China-based shoe stocks continue to rally

KUALA LUMPUR: China-based shoe stocks on Bursa Malaysia continued their uptrend for the second day yesterday as investor sentiment improved towards the sector.

The rally follows a comprehensive three-page report by The Edge Financial Daily on Monday, highlighting the attractive valuations of all five China-based shoe companies listed here.

The Edge Financial Daily had highlighted that all five counters were trading at large discounts to book value and at price-to-earnings ratios (PERs) of around two times, based on last Friday’s closing prices. They were all in a net cash position and their earnings have grown impressively from 2006 to 2010.

Another potential re-rating catalyst, the report argued, was the recent listing of two Chinese companies in Hong Kong — China Outfitters Holdings Ltd (COH) and Active Group Holdings Ltd (AGH).

Listed in the fourth quarter of 2011, the two Hong Kong-listed stocks are trading at a PER of about three times more than their Malaysian-listed peers, which were trading at a PER of just over two times, according to Bloomberg data.

Over the last two days, all five China-based shoe stocks have chalked up total gains ranging from 3.8% to 12.5%.



K-Star Sports Ltd was the top performer, with a two-day total gain of 12.5%, followed by Maxwell International Holdings Bhd with 9.6%, XiDeLang Holdings Ltd (XDL) with 5.4%, Xingquan International Sports Holdings Ltd with 5.3% and Multisports Holdings Ltd with 3.8%.

On Monday, K-Star climbed 5.4% or 1.5 sen to close at 29.5 sen on a volume of 3.6 million shares. The stock gained another two sen or 6.8% to close at 31.5 sen with volume surging to 17.94 million shares.

The company’s book value stood at 85 sen as at Sept 30, 2011.

Maxwell gained the most on Monday, up 9.6% or four sen to close at 45.5 sen with 1.43 million shares changing hands. The stock ended unchanged yesterday with 954,100 shares traded.

Maxwell is still trading below its end-September 2011 net cash per share and book value of 48 sen and 73 sen respectively.

XDL saw its trading volume surge yesterday to 16.4 million shares from 6.18 million shares on Monday. After gaining 4% or 1.5 sen to 38.5 sen on Monday, it added another 0.5 sen or 1.3% to close at 39 sen yesterday. Its book value was 73 sen as at end-September 2011.

Xingquan, the first China-based company listed here, also enjoyed a two-day rally.

The stock closed 1.6% or 1.5 sen higher at 96.5 sen on Monday, and added another 3.5 sen or 3.6% to close at RM1 yesterday.

Trading volume increased from 902,500 shares on Monday to 1.6 million shares yesterday. Its book value was RM1.69 as at end-Sept ember last year.

Multisports Holdings Ltd had climbed 1.3% or 0.5 sen to close at 40.5 sen on a volume of 656,000 on Monday.

Yesterday, the stock added another one sen or 2.5% to close at 41.5 sen, with volume increasing to five million shares.

Multisports’ book value stood at 85 sen at end-September 2011.


This article appeared in The Edge Financial Daily, February 15, 2012.



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Is it worth taking a bet on Maxwell?

Shares in Maxwell International Holdings (43 sen) have not fared well in the year since listing on the Main Market. The stock hit a high of 56 sen in the week of its debut in early January 2011, but has since then seen waning investor interest. The stock fell to as low as 30 sen in July. Despite clawing back some lost ground in recent months, Maxwell shares remain well below the initial public offering price of 54 sen.

We believe the poor sentiment has less to do with Maxwell’s underlying fundamentals than it does with the negative perception surrounding all China-based companies listed on Bursa Malaysia. Even though most of have not disappointed earnings-wise, investors are leery of their reported numbers.

This negative perception can be attributed to news reports of financial irregularities and corporate governance issues in Chinese companies listed overseas, including those in neighbouring Singapore and most recently in the US.

It may not be quite fair to tar all the Bursa-listed Chinese companies with the same brush. Indeed, accounting irregularities and corporate governance issues are not exclusive to any particular class of companies. There have been ample such cases involving local companies, including more than a few investor darlings of yesteryear.

Re-rating from prevailing low valuations?
Maxwell shares are currently trading at an estimated forward price-earnings ratio (PER) of just about 4.3 times. Its share price is also well below the company’s net assets per share of 73 sen as at end-September 2011. This is including net cash of RM193.1 million, equivalent to 48 sen per share.

In addition, Maxwell intends to pay some 20% of its annual net profit as dividends. Based on our forecast, dividends are estimated to total roughly 3.5 sen per share for 2011, up from 3.35 sen per share in 2010. That would give shareholders a higher than market average net yield of 8.1% at the prevailing share price.



Such valuations would appear to provide a compelling case for further gains. The company’s executive chairman and major shareholder Li Kwai Chun has raised her stake to about 57.7%, up from 54.6% during the IPO.

Still, it remains to be seen if valuations and/or a longer track record will change investors’ perception and bring about an upward re-rating for the stock. Only time will tell.

