foreland fabrictech group - nra capital - final.pdf · margins to jump, ... but achieving...

12120

Source: Bloomberg

Foreland Fabrictech Group

Initiating Coverage

Staging a solid recovery

Initiate coverage with Buy recommendation. We view Foreland to be on track for strong recovery in the coming quarters following the upgrade of production lines. The share price performance has lagged the stock markets due to its delayed recovery. By applying a 20% discount to industry average (for its smaller size) of FY11 PER of 8x, we derive a target price of $0.18, representing 112% upside potential.

Strong customer orders until 3Q2011. Enquiries by customers have been strong since the beginning of 2010. However, the company is prudent when it comes to customer selection. The prudence translated into the shorter collection days compared to the industry, as evidenced in its past results. Now, the company is busy fulfilling customer orders as textile retailers are piling up stocks ahead of Chinese New Year. The orders are mounting and the capacity allocation has been stretched until 3Q2011. We forecast utilization rate to hit 90% in 4Q2010 and to remain high in 2011, ranging between 85% and 90%.

Rising ASP: New products introduction and increased demand for high-grade fabrics will help push Foreland‟s product average selling price (“ASP”) higher from its rock bottom in 2Q2010. The company‟s ASP plunged 38% since the onset of the financial collapse, down from RMB13.8 per yard in 1Q2009 to RMB8.8 per yard in 2Q2010. We forecast ASP to rise to RMB9.7 per yard in 3Q2010 and RMB10.7 per yard in 4Q2010 and the uptrend to continue in 2011, supported by global economic recovery and trading up by increasingly affluent Chinese consumers. We expect ASP in 2011 to range between RMB10.8 and RMB11.2 per yard.

Margins to jump, but achieving pre-crisis level a daunting task: We expect margins to improve, but achieving pre-crisis level is a challenging target. We estimate gross profit margin (“GPM”) to improve from 11.2% in 1Q10, the lowest since listing, to 27% in 4Q10. Although that would be a tremendous improvement, it is still below the more than 35% GPM achieved before the crisis.

Key Financial Data

(Rmb m, FYE Dec) 2008 2009 2010F 2011F 2012F

Sales 460.7 282.0 314.1 464.0 453.9

Gross Profit 171.9 62.5 66.2 122.4 118.8

Net Profit 106.9 32.6 31.1 64.4 62.3

Basic EPS (cents) 24.3 7.3 6.9 14.2 13.8

Diluted EPS (cents) 24.3 7.3 6.9 14.2 13.8

EPS growth (%) 5.9 (69.9) (5.9) 106.9 (3.3)

PER (x) 1.8 6.0 6.4 3.1 3.2

NTA/share (Rmb) 93.4 98.0 104.9 117.7 128.6

DPS (S cents) 1.2 0.0 1.4 2.8 2.8

Div Yield (%) 2.7 0.0 3.1 6.5 6.2

Source: Company, NRA Capital estimates

BUY

Current Price S$0.085

08 Nov 2010 Fair Value S$0.18 Jacky Lee

65 6236 6886 [email protected]

Historical Chart

Source: Bloomberg

Stock Statistics

Market Cap S$38.4m 52-HI S$0.105 52-LOW S$0.055 Avg Vol (1 yr) 378,012 Shares Outstanding

452.3m

Free Float 162.7m

Key Indicators

ROE 10F 6.8% ROA 10F 6.0% P/BK 0.5x Gearing Net cash

Major Shareholders

Tsoi Kin Chit 64.06%

page 1 NRA Capital Pte Ltd www.nracapital.com

NRA Capital Pte Ltd www.nracapital.com

Foreland Fabrictech

Company Background

Foreland Fabrictech Holdings Limited (“Foreland”), established in 1988, is a vertically integrated manufacturer of functional and normal fabrics based in Jinjiang City, Fujian Province, the PRC. Its production processes encompass weaving, dyeing, and

coating to finishing of fabrics. Most of the products are marketed under “Fulian” (福联)

brand and primarily sold to domestic apparel manufacturers who in turn sell to reputable brands such as “Li-Ning”, “Anta”, and “Edenbo”.

Through collaborations with global top chemical manufacturers such as Bayer, Ciba, Evermore Chemical, Farbchemie, Zschimmer and Daiwa Chemical, Foreland has successfully developed 17 functional fabrics since the inception of research and development in 2003.

