Daiwa has buy call on China Taisan, price target 32 cents reflects market leadership.

DAIWA SECURITIES has raised its target price for China Taisan to 32 cents after the leading PRC producer of knitted performance polyester doubled its 1H 08 top and bottom line.

The Japanese investment bank revised its earnings forecast upward by 3%-7% yesterday, citing a more positive outlook.

China Taisan’s 1H08 sales grew 92% y-o-y to reach Rmb 606.2 million while net earnings grew 108% to Rmb 134.9 million.

Second-half earnings are expected to better than the first half, as sales seasonally peak during the fourth quarter, that is, half a year ahead of the summer sporting season.
CEO Lin Wenchang

Most of China Taisan’s fabrics is used to make sporting apparel for the domestic market.  Consumer spending remains strong, as indicated by the 23% yoy increase in China’s retail sales during Jul 2008.

Order book as at 31 Jul 2008 was at Rmb 245.1 million.  The management expects to deliver these orders within 3 months.

On the cards are at least two new fabric types.  One of them is a substitute product for Dupont’s Lycra, which adds spandex to polyester.

”The Lycra substitute is expected to sell at 10% to 15% higher than other performance polyester fabric”, said CEO Lin Wenchang.

No interim dividend was declared but the management said that FY08’s final dividend payout would be 30% or more of net profits.

Based on Daiwa’s FY08 earnings forecast of Rmb 292.4 million and the stock’s closing price of 20 cents today, this works out to a yield of at least 9%.

10,642 tons sold in 1H08 generated Rmb 606 million.

Sales focus on high-margin products while selling prices hike

1H08 tonnage sales of performance fabrics, which enjoyed gross margins in excess of 30%, grew 78%.

In comparison, tonnage sales of normal fabrics and fabric processing (with lower gross margins of 20%-plus) fell 28% and 5%, respectively.

Production of normal fabrics ceased during 2Q08.

”The normal fabric segment will be hived off,” said Mr Lin, who wants to allocate the company’s facilities to more lucrative use.

Weighted average selling prices grew 38% yoy as selling prices increased across all 3 segments.  Fabric processing fees charged showed the most improvement, and was up 23%.

Given that China Taisan’s is one of the few Chinese makers of top quality multi-functional fabric for sporting apparel, and has a strong earnings outlook, Daiwa’s six-month target price was based on 5X FY08 PE, a premium to the sector average of 3.8X.

Multi-functional Fabric MakersStock PriceMarket CapSalesFY07 PEFY08 Div Yield ForecastGross Margin
CHINA TAISAN20 cts$185.6m$166.6m3.89.5% (Daiwa)31.3%
FORELAND FABRICTECH18.5 cts$81.5m$86.3m3.77.6% (OCBC)38.4%

Related stories:

30 Jun 2008CHINA TAISAN: Gaining foothold in sports apparel industry
18 Jun 2008CHINA TAISAN: Synthetic fabric maker's 1Q08 earnings up 3-fold

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