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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Xingquan to maintain double-digit growth

KUALA LUMPUR: China-based shoe manufacturer Xingquan International Sports Holdings Ltd’s CEO Wu Qingquan believes the company can maintain its double-digit growth for FY12 ending June 30.

From 2006 to 2011 the company had chalked up a compound annual growth rate of around 39% for both revenue and net profit.

Xingquan, through its wholly-owned subsidiaries in China, is principally engaged in the manufacturing of shoe soles and shoes, and the sale of shoe soles, shoes, apparel and accessories.

An own brand manufacturer (OBM), its shoes, apparel and accessories are sold under its own brand Gertop in the outdoor casual wear segment in over 2,300 outlets via 31 distributors in 26 provinces in China.

Subsequent to Xingquan’s listing on Bursa Malaysia on July 10, 2009, four more China-based shoe companies were also listed, with the latest being Maxwell International Holdings Bhd on Jan 6 , 2011.

Despite its sound fundamentals, Xingquan — like the other China-based shoe companies listed on Bursa Malaysia — has seen steep declines in its share price due to the negative perception of Chinese companies listed on overseas exchanges.

Wu posing with some of the shoes produced by Xingquan.

However, as a result of the double-digit growth and undemanding fundamentals shown by Xinquan and the other China-based shoe companies listed on Bursa, hopefully, investors will have a change of heart, Wu told The Edge Financial Daily.

“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,” Wu told pressmen after the company’s recent AGM.

It appears investors are starting to take a second look at the sector.

Xingquan rose 3.5 sen to RM1 yesterday, and with Monday’s 1.5 sen rise, its share price has risen 5.3% in the last two days.

On Monday The Edge Financial Daily highlighted in a report the attractive valuations of the five China-based shoe companies.

At the closing price of RM1 yesterday, Xingquan is trading at a 40.8% discount to its end-September book value of RM1.69 and 15.3% below its net cash per share of RM1.18.



Its stock has been battered down by 41.5% from its IPO price of RM1.71.

Wu said Xingquan should be able to main its double-digit growth for FY12 as it has received a 10.7% increase in orders, amounting to 670 million yuan (RM329.64 million), from its 2012 spring/summer sales fair.

Xingquan finished its first quarter of FY12 (ended Sept 30) well, posting a 25.4% increase in net profit to 70.21 million yuan from 56.01 million yuan a year ago, on a 26.8% increase in revenue to 426.3 million yuan from 336.09 million yuan previously.

For FY11, it posted a 16% increase in net profit to 252.29 million yuan from 217.27 million yuan for FY10, while its revenue increased by 22% to 1.497 billion yuan from 1.23 billion yuan previously.

Xingquan’s point of sales (POS) or sales outlets for its Gertop products has increased to 2,382 in FY11 from 409 in FY06.

Wu said the immediate target is to add 200 sales outlets across the 26 provinces in China in FY12.

He said Xingquan does not actually own the outlets, but helps establish them by providing subsidies.

Xingquan will spend about 25 million yuan in subsidies for the 200 new sales outlets, he said.

Wu said Xingquan outsources the manufacturing of its outdoor apparel products. At the moment, Xingquan does not have plans to start its own manufacturing of outdoor apparel products, he said.

For shoe soles, Xingquan has a production capacity of 24 million pairs per annum which will be expanded to around 30 million pairs in FY12, according to Wu.

For shoes, Xingquan’s current production capacity is around six million pairs, he said.

Moving forward, Wu expects its apparel division to be the main driver of revenue.

“People would rather spend more on apparel than on shoes,” he said.

In recent years, Xingquan made a switch in products from outdoor sportswear to outdoor casual wear.

When Xingquan was in the outdoor sportswear market, it was not among the top 10 most popular brands in China, Wu said. But now the Gertop brand (launched in 2010) is among the top three most popular outdoor casual wear brands in China.

Its competitors include Camel, Jeep and Timberland, he said.

“We have first mover advantage in the outdoor casual wear segment,” said Wu, adding that there are not many players in the market.

According to Wu, the outdoor casual wear market is a young industry and has better growth in average selling price (ASP) compared to the outdoor sportswear market.

Xingquan’s ASP for apparel (per piece) has increased 35.4% to 90.3 yuan in FY11 from 66.7 yuan in FY10. Wu said the increase in ASP mainly came from branding initiatives.

Xingquan said the outdoor casual wear market is estimated to be worth at least 27 billion yuan in 2010 based on research by Converging Knowledge Pte Ltd which said this market is expected to grow at an annual growth rate of 30% for 2011 and 2012, and subsequently slow down to 20% in 2013. Based on this growth projection, the market may reach 55 billion yuan by 2013.

Wu said by CY2012, its apparel segment will most likely contribute more revenue than its shoe segment.

In FY11, shoes accounted for most of Xingquan’s revenue (49%), followed by the apparel and accessories segment (33%) and soles (19%). However, for 1QFY12, its apparel and accessories segment contributed 39% to revenue compared to shoes (37%) and soles (24%).

