Key takeaways from Fuxing 1-1 meeting with the CFO

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Key takeaways from Fuxing 1-1 meeting with the CFO

With reference to my write-up on Fuxing China, 7 Nov 10 http://ernest15percent.com/index.php/2010/11/08/fuxing-backed-by-014-of-net-cas/ , I have mentioned that I will check with their management to understand more about the company and industry before deciding whether to put in my recommended list. Subsequent to its 3QFY10 results, I dropped an email to Mr Koh Choon Kong (“CK”), CFO on some queries on Fuxing. He promptly replied and took the initiative to come down with Ms Jennie Liu, Investor Relations Manager, to CIMB office to discuss with me on an 1-1 basis.
Below are the key takeaways from the meeting.
More details on the targeted acquisitions…
According to 3QFY10 press release, management is seriously considering three companies providing electroplating services, colour dying services and dyed yarn supplying business. CK emphasized that these companies are not loss making companies; they are actually making profits and would contribute significantly to Fuxing’s bottomline immediately upon acquisition.
If all three acquisitions materialize, these companies should provide a significant boost to Fuxing’s net profit in 2011. Consequently, it should attract more interest from the investment community.
“Contributions from the three target companies would be
significant to Fuxing’s bottomline, if all three materialized,”
Choon Kong, CFA, CPA Singapore, Fuxing’s CFO
Super-durable zipper (“SDZ”) – progressive contribution in 2011 and more meaningful contribution in 2012
Fuxing reported an insignificant contribution from SDZ for the 9MFY10 results. It is likely SDZ should contribute progressively in 2011 but a more conservative estimate would be that they are likely to have meaningful contribution in 2012.
Shanghai and Qingdao plant expected to contribute positively in 2011.
For the 9MFY10, Shanghai plant saw RMB5m of operating loss on the back of RMB7m revenue for 9MFY10. Qingdao plant reported an operating loss of less than RMB1m on the back RMB9m revenue. Management is confident that the plants should have positive contribution in 2011.
Tax rate – Difference to be rebated in 4QFY10 or 1QFY11
Fuxing obtains the New and High Technology Enterprise which allows its subsidiary to be taxed at a preferential rate of 15% for the next three years. However, according to the 9MFY10 results, Fuxing is still taxed at the corporate tax rate of 25%. I understand from management that they will put in a request at the end of the year to the local tax bureau in order to get the rebate (i.e. simplistically speaking, it’s the difference between the 25% and 15%). Depending on when the local tax bureau approves the request, the tax rebate may be reflected in 4QFY10 or 1QFY11 statement.
Limited order books visibility
Typically, Fuxing has limited order books visibility as firstly, clients typically want a short delivery time and they would not order very far in advance. Secondly, Fuxing also does not want to commit to orders which are a few months away as this would increase their exposure to raw material costs which constitute 74% of cost of goods sold for 3QFY10. Examples of their raw materials are zinc, thread, drawn textured yarn and copper.  
Labour shortage – a challenge which they foresee will persist in the near term
Management continues to see the availability of labour as a challenge in the near term. Labour costs are likely to remain high due to the shortage of labour. Besides competitive salaries, Fuxing would be investing RMB25m for the construction of two blocks of workers’ dormitory so as to improve their working environment.
Increasingly on funds radar
According to CK, some Finnish and Poland funds have visited Fuxing and they like the company. Besides, management is extremely proactive in engaging the investment community which should bode well for Fuxing in the medium term.
Conclusion: Potential re-rating in the months ahead
With reference to Table 1 below, Fuxing trades at an approximate 60% discount to its competitor Fujian SBS which is trading at 23.8x FY10F PE. With Fuxing’s strong earnings growth potential in 2011 (from acquisitions) and 2012 (SDZ), it is likely that it will be re-rated in the months ahead.
Table 1: Comparison of Fuxing vis-à-vis its peers
Ticker
Short Name
Lcl Cur
Last Px
Analyst TP
Adj Mkt Cap (S$m)
FY09 PE
FY10F PE
ROE (%)
FUXC SP Equity
Fuxing China Grp
SGD
0.165
0.270
144.2
12.0
9.1
2.9
CMZ SP Equity
Cmz Holdings Ltd
SGD
0.140
NA
42.7
5.6
NA
19.5
002098 CH Equity
Fujian Sbs Zip-A
CNY
13.73
NA
428.2
45.4
23.8
5.8
002003 CH Equity
Zhejiang Weixi-A
CNY
28.17
NA
1,118.5
24.5
23.6
17.9
8932 TT Equity
Max Zipper Co L
TWD
9.90
NA
20.8
33.0
NA
3.6
Average ex Fuxing
27.1
23.7

Source: Bloomberg (as of 3 Dec 10)

This is an amended version of the write-up which I sent to my clients this morning.
Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied.  In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

17 thoughts on “Key takeaways from Fuxing 1-1 meeting with the CFO”

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