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By Rachel Ng
Wed, 21 Mar 2007, 09:43:35
Summary: Apart from generating higher net profit for shareholders, CG Technologies (CGT) also seek ways to improve its strategy by adding intangible value to its business model to sustain growth in the long term. CGT is now well on its way to build a strong brand image for the company. They have proposed a change in name to C&G and have opened a marketing office in Hong Kong with another one planned in Shanghai. CGT also plans to add value to its business model by focusing on product development. The completion of the PSF plant in 3Q07 will allow CGT to have more control over the quality and designs of its yarn products as well as enable the group to produce yarns with varied functionalities to cater to consumer preferences. The proposed corporate tax cut for domestic enterprises in China, if approved, will also be beneficial for CGT from 2008 onwards when the group will no longer enjoy preferential tax rates. Despite the market volatility lately, CGT share price has shown resilience. We also continue to believe in the fundamentals of the company and hence reiterate our BUY rating and fair value of S$0.98.
Building a brand image. CG Technologies (CGT) believes that in order to add value to its products, it needs to build a strong brand image that garment retailers can associate with. Hence, it announced during the last results that it will be changing its name to C&G Industrial Holdings to better represent the company?s operations and help headway their marketing plans. This change will probably take effect after 25 April. CGT has also opened a new marketing office in Hong Kong and is planning another in Shanghai. The strategic locations of the marketing offices will also provide CGT with easier access to garment retailers to market its products more effectively. Greater acceptance of CGT?s products by the garment retailers will also help to maintain the strong demand for PET chips and yarn products and also provide a more compelling competitive edge for CGT. Any orders or contracts directly from the garment retailer will also boost brand awareness for CGT.
Emphasis on product development. Another strategy to add value to its business model is to continue its emphasis on research and development to help with product development. The completion of the PSF (raw material for yarn) plant will enable CGT to achieve full vertical integration. Without having to source for raw materials for its yarn products, CGT is therefore able to have more control over product designs and technologies to produce yarns with various functionalities to cater to varying consumer preferences. Producing PSF internally, which is slated to commence in 4Q07, will also reap better margins for CGT.
Possible corporate tax cut in China. The Chinese government is proposing a standard tax rate of 25% for all domestic and foreign enterprises instead of the current 15% for foreign enterprises and 33% for domestic businesses. This proposed corporate tax cut for domestic enterprises will be beneficial for CGT from 2008 onwards when they will not enjoy the preferential tax rates they have currently.
Maintain BUY. Despite the correction in many China stocks lately, CGT share price has shown resilience amidst the volatility. We continue to believe in the fundamentals of the company and that FY07 will be another year of strong growth for CGT in terms of margins appreciation and growth in net profit. We reiterate our BUY rating and fair value of S$0.98.
