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| S-CHIPS: Time to re-look 'cheap' textile plays? |
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| Written by Sim Kih | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Wednesday, 29 July 2009 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 Textile
stocks might be cheap but the end products can be as pricey as a
4-digit sum for a swimsuit. Above: Li Heng's nylon is used to make
swimwear. THE HISTORICAL price earnings ratio (PE) of profitable S-chips now averages about 8X (based on Tuesday's closing prices), compared to an amazing average of 37X for the Shanghai Composite Index, Shenzhen Composite and Hang Seng Index. One may argue that companies listed in mainland China and in Hong Kong may have more lucrative businesses, but even the FTSE ST Small Cap Index is trading at an euphoric valuation of 30X PE. Is it now time to pick up lowly valued stocks? Of the 100-odd S-chips, we found 80-odd businesses to have reported profits in the past 12 months. Further, in the universe of S-chips trading at less than 5 times PE, we found 36 laggards, of which a third are from the textile industry. The market appears to be slow in catching on to the upturn in China's textile and garment exports. In June, it was up 13.3% over the previous month (albeit down 10% year-on-year), and reached US$13.95 billion. Cumulative export output between January and June amounted to US$72.8 billion, down about 11% year-on-year, according to China’s General Administration of Customs. Two chemical fiber players, Li Heng and China Sky Chemical, have respectively gained 22% and 12.5% over the past month after UOB Kayhian issued its ‘Overweight’ call on China’s nylon industry on 22 July. UOB Kay Hian analyst Allen Jiao believes that China’s chemical fibre industry has likely hit bottom after a downcycle from late-4Q08 to early-1Q09 that was plagued by plunging selling prices, lower production, decreased profitability, longer receivables and asset turnover, as well as heavy cutbacks in fixed asset investment,
28 July 2009). The analyst, who is based in Shanghai, has a “buy” call on Li Heng with a target price of 29 cents. He has a “hold” call on China Sky, with a target price of 22 cents. Normally, synthetic yarns can be weaved into fabric with functionalities such as water-resistance, fire-resistance and chlorine-resistance, etc, and therefore fetch better prices. As makers of synthetic yarn, Li Heng and China Sky are the most upstream on the textile supply chain. Its nylon yarn products used in apparel, hosiery, home furnishing, shoes, bags, umbrellas, etc. What do other laggards in the textile industry do?  At 27 cents, Li Heng is close to UOBKH's target of 29 cents. Other yarn makers Sino Techfibre is also a synthetic fiber maker. It produces polyurethane (PU) and microfibre synthetic leather. Its products are used by makers of fashion apparel, footwear, sports apparel and equipment, luggage and travel accessories, as well as upholstery for furniture. Zhongguo Pengjie is a yarn-maker, but focuses on cotton yarn, which is considered low-end relative to functional synthetic fiber. Part of this yarn is spun into loom-state cotton fabric, which needs to be treated and processed. The company also makes higher end yarns from fibers such as bamboo and wood, as well as synthetic fibres such as polyester. Hongwei Technologies makes polyester differential fibers primarily for yarn and textile manufacturers. Weave fabric from yarn China Hongcheng makes home textiles. It produces cotton yarn and fabric, silk cotton fabric, yarn dyed cotton fabric, high-density broad-width cotton fabric, and jacquard cotton fabric. China Taisan makes functional knitted polyester fabrics used for sports and leisure apparel. The company manufactures knitted fabrics, not the apparel itself. Foreland Fabrictech’s weaving process embeds functional properties during its dyeing, coating and finishing. Qian Feng Fabric Tech produces functional synthetic knitted fabrics and provides related dyeing and post-processing treatment services.  China Sky is now at 18.5 cents, with 19% upside to UOBKH target of 22 cents Fabric processing and finishing China Fibretech provides dyeing and post processing treatment services for cotton, polyester, and mixed knitted fabrics. Sporting apparel and shoes China Eratat Sports Fashion designs, manufactures, and distributes sports footwear. The Company also designs and distributes sports apparel. China Sports designs, manufactures, and sells branded sports fashion footwear and apparel products. Zippers Fuxing China makes zipper sliders and zipper chains. Its products are mainly sold to local manufacturers of apparel and footwear products, camping equipment, bags, and upholstery furnishings. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LAGGARDS which might be under-appreciated gems |
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| Written by Leong Chan Teik | |
| Saturday, 25 July 2009 | |
 Source: Bloomberg. Data as of Wednesday close of trading. WHO ARE THE laggards in this sharp, surprising market rally? We did a search on Bloomberg of stock that meet all the following screens: * PE less than or equal to 5. * Price/Book less than or equal to 5 * Dividend yield equals to or more than 5  Chinese consumer examining China Zaino's backpacks in a Carrefour store in Beijing. Photo by Andrew van Buren The results are the stocks that appear on this page. Certainly there might be undiscovered gems among them but we don’t think all are necessarily worthy of investment. To start with, the dividend yield of some of them look high but it’s not sustainable. Similarly, their PE ratios make them look cheap but that’s before any adjustment for a plunge in their earnings this year given the lousy economic climate. Most of these stocks are not covered by analysts, so there is not much to go on. The few which are and/or whose business stories we know of are as follows (highlighted in yellow in the two tables), along with snippets of what has been reported recently: Li Heng: The stock has plunged in the past year but UOB Kay Hian is seeing signs of recovery. “China’s nylon fibre industry has seen a substantial improvement since the beginning of the second quarter. We expect Li Heng and China Sky to record quarter-on-quarter earnings improvement for 2Q09,” said UOB Kay Hian analyst Allen Jiao recently. He is maintaining a “buy” on Li Heng with a target price of S$0.29 (closing price: 23 cents yesterday), based on Hong Kong peers’ average FY10 PE of 5x. Read our China correspondent's recent exclusive interview with the chairman of Li Heng > LI HENG: Aiming to emerge leaner, meaner, greener |
