Xingquan International (Feb 9, 96 sen)
Maintain outperform with target price of RM1.47: The 4Q11 listing of two small-cap casual wear stocks in Hong Kong could leave a footprint on Xingquan, which is well overdue for an upward re-rating given its huge valuation discount to the two stocks. The stock could also be catalysed by a resumption of dividends.
We still think Xingquan could be taken private in view of its depressed valuations. If its valuation discount to Hong Kong-listed comparables does not narrow, it may be only a matter of time before it is taken private and listed on other markets. Our target price basis remains one times price-to-book value (P/BV).
The two small-cap casual wear stocks that were listed in Hong Kong in 4Q11 — China Outfitters (COH) and Active Group Holdings (AGH) — are now trading at seven to eight times CY12 price-earnings ratio (PER).
This is much higher than the two times PER for Xingquan, which is also involved in casual wear in China. Xingquan is fairly similar in size to the two companies, with a CY12 net profit forecast in between AGH’s and COH’s.
Xingquan’s big valuation discount is unwarranted in our view. Ex-cash, its calendar year 2012 PER is less than one times. Most of the China shoe producers listed on Bursa Malaysia are trading at only two times PER.
In FY11 ended June, Xingquan did not announce a dividend, which hurt sentiment on this stock. The company indicated the funds were needed for working capital.
However, over the past few months, working capital needs have eased as raw material prices have fallen to more “normal” levels and there is less pressure for up-front payments to suppliers.
We, therefore, see no fundamental reason for Xingquan not to pay some dividends in FY12. We are hopeful that the company will surprise investors with an interim dividend announcement after releasing its 2QFY12 results at end-February. — CIMB IB Research, Feb 9
This article appeared in The Edge Financial Daily, February 10, 2012.
Maintain outperform with target price of RM1.47: The 4Q11 listing of two small-cap casual wear stocks in Hong Kong could leave a footprint on Xingquan, which is well overdue for an upward re-rating given its huge valuation discount to the two stocks. The stock could also be catalysed by a resumption of dividends.
We still think Xingquan could be taken private in view of its depressed valuations. If its valuation discount to Hong Kong-listed comparables does not narrow, it may be only a matter of time before it is taken private and listed on other markets. Our target price basis remains one times price-to-book value (P/BV).
The two small-cap casual wear stocks that were listed in Hong Kong in 4Q11 — China Outfitters (COH) and Active Group Holdings (AGH) — are now trading at seven to eight times CY12 price-earnings ratio (PER).
This is much higher than the two times PER for Xingquan, which is also involved in casual wear in China. Xingquan is fairly similar in size to the two companies, with a CY12 net profit forecast in between AGH’s and COH’s.
Xingquan’s big valuation discount is unwarranted in our view. Ex-cash, its calendar year 2012 PER is less than one times. Most of the China shoe producers listed on Bursa Malaysia are trading at only two times PER.
In FY11 ended June, Xingquan did not announce a dividend, which hurt sentiment on this stock. The company indicated the funds were needed for working capital.
However, over the past few months, working capital needs have eased as raw material prices have fallen to more “normal” levels and there is less pressure for up-front payments to suppliers.
We, therefore, see no fundamental reason for Xingquan not to pay some dividends in FY12. We are hopeful that the company will surprise investors with an interim dividend announcement after releasing its 2QFY12 results at end-February. — CIMB IB Research, Feb 9
This article appeared in The Edge Financial Daily, February 10, 2012.