Its products conform to various standards such as AATCC, ASTM, Din, as well as product labeling such as the Oek-Tex100 and the China Environment Labeling. The company has obtained quality assurance certifications including ISO9001:2000 and ISO14001:2004. The company was also conferred one of China‟s most prestigious and respected industry qualifications - the “Fabrics China Pioneer Plant – Chemical Fibre Functional Fabric Qualification” issued by the China Textiles Development Center and the China Textile Information Center.

Products

Foreland offers a wide range of functional fabrics, used for sportswear, tents, umbrellas, military attire, golfwear, business attire, bags, luggage etc. The company possesses the technical expertise to produce customized fabrics required by the garment manufacturers and textile traders.

The company‟s proprietary know-how lies in the secret formula that it uses to mix proportions of chemicals, additives and the application in the production process to produce high grade products with higher selling price and hence better profit margins. The formula is the key for the company to differentiate itself from its peers.

On top of high-grade products, the company also produces low-grade products, which are relatively recession-proof in terms of production volume. While this type of products has lower profit margins due to intense competition and low barrier of entry, it serves as a cushion in difficult times when consumers find ways to stretch their dollars.

Lately, the company launched two new functional fabrics, namely ultra, light and thin fabric and water-printed fabric that led to new orders from major manufacturers in

PRC such as Hangzhou Paradise Umbrella Group (杭州天堂伞集团 ), a famous

umbrella manufacturers located in Hangzhou, China. At one time, Paradise Umbrella is the top ten trademarks in China. Although the share of revenue contribution from this customer is less than 5%, the company‟s ability to expand customer base via continuous product innovations is a testimony to its competitiveness and technical know-how.

Function Description

Moisture & air breath Allow moisture from perspiration and body heat to dissipate

Used for sports, winter and leisure apparel

UV protection Reduce the penetration of harmful UV ray

Used for sports, leisure and business apparel

Dust, oil & stain resistant

Resistant to dust, oil and stain

Used for uniforms and business apparel

Moisture absorbent Absorb perspiration and facilitates rapid vaporization


Foreland Fabrictech

Used for sports and leisure apparel

Combustion resistant Do not combust when in contact with fire

Used for firefighting and military uniforms and home textiles

Anti-bacteria & anti-odor Prevent bacteria growth and odor

Used for sports, leisure and business apparel

High color fastness I & II Retain color under conditions such as prolonged washing

Used for various types of apparel

Chlorine resistant Retain original color over a long period of time

Used for sports and leisure apparel (swimwear and beachwear)

Cold feel Cool the body

Used for sports and leisure apparel

Anti-insect Guard against pests effectively

Used for apparel, tentages and home textiles

Anti-radiation Reduce wearer‟s exposure to radiation

Used for maternity clothes, uniforms for computer users or X-ray machine operators, etc.

Biodegradable compound

Environmental friendly and biodegradable

Used for army uniforms, golf wear, mountain climbing and skiing attire, as well as bags and luggage

Fluorescent Increase visibility

Used for security, traffic and transportation purposes

Memory fabric Maintain shape and pattern even after it undergoes further fabric processing.

Ultra light, thin and fine fabric

Fabric made of ultra fine loom-state fabric. Thickness and weight of fabric is effectively reduced while maintaining a smooth surface and resistant to water

Used for high-grade umbrella with ultra-light weight.

Water-printed fabric Customized designed pattern will appear when fabric gets in touch with water or rain

Used for high-grade umbrella

Source: Company

Value Chain

The raw materials procured by the company comprise mainly yarn, chemicals and additives. The company does not have any long-term contract with any suppliers. As there are many suppliers available in the market, the company so far has not experienced difficulty in obtaining supplies. Nevertheless, the selling price of raw materials is largely dependent on crude oil prices and its volatility can be incredibly unpredictable as witnessed in 2008, during which commodity prices increased sharply.

The company‟s customers mainly comprise manufacturers of sports, leisure and business apparel and textile traders in China. It has a well-diversified customer base, with none of them constituting more than 5% of total revenue. Product selling price varies, depending on the quality and specifications required by customers. Price negotiation is conducted periodically to reflect changes in raw material cost, but passing on higher costs proved a daunting task during the commodity price rally in 2008, especially for low-grade products. During the onset of the recession in 2009, most consumers traded down, hence lower sales volume for high-grade products. Therefore, profit margin was severely affected. The financial performance in 2008/09 is descriptive of how the company was affected under inflated commodity prices and economic downturn.


