Market Gem: SINOTECH FIBRE

Core Business:
Based in Longkou City in Shandong Province, Sino Tech-fiber produces polyurethane (PU) and microfiber synthetic leather, these products are then sold to manufacturers and trading companies that produce fashion apparel, sports apparel and equipment, luggage and travel accessories, as well as upholstery furnishings for furniture. Take not that Sino Tech-fiber is the producer and supplier of these raw materials and not a manufacturer of the end products.
Sino Tech---Processed materials ---Manufacturing companies---Finished products---China’s consumers

Profit breakdown and sales location:
Microfiber Synthetic Leather: 40% of sales
PU Synthetic Leather: 60% of sales
92% of sales come from China
6% of sales come from India
2% from other countries

Risks involving the company:
Competitors, higher taxation, slow down in China consumers’ demand, frauds, failure of the PMP project and natural disasters like the recent earthquake that cause factories to shut down.

Comments: Ever since listed, their sales have been steadily increasing, almost 300million RMB every year. Net profit likewise also increases in tandem with sales. Operational cash flow remains healthy with the rate of receivables growth kept at minimal.

Comments: Due to the fact, the company has to plan for its future and sustain their competitiveness in the industry; A lower free cash flow (FCF) is seen. This was deal to more research and development cost. Recently in 2008, they spend a total of $600million RMB for the establishment of the new PMP production lines and expansion of current capacity. Profit margin remains very high and maintains at 36.8%-35% region.

Competitive advantage:
Their industry outlook:
Strengthen by environment and animal rights and Quality of life in China, Chinese consumers demand more of such high quality products. Under their annual report in 2007 they state that
“Coupled with rising affluence and increasing customer sophistication, more Chinese consumers are demanding higher quality synthetic leather products thus resulting in China importing more high quality synthetic leather products. This augers well for the PRC synthetic leather industry, which will undoubtedly, continue to develop and ride on the latest technologies to produce newer and higher quality synthetic leather products to match the increasing demand.”

Still unconvinced, I went to research more on the demand for synthetic fibre and found evidence as stated below.http://news.tootoo.com/Textile/Fiber_Yarn/20080928/160597.html
http://www.pcifibres.com/ (Look under synthetic fibre index)
http://www.atimes.com/atimes/China_Business/HE23Cb03.html

Unique Advantage:
Sino Tech-fiber is one of the designated uniform material production companies for the Naval Armament Research Institute the State Administration of Taxation and the State Administration for Industry and Commerce, The People’s Liberation Army (“PLA”), Chinese People’s Armed Police Force, the Ministry of Public Security and other uniformed groups, along with the Government’s Tax and Judiciary departments accounted for 14.4% of total revenue in FY2007.

Market Leadership:
First and only company that deals with PATTERN MOULDING PAPER, in addition to that probably one of the few companies that supply leather to the Chinese army. The People's liberation army is one of the world's largest military forces, with approximately 7,000,000 members
-With a wide customer base of over 120 customers
With that said , the company is not the largest producer of Synthetic Fibre in China. This fact does not deter me from investing, because the company’s stock is not considered a blue chip but that of a high growth stock. So I think its best to give this young company a chance to prove itself in the coming future in terms of climbing up the market leadership ladder.

Future Growth Drivers:
Development of new products:
Sino Techfibre Limited has crossed a significant milestone as it rolls out its Pattern Molding Paper (“PMP”) capabilities – it is the first and only Chinese company to have this unique capability. The Group’s initial PMP production capacity of 40 million meters will be doubled in FY2009 when our third and fourth lines are installed.

In line with our Group’s continual efforts to develop new cutting edge products, Sino Techfibre recently installed new machines to produce TPU – an ultra-thin film (ranging from 0.015mm to 0.03mm in thickness) which enhances the waterproofing and wind proofing properties of garments such as raincoats, winter wear, sports shoes, gloves, medical equipment and packaging materials.

Other potential:
The Group has benefited from the launch of PLA’s new uniforms on 1 August 2007 and will continue to enjoy orders for these new uniform materials as they are phased in, progressively for the next few years. In addition, the other uniformed groups such as Ministry of Public Security are due for a uniform change later this year (2008).

The company has recently appointed a local PMP distributor with extensive experience in Japan, Italy and UK-made products.

Analyst Coverage from CIMB written by Kenneth Ng CFA
kenneth.ng@cimb.com (His report on future growth)

PMP sales showed up, the next six-to-nine months will give clear signals whether
this is indeed the holy grail. Sino Techfibre had a nascent 1% of group revenue and
profit derived from its new Pattern Moulding Paper (PMP) product in 2Q. The new star
product recorded ASPs of Rmb17.2/m and gross margins of 42.2%, slightly below the
guidance of Rmb20/m and >50% gross margins. 2Q contributions are trial runs and it is
still early days yet for the product. We expect PMP to contribute about 10% of FY08
profits and 30% of FY09 profits. Management updated that its glossy–blend of PMP had
gotten good response from the market and it is 1) expanding its product range and 2)
doubling its PMP production capacity to 80k meters by FY09. In our opinion, the next
six to nine months will give clear signals on whether this new product would indeed be
the holy grail for Sino Techfibre. This remains the key driver for the stock.