Xingquan did not declare any dividend payment in FY11. For FY12, Wu said dividends will depend on the cashflow position of the company.


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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Re-rating of China-based stocks?

KUALA LUMPUR: The recent listing of two Chinese companies in Hong Kong could trigger a re-rating of China-based stocks listed in Malaysia. It may even change investor perception on these stocks here.

Listed in the fourth quarter of 2011, China Outfitters Holdings Ltd (COH) and Active Group Holdings Ltd (AGH), are trading at higher valuations than China-based stocks listed on Bursa Malaysia. They are trading at a price-to-earnings ratio (PER) of about three times more than their Malaysian-listed peers that have hit rock-bottom PER of around two times, according to CIMB Research in a report last week.

CIMB said the recent listing of the two small-and mid-cap stocks in Hong Kong could help towards an upward re-rating of Malaysia-listed Xingquan International Sports Holdings Ltd.

COH and AGH provide a good comparison to Xingquan as they are all in the same business category — the production and sale of casual wear products in China.

Xingquan sells apparel and shoes, while COH sells men’s casual wear and AGH men’s casual footwear.

Even though Xingquan is in a similar business, it is trading at a huge discount compared with them.

Xingquan’s CY12 PER is around two times, while COH and AGH have PER of six and seven times respectively. Ex-cash, Xingquan’s PER stands at 0.8 times compared with five times for COH and 5.8 times for AGH, CIMB said.

On a price to book value (P/BV) basis, Xingquan is also at a huge discount to the two firms with a P/BV of 0.5 times against COH’s 2.1 times and AGH’s 1.5 times.

According to CIMB, among the three, Xingquan has the highest net cash per market capitalisation ratio at 0.7 times, which means that 70% of the share price is supported by its net cash.

If valuations of Xingquan and other China shoe companies listed on Bursa do not narrow, CIMB said it may be only a matter of time before they are taken private and listed on other markets.

The local research house said with the Hong Kong listing of small- and mid-cap retail stocks such as COH and AGH, Xingquan should be more than qualified to list there in the near future, where it should fetch a much higher valuation.


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



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Is Xingquan in for a re-rating?

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.



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CIMB Research has technical buy on Xingquan at 83.5 sen

KUALA LUMPUR (Jan 30): CIMB Equities Research has a technical buy on Xingquan International Sport at 83.5 sen at which it is trading at a FY13 price-to-earnings of 1.9 times and price-to-book value of 0.6 times.

It said on Monday that the stock closed above its 50-day SMA on Friday on rising volume.

The research house said even though the stock is still in a downtrend, it believes that it may have hit a significant bottom in December following a surge in trading volume at the low. The burst in volume suggest a selling climax.

“Indicators are showing signs of improvement with its MACD moving back into positive territory while its RSI is starting to rise once more,” it said.

CIMB Research said the stock is a buy now with a stop placed below 74 sen. Prices could climb towards the resistance trend line at 92 sen in the near term. It added that there is a cluster of resistance between 92 sen and 99 sen, making it a likely stopping point.

“A breakout further would send prices shooting towards RM1.06-RM1.14 next,” it said.



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Stocks to watch: Glomac, Mah Sing, Tan Chong, Fibon

KUALA LUMPUR (Dec 3): The FBM KLCI may trend higher and again test the psychologically important 1,500 level in the week ahead, starting Monday, Dec 5 on more global liquidity and economic optimism.

On Friday, Dec 2, the FBM KLCI closed in positive territory as some key regional markets reversed their earlier losses, but gains at the local market remained muted as investor sentiment stayed cautious.

Week-on-week, the KLCI was up 57.45 points to end at 1,489 with the market capitalisation up RM39.59 billion to RM1,269.59 billion.

Affin Investment Bank head of retail research Dr Nazri Khan said the sentiment could be propped by the coordinated move by central banks including China and Brazil to ease monetary policies.

Another positive factor is the rising expectation of an aggressive cut in the ECB interest rate and stronger EU deal to resolve the debt crisis.

“However, despite the gains spotted worldwide, we recommended caution since the liquidity move is yet to address the core problems that Europe faces which is to provide a long-term sustainable funding solution to the troubled European banking community,” he said.

Dr Nazri expected the broad market to trend higher slowly as they digest more clarity on the EU plan to deal the problems (possibly disclosed in the upcoming Dec 9, EU summit).

“These may includes details on how to enforce budget balancing for troubled countries, how to implement tough austerity measures especially for Portugal, Italy, Ireland, Greece and Spain, how to leverage the rescue funds and how to strengthen the ECB to backstop future crisis,” he pointed out.

Among the stocks which could see trading interest are GLOMAC BHD [], MAH SING GROUP BHD [], TAN CHONG MOTOR HOLDINGS BHD [] and Fibon Bhd.

