HU AN CABLE: Investors check out China's largest cable factory

L-R: OSK-DMG sell-side analyst Goh Han Peng, The Edge reporter Frankie Ho, World Precision Machinery CFO Samuel Ng, Shanghai China Best buy-side analyst Gang Weiwen, CIMB-GK sell-side analyst Renfred Tay and other investors from Singapore checked out Hu An Cable's ultra-high voltage cable & wire manufacturing facility under construction recently. The new product line is expected to improve the Group's margins.

Photos by Sim Kih and El Lee

"We came up with a dual-brand strategy to double the orders that SOEs allocate to the Group," said CEO Dai Zhixiang

HU AN CABLE, one of China’s largest cable and wire manufacturers, is building the country’s largest and most powerful cable manufacturing facility, spanning land equivalent to 15 football fields.

NextInsight travelled with a group of analysts and investors recently to check out the final stages of the construction of its 80,000 square-meter factory in Yixing, China’s hub for cable and wire manufacturing.

A striking feature is a tower exceeding 120 meters in height, which is about as tall as a Singapore skyscraper such as One Raffles Quay, which boasts 29 storeys.

The Hu An factory tower is for the manufacture of top-quality Ultra-High Voltage (UHV) power cables.

The company, which is Singapore-listed, is installing two European production lines for UHV power cables with a design capacity of 600 km per annum.

The management expects the new facilities to be operational by 3Q2012 and the UHV power cables to generate relatively higher margins.

Sharon Xue, CFO.

Products manufactured there will be marketed under a separate operating subsidiary with a new brand name, "Shen Huan Cable".

Hu An Cable's customers include state-owned companies which have the policy of allocating equal order sizes to each qualified bidder and there are 10 such players in the cable and wire market.

Setting up Shen Huan Cable for the new UHV product range effectively allows the Group to submit a second bid under a different qualified identity and secure twice the order value.

Hu An Cable, which currently has an annual production capacity for 5,160 km of mid to high-end power cables, has been amply covered in NextInsight articles (see links to recent ones below). Here, we supplement the coverage with photos of the operations and people.

What analysts say after the plant visit

OCBC analyst Sarah Ong

>> "At 17 cents, Hu An Cable is trading at an attractive valuation of 3.1X FY12 PE and offering a dividend yield of about 4.6%.  In contrast, its China and Taiwan listed peers are trading at an average PE of 22.8X and offering a dividend yield of about 1.0%." - Sarah Ong, OCBC Investment Research.

>> "I don't see fluctuations in cost of copper as a key risk because Hu An Cable has a cost-plus pricing mechanism.  As long as the company is able to execute its capacity expansion plans, earnings will grow." -- Darrien Ong, assistant vice president at private equity fund Seavi Venture, which has a 4.22% share stake in Hu An Cable.

>> "We also observed that the production of cables was not as labour intensive as most of us would think. Rising wages are less of a risk as Hu An Cable increases the extent of its automation....What we have seen ties in with what management has been guiding. Current estimates remain intact with unchanged target price of S$0.38 based on 6.0x CY13 EPS. We believe Hu An Cable is still very cheap and recommend value investors to continue accumulating." - Renfred Tay, CIMB

A Finnish engineer from the equipment supplier tests the installation of cable extrusion equipment from Maillefer at Hu An Cable's new workshop.  Maillefer is a world leading cable equipment solutions provider in halogen-free flame-retardant insulation and jacketing based in Finland and Switzerland.

L-R: Dai Zhiyun (Assistant general manager at key operating subsidiary, Shen Huan Cable) and Yi Hong (chief financial officer for PRC operations) showed Singapore investors and analysts around the factory. He can speak German and is the CEO's relative, and has 10 years of education and work experience in cables and wires in Germany. He is responsible for liaison with the company's European equipment suppliers.

One installation of aerial cables can stretch as far as 2km. To improve the efficiency of power transmission, there should be as few connectors as possible. That's why cables have to be processed on a long facility.

New connector products to be launched. Lower right: Extensive product certification is required for supplying to State-Owned Enterprises, and is a key barrier to entry in the industry.

The Singapore investors and analysts at a Q&A session with CEO Dai Zhixiang, CFO Sharon Xue and the local management based in Yixing, PRC.

Related stories:  HU AN CABLE: High Voltage Cables To Help Improve Margins

HU AN is 'unjustifiably undervalued', SIA gets 'neutral' rating