When launching new products, capex is minimal as existing facilities need not be replaced, says CEO Cao Xiangbin. Photo by Sim Kih
UOB KAYHIAN’S Shanghai-based analyst Allen Jiao initiated coverage on China Gaoxian Fibre Fabric last week with a “Buy” call and 40-ct target price based on 6X 2010PE.

His ‘buy’ recommendation was made despite a 5.6% year-on-year drop in 3Q09 revenue to Rmb 473.6 million.  Earnings per share (EPS) dipped 4.3% to 9 fen (Rmb 0.09).

Average selling prices had declined due to lower raw material prices and a general slowdown in the textile industry.

However, Gaoxian’s executive chairman, Mr Cao Xiangbin, is upbeat about the sector outlook.  He told investors at the company’s 3Q09 results briefing last week he is expecting 4Q09 to continue showing sequential quarterly sales growth.

During 3Q09, the company increased its sequential quarterly sales for ‘warp knit fabric’ and ‘triangular-fibre yarn’, or artificial silk.

These two products carry differential properties and enjoy gross margins of 4.6 to 8.1 percentage points higher than group gross margins of 31.7%.

Combined, the two products contribute about a third of the group’s gross profits of Rmb 150.2 million.

Based on UOBKH estimates, the stock’s last close price of 22.5 cents translates to 2010PE of about 3 times, or half that of other SGX-listed chemical fibre players.

Li Heng and China Sky are trading at 2010PE of 6.2 times on the average.

Unlike Li Heng and China Sky, which are nylon players, Gaoxian produces polyester yarn and fabric.

Polyester is the most widely used chemical fibre for making apparel, synthetic leather and industrial products, and accounted for over 80% of 2008’s chemical fibre production in China.

Import substitution strategy
UOBKH initiates coverage with 'Buy' on 11 Nov.

Even though there is currently a supply glut of polyester yarn in China, due to technology constraints, a small volume of high quality polyester yarn that it is unable to produce are imported.

Imports amount to about 70% of highly differential polyester yarns used in China, according to Mr Jiao.

The phrase ‘differential’ refers to properties exhibited by the yarn and by the fabric it is weaved into.

These properties may be warmth, texture and feel, luster, tensile strength, or abrasion-resistance, as dictated by the fashion designer.

Mr Jiao likes Gaoxian’s cost advantage potential.  This, he says, allows Gaoxian to compete with foreign manufacturers, which currently command a market share of 70% in China for highly differential polyester yarn.

”Other than lower prices compared to imports and more timely delivery, we believe our quality is the best, which is why our selling prices are among the highest,” said Mr Cao.

As Gaoxian is one of a few local producers of its core products, demand is so strong that Mr Cao will not consider the export market until the company has much larger capacity.

Some Rmb 302 million worth of orders await to be filled as at 30 Sep.

Gaoxian Fibre

Stock price on 16 Nov 22.5 cts
9m09 net margins 22%
Annualised ROE 31%
Gearing Net cash
Market capitalisation S$324 million

As at 3Q09, it had 532 yarn production stations and 79 knitting machines.

The plan is to increase to 782 yarn production stations and 379 knitting machines by end 2010 at an estimated capital expenditure of Rmb 330 million.  

That will bring its annual capacity of premium differentiated polyester yarn to 248,500 metric tons and warp knit fabric to 81,900 metric tons.

Related story:  
CHINA GAOXIAN FIBRE: Riding on recovery of chemical fibre sector

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