| LI HENG: UOBKH's top pick among SGX-listed nylon makers |
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| Written by Andrew van Buren (China Correspondent) | |
| Monday, 29 June 2009 | |
 UOBKH says China's chemical fibre sector has hit bottom, in its report issued last Mon. CHINA’S CRUCIAL CHEMICAL FIBRE sector has likely touched the nadir of the downturn and is on the mend. “China’s nylon fibre industry has seen a substantial improvement since the beginning of the second quarter. We expect Li Heng and China Sky to record quarter-on-quarter earnings improvement for 2Q09,” said UOB Kay Hian analyst Allen Jiao. China’s chemical fibre industry likely hit bottom after entering a downcycle from late-4Q08 to early-1Q09. Implications include the plunge in selling prices, lower production, decreased profitability, longer receivables and asset turnover, as well as heavy cutbacks in fixed asset investment. “Since early-2Q09, the chemical fibre industry has begun to experience a recovery, especially from May 09 onwards. The improvement appears quite substantial with production revisiting double-digit growth in May 09,” he said. He pointed to the fourth quarter of last year, when prices fell sharply. “Nylon fibre makers suffered from both sales decline (as a result of lower selling prices) and severe margin erosion when they had to purchase chips at a higher price level and sold yarn products at a lower price level. The situation has since reversed and prices are now rising. Thus, we believe the benefits to fibre producers would also double in terms of higher sales and better margins.” The upcoming export order flurry – though likely to be decidedly less frenzied than before the financial crisis – will nevertheless supply more tailwinds to steer peers out of their ongoing order doldrums. “The chemical fibre industry will soon enter the strong July-August season when fibre producers will fulfill more export orders for Christmas sales.  Li Heng chairman, Mr Chen Jianlong: reasonable results given tough environment Business climate and consumer confidence appear to be picking up in many western countries, especially the US. We therefore expect fibre makers to see more orders rolling in,” Mr. Jiao said. Although textile and garment exports for July-August could still record a year-on-year decline due to a relatively high base last year, the brokerage believes the chemical fibre industry will still benefit as stronger demand will help the sector step further out of the trough, heading towards recovery. Hung up on Li Heng Fujian Province-based Li Heng is the brokerage’s top SGX-listed nylon maker. “We like Li Heng for its consistent capability to maintain production at full capacity and generate profits when others fail to do so, which generally validates the company’s leadership position and enables it to gain additional market share. As the industry recovers, we expect Li Heng to benefit more as a market leader in terms of charging more decent prices and reporting better margins,” Mr. Jiao said. UOB Kay Hian is maintaining a “buy” on Li Heng with a target price of S$0.29 (current price: S$0.20), based on Hong Kong peers’ average FY10 PE of 5x. Meanwhile, it is staying “hold” on China Sky with a fair price of S$0.22 (current price S$0.16) “Li Heng has had substantial improvement since May in terms of stronger order flow and higher selling prices. Its production remained at full capacity in 2Q09 with monthly output reaching nearly 10,000 tonnes, similar to that of 1Q09,” UOBKH said. Li Heng is also reaping the benefits of higher selling prices, which provided a much-needed shot in the arm to overall margin fitness. “Average selling price (ASP) has risen over 10% versus March. Gross margin rose in tandem with the ASP movement at around 8% in April, higher than 5-6% in March before strengthening further to 12-13% in May. It is approaching 15% in June.” Mr. Jiao added that thanks to the “very strong” January performance, Li Heng achieved gross margin of 12.9% for the first quarter. “We expect 2Q09 gross margin to stay close to the 1Q09 level. However, we believe the gross margin will improve quarter-on-quarter on higher revenue due to higher ASP.” He added that in contrast to incurring a forex loss of over 20 mln yuan in 1Q09, Li Heng is likely to record a small forex gain in 2Q09, which would further boost the company’s sequential bottom line.  Li Heng chairman, Chen Jianlong with analysts at its nylon yarn warehouse. Li Heng’s first quarter-to-March revenue was 473 mln yuan, down from nearly 804 mln a year earlier, while profit attributable to shareholders fell considerably to 10.2 mln yuan. However, due to adept adjustments to the sail during the doldrums, Li Heng’s first quarter net cash generated from operating activities rose to 253 mln yuan, versus 243 mln a year prior. “I think we managed a reasonable quarter during such volatile times due to our diligence in managing a few factors of our business operations,” said Li Heng Chairman Mr Chen Jianlong, in an exclusive interview with NextInsight earlier this week. UOB Kay Hian is “overweight” on SGX-listed chemical fibre firms. Related story: LI HENG: Aiming to emerge leaner, meaner, greener |