C&G Industrial Holdings Limited (CG Tech) manufactures and distributes key components for the textile industry in the People’s Republic of China.
Its products include polyethylene terephthalate (PET) chips, yarn products and polyester short fiber (PSF). Its PET chips are fiber-grade PET chips.
As of December 31, 2006, CG Tech manufactures alkali-soluble PET chips, high-shrinkage PET chips, dye-absorbing PET chips, yarn products and combed yarn. The construction of production facilities for combed yarn, with an annual capacity of 6,000 tons was completed in April 2006. Its yarn products include pure polyester spun yarn, cotton and polyester blended yarn, viscose yarn, flame-retardant yarn and breathable yarn. During the year ended December 31, 2006, the Company’s yarn production amounted to 9,750 tons.
The Company’s major customers are mainly chemical fiber and textile manufacturers based in the Fujian, Guandong and Zhejiang provinces in the People Republic of China.
Current Market Situation
C&G is the company i don’t understand. You have one of the longest topics in Channelnewsasia forum and the stock price doesnt move up from 60ct – 70ct range. You have a very good looking balance sheet and your stock price doesn’t move.
And you have such good margins and cashflow generation and the stock price just dives like the rest of the china listed singapore stocks.
Readers here would know that i am vested in Hongwei Tech, which does polyester fibers to yarns. Hongwei’s price is holding up more than C&G (touch wood!) and C&G, since result announce and rose back to 36 cents fell back to 26.5 cts.
You would expect them to get frag by the market from the looks of that share price. From the looks of it, it is better than that.
- Revenue increased by 23.9%
- Increased in turnover attributed to new production facility that increase capacity by 53% to 11 tonnes
- New yarn production facility that increase yarn producing capabilities
- Net profit margins increase from 27.5% to 28.5%
- Selling and distribution cost increase by 10% in 4Q and by 37% in FY07
- Administrative expenses increased by 11% in 4Q and 20% in FY07
- Income tax expense was higher, more so due to the expiry of tax relief. Taxes was 100% higher.
The results look good. Growth Momentum has been maintained and i am surprised Net Profit Margins is actually getting better. This is the few companies that i see that is able to expand this. We will look to this results every quarter. Textile and textile related industry is known for its bad economics as was mentioned by Buffett some time ago.
High margins and low barriers to entry(we will see this later) will lead to new entrants and competition which would eventually drive this down. How, they sustain this is also an eye opener for me.
Total assets increased by 40% since FY 06
- Stable levels of inventories and receivables
- Cash holdings, after a placement of 220mil RMB, represents almost 50% of assets
- That is 75% of current market cap at 27 cts
- Interest bearing debt, as a percentage of assets is less from 25% to 14% of assets
The balance sheet looks very sound, This is prevalent in most of the companies that i see nowadays. As a % of assets, C&G’s fixed assets is much less than its cash holdings, at 284 mil, it is not difficult for a new entrant to come in and compete with C&G. So what gives C&G its advantage to maintain that margin?
This is where C&G really excels in.
With all the cost concerns facing manufacturing companies, C&G’s gross margins increased from 23% to 27%.
Return on invested capital increased from 46% to 52%. I believe if they have a chance to invest more of those cash, their cashflow will be astounding. Of course, if the market is too small for them to redeploy those cash, then it probably is abit disappointing as a share holder.
In terms of Operating Cashflow yield, this is the strongest cashflow yield as a % of market cap at 25%! thats up from 18.80%. On my excel sheet, only Courage Marine managed to measure up to it, and courage is a cyclical shipping play that 2007 was good for it!
AT 27 cts, the Price to book value is valued at 0.95 times. Thus some of you that use PTB might be interested in this.
The thing about C&G, compared to hongwei and likes is, they are definately generating cashflow for the past few years based on the financial statements, however they don’t increase their dividend payout. It as at 19 mil in 2006, it is at 19 mil in 2007. That is about a 10% payout ratio.
Perhaps they are being cautious, perhaps they are stingy, i have no idea on this.