Foreland Fabrictech

Source: company

Top 5 customers in the last financial year % of revenue

Jinjiang Hongli(晋江弘力织造有限公司) 2.90%

Quanzhou Yongsheng (泉州远生纺织品贸易有限公司) 2.79%

Jinjiang Tianyi(晋江市天益服饰织造有限公司) 2.60%

Jiangxi Longdu(江西龙都服饰织造有限公司) 2.49%

Shisi HuaFei(石狮华飞制衣有限公司) 2.36%

Top 5 suppliers in the last financial year % of cogs

Jinjiang Hengtai(晋江恒泰化工贸易有限公司) 6.55%

Fujian BaiHong(福建百宏聚纤科技实业有限公司) 6.28%

Fujian JinXing(锦兴(福建)化纤纺织实业有限公司) 5.93%

Dongshan WeiHai(山东威海江源精细化工有限公司) 5.75%

Jinjiang LongSheng(浙江龙盛染料化工有限公司) 5.60%

Source: company

Suppliers

• Textile machinery manufacturers

• Yarn producers

• Chemicals and addictives producers

Group's Manufacturing

Process

• Spinning of Fibres

• Knitting

• Printing

• Coating

• Finishing

• Packaging and delivery

Direct Customers

• Garment manufacturers

• Textile traders


Foreland Fabrictech

Industry Outlook

Significant industry growth in 1H2010: The following table compiled by China National Textile and Apparel Council shows the financial results of 67 listed textile companies in China, comprising 31 textile manufacturers, 18 apparel manufacturers and 3 textile machinery manufacturers. For the first half in 2010, the industry has made a substantial progress, with revenue and net profit up 45.9% and 69.4% respectively. Also, according to data collected from statistics-worthy Chinese enterprises surveyed by National Bureau of Statistics of China, chemical fiber production rose 13.9% yoy to 17.2m tons in the first half of 2010. Looking further, from January to June, yarn output reached 15m tons, up 16.2 per cent from the previous year's period; fabric 35.4 bn meters, up 16.7% yoy; and garment 15.0 bn pieces, up 17.3% yoy.

Financial results (CNY 100 mil) 1H 2010 1H 2009 yoy change (%)

Total business income 634.69 434.89 45.94

Total operating capital 600 420.57 42.67

Cost of sales 31.81 23.88 33.23

Overhead cost 31.54 25.84 22.07

Financial costs 12.91 11.89 8.57

Net profit 30.5 18.1 69.44

Source: China National Textile and apparel Council, National Bureau of Statistics of China, Sina

Tightening environmental protection rules: China govermnet has been tightening environmental protection rules as it felt the damaging impact of pollution from burgeoning manufacturing sector on society. Health problems, poor living condition, etc has posed immeasureable social costs in China. Being aware of detrimental consequences, China has started a slew of clamp down measures aimed to make the country greener. Textile industry has been notoriously known for its polluting scale. High discharge of chemical oxygen demand (“COD”) (a major indicator for concentration of organic pollutants in sewage water) , high water consumption in dyeing process, and high power usage in production are the main problems faced in textile industry. According to the Shaoxing county government, the country which produces one third of china‟s printed and dyed farbics, is set to reduce the number of printing and dyeing companies from 200 to 100 and reduce the output of printed and dyed fabrics from 15.6 bn to 10 bn meters per year. Apart from that, the officials also encourage manufacturers to adopt environmental friendly technology.

Industry consolidation gradually taking place: As a consequences of stricter environmental rules and regulations, we view that industry consolidation has already begun. This will benefit players with stronger war chest which allow them to acquire clean technology and absorb higher production costs. The environmental compliance cost will inevitably rise, but over the long run, it is healthy for the textile industry as excess capacity will be wiped out and hence better overall profitability for the remaining players.