Proven underlying business model
Operations-wise, Maxwell’s business model as OEM (original equipment manufacturer) and ODM (original design manufacturer) for primarily court sports shoes has been quite successful. The company’s net profit grew at a compound annual rate of nearly 53% from 2007 to 2010.

In recent years, major brand owners have shifted their focus to research and development as well as sales, marketing and distribution while outsourcing the manufacturing activities to third parties. This trend is likely to continue. As an ODM, Maxwell is able to provide greater value-added services to customers.

Currently, about half of its manufactured products are based on in-house designs.

The majority of Maxwell’s customers are trading houses and brand distributors, who in turn service a wide range of international brand names including Yonex, Diadora, Kappa, Hush Puppies, Brooks, FILA and most recently Li Ning.

Although Maxwell manufactures on a short-term contract basis, most of its customers are in fact repeat customers. The bulk of the company’s end products are ultimately exported to the rest of the world, where demand is expected to keep growing.

Case in point, few consumers own just one pair of shoes, which are considered now less a necessity and more an accessory and fashion statement. Consumers are, however, fickle. And fast-changing consumer preference is among the biggest threats for any brand name.

But as an OEM, Maxwell is buffered against such risks. It also does not have to spend on building and marketing its own brand name. Maxwell earns a manufacturing margin by pricing its products on a cost plus basis.

All in all, this business model has enabled the company to maintain pretty good margins and returns on assets over the years.

We estimate net profit at roughly RM69.3 million for 2011, including RM2.5 million in one-off listing expenses, up some 6% year-on-year. Earnings are forecast to expand further to RM81.5 million in the current year. Net margin is estimated at roughly 18% to 19% while the average return on assets for the two years is estimated at about 26.3%.

Putting cash to better use
Maxwell is sitting on net cash totalling some RM193.1 million, almost all of which is earning marginal interest income from bank deposits. The company expects to distribute about 20% of its annual net earnings as dividends — estimated to total some RM30 million for 2011/12. It intends to reinvest the bulk of the remaining cash.

The company is planning to double its production capacity, from the current eight million shoe pairs per year as well as to expand its in-house design division. At the moment, the company outsources about half of its orders to smaller contract manufacturers.

Outsourcing gives it greater flexibility to cope with surges in orders while limiting the downside risks, in terms of fixed overheads and salaries, on unexpected demand drops. Margins for both in-house production and outsource are about the same.

Elsewhere, Maxwell is in negotiations to acquire a sportswear apparel company based in Hong Kong. The acquisition will change the company’s scope of operations, expanding its product range to include its own apparel brand name and diversifying into the downstream retail business. This would also change the overall risks for the company.

On the other hand, contributions from the acquisition will provide an immediate boost to its earnings, compared with prevailing low interest income, and raise the company’s overall return on assets. Based on its existing operations, the stock is trading at just about 4.3 times our forecast earnings for 2012.

Successful completion of the proposed acquisition would drive valuations even lower, although this would likely entail higher earnings risks.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


This article appeared in The Edge Financial Daily, February 15, 2012.



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Can China shoe stocks remain at bargains

KUALA LUMPUR: After being battered down from their IPO prices, all the five China-based shoe companies on Bursa Malaysia are trading at large discounts to their book values and at low price-earnings ratio (PER) of around two times. Coupled with impressive double-digit growth and attractive dividend yields, how much longer can they remain at bargain levels?

Most investors are no doubt sceptical about China stocks listed on overseas exchanges, given the numerous accounting issues these companies have faced in the US and Singapore over the last few years.

However, analysts also noted that none of these issues has surfaced in Malaysia yet, and the Chinese companies listed here have consistently delivered strong earnings despite their lacklustre stock price performances.

Xingquan International Sports Holdings Ltd, the first Chinese company listed in Malaysia for close to three years now, has yet to disappoint investors in terms of earnings. Apart from Xingquan, four other shoe companies listed here are Multi Sports Holdings Ltd, XiDeLang Holdings Ltd (XDL), K-Star Sports Ltd, and Maxwell International Holdings Bhd.

According to calculations by The Edge Financial Daily, from 2006 to 2010, the five shoe companies chalked up a compound annual growth rate (CAGR) of at least 30% for both revenue and net profit.

The five China-based shoe stocks are sitting on large cash reserves and most have paid high-yielding dividends.

Their PERs are about two times — well below the market’s broader average of 15 to 16 times.

The recent listing of two China-based apparel stocks in Hong Kong could also provide a re-rating catalyst for the Malaysian — listed shoe makers. China Outfitters Holdings Ltd and Active Group Holdings Ltd were listed at PERs of six to seven times, three times more than their Malaysia-listed peers.

With such low valuations, the possibility of potential privatisations and corporate exercises cannot be ruled out, according to analysts. This almost happened in the case of XDL.

XDL’s share price saw some excitement recently when the company’s major shareholder revealed that he held informal discussions with Navis Capital Partners to sell a stake to the latter.