However, the thing that caught my eye was this: Having a PTB of 0.95 times is only good if the book value is valuable. C&G’s isn’t shopping malls or office buildings at prime places, however, 54% of assets is cash, and any way you look at it, you will have the use of it.
The Market Cap of C&G is RMB730 million. Minus off RMB554 million worth of cash and add 147 million of interest bearing debt. The result, which is the enterprise value is RMB 323 million.
The assets currently, produced 137 mil in operating cashflow after tax in 2006 and 188 mil in 2007. Thats about 2.35 times and 1.7 times respectively of enterprise value!
What the directors think going foward
The Group has completed the construction of a new plant for the production of compact combed yarn. The Group plans to commence production in March 2008. The new factory will have an annual production capacity of approximately 7,000 tons for compact combed yarn. The establishment of a compact combed yarn production facility is a natural progression of the current combed yarn production facility, which has commenced production in May 2006. Our annual capacity for combed yarn is approximately 6,000 tonnes. Since May 2006, the combed yarn products have made good contribution to our Group’s turnover and
gross profit to date.
Our Directors believe that the rising affluence of the PRC population will spur demand for high quality textile products, which will increase the demand for raw materials required for the production of these products.Combed yarn and compact combed yarn are examples of such raw materials, capable of producing textiles of finer qualities. Combed yarn and compact combed yarn are strong, fine and smooth yarn which are used to produce high quality textiles which are mainly used in garments of finer quality.
Based on our industry knowledge, the domestic supply of compact combed yarn products is insufficient to meet domestic demand, as manufacturing of compact combed yarn products requires special technical knowledge. The successful commencement of production for combed yarn products has equipped the Group with the necessary technical know-how to enter into the production of compact combed yarn products.
The expansion of the production facilities for compact combed yarn products with higher margin than our existing combed yarn products is part of our Group’s growth strategy of focusing on higher margin differentiated functional products with strong cash flows that are able to continuously enhance the overall profitability of the Group and shareholder returns.
The Group has also begun the construction of a new plant for the manufacturing of industrial bi-component fibre. The new industrial bi-component fibre was invented by Chisso Japan in the 90’s, as a critical raw material for environmentally-friendly manufacturing of adhesive-bonded cloth. Adhesive-bonded cloth is widely used in healthcare and personal care products. SARS, Avian Flu, Foot and Mouth disease have spurred rapid demand on disposable adhesive-bonded cloth, which is projected to grow at 8-10% per annum globally. Besides healthcare and personal care products, the new industrial bi-component fibre can also be used as a critical raw material for the manufacturing of non-adhesive synthetic cotton, which are widely used in textile apparels, bedding and home appliance, with its distinctive environmental benefit of zero formaldehyde emission. Moving forward, the Group will focus on product safety and environmental-friendliness, given the increasing importance modern consumers place on these factors. A prime example will be the new industrial bi-component fibre. The plant will take about 18 months to build, and the new industrial bi-component fibre is expected to contribute to the Group’s financial performance by 1Q09 with its annual production capacity of 20,000 tonnes.
PTA, MEG, PEG, PSF and SIP, the main raw materials used in the production of our products, are all petrochemical products. Any fluctuations in global crude oil prices, a global commodity, have an indirect impact on the prices of our main raw materials. However, to date we have been able to pass on such increases in raw material prices to our customers as demand for our differentiated functional products has consistently outstripped the supply.
I think this is a valuable company. However, liek Hongwei, this ain’t your inflation hedge. Its those company that is fighting for its margins from competitors by always moving to higher margin market segment that have lower barriers to entry.
For those who find this attractive, do your homework well because if you feel oil prices is going to be sustainable this company would be facing difficult challenges. However, in the textile supply chain, if you have many buyers and few suppliers, you will be in a good situation where u can pass the cost to buyers. This is easier if your product offering is niche, differentiated or plain high tech and secretive.
CG Tech last i known, are few to provide PET chips in China, however, their customers can always look to japanese providers to double teamed C&G tech.
If the price falls to 21cts, that would be a good price since that is the value of C&G’s cash holdings.