Looking ahead, company intends to produce non-woven cloth as well. The other
noteworthy point is that Sino Techfibre intends to start another new product, non-woven
cloth. The company intends to take delivery of non-woven cloth machines in 4Q08 and
produce their own non-woven cloth in 2009. The non-woven fabric which it intends to
produce will be used for high-end PU leather. Currently, the company imports this raw
material from Korea. The expansion into non-woven cloth can help prop up margins of
their PU leather product as well as to aid collaboration with the PLA to jointly develop
products. This expansion adds to a list of new products it has planned for FY09-10.

Management matters:

Looking for more buying from management?
Lam Tin Tsoh and Li Wenheng are buying more at 0.71

Is the salary of the management, acceptable? Too high? As compare to the Net profit. (As a general measure it cannot be more then 10% of Net profit)
Net profit after tax =$S94 million

Director’s fees converted to $SG 888.2k

Thus 888,200/94,000,000*100%=0.18%

Are they giving employees too much stock options?
Nope

Is the firm counting expanding, applying more of RnD during tough times?
Yes

Debt analysis:
Conservative Debt:
Sinotech is able to pay off their long term debts within 2years, only provided they are able to maintain their current net profit of RMB 470,600,000

Short term debt analysis:
Problems: Clarification Announcement Relating To the Article "Who’s Cash Flow Pipeline Is Choked?" In The Straits Times on 14 October 2008

(What the company says)
Based on the latest financial results for the six months ended 30 June 2008 (“1H2008”), the Company maintained a financially sound position with a low gearing of 1.4%. Going forward, the Company do not foresee any liquidity problems arising from paying off the short-term obligations from current assets excluding inventories, given a healthy quick ratio of 3.49.

The net decrease in cash and cash equivalents amounting to RMB353.5 million in 1Q2008 is mainly due to amount of RMB430.9 million of cash paid to purchase property, plant and equipment. This capital expenditure was mainly supported by the Company’s internal funds.

As mentioned in the press release dated 14 August 2008, the Company has budgeted approximately RMB600 million for its expansion in order to stay on the forefront of the product curve by investing resources in higher technology production capabilities to improve gross margins and introduce new and higher value products. Such investments are made with the view to secure the Group’s competitiveness in the near future, instead of short-term growth. The Board envisages that this capital expenditure is sufficient to secure the Company’s growth for the next few years, and that there will not be any major capital expenditure in the foreseeable future. The management’s approach is to be prudent in the Group’s financial management.

(What I think)
Update* 2008, company undertook major capital expenditure of 600M Rmb, in doing raising current liabilities to 226million and lowering cash on hand 171million from 440million. Total Liabilities stands at 249.7million, prepayments and receivable need to come in to settle these liabilities, however there is a risk of not receiving these assets in time and possible reduction to bad debts, in light of these, I still deem Sino tech acceptable as higher net profit is to be expected in the long run, and I believe they are able to get back all their receivables and be able to repay their current liabilities on time. Lastly, I would expect the company to maintain an average among capital expenditure spent in the coming years.


ROE data:
2006' ROE:27%

2007'ROE 28%

Comments: Love their high ROE figures.

Any ROE above 15% is exceptional.

EPS growth Model:

Results from EPS growth model: Worth at least $0.80 per share if company is able to maintain an EPS of 0.10 per year for the next ten years.
Take note, that I change the Net profit to Sing Dollars in order to be accurate in my EPS figures.

Other Important Ratios:
At the current price of $0.14 as of 29Oct 2008

PBV per share: 0.41 times
(Remember, anything below 1 time PV is considered cheap)
Historical PE: 8-9 times
PE: 1.38 times

NAV per share: $0.35 based on annual report 2007
Nav per share is set to increase , as more euiqment is bought and more Net profit is expected to be yield by the company.

Last words:
Having read through many analyst reports and research information, I find Sino Tech Fibre at a price of 0.14 is ridiculously low. This young company’s share price has indeed been unjustifiably beaten to such a level; it’s as if some one took a Sledge hammer and wack a young innocent child on the head even thought the child did nothing wrong. I say this because; the market faults the company for spending too much on expanding and securing its competitive future in the fibre industry in China even though most of the funding comes from the company itself and the market also disregard its shares simply because it’s an S-share.
With that said, there is indeed fundamental value in this young company, which is definitely not worth 0.14 per share, given its ability to amass a total of $400million RMB within a few years, has good exposure to the Chinese government market, strong margins and good cash flows.
Having vested interest in it, I shall say no more.

However Sino Tech’s new venture into PMP and cotton industry has to works out, having spent soo much capital expenditure on it. Should everything turn out fine, even without the cotton venture in place, the intrinsic value will be much MUCH more higher then $0.80. Suffice to say this is a gem given its price at $0.14; I suggest buying it before it becomes expensive again!