According to reports, XDL’s founder and managing director Ding Peng Peng was “frustrated with the stock’s lacklustre share price”.

However, the talks with Navis apparently did not pan out. Investors have started to take notice of XDL’s low valuations, and the stock has risen about 25% since the beginning of the year. It has proposed a bonus issue, private placement and warrants.

Edmund Tham, head of research with Mercury Securities, said the perception of China-based stocks in Malaysia will gradually improve over the years.

“It might take a couple of months or even years for investors to change their perception of China companies listed in Malaysia. Over time, with more roadshows and briefings, people will start to see that they are good companies, provided they continue to generate sufficient operating cash flows and profits,” said Tham.

According to Tham, a good business model and an attractive dividend policy will cause investors to take note.

He added that the public should not be doubtful about these companies as some of them have first- and second-tier global auditors such as BDO Binder and Grant Thornton.

Tham covers Xingquan, Xidelang, Multi Sports and Sozo Global Ltd (a China-based foodstuff manufacturer listed on Bursa).

Except for K-Star, all the companies are covered by a research house as a result of their participation in Bursa Malaysia’s CMDF-Bursa Research Scheme, which aims to enhance research coverage and interest in stocks, particularly smaller capitalised ones.

On July 10, 2009, Xingquan became the first China-based shoe company to be listed on Bursa. The last was Maxwell which was listed on Jan 6 last year.

Multi Sports made its debut on Aug 19, 2009, followed by XDL on Nov 11, and K-Star on June 4, 2010.

The Edge Financial Daily takes a look at the five shoe companies and their underlying fundamentals that appear to be attractively undervalued.

As at last Friday, the stock which had fallen the most from its IPO price was K-Star (-60.9%), followed by Multi Sports (-52.9%), Xingquan (-44.4%), XDL (-36.2%), and Maxwell (-23.1%).

These counters are trading at a PER of 1.8 to 2.4 times, according to Bloomberg data. They are also trading below their book values at discounts between 41% and 67% and all are in net cash positions from RM90 million to RM193 million.

Tham likes Xingquan as it registers the strongest earnings of more than RM100 million and has a strong leadership position in the outdoor casual wear market. Another analyst likes Maxwell as the stock is trading below its cash value per share.

“The share price is something beyond our control. We will continue to manage the company well, deliver good results and hopefully the share price will take care of itself,” Xingquan CEO Wu Qingquan told The Edge Financial Daily recently.

He believes the company can maintain double digit growth in its FY12 ending June.

Xingquan
Xingquan is principally engaged in the manufacturing and sale of shoes and soles, as well as the sale of apparel and accessories.

In 2004, it started its own brand manufacturing business for footwear under Addnice and in 2005 expanded into the sports apparel and accessories market.

Due to better growth opportunities, Xingquan left the sportswear market and ventured into outdoor casual wear with the launch of its Gertop brand in 2010. Its shoes, apparel and accessories are sold under the Gertop brand in the outdoor casual wear segment at more than 2,300 outlets via 31 distributors in 26 provinces in China.

Compared with the IPO price of RM1.71 in July 2009, Xingquan tumbled 44.4% to close at 95 sen last Friday. The closing price represented a 43.8% discount to its end-September 2011 book value of RM1.69.

At end-September 2011, it had cash reserves of 399.77 million yuan (RM192.05 million) against borrowings of 38 million yuan, which translated into net cash of 56.3 sen per share. From 2006 to 2011, Xingquan chalked up a CAGR of about 39% for both revenue and net profit.

For FY11, it posted a 16% rise in net profit to 252.29 million yuan from 217.27 million yuan a year ago, while its revenue increased by 22% to 1.5 billion yuan from 1.23 billion yuan previously. Shoes accounted for 49% of revenue, followed by apparel and accessories (33%), and soles (19%).

For 1QFY12 ended Sept 30, the apparel and accessories segment contributed 39% to revenue, compared with shoes (37%) and soles (24%). Due to higher contributions from its apparel and accessories segment in recent quarters, Xingquan expects the apparel division to be its main revenue driver.

For 1QFY12, Xingquan posted a 25.4% increase in net profit to 70.21 million yuan from 56.01 million yuan a year ago, in addition to a 26.8% jump in revenue to 426.30 million yuan from 336.09 million yuan previously.

Xinquan’s outlets in China grew to 2,382 in FY11 from 409 in FY06. The company said it will add 200 sales outlets in FY12. It will also expand its production capacity for soles to around 30 million pairs in FY12 from 24 million currently. Its current production capacity for shoes is about six million pairs.

For FY10 ended June 30, Xingquan paid net dividends of five sen per share.

To ensure sufficient funds for the planned expansion and working capital requirements, no dividends were declared by Xingquan in FY11.



Maxwell
Maxwell is an original equipment manufacturer (OEM) and original design manufacturer (ODM) in the sports shoe market. As an ODM the company is able to manufacture as well as design and develop shoes for its customers.

