HU AN CABLE operates in an industry in China with excellent revenue growth prospects, but the leading cable manufacturer suffered a fall in profit margin last year.
The good news is, this is set to change when its new sprawling plant starts producing ultra-high voltage cables in 3Q this year.
The company, which is among the top 10 largest integrated cable and wire manufacturers in China, had grown its FY2011 revenues by 36.2% to RMB3.3 billion.
Its two main business segments – cables & wires as well as copper rods - experienced margin erosion.
The gross profit margin of its cable & wire segment dipped by 1.9 percentage points to 17.6% due to less revenue contribution from sales of special cables (these are fire, water and chemical resistant, and carry higher margin).
The gross profit margin of copper rods also dropped as copper prices had increased by 14.9% to Rmb 67,850 per ton during the year.
”Though margins for copper rods are relatively thin, the segment improves the Group’s gross profits and operational cash flow,” said Hu An Cable’s CFO, Sharon Xue, at an investor presentation at CIMB-GK Securities on Tuesday.
This is because copper rods inventory turn around in one to two weeks, compared to three to four months for cables & wires.
According to the CFO, the company’s margins are set to improve as its new factory kicks into full operations.
That is because it will have ample capacity to produce high-end cables, which fetch order sizes of 10 to 30 times for the same point-to-point electrical power connection.
As China urbanizes, household use of electrical appliances is expected to increase by a quantum leap. This means that construction projects in China are expected to switch to higher voltage cables to support heavier electricity usage burden.
Secondly, the government's initiative to replace aerial cables with underground cables will also increase demand for high-end cables.
Currently, only 40% of China's cables are laid underground. The mandate is to increase this to 60% by 2020.
At a total investment cost of Rmb 430 million, and sitting on 190,000 sq m of land, Hu An Cable's new factory start operations in 3 phases (see table above). “The new factory started contributing a small amount to Group revenues in 4Q2011,” said Ms Xue.
From a current capacity of 3,000 km of mid voltage power cables (6Kv to 35Kv), the new facilities have already brought capacity up to 4,800 km for mid voltage power cables.
Production capacity for another 360 km of high voltage power cables (110Kv to 220Kv) was also added in 4Q2011.
By 3Q2012, the factory will be able to produce 600 km of ultra-high voltage power cables (220Kv to 500Kv) a year, and these belong to the high-end category.
In the meantime, it now has chalked up a three-year track record (FY09, FY10 and FY11) of paying dividends since its listing on SGX in Feb 2010.
The company declared a final dividend of SGD0.7 cents per share for FY2011, translating into a dividend yield of 4.6% based on its Tuesday closing price of 16.6 cents.
CIMB analyst Renfred Tay has a buy call on the stock and a target price of S$0.38 based on 6.0x expected earnings for 2013.
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