Product and process innovation: Gone are the days where profit can be easily made. With rising labour cost, shrinking external demand and increasing environmental awareness among consumers, textile manufacturers have to change the manner in which the business is run. To survive, innovation in terms of both products design and manufacturing process is crucial. We foresee demand for low carbon and environmental-friendly textile products to be on the uptrend going forward as consumers turn more environmentally conscious. Using new materials, introducing new designs and adopting clean technologies will be the way to unshackle the threat of declining margin in traditional textile business.


Foreland Fabrictech

Rising domestic sales: Facing shrinking external demand, textile manufacturers heave a sign of relief as they digest the recent retiail sales data. The trajectory of retail sales of garment, footwear and textile in China is a source of comfort and there is no sign of abating as yet on the back of incrome growth, swelling middle class and stronger purchasing power among Chinese.

Source: China Economic Information Net, Bloomberg

Rising yuan hurt demand: Rising yuan could send many Chinese exporters to the wall. Foreland has minimal exposure to forex risk as it supplies mostly to domestic garment manufacturers and textile traders. However, it may receive dwindling orders from customers who face shrinking profits from the yuan appreciation. According to a study by the Jiangsu Provincial Social Sciences and the province‟s Department of Commerce, every percentage point rise of yuan‟s value in real terms equaled a 1.47 percentage point contraction in exports of textiles and garments. Since People‟s Bank of China (“PBOC”)‟s pledge on June 19 to increase exchange rate flexibility, yuan has strengthened by about 2%. The uptrend shows no signs of weakening. The challenge now for China is to increase domestic consumption in order to ease the over-reliance on exports.

Source: Bloomberg

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Foreland Fabrictech

Bloomberg: Customs General Administration

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Foreland Fabrictech

Company Outlook

New products to drive growth. Despite the challenging and ever-changing business conditions, Foreland‟s focus on research and development (“R&D”) has never been swayed. In the past, the company developed a series of novel functional fabrics via collaboration with its business partners. That is an important growth engine for the company. Margins of a typical product is apt to decline over time due to competition and change in fashion. As such, R&D and product development capability plays a strategic role in retaining competitiveness in the market. For instance, the company‟s latest development of an „ultra light, thin and fine‟ fabric and a „water-printed‟ fabric helped secure some major customers.

Expanding customer base. By leveraging on new products developed in FY09, the company managed to venture into high-grade umbrella fabrics. It currently supplies to a few prominent umbrella producers in the PRC, such as Hangzhou Paradise Umbrella Group Co., Ltd., Susino Umbrella Co.,Ltd. and Fulong Umbrella Co., Ltd. These new businesses are a testament to the company‟s capability to grow its product range and hence customer base.

Machinery replacement underpinning strong growth in second half 2010. For the first half of 2010, Foreland suffered from operation downtime as it replaced its old equipment with the new one in a bid to improve operation efficiency and production capability. With the machinery upgrade, the annual capacity has increased from 39m to 50m yards and the rising utilization of new capacity took effect since the end of August 2010.

New capacity, new chapter of growth: The construction of the new factory at Andong Industrial Area in Jinjiang City met numerous obstacles, most of which have been solved. But the approval of the recycling plant is still outstanding. The government has tightened the environmental protection rule, raising recycling rate of COD emission from 20% to 80%. The new proposal has been submitted to comply with this and estimated timeline for approval is by 1Q11. However, management does not rule out the possibility of further delay to this timeline.

The total land size of the new factory is 76,000 sqm, of which 30,000 sqm is catered for production floor area. In comparison, the existing plant, located in Dongshi Town, Jinjiang City, Fujian Province, is situated on a land area of about 29,300 sqm, with a built-in area of about 22,400 sqm. With that, the new factory will allow the company to increase the current capacity of 50m yards by another 30-40%.

Strong customer orders until 3Q2011. Enquiries by customers have been strong since the beginning of 2010. However, the company is prudent when it comes to customer selection and credit risk control. The prudence translated into the shorter collection days than industry standard as evidenced in its past results. Now, the company is busy fulfilling customer orders as textile retailers are piling up stocks ahead of Chinese New Year. At the same time, it is also ironing out next year‟s production volume and capacity allocation with customers. We forecast the utilization rate to hit 90% in 4Q2010 and 85-90% in 2011.