Its primary products are court sports shoes (soccer, tennis, skateboarding, basketball, badminton and baseball), which contributed to 88.4% of revenue in 2010. Its end-customers include international brand names such as Yonex, Diadora, Kappa, Brooks and FILA.

Since the debut at the IPO price of 54 sen in January 2011, Maxwell’s stock has tumbled by 23.1% to close at 41.5 sen last Friday. The closing price represented a 13.5% discount to its end-September 2011 cash per share of 48 sen and a 43.2% discount to its book value of 73 sen.

Maxwell paid its maiden dividend of 3.35 sen net per share in September last year, which represented a net yield of 8.1% based on last Friday’s close. Maxwell has set a dividend policy of 20%.

As at Sept 30, 2011, it was in a net cash position of RM193.12 million with zero borrowing. From 2006 to 2010, revenue and net profit grew at a CAGR of 46% and 53% respectively.

For FY10 ended December, it posted a net profit of RM65.14 million on RM335.92 million in revenue. About 96% of the revenue came from China. Customers are mainly trading houses and brand distributors based in China. These customers in turn export Maxwell’s shoes to Europe, South and North America, Asia and Africa.

For 3QFY11 ended September, Maxwell announced a 13.8% year-on-year (y-o-y) rise in net profit to RM22.59 million from RM19.85 million a year ago. Due to better sales, revenue also increased by 18.4% to RM114.7 million from RM96.88 million previously.

For the nine months to Sept 30, net profit remained flat at RM49.6 million against RM49.8 million in the previous corresponding period, while revenue grew by 10.8% to RM272 million from RM245.3 million previously.

Maxwell plans to increase its production capacity to 16 million pairs of shoes by adding four production lines to its current four. In 2010, it produced 11.27 million pairs of shoes, of which 47% was outsourced.

It is close to sealing a deal with a leading international sports shoe brand, the company added.



Multi Sports
Multi Sports stands out from the rest as its main business is to design, develop and manufacture shoe soles only.

It is a one-stop shoe sole specialist for China’s sports footwear industry. It is vertically integrated and is able to process raw materials into its needed shoe components. The company has produced over 300 designs suitable for a wide range of sports shoes.

Since listing on Aug 19, 2009, the shoe sole maker has dropped 52.9% from its IPO price of 85 sen to last Friday’s close of 40 sen. It is trading 41.2% below its end-September 2011 book value of 68 sen.

At end-September 2011, it had cash reserves of 365.3 million yuan versus borrowings of 27.5 million yuan, which translated into net cash per share of 31.2 sen.

In FY10, Multi Sports paid a net dividend of 2.5 sen per share, giving a yield of 6.3%, based on its closing price last Friday. From 2006 to 2010, it chalked up a CAGR of about 30% for both net profit and revenue.

For FY10 ended December, net profit increased to 139.14 million yuan from 113.94 million yuan for FY09, while revenue increased to 613.46 million yuan from 474.19 million yuan previously.

Multi Sports’ revenue comes from four types of soles it produces namely thermoplastic rubber (TPR), rubber, ethylene vinyl acetate (EVA) Model 1 (MD1), and EVA Model 2 (MD2). EVA soles are known to have better elasticity, softness and flexibility.

In FY10, its MD2 accounted for 56.3% of revenue, while MD1 contributed 31.2%, TPR (8.8%), and rubber (3.6%).

For 3QFY11 ended September, it posted a net profit of 49.7 million yuan on revenue of 239.60 million yuan, up from a net profit of 35.78 million yuan on revenue of 152.72 million yuan previously.

The company attributed the higher revenue to increased MD2 sales, but said profit margins had dropped due to higher labour and raw material costs, and depreciation expenses.

In its 2010 annual report, Multi Sports said annual production capacity is expected to increase to 84.4 million pairs in FY11 from about 35.6 million in FY10, with its new production centre in Jinjiang City.

On Dec 30, 2011, Multi Sports issued 67.5 million new shares or 15% of its existing issued and paid-up capital to sponsor a depository receipt programme in Taiwan, which entailed the issuance of Taiwan Depository Receipts. The issuance was expected to raise NT$236 million (RM24 million) for capacity expansion and working capital.



K-Star
K-Star is principally engaged in the design, manufacture and distribution of sports footwear under its own proprietary brands, Dixing and K-Star. The company generates over 700 designs annually.

Its product range covers athletic shoes for running, tennis, basketball and mountain climbing as well as leisure. K-Star is also an OEM and ODM for international sports brands including Umbro, Diadora, Kappa and China’s footwear brand, Double Star.

Its proprietary products are distributed across 18 provinces and three municipalities in China at over 870 retail locations. They are exported to Russia and other markets such as Ukraine, Belarus, the Czech Republic, Poland, Finland, Romania and Hungary. In 2010, K-Star expanded into sports fashion apparel and accessories.