Glomac's net profit for the second quarter ended Oct 31, 2011 rose 50pct to RM23.78 million from RM15.88 million a year ago, underpinned by on-going projects particularly Glomac Damansara, Glomac Cyberjaya, Saujana Rawang and Bandar Saujana Utama.

Its revenue for the quarter however declined 4.3pct to RM134.83 million from RM140.89 million, due to completion of two projects namely Glomac Tower and Glomac Galleria.

Mah Sing's proposed joint development of 4.08 acres of prime land along Jalan Tun Razak-Jalan Pahang faced a setback after the conditions were not met.

However, Mah Sing said it would explore options to move ahead on this. The project is a niche development – M Sentral -- with an estimated gross development value of RM900 million and it is part of the RM9-billion 58 acre riverside urban regeneration project.

The Edge weekly reports that Tan Chong Motor Holdings Bhd, which invested nearly US$45 million in Nissan Vietnam Co Ltd since acquiring a controlling stake in the company last year, is optimistic that it will reach break-even earlier than anticipated.

Meanwhile, Fibon – a chemical compounds producer -- is poised to enter a new phase of growth with the upcoming launch of its new switchboard Fibon LogiCube.

Anther company which could see trading interest are sports shoe sole manufacturer Xingquan International Sports Holdings Ltd. Its chief executive officer Wu Qingquan is confident that it can maintain its double digit growth in revenue for the financial year ending June 2012, said. The compound annual growth rate from 2006 to 2011 was 39%.

Last Friday, MMC CORPORATION BHD []'s Tanjung Bin Energy Sdn Bhd has sealed a power purchase agreement with TENAGA NASIONAL BHD [] to supply electricity over 25 years. However, the price of electricity which Tanjung Bin would sell to Tenaga was not disclosed in the statement to Bursa Malaysia.



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Xingquan confident of continuing double digit growth, says CEO

KUALA LUMPUR (Dec 2): Xingquan International Sports Holdings Ltd is confident that it can maintain its double digit growth in revenue for FY12 ending June 2012, said its chief executive officer Wu Qingquan.

Speaking after the company’s third AGM on Friday, Wu said its compound annual growth rate from 2006 to 2011 was 39%.

“Based on the recently concluded spring and summer sales order, we got about a 10% increase in sales order from our distributors,” he said.

On its expansion plans, Wu said its immediate target was to add another 200 sales outlet in China from 2300 outlets currently, for its outdoor casual wear brand, GERTOP.

Wu said it will spend about RMB25 million in subsidies for the 200 sales outlets.

Wu added that Xingquan will its expand production capicity for outdoor shoes by 20% to 30 million pairs of shoes from 24 million pairs of shoes currently.

Moving forward, Wu expects its apparel division to be the main driver in revenue for the company.

In FY11, apparels contributed to 28% to Xingquan's revenue, while shoes (40%), and soles (19%).

Xingquan is involved in manufacturing of shoes and shoe soles, and the sale of shoes, shoe soles, apparels and accesorries. Its main products are outdoor sports shoes and apparels.

Xingquan became the first conmpany from China to be listed on Bursa on July 10, 2009.



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News in brief

Selvarajah still Permanis CEO
KUALA LUMPUR: Erwin Selvarajah is still CEO of beverage-maker Permanis Sdn Bhd that has just been sold to Japan’s Asahi Group, CI Holdings Bhd (CIH) said in a statement yesterday to clarify an earlier announcement.

On Nov 11, CIH announced 41-year-old Selvarajah’s resignation as its CEO, following the change in Permanis’ ownership.

Formerly wholly owned by CIH, Permanis — the maker of beverages like Pepsi, Gatorade and Tropicana in Malaysia — is sold to Asahi for RM820 million, of which 88% or RM724.2 million will be distributed to CIH shareholders.

Selvarajah has been Permanis’ CEO since 1999, and had only been CIH’s CEO for 15 months from Aug 25 last year. Selvarajah has a 2.99% stake in CIH.


Xingquan locks in RM333m sales
KUALA LUMPUR: China-based Xingquan International Sports Holdings Ltd locked in 670 million yuan (RM333 million) in sales of its Gertop brand of shoes, apparels and accessories at its recent Spring/Summer 2012 sales fair in Quanzhou, Fujian province.

That’s up 10.7% from that booked at the same event last year, it said in a statement yesterday. The orders would boost the top line for FY ending June 30, 2012, it said.

Xingquan is slated to release results for 1Q ended Sept 30, 2011 next week. Its FY11 audited net profit was 216.6 million yuan on the back of 1.5 billion yuan in sales.


Esthetics prices rights at 8.7% premium
KUALA LUMPUR: Esthetics International Group Bhd has priced its warrant-sweetened two-for-five rights issue of 52.8 million shares at 50 sen apiece, a 8.7% premium to its five-day volume weighted market price of 46 sen.

Entitlement dates for the rights that comes with a similar number of warrants, exercisable at 50 sen each, will be determined at a later date.


This article appeared in The Edge Financial Daily, November 17, 2011.



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