Improving ASP: To differentiate itself from hundreds, if not thousands, of peers, Foreland has been focusing on high-grade products whose selling prices are high and margins are good. However, demand for high-grade fabrics is highly correlated with economic cycle and it tends to shrink much faster than low-grade fabrics in economic crisis. The business environment has changed much since the global economic meltdown, China‟s economy continues to hum as indicated by recent better-than- estimated China‟s PMI. The company tends to reject orders for low-grade fabrics whose margins are low, in a bid to maintain a healthy product composition. We estimate the ASP bottomed out in 2Q2010, and the uptrend is to continue until 4Q2011.


Foreland Fabrictech

Financial Overview

Rising ASP: Given that China‟s inflation is on the rise and more closures of highly polluting manufacturers are underway, we expect the supply overhang concern to ease. New products introduction and increased demand for high-grade fabrics will help push Foreland‟s product average selling price (“ASP”) higher from its rock bottom in 2Q2010. The company‟s ASP plunged 38% since the onset of the financial collapse, down from RMB13.8 per yard in 1Q2009 to RMB 8.8 per yard in 2Q 2010. We estimate ASP to rise to RMB9.7 per yard in 3Q2010 and RMB10.7 per yard in 4Q2010. We expect the uptrend to continue in 2011, supported by global economic recovery and trading up by increasingly affluent Chinese consumers. We expect ASP in 2011 to range between RMB10.8 and RMB11.2 per yard.


Utilization to improve: We forecast utilization to range from 80% to 90% from 3Q10 to 4Q11, assuming the company will be operating at its old factory. We think the assumption is fair as the decision to move to the new factory is contingent on several factors, particularly approval by government official and delivery time of customer orders. Of note, the preliminary estimate of downtime caused by production shift is about one month, which will bring the quarterly utilization down to about 60%.


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Foreland Fabrictech

Margins to jump, but achieving pre-crisis levels a daunting task. We expect margins to improve, but achieving pre-crisis levels will be a challenging target, given (1) higher environmental compliance cost, (2) slow recovery in demand for high-grade fabric, and (3) high set-up cost for new facility. It is noteworthy that the new factory will introduce additional depreciation and amortization costs when it starts operating. We estimate gross profit margin (“GPM”) to improve from 11.2% in 1Q10, the lowest since listing, to 27% in 4Q10. Although that was a tremendous improvement, it is way below its historical realm of more than 35% GPM before the crisis.


Healthy cash flow: The company‟s cash conversion cycle (“CCC”) is one of the lowest in the industry. It stood at about 45 days against industry average of 80 days as at last financial year. The ratio of operating cash flow to profit before tax, a measure of earnings quality, also showed positive signs during the period 2006 to 2009, ranging from 0.6x to 1.6x.


Asset heavy, net cash: The sudden surge in proportion of property, plant and equipment (“PPE”) in 2009 was due to investment of about RMB180m poured into construction of the new factory. We estimate capex will total RMB50m in 2010 (50% for equipment, 50% for construction) and RMB70m in 2011 (100% for construction). The company has zero borrowings as of 1H2010, allowing it to stretch its balance sheet when business expansion opportunities present.

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Foreland Fabrictech


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Foreland Fabrictech

Risks

Volatility in raw material prices: The cost of direct materials constituted about 65-75% of company‟s cost of sales in the past. Nylon and polyester yarn are the major cost component as this accounts for about 30-45% of cost of sales. The market prices of nylon and polyester are subject to fluctuation of crude oil price as both of them are derivative products of crude oil. Foreland may not be able to pass on the additional cost to customer, resulting in margin compression.

Source: Bloomberg

Unexpected high set-up costs for Andong project: The construction of the new facility led to significant cost overrun of some RMB 294 mil – more than two times the original budget - due to unexpected geographical conditions that required more raw materials and labor costs. That increase jacked up the estimated budget for the project to RMB438 mil. On top of that, we expect the company to incur start-up costs at its new facility during trials and adjustments period. We expect Foreland will require about 2 to 3 months before the company can attain optimal production level. That could put some pressure on its profit margin.

New factory budget (CNY mil) Original New Land use rights 24,100 64,745 Construction costs 26,150 318,991 New equipments 78,614 38,325 Wastewater treatment 15,000 15,500 Total 143,864 437,561

Source: IPO Prospectus, Company

Delay in getting approval: The Chinese government has imposed stricter requirements on COD emission. That has resulted in a change in construction plan for the wastewater recycling plant. The amended proposal has already been submitted and management expects the approval to be received by 1Q2011. However, we believe that further delay in getting approval should not be ruled out.