Listed on June 4, 2010, K-Star closed at 28 sen last Friday, falling 60.9% from its IPO price of 71.7 sen (IPO price adjusted for a one-to-three share split on Nov 1, 2010)

It is trading at a 67.1% discount to its end-September 2011 book value of 177.97 yuan and close to its net cash per share of 25 sen. As at end-September 2011, it had cash reserves of 154.81 million yuan versus current borrowings of 17.68 million yuan, which translated into a net cash position of 137.13 million yuan.

In FY10, it paid a net dividend of 1.6 sen per share, representing a yield of 5.7%. From FY06 to FY10, the company’s CAGR for net profit and revenue was 47.8% and 43.8% respectively. For FY10, it posted a net profit of 88.25 million yuan on revenue of 670.87 million yuan.

For 3QFY11 ended September, it posted a net profit of 11.14 million yuan on revenue of 169.60 million yuan, down from a net profit of 31.16 million yuan on revenue of 191.48 million yuan previously. K-Star said the decline was mainly due to higher raw material and labour costs.

Its sports footwear segment contributed to about 95% of revenue, while its sports apparel and accessories accounted for the remaining 5%.

As part of its expansion plan, K-Star announced in October that it was buying a piece of state-owned leasehold land of 675 sq m in Jinjiang City in Fujian Province for 27 million yuan in cash.

As at end-2010, it had four production lines at three factories in Jinjiang City. Its estimated annual production capacity was 3.97 million pairs and output utilisation rate was 93.7% in 2010.



XiDeLang
XDL is predominantly involved in the design, manufacturing and marketing of its own Xidelang brand of sports shoes, as well as designing and marketing of sports apparel, accessories and equipment in China.

It churns out around 2,000 sports shoe designs yearly, of which 500 are commercialised. Its direct customers are intermediaries such as third-party distributors and retailers.

XDL’s products are retailed across 25 provinces and municipalities in China through a network of more than 2,500 retail locations, of which about 1,300 are concept stores.

Shares in XDL have been actively traded since the start of the year following speculation that a major shareholder plans to sell its entire 54.5% stake in XDL to Navis Capital Partners. However, XDL said in a Bursa announcement last month that it had not made any concrete plans or proposal on the matter.

Since Dec 30, 2011, XDL has risen about 25% to close at 37 sen last Friday. Despite the recent surge, XDL is still trading at undemanding valuations. Based on Friday’s close, the share price was at a 49.3% discount to its book value of 73 sen (as at Sept 30, 2011)

As at end-September last year, it had cash reserves of RM136.53 million and current borrowings of RM47.17 million, which translated into net cash of RM89.36 million or 20.3 sen per share.

In FY10, it paid net dividends of 2.5 sen per share, representing a yield of about 6.8% based on Friday’s closing price. From 2006 to 2010, the CAGR for revenue and net profit was 48.5% and 60% respectively. For FY10, it posted a net profit of RM68.19 million on revenue of RM77.91 million, all of which was derived from China.

XDL’s shoe segment contributed 53% of revenue, while the remaining 47% came from its apparel, accessories and equipment.

For its 3QFY11 ended September, its net profit increased to RM23.98 million from RM21.92 million a year ago, while revenue was RM132.94 million compared with RM125.25 million previously.

XDL said an increase in brand awareness and demand led to the improved performance.

On Jan 18, XDL proposed a private placement, bonus issue and rights issue of warrants to raise up to RM29.7 million for expanding production capacity at its new design and production centre.

The construction of the first stage of the centre is expected to be completed by the first half of 2012.




This article appeared in The Edge Financial Daily, February 13, 2012.



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Maxwell to tie up with leading sports shoe brand

KUALA LUMPUR: China-based shoe manufacturer Maxwell International Holdings Bhd is close to sealing a deal with a leading international sports shoe brand, according to CEO Xie Zhen’an.

In an interview with The Edge Financial Daily yesterday, Xie said the tie-up will provide good long-term prospects for Maxwell, adding that the international brand will be disclosed once the deal is finalised.

Through its wholly owned subsidiary, Jinjiang Zhenxing Shoes & Plastics Co Ltd, Maxwell is an original equipment manufacturer (OEM) and original design manufacturer (ODM) in the sports shoe market. Its end-customers include international brand names such as Yonex, Diadora, Kappa, Brooks and FILA.

Maxwell which is listed on Bursa Malaysia, announced a 13.8% year-on-year rise in net profit yesterday to RM22.59 million for 3QFY11 ended Sept from RM19.85 million a year ago. Due to better sales, revenue also increased by a larger margin of 18.4% to RM114.7 million from RM96.88 million previously. Basic earnings per share for the quarter was 5.65 sen compared with 5.90 sen a year ago.

For the nine months to Sept 30, net profit was unchanged at RM49.6 million on revenue growth of 10.8% to RM272 million from RM245.3 million a year ago.

For FY10, it posted a net profit of RM65.14 million on the back of RM335.92 million revenue. It is noteworthy that between 2006 and 2010, Maxwell’s revenue and net profit saw a compound annual growth rate of 46% and 53%.

