| CHINA GAOXIAN: Unloved stock (2.6X forecast 09 PE!) with great potential |
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| CHINA GAOXIAN: Unloved stock (2.6X forecast 09 PE!) with great potential |
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This article was recently published at www.sharesinv.com, and is reproduced here with permission. The writer, Ernest Lim, works as an investment manager. He is also a shareholder of China Gaoxian. Ernest Lim, CFA, CPA AT THE TIME of its listing, China Gaoxian Fibre Fabric Holdings (Gaoxian) was the largest IPO in 2009, raising net proceeds of S$78.3m and sporting a market capitalization of S$350m. However, with only one analyst covering it, China Gaoxian soon faded into obscurity. It closed at S$0.175 recently, 33% below its IPO price. Should investors invest in China Gaoxian? Let’s take a look at this premium high-end yarn and fabric manufacturer. Up till 2007, Gaoxian only produced full drawn yarn. It introduced three new products, namely drawn textured yarn, blended polyester yarn and triangular fibre yarn in 2008 and warp knit fibre in 2009. It sells its products under “华港” (HuaGang) and “大华威” (DaHuaWei) brands. Its clientele includes more than 1,500 garment and textile manufacturers in the PRC, who use the products to manufacture apparels, sports shoes and upholstery for automobiles and airplanes, etc. Examples of domestic brands in Gaoxian’s clientele are Metersbonwe, Septwolves, Tebu and Xtep.  These are products that Gaoxian's premium yarn are used to manufacture. Investment Merits a) Improving industry prospects: Gaoxian operates in the highly differentiated yarn niche, where demand outstrips supply. According to management, China is a net importer of such yarn, importing about 50% of its total demand. Demand is increasing steadily due to the rising affluence of the people. Furthermore, the government supports the textile and garment industry as it employs a lot of workers. b) Expansion drives growth: In view of the improving industry outlook, Gaoxian is planning to increase yarn production capacity by 37% from 176,200 tonnes in 2009 to 241,300 tonnes in 2010. Moreover, it is targeting to increase its fabric production capacity by 382% from 17,000 tonnes in 2009 to 81,900 tonnes in phases. c) High net margins – a testament to demand Net margins have remained around 20% since its records in 2006. 9MFY09 net margin is at an enviable 22.0%. One of Warren Buffett’s tenets is to buy companies with a high profit margin as it is important for the company management to convert sales into profits and to control their expenses. Gaoxian satisfies this tenet. d) Cheap valuations Gaoxian trades at a substantial discount against its peers. According to Bloomberg, at the close of trade on 10 Feb, Gaoxian traded at 2.6x FY09F earnings vis-à-vis the peers average of 8.6x. (The FY09F average PE is calculated by taking the average of Li Heng and China Taisan FY09F PE. I have ignored the companies with “NA” FY09F PE, as well as, China Sky’s astronomical FY09F PE in the calculation.) This colossal discount is unwarranted for Gaoxian which is the most profitable fibre company listed on SGX and has great potential in the next few years.  CEO Cao Xiangbin. NextInsight file photo. e) Play on domestic theme Gaoxian services domestic brands such as Xtep and Metersbonwe. Recently, Xtep announced that its 2010 3Q sales fair in Hefei City saw strong order book growth of 23% year-on-year (y-o-y) in sales value. Orders for apparel products soared 25% y-o-y, while footwear orders jumped 22%. The macro economiy is set to brighten. I believe the 12th Five-year Plan (2011-2015) would likely include more policies which are conducive to domestic consumption, as China seeks to shift gradually from an export-driven economy to a consumption-based economy.Overall, this bodes well for companies which serve the domestic sector. |