Higher labor cost: On top of land cost, the wages along the coastal area are relatively higher than inland. The discrepancy in cost structure has encouraged many textile manufacturers to move their production plant inland. Foreland might lose competitiveness to its rivals in getting cheap labor and resources.

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Foreland Fabrictech

Management

Mr Tsoi Kin Chit, the founder and Executive Chairman, is responsible for formulating the strategies and steering the directions of the Group. He has more than 18 years of experience in the textile industry. He started his career as factory manager at Jinjiang Second Welfare Factory, a state-owned shoe-manufacturing enterprise, in June 1979. In October 1988, he founded Fulian Knitting and has been the chairman and managing director of Fulian Knitting since then. Mr Tsoi is presently a member of the Jinjiang City Executive Committee of the Chinese People‟s Political Consultative Conference; a member of the Quanzhou City Textile and Garment Chamber of Commerce; the deputy chairman of the China Chamber of International Commerce, Jinjiang City; the chairman of the Returned Overseas Chinese Federation of Dongshi township, Jinjiang City; deputy chairman of Jinjiang City Labour Model Association; and deputy chairman of the Chamber of Commerce and Industry, Jinjiang City. He obtained his degree in Enterprise Management from Fujian Province Radio Broadcasting Television University in 1988.

Mr Cai Fengquan, the Executive Director, is primarily responsible for the overall administrative management of the group‟s operations. From October 2006 to April 2007, he was a software developer at Techcom Solutions, and was responsible for software development and engineering. Since June 2007, he has assisted Executive Chairman, Mr Tsoi Kin Chit, in the management and administration of Fulian Knitting. He obtained his Master of Information Technology degree and Bachelor in Information Technology (Software Engineering and Data Communications) degree from the Queensland University of Technology, Australia in 2006 and 2003, respectively.

Mr Wong Shing Mun, the Chief Financial Officer, is responsible for the group‟s financial and accounting functions. He was a senior auditor at Hong Kong PricewaterhouseCoopers, where he was involved in auditing, accounting and business consultancy matters for more than 4 years. Mr Wong is a fellow of the Association of Chartered Certified Accountants (FCCA), a member of the Hong Kong Institute of Certified Public Accountants and the Institute of Chartered Accountants in England and Wales. He obtained a Bachelor of Business Administration degree from the Hong Kong University of Science and Technology in 1998.


Foreland Fabrictech

Competition

The fabric industry is very fragmented, with at least several hundreds of enterprises in China. In terms of scale, Foreland is considered mid-size. We deem Weiqiao as a bellwether of the fabric manufacturing sector since it is probably the largest listed fabric manufacturer based in China.

Valuation:

Actual Y1 Y2

Code Price MktCap PER PER PER PBR ROE ROC ROA Yield

Name (Local) (S$ m) (x) (x) (x) (x) (%) (%) (%) (%)

Average

511.9 12.6 9.5 7.4 1.5 18.0 15.4 12.7 1.3

FORELAND FLFT SP 0.09 38.40 6.00 6.40 3.10 0.45 6.80 6.70 6.00 0.00

CHINA TAISAN CTSAN SP 0.20 221.9 9.0 4.7 4.3 1.2 13.7 13.2 10.4 3.5

QIAN FENG QFENG SP 0.11 51.5 6.0 - - 0.7 11.9 11.8 10.5 0.0

CHINA GAOXIAN CGXF SP 0.24 345.6 3.7 - - 1.4 43.5 38.4 30.5 2.7

ZIWO HOLDINGS ZIWO SP 0.36 107.6 5.0 4.9 4.4 1.4 45.0 38.9 35.7 0.0

WEIQIAO 2698 HK 6.80 1349.4 6.7 9.0 8.1 0.5 6.5 5.5 3.3 3.9

HUAFU TOP 002042 CH 28.10 1273.7 23.3 22.7 17.1 4.5 13.8 7.5 4.2 0.0

HENAN XINYE 002087 CH 7.06 707.4 41.6 - - 2.3 2.9 1.3 1.3 0.0

Source:Bloomberg, NRA Capital Estimates

Financial analysis:

FYE SALES GPM OPM NPM SALES EPS CCC FIN INT DEBT/

GRTH GRTH LEV COV. EQY

Name (SGD) (%) (%) (%) (%) (%) (days) (x) (x) (x)

Average

21.4 17.2 12.9 -11.9 831.4 79.1 1.7 36.1 47.8

FORELAND 12/2009 60.0 22.2 15.9 11.6 -38.8 -69.9 47.8 1.1 >100 0.0

CHINA TAISAN 12/2009 177.2 19.4 17.7 12.8 -29.4 -62.0 83.8 1.3 54.9 5.7

QIAN FENG 12/2009 56.8 26.4 18.5 16.8 -42.9 -76.6 50.4 1.1 46.2 2.8

CHINA GAOXIAN 12/2009 385.7 31.8 29.9 22.6 -1.0 -3.2 81.6 1.4 32.7 4.7

ZIWO HOLDINGS 12/2009 94.7 31.7 27.6 22.7 26.2 33.2 63.0 1.3 75.2 5.2

WEIQIAO 12/2009 3350.0 11.1 12.1 6.4 -12.9 50.0 39.4 2.0 3.6 66.0

HUAFU TOP 12/2009 882.2 18.3 9.5 6.5 -6.2 6800.0 142.4 3.3 3.9 167.4

HENAN XINYE 12/2009 441.8 10.7 6.2 3.5 9.4 -20.0 124.2 2.3 - 130.6


Valuation and Recommendation

Strong recovery underway. We believe that Foreland is on track for strong recovery following the upgrade of production lines that increased the annual capacity from 38m to 50m yards. The additional capacity has already started making contribution to its results since mid 3Q2010. Orders from customers are mounting and the capacity allocation has been stretched until 3Q2011. Furthermore, the demand for high-grade fabrics whose ASP are higher with attractive margins has been gaining traction. All in all, we expect Foreland to perform well in the coming quarters.

Initiate coverage with Buy recommendation and target price of S$0.18. The share price performance has lagged the stock markets due to its delayed recovery. As mentioned above, the delay was caused by downtime during the upgrade of production lines. By applying a 20% discount to industry average (for its smaller size) of FY11 PER of 8x, we derive a target price of $0.18, representing 112% upside potential.


Foreland Fabrictech

Profit & Loss (RMB m, FYE Dec) 2008 2009 2010F 2011F 2012F

Revenue 460.7 282.0 314.1 464.0 453.9 Operating expenses (295.5) (217.4) (250.0) (346.8) (339.0) EBITDA 165.3 64.6 64.2 117.2 114.9 Depreciation & amortisation (18.8) (19.8) (20.6) (26.6) (27.9) EBIT 146.5 44.8 43.6 90.6 87.0 Net interest & invt income 0.7 0.5 (0.1) (1.1) (0.5) Associates' contribution 0.0 0.0 0.0 0.0 0.0 Exceptional items 0.0 0.0 0.0 0.0 0.0 Pretax profit 147.1 45.4 43.5 89.4 86.5 Tax (40.2) (12.7) (12.3) (25.0) (24.2) Minority interests 0.0 0.0 0.0 0.0 0.0 Net profit 106.9 32.6 31.1 64.4 62.3 Wt. shares (m) 440.4 446.6 452.3 452.3 452.3 Shares at year-end (m) 440.4 452.3 452.3 452.3 452.3

Balance Sheet (RMB m, as at Dec) 2008 2009 2010F 2011F 2012F

Fixed assets 129.7 294.3 323.7 367.2 359.2 Intangible assets 0.0 0.0 0.0 0.0 0.0 Other long-term assets 0.0 0.0 0.0 0.0 0.0 Total non-current assets 129.7 294.3 323.7 367.2 359.2 Cash and equivalents 213.2 100.7 85.2 93.3 187.2 Stocks 25.2 11.9 21.9 29.6 18.4 Trade debtors 82.0 43.2 80.6 113.2 70.9 Other current assets 29.7 39.9 39.9 39.9 39.9 Total current assets 350.0 195.8 227.6 276.1 316.4 Trade creditors 45.2 31.9 52.0 65.7 48.7 Short-term borrowings 0.0 0.0 10.0 30.0 30.0 Other current liabilities 21.0 12.4 12.4 12.4 12.4 Total current liabilities 66.1 44.2 74.3 108.0 91.0 Long-term borrowings 0.0 0.0 0.0 0.0 0.0 Other long-term liabilities 2.1 2.7 2.7 2.7 2.7 Total long-term liabilities 2.1 2.7 2.7 2.7 2.7 Shareholders' funds 411.5 443.2 474.3 532.5 581.9 Minority interests 0.0 0.0 0.0 0.0 0.0 NTA/share (Rmb) 0.93 0.98 1.05 1.18 1.29 Total Assets 479.7 490.1 551.4 643.2 675.6 Total Liabilities + S’holders' funds 479.7 490.1 551.4 643.2 675.6

