Can China shoe stocks remain at bargains

Februray 13, 2012

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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