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TEXTILE S-CHIPS: Bargain prices @ PE of 4X |
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Tuesday, 02 September 2008
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 Source: DBS Vickers
 Analysts visited Fibrechem recently.
IN A raging bull market, it’s unheard of for stocks to trade at 4X current-year earnings, sporting return on equity at the 30%-level and net profit margin at the 30%-level too.
Such stocks would have been snapped up and their prices pushed to double or even triple levels.
In the current bear market, they exist in quite abundance. That is why DBS Vickers this morning issued a report saying it sees value emerging in SGX-listed textile players, which are trading at an average PE of c.4x FY08 earnings.
The valuation of the four larger SGX-listed textile stocks, China Sky, Fibrechem, Li Heng and Sino Techfibre have plunged from 8x-16x PE as of early 2008 to the current 4x PE on FY08 earnings.
“The de-rating of PE multiple was due to earnings downgrade as textile players face pressure from high oil prices, strengthened Chinese Renminbi, forced operations shutdown due to Olympic in August, and concerns over slowing domestic demand in China.”
Its key points:
 Analysts also visited Li Heng recently.
Positive changes to operating environment of Chinese textile industry.
We have recently seen positive changes to the textile industry which may lift share prices of textile players from its trough in the near term:
(1) Chinese government stepped in to help export-oriented textile industry through the raising of export rebates;
(2) Possible growth stimulus package may boost domestic consumption;
(3) While oil price is likely set to rebound due to the current hurricane season in Gulf of Mexico,the retreat of oil prices from the peak of US$145/barrel to <US$120/barrel in 3Q should ease cost concern in the near term given the 6 months time lag．
Risk-reward ratio getting attractive.
In fact, these textile companies are generally financially sound. They are in net cash position and are still garnering lucrative net margin of 26%-30%, rewarding investors with a decent ROE of >20%. As high-end textile manufacturers are relatively asset-heavy given their high capex investment, current low historic P/NTA of c. 1x also indicates opportunities to pick up shares in these companies at bargain prices.
China Sky stands out among the four with historic P/NTA of <1x and FY08 net cash of S$0.40 per share. We upgrade China Sky to BUY given that the current share price represents >40% upside to our fair value of S$0.96.
Recent story: LI HENG: Visit to leading China nylon producer
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