising Within 12 months 3.0

Enhance product D&D capabilities Within 12 months 4.5

General working capital Within 12 months 5.4

Estimated listing expenses Within 6 months 6.0

Total proceeds 32.9

Source: Prospectus

Chart 5. Revenue, Net Profit and Net Profit Margin Trends (from FY06-09)

RM B m
600.0 18.0
16.0
500.0
14.0
400.0 12.0
10.0
300.0
8.0
200.0 6.0
4.0
100.0
2.0
0.0 0.0
2006 2007 2008 2009
Revenue Net P ro fit Net M argin

Source: Company data

♦ Financial forecast. For FY06-09 K-Star recorded revenue and net profit CAGR of 38.2% and 47.8%
respectively due to: 1) the increase in consumer demand for their sports footwear mainly among the growing
urban population in the second and third-tier cities in PRC as well as overseas; 2) the increase in average
selling prices due to its overall higher price positioning for its proprietary brands; and 3) the improvement in
margins due to economies of scale derived from higher manufacturing volume and from bulk purchasing of
raw materials.

Going forward, we project K-Star to post FY10-12 revenue CAGR of 10.8%, driven by: 1) the company’s
capacity expansion plan; and 2) rising brand awareness due to the increasing number of points of sales
across China. We have, however, projected FY10-12 earnings CAGR of 11.7% as a result of margin expansion
(FY10-12 EBITDA margin assumptions of 21.4-21.9% against FY09 EBITDA margin of 21.5%) following the
introduction of sports apparels in 2HFY10, which typically enjoy better margins than sports shoes.

According to the prospectus, K-Star’s dividend policy is to pay out between 10-20% of its annual earnings.
Following that, we have assumed FY10-12 annual gross dividend per share of 7.2-10.8 sen, which translates
to gross yields and net payout ratio of 3.0-4.5% (based on fair value) and 9.0-9.8% respectively.

♦ Valuations. For comparison purposes, we have selected a combination of companies that have similar
business divisions and produce goods related to K-Star’s portfolio of products. By applying a 60% discount to
the FY10 sector average of 10.4x, we derive a target PER of 4x. We have applied the discount to reflect its
smaller size, i.e. revenue and capacity. Ascribing a target CY10 PER of 4x suggests a fair value of RM2.38 for
K-Star.

K-STAR 4 SPORTS LTD

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Table 5: Comparative Valuations

FY09 FY09
Bloomberg Market cap
Company Revenue FY10 PER (x) FY11 PER (x) Operating
ticker (US$ m)
(US$ m) Margin (%)
Li Ning Company Ltd 2331 HK 4,160.6 1,228.3 25.0 20.5 16.0
Anta Sports Products 2020 HK 4,885.8 860.4 23.2 19.5 23.7
Ltd
Xtep International 1368 HK 1,973.8 519.2 16.9 13.9 20.2
Holdings Ltd
Belle International 1880 HK 12,871.4 2,894.2 28.2 24.2 14.3
Holdings Ltd
China Sports CSPORT SP 57.1 279.0 0.9 0.9 8.3
International Ltd SGD
China Hongxing CHHS SP 240.0 292.7 2.5 2.0 7.7
Sports Ltd SGD
China Eratat CERAT SP 40.0 113.8 0.7 0.6 26.1
SGD
Xingquan Limited XISH MK 112.1 258.6 3.3 2.4 26.1
Multi Sports Holdings MSH MK 43.6 72.9 1.7 1.6 27.9
Ltd
XiDeLang Holdings XIDE MK 42.9 118.0 1.5 1.2 24.1
Ltd
Simple average 10.4 8.7
K-Star Holdings Ltd KSTR MK 64.9 175.0 4.0 3.0 20.9

Valuation for K-Star based on our fair value estimate of RM2.38

Source: RHBRI and Bloomberg

Table 6: Earnings Forecasts

FYE Dec (RM m) 2008PF 2009PF 2010F 2011F 2012F
Revenue 241.8 294.5 337.5 425.2 459.3
Revenue growth (%) 78.1 21.8 14.6 26.0 8.0

EBITDA 51.2 63.2 72.2 95.1 100.6

EBITDA margin (%) 21.2 21.5 21.4 22.4 21.9
Dep & Amort (1.3) (1.6) (1.3) (1.6) (1.9)

EBIT 49.9 61.6 70.9 93.6 98.7

EBIT margin (%) 20.6 20.9 21.0 22.0 21.5
Net interest expense (0.4) (0.3) (0.3) (0.3) (0.3)
Associates 0.0 0.0 0.0 0.0 0.0
Pretax Profit 49.5 61.3 70.6 93.3 98.4
Tax (12.2) (15.7) (17.6) (23.3) (24.6)
Minorities 0.0 0.0 0.0 0.0 0.0
Net Profit 37.3 45.5 52.9 69.9 73.8
Net profit growth (%) 94.0 22.2 16.2 32.1 5.6
Source: Company data, RHBRI’s forecasts

K-STAR 5 SPORTS LTD

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15%
or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing
to take on higher risks.

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Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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for the actions of third parties in this respect.

K-STAR 6 SPORTS LTD

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