Xie says investors should not stereotype China-based companies but instead judge them on merit.

Maxwell’s customers are mainly trading houses and brand distributors based in China. Xie said these customers in turn export Maxwell’s shoes to Europe, South and North America, Asia and Africa. In FY10, about 96% of its revenue came from China.

Despite having sound financials, Maxwell, like other China-based companies listed on Bursa, has experienced steep declines in its share price. Xie said this is most likely due to a negative perception arising from accounting irregularities at some China-based companies listed in Singapore and elsewhere.

“The perception is that just because one apple is bad, then the others should be as well. I hope investors will eventually start to judge a company based on its merit,” he said of Maxwell being stereotyped as a China-based company.

Maxwell’s share price has fallen by 30% to close at 38 sen yesterday from its IPO price of 54 sen in January.

As at end-June, Maxwell had a net cash position of RM193.12 million with no borrowings.

Its prevailing share price of 38 sen is below its book value of 73 sen and its net cash per share of 48 sen as at end-September. It paid its maiden dividend of 3.35 sen per share in September, representing a net dividend yield of 8.8%. Maxwell has a dividend payout policy of 20%. Xie said these figures make Maxwell an undervalued company.

Compared with other China-based shoe companies listed on Bursa, Xie said Maxwell is slightly different because it focuses on ODM and OEM.

The other Chinese shoe companies, K-Star Sports Ltd , XiDeLang Holdings Ltd and Xingquan International Sports Holdings Ltd are primarily own-brand manufacturers (OBM) — their products are marketed and sold under proprietary brand names and distribution networks.

Unlike an OBM, he said Maxwell does not incur large expenditure in building and marketing its own brand name.

Maxwell has a design and development (D&D) department focusing on developing new designs in-house or in accordance to specifications provided by customers. Xie said this capability differentiates Maxwell from other OEMs. Maxwell develops 1,000 designs annually and will be increasing that number to 1,500 in the future, he said.

Maxwell is planning to increase its production capacity to 16 million pairs of shoes by adding another four more production lines to its current four production lines. Each production line has an annual capacity of two million pairs of shoes, he said.

Maxwell’s production facility is located in Jinjiang, Fujian province. Xie said Jinjiang is the world’s largest sports shoe hub and is in proximity to raw material sources and suppliers.

For the expansion, Maxwell has yet to decide if it will completely relocate its production facility or continue expanding in the same location. Adding production lines in the vicinity of its present facility will take a year to complete and cost around RM50 million to RM60 million, he said. It will involve tearing down a warehouse and then building an eight- to nine-storey building.

If Maxwell chooses to relocate, it will have to rebuild its facility at a new location with a larger land area. Xie said this option will take three years and provides better long-term prospects as there will be more space to add production lines there in the future.

In 2010, Maxwell produced 11.27 million pairs of shoes, of which 47% were outsourced externally. Xie said outsourcing allows Maxwell to limit the risk of an unexpected drop in demand or to cope with increasing demand. Xie added that gross profit margins from outsourcing and in-house production were almost the same in 2010.

Xie said shoe soles account for half of Maxwell’s raw material costs, which made up 71% of Maxwell’s total cost of sales in 2010. He said Maxwell is able to pass down increases in raw material costs to its customers.

To sustain consistent margins going forward, Xie said Maxwell ensures that it has at least a gross profit margin of 25% before accepting a sales order.


This article appeared in The Edge Financial Daily, November 18, 2011.



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Maxwell Int posts higher Q3 pre-tax profit

Maxwell International Holdings Bhd's pre-tax profit for the third quarter ended Sept 30, 2011 rose to RM30.2 million from RM26.5 million in the same quarter last year.

Revenue increased to RM114.7 million from RM96.88 million previously,
Maxwell said in a statement today.

For the nine-month period, its pre-tax profit increased to RM67.18 million
from RM66.7 million in the same period last year. Revenue rose to RM272 million from RM245 million previously.

Maxwell said the increase in revenue was in line with the increase in sales
to approximately 9.1 million pairs of sports shoes during the period from 8.2
million pairs last year.

"However, the increase in sales was partly offset by a marginal fall in
average selling price of the sports shoes to RM29.87 from RM29.98 last year," it
said. -- Bernama



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Maxwell 3Q earnings up 13.8% to RM22.59m

KUALA LUMPUR (Nov 17): China-based sports shoe maker Maxwell International Holdings Bhd’s earnings rose 13.8% to RM22.59 million in the third quarter ended Sept 30, 2011 from RM19.85 million a year ago.

It said on Thursday that revenue increased 18.4% to RM114.70 million from RM 96.88 million while earnings per share were 5.65 sen, a decline from 5.90 a year ago.

“The increase in revenue was in line with the group's increase in sales volume of our products from approximately 8.2 million pairs of sports shoes in FPE 2010 to approximately 9.1 million pairs of sports shoes in FPE 2011,” it said

However, Maxwell said the increase in sales volume was partly offset by marginally decrease in average selling price (ASP) of sports shoes from RM29.98 per pair in FPE 2010 to RM29.87 per pair in FPE 2011.

