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.

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

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.

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.

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.

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.  

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.

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.

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)

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