Citigroup has its first buy rating on 1028.HK, with a target price of HK $2.50, equivalent to 14.6 times earnings for fiscal 2011 and 11.2 times earnings for fiscal 2012.

Citigroup said Hongguo was undervalued and represented China's further integrated direct sales sector. The company is the second largest middle-and high-end women's shoes retailer in China, with four self-developed brands. Citi expects earnings per share to grow at a compound annual rate of 25.5 per cent in the 2011-2014 fiscal year. Hongguo International's net profit in the first half of 2011 rose 118 per cent from a year earlier to 126 million yuan, in line with Citigroup's expectations, with same-store sales growth rising to 22.7 per cent in the third quarter of 2011 from 12.6 per cent in the first half. This is equivalent to a 15.8% increase in same-store sales in the first nine months of 2011, and Citi's forecast of 12% growth may be a bit conservative.

The stock fell 4.2 per cent to HK $1.83 yesterday.