The overall ASP decreased was mainly due to conversion of average exchange rate from renminbi 1: RM0.4766 in FPE 2010 to RMB 1: RM0.4661 in FPE 2011.

For the nine-month period, earnings were marginally lower at RM49.58 million compared with RM49.77 million in the previous corresponding period. Revenue came in 10.8% higher at RM272.03 million versus RM245.34 million a year ago.

On the outlook, Maxwell said it remained optimistic about the long-term growth potential of the sportswear market in China and overseas.

“To maintain our competitive edge, we will continue to focus on our group’s strategy of product design and development, strengthening and expanding our sale and distribution network,” it said.



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Are weak IPOs worth another look?

KUALA LUMPUR: Many of this year’s initial public offering (IPO) stocks have been among Bursa Malaysia’s worst performers — but are they now worth another look?

Interest certainly appears to be returning to them, as investors are starting to take notice of stocks that have fallen under the radar and are offering good bargains.

In the past 1½ weeks, stocks such as UOA Development Bhd, MSM Malaysia Holdings Bhd and Petronas Chemicals Group Bhd have regularly dominated either the top actives or gainers lists, while others like Oldtown Bhd and Benalec Holdings Bhd have bounced well off their lows on high volume.

Many of the newly listed stocks slumped after their debuts. Fuelled by weak market sentiment, they have fallen more than the general market due to a high number of short-term investors, such as venture capitalists, high net worth placees and short-term institutional funds, exiting these stocks, said industry observers.

The renewed interest in IPOs was triggered on Oct 13, when UOA emerged from almost nowhere as one of the most actively traded stocks, closing 22 sen or 17.2% higher at RM1.50.

The stock again emerged as one of the most actively traded a week later last Thursday when it surged 19 sen or 12.58% to RM1.70.

Though ending last Friday lower at RM1.59, the stock has gained 37.1% since hitting a low of RM1.16 on Sept 27. Its net assets per share was RM1.35 as at June 30.

Even now, the stock is still 38.8% off its IPO price of RM2.60 when it was listed on June 8. During its lows, few had noticed that UOA had actually slumped more than 55.4%.

The Edge Financial Daily took a look at some of the best and worst performing IPOs this year, and which stocks may be of interest to investors.

As at last Friday, only eight out of 26 companies listed this year were winners.

The two biggest losers were MClean Technologies Bhd (-68.3%) and XOX Bhd (-69.4%), for fairly obvious reasons as their results have been less than impressive.

They were followed by UOA (-38.8%), Maxwell International Holdings Bhd (-34.3%), Oldtown (-12.8%), and Hibiscus Petroleum Bhd (-10%).

Listed on the ACE Market on May 10, MClean’s share price has dropped 68.3% to 16.5 sen from its listing price of 52 sen.


MClean, which provides precision cleaning services for hard disk drives, caused shock waves when it announced a net loss of RM190,000 just three weeks after its listing in May.

Another ACE Market-listed company, XOX tumbled 69.4% to close at 24.5 sen last Friday, compared with its offer price of 80 sen.

XOX also stunned when it reported a loss of RM1.66 million for 1QFY11 just a day before its debut. The loss sent its share price south by more than 35% on its debut. For its 2QFY11, XOX reported a net loss of RM2.92 million, due to higher selling and distribution expenses.

Value among major losers?
Not all of the IPOs that fared badly were due to their fundamentals, with UOA, Maxwell and Oldtown among those that could look attractive.

Affin Investment Bank has a “buy” call on UOA with a target price of RM2.07.

“We believe that value has emerged after UOA’s sharp share price correction,” it stated in an Oct 12 report.

UOA recently strengthened its landbank with the proposed acquisition of 9.8 acres of freehold land in Kepong for RM72.9 million or RM170 psf.

The report said it expects UOA’s other standalone residential projects such as Setapak Green and Sri Petaling and current unbilled sales of RM684 million to help sustain its medium-term earnings and dividend yield of over 5.5%.

China-based sports footwear designer and manufacturer Maxwell saw its share price close at 35.5 sen on Friday, down 34.3% from its IPO price of 54 sen in January.

While investors have been cautious of China-based companies in general, Maxwell appears to have a good earnings track record and high dividends to boot.
Between 2006 and 2010, Maxwell’s revenue and net profit saw a compound annual growth rate of 46% and 53% respectively.

For its first half this year, it had a cumulative revenue of RM157.34 million and net profit of RM26.99 million. With half-year earnings per share (EPS) of 6.75 sen, its annualised price-earnings ratio (PER) would be just 2.63 times.

Maxwell paid its maiden dividend of 3.35 sen net per share on Sept 28, representing a 9.4% net yield on its prevailing price.

