Kevin Scully, the executive chairman of NRA Capital, posted the following at his blog yesterday. Visit www.nracapital.com


end_products_391
China Goaxian's fabrics are used to make a wide range of products.
On 20 September 2010, Lim a Blog visitor posed this question to me:

What do you think about China Gaoxian? In my view, this company has an excellent set of figures in balance sheet and strong cash flow. It is trading @ only 2.5PE in FY09, a huge discount compared to its peers. And it is going for dual listing in Korea. I hope Netresearch will do some reports on this gem. i think it is a 10 bagger stock. 

My initial response was as follows:


“Hi Lim its Kevin not Kelvin.....dont worry even some of my relatives make the same mistake despite knowing me.

I have been looking at this company on and off. On paper the numbers look great - as u say low single digit PER, huge amounts of cash. Am trying to contact CFO with some questions - main one being that they seem to be an exception among other fabric makers in the same space in terms of profit.....will keep u posted if I find out anything. 

Kevin  on 21 September 2010  05:36 PM"

Yesterday Lim posted another question to me:

"Hi Sir. Gaoxian had an unexceptionally trading today. There is an married deal of 23 mil noted during the day. Do you think it is healthy in your opinion? Could it be starting to attract attention of the fund houses? Thanks. 

lim  on 27 September 2010  08:22 PM"



 

350_kevin_aice
Kevin Scully is a sought-after speaker. NextInsight file photo
Let me put the stock in some perspective.  Its a new listing and is apparently trading on very low PERs with a lot of cash in the balance sheet.  On 10 August 2010, China GaoXian released its Q2-2010 and H1-2010 results

Result highlights

Revenue rose 5.3% to RMB444.9mn for Q2 and rose 7.6 to RMB904.7mn for H1-2010

Net profit rose 4% to RMB94.9mn while H1-2010 net profit rose 8% to RMB199.9mn

EPS for H1-2010 was RMB13.9 (S$5.6 cents - annualised)  cents while NAV was RMB109.5 cents (S$21.9 cents)

Based on yesterday's closing price of S$0.195 - stock is trading on 2010 annualised PER of 3.5 times and at 0.9 time price to book

Balance sheet appears healthy with gross cash as at 30 June 2010 of RMB797mn and net cash of about RMB730mn.

From item 10 in its H1-2010 results announcement (forward looking statement) - the Company said:

"Due to the above factors, barring unforeseen circumstances, the Group expects to maintain its positive performance for the remainder of FY 2010."

 

Since then the company has also made an announcement regarding its plans for a secondary listing in Korea.  The company was concerned about the rise in volume given that it Korean listing plans were still in their early stages.

350_raymond_wong
CFO Raymond Wong. Photo by Sim Kih
Key points from my telephone conversation with the CFO last Friday:

1.I noticed a decline in Q2-2010 over Q1-2010 - H1-2010 is normally seasonally lower but it was unusual for Q2-2010 to be lower than Q1-2010.  The CFO explained that there plant closures for overhaul and revamping which reduced output in Q2-2010

2.I asked if the second half would be better and whether the Company was still maintaining its positive forward looking statement for the rest of 2010.  He replied that unless there was a Government policy change, the forward looking statement was intact.

3. I asked what the cash position in the company would be at the end of 2010.  He said that it would be lower.....as about RMB300mn would be used for plant expansion.  They will be expanding their equipment by "100 sets".  They would also be reducing some of their loans by RMB50-70mn and there would be some expenses for land acquisition.  

4. Is the Company likely to pay a dividend in 2010.....he was non-commital in this area as much would depend on the Company's cashflow, working capital and cash requirements.

Conclusion

As this is a new IPO and its my first time speaking with the CFO, I have no feel on the reliability of guidance.  This reliability is usually built up over time as we follow guidance and what is actually delivered by the Company relative to guidance.  Relying just on guidance and what they have delivered in their H1-2010 numbers, the Company is cheap in terms of PER and seems to be backed by a strong balance sheet (the cash).  This is implied guidance that it will delivere mid single digit profit growth for 2010.

Like most other S-Chips, China GaoXian must build investor confidence with regard to the reliability of its guidance....so far so good and if it delivers net profit for FY2010 in excess of RMB400mn.....we are likely to see its PER expand.....more so if they continue to pay dividends.

Plans fo dual listing are linked to this intention to be properly valued, ie have a PER similar to its peers....having a listing and trading on 3-4 times PER is not acceptable.  So maybe like Midas and China Animal which were rerated to the high single digit and teens PER, this was achieved as they met guidance and as their dual listing plans became more concrete.

As to the married deal yesterday of 21mn shares, I think that the moratorium on some of the Pre-IPO investors is over and this could be vendor blocks being transacted.  If we find fund investors taking up this block - it would be good for the shares.  China Animal for example now has BlackStone, Fidelity and Legg Mason as fund investors who collectively own about 20% of the company.  I would be watching for the official disclosures on whether any strategic buyer emerges in the announcements in the coming days and weeks.

Definitely worth keeping on the radar screen.  It can only be a multi-bagger that Lim suggests if it can gain investor confidence by giving good guidance, paying dividends and successfully going through its dual listing plans.....all these need time.


Recent story: GAOXIAN: Big is beautiful in China's chemical fibre sector

 


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