Qingmei

Indeed there are always 2 sides to a coin, there is no 'sure-win' case in any investment, but that shouldn't stop you from taking the next step to grow your business, which is what both Eratat and Qingmei are doing in their respective lines of businesses. Qingmei is also experiencing increasing costs and decreasing magins with their increasing production capacity, and let's hope they find ample demand for their increasing supply, which I am confident they can. By the way Eratat is not yet setting up its directly owned stores, but is facilitating the setting up of specialty stores by its distributors in order to increase brand awareness and visibility. 

Qingme completed the new installation of machineries by end of Dec 2010. Some machines are completed earlier and others towards end of Dec 2010.
If you notice, the depreciation charges has increase from 1Q to 2Q due to new production faciliaties. Exclude FX gain. Qingmei post slightly better 2Q 2011 result compare to 1Q 2011.
1Q 2011 profit b4 tax (exclude FX gain) RMB 74.294m, depreciation charges RMB 11.035m
2Q 2012 profit b4 tax (exclude FX gain) RMB 74.822m, depreciation charges RMB 14.873m
Gross margin 2Q 2011 is 29.17% vs 1Q 2011 28.99% 
Qingmei also reduce loan during 2Q 2011 (less RMB 12.5m).
So I think the Qingmei 2Q 2011 result is slightly better than 1Q 2011.
 
FYI, Qingmei has start (small) production during Dec 2010 for the new capacity. I will post more info later.

Now I will explain why it is possible that a small production had started during Dec 2010.
Before the new capacity is completed.
Max capacity (pairs) per year/per qtr
MD II: 26.64m, 6.66m
MD I 19.98m, 4.995m
RB outsoles/shoe soles: 45.624m, 11.406m
 
Capacity is limited due RB shoe soles.
2Q 2010 RB outsoles/shoe soles: 11.713m
3Q 2010 RB outsoles/shoe soles: 11.199m
4Q 2010 RB outsoles/shoe soles: 11.365m
1Q 2011 RB outsoles/shoe soles: 11.03m
2Q 2011 RB outsoles/shoe soles: 11.842m
Now you can see 11.842m pair of shoe soles is more than 11.406m shoes soles. (old capacity). Even if we assume Oct to Dec has extra 1 day of production, it is still above the maximum production. Question is on 2Q 2010, Qingmei had produce 11.713m pair of shoe soles.
If you dig further, it seems that when they produce more MD II soles, the total shoe soles drop. Perhaps, producing MD II soles require more work.
Base on 1Q 2011 and 2Q 2011 shoe soles, it seems that small production has begun as per Qingmei mgmt guidance.

Base on past 5 quarters break down of differement of soles
2Q 2010, 3Q 2010 4Q 2010, 1Q 2011, 2Q 2011
MD II soles, 5.675m, 6.252m, 6.579m, 6.598m, 6.596m
MD I soles 4.061m, 3.966m, 3.351m, 3.552m, 3.706m
RB shoe soles 2.452m, 981K, 1.435m, 880K, 1.54m
Total soles 11.713m, 11.199m, 11.365m, 11.03m, 11.842m
Due to capacity constraint previously, they choose to produce more MD II soles and reduce MD I soles.
Comparing 2Q 2011 with 1Q 2011, you can see the increase of MD I soles and RB shoe soles and MD II soles is stable.
I suspect the mgmt take in slightly more orders for MD I soles and RB shoe soles because they expect the capacity expansion for RB outsoles/shoes to be completed earlier and RB outsoles & shoe soles are more simple to produce. Since they have increase many production lines, some RB Outsoles & shoe soles and EVA II Midsoles production lines were completed earlier than end of Dec 2010.
"MD II shoe sole" An integrated shoe sole unit that typically comprises an RB Outsole and an EVA II Midsole
To make MD II shoe sole, you will need EVA II Mid sole + RB Out soles.
So I think it is prudent to make sure new capacity for RB out soles are produce first. Once it is produce successfully, next time is produce EVA II Midsole + RB outsoles to produce MD II shoe soles.
So from Jan 2011 onwards, mgmt may likely take in more orders for MD II soles (higher revenue and higher profit margin). This will help their future earning.
 
 

The China Hongxing group has been one of the many customers of the Group since
August 2008. The Board wishes to inform its shareholders that it does not expect any
material impact on the Group's business, operations and financial performance arising
from commercial transactions with China Hongxing. The sales of sports shoe soles for
the half year ended 31 December 2010 to the China Hongxing group was approximately
1.7% of the Group's total sales for the period. As at 28 February 2011, the outstanding
receivables from the China Hongxing group amounted to approximately RMB2.5 million.
Settlement by the China Hongxing group has been in line with the credit terms offered.

strange that the aussie fund has not even nibbled at this stock which has fallen to 25 cents.