Hibiscus, a special purpose acquisition company, was the first of its kind to be listed on Bursa Malaysia in July. It elicited some negative publicity then for its relatively high premium for what was essentially seen as a cash-rich shell company with management expertise.

From an IPO price of 75 sen though, Hibiscus’ share price has tumbled by 10% to 67.5 sen, above its cash per share of 58.6 sen. Hibiscus has three years from the time of listing to acquire a target company or asset, failing which it will be liquidated.

Meanwhile, despite the resilience of the food and beverage (F&B) sector, Oldtown saw its share price dip by 12.8% to RM1.09 from its IPO price of RM1.25.

Listed in July, the local coffee manufacturer and cafe operator is penetrating the China consumer market by opening its first two cafes in Guangzhou this month. Oldtown has set up a food processing centre in China and is targeting to open more outlets, especially in southern China, to achieve greater economies of scale. Although not rated, a report by OSK Research on Sept 20 valued Oldtown at 12.5 times FY11 EPS, which translates into a fair value of RM1.34.

Top performers: Are they still worth buying?
Some of the IPO stocks which had the best returns as at last Friday are Boilermech Holdings Bhd (+93.9%), Berjaya Food Bhd (BFood) (+71.6%), MSM Malaysia Bhd (+42.9%), Bumi Armada Bhd (+20.8%), and Benalec Holdings Bhd (16%).

Listed on the ACE Market on May 5, Boilermech has been the best performing IPO this year gaining 93.9% to 64 sen from its listing price of 33 sen. Still, the stock has fallen 35.7% from an all-time high of 99.5 sen in May.

A biomass boiler manufacturer, Boilermech is a 35% associate company of food and agriculture group QL Resources Bhd. It is primarily engaged in the manufacture of boilers for the plantation, manufacturing and food industries.

Boilermech’s performance, market observers said, was attributed to its strong parent, QL Resources and its exposure to the renewable energy sector.

The second best performer was BFood, which is mainly involved in the operations of Kenny Rogers Roasters (KRR) restaurants in Malaysia. The stock has climbed 71.6% to 87.5 sen last Friday from its IPO price of 51 sen.

With 68 restaurants, BFood plans to open another 15 KRR restaurants in FY12. Via a joint venture, it will also expand its KRR operations in Indonesia where it targets to open 12 stores by end-June 2012.

For its FY11 ended April 30, its net profit was up by 17% to RM10.2 million from RM8.68 million in FY10. Revenue grew by 19% to RM71.9 million from RM60.42 in FY10.

BFood has a clean balance sheet with net cash of about RM31.29 million and no borrowings as at end-July. It paid its first interim dividend of three sen in FY11, amounting to RM4.26 million, which translates into a payout ratio of 41.8% and net yield of 3.4%. BFood’s earnings for FY13 onwards will get a boost from the ongoing acquisition of a 50% stake in Berjaya Starbucks Coffee Co Sdn Bhd, which will be concluded in 1Q12. It targets to open 12 to 15 Starbucks outlets every year.

Last Friday, the stock had a historical PER of 12.4 times and market capitalisation of RM124.24 million. As a comparison, KFC Holdings (M) Bhd has a historical PER of 17.2 times and market capitalisation of RM2.697 billion.

MSM, the largest sugar refiner in the country, was listed at end-June with an IPO price of RM3.50. Its share price had gained 42.9% to RM5 last Friday, partly due to its small free float.

MSM has adopted a dividend policy to pay out at least 50% of its annual net profit. Assuming this payout level, annual dividends are estimated to be 20 sen per share in 2011/12, which translates into a net yield of about 4% at its closing price on Friday.

As at end-June, MSM had net cash of RM141.7 million, which will support future capital expansion. About RM320 million of the RM425 million proceeds from the IPO have been allocated for capital expansion over the next two to three years.

A report by OSK Research on Sept 27 had a “buy” call on MSM with a fair value of RM5.24.

Benalec worth watching
Analysts say Benalec is a stock worth watching, as the company is well-liked for its niche in land reclamation jobs where margins are high and competitors are few. Its land reclamation projects also provide Benalec with ample and low-cost landbank for property development.

Listed on Jan 17, the stock closed at RM1.16 last Friday, 16% above its offer price of RM1, but well below its year high of RM1.61.

Benalec is bidding for land reclamation projects with a combined estimated contract value of RM8 billion and has a large unbilled order book of RM590 million.

AmResearch and Kenanga Research have “buy” recommendations with a price target of RM2.22 and RM1.93 respectively.

Bumi Armada, an oilfield services provider, rose 20.8% to RM3.66 last Friday, compared with its listing price of RM3.03 in July.

In late September, Bumi Armada announced its wholly-owned unit Armada Balnaves Pte Ltd had signed a floating, production, storage and offloading contract with Apache Energy Ltd, Australia. Valued at about RM1.46 billion, the contract is expected to contribute positively to Bumi Armada’s revenue and earnings for FY11 ending Dec 31.


This article appeared in The Edge Financial Daily, October 24, 2011.