Cash Flow (RMB m, FYE Dec) 2008 2009 2010F 2011F 2012F

Pretax profit 147.1 45.4 43.5 89.4 86.5 Depreciation & non-cash adjustments 18.8 19.8 20.6 26.6 27.9 Working capital changes (24.9) 28.5 (27.2) (26.6) 36.5 Cash tax paid (39.6) (20.8) (12.3) (25.0) (24.2) Others (0.6) (0.6) 0.6 1.8 1.8 Cash flow from operations 100.9 72.2 25.1 66.2 128.5 Capex (26.5) (184.4) (50.0) (70.0) (20.0) Net investments & sale of FA 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 0.0 Cash flow from investing (26.5) (184.4) (50.0) (70.0) (20.0) Debt raised/(repaid) (3.0) 0.0 10.0 20.0 0.0 Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0 Dividends paid (30.4) (0.9) 0.0 (6.2) (12.9) Cash interest & others 0.6 0.6 (0.6) (1.8) (1.8) Cash flow from financing (32.8) (0.3) 9.4 12.0 (14.7) Change in cash 41.5 (112.5) (15.5) 8.1 93.8 Change in net cash/(debt) 44.5 (112.5) (25.5) (11.9) 93.8 Ending net cash/(debt) 213.2 100.7 75.2 63.3 157.2

KEY RATIOS (FYE Dec) 2008 2009 2010F 2011F 2012F

Revenue growth (%) 9.7 (38.8) 11.4 47.7 (2.2) EBITDA growth (%) 3.0 (60.9) (0.6) 82.6 (1.9) Pretax margins (%) 31.9 16.1 13.8 19.3 19.1 Net profit margins (%) 23.2 11.6 9.9 13.9 13.7 Interest cover (x) >100 >100 >100 65.1 63.8 Effective tax rates (%) 27.3 28.1 28.4 28.0 28.0 Net dividend payout (%) 4.9 0.0 20.0 20.0 20.0 Debtors turnover (days) 64.7 81.0 71.9 76.2 74.0 Stock turnover (days) 20.9 30.8 24.9 27.5 26.1 Creditors turnover (days) 59.5 64.1 61.7 62.9 62.3



Foreland Fabrictech

NRA Capital Pte. Ltd (“NRA Capital”) has received compensation for this valuation report. This publication is confidential and general in nature. It was prepared from data which NRA Capital believes to be reliable, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect, special or consequential damages or economic loss that may arise from the use of information or opinions in this publication. Opinions expressed are subject to change without notice. NRA Capital and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. NRA Capital and its related companies may from time to time perform advisory, investment or other services for, or solicit such advisory, investment or other services from any entity mentioned in this report. The research professionals who were involved in the preparing of this material may participate in the solicitation of such business. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. You acknowledge that the price of securities traded on the Singapore Exchange Securities Trading Limited ("SGX-ST") are subject to investment risks, can and does fluctuate, and any individual security may experience upwards or downwards movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities traded on the SGX-ST. You are aware of the risk of exchange rate fluctuations which can cause a loss of the principal invested. You also acknowledge that these are risks that you are prepared to accept. You understand that you should make the decision to invest only after due and careful consideration. You agree that you will not make any orders in reliance on any representation/advice, view, opinion or other statement made by NRA Capital, and you will not hold NRA Capital either directly or indirectly liable for any loss suffered by you in the event you do so rely on them. You understand that you should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of securities on the SGX-ST.

foreland fabrictech group - nra capital - final.pdf · margins to jump, ... but achieving...

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