FROM A LOW of 2.6 cents on 21 Dec 2015, Luzhou Bio-Chem Technology has shot up 77% to 4.6 cents last Friday.

This strong performance, in the face of a turbulent and falling market, is extraordinary.

We briefly checked out the Singapore-listed company and, while the stock may be in play among speculators, there is at least some fundamental reason for the market to respond favourably.

Luzhou montage1.16Luzhou Bio-Chem said it has benefited from domestic food & beverage producers switching to corn syrup products as a substitute for the more expensive cane sugar. Montage: Company
Luzhou appears to be enjoying a sharp business turnaround, 
reporting profitability in every quarter of 2015. Its 9M2015 net profit shot up 107.6% year-on-year to RMB20.4 million.

With 9M2015 revenue up 18.5% year-on-year at RMB1.9 billion, Luzhou is one of the largest producers of maltose-related products and other corn sweeteners in the PRC.

Its existing customers include Coca-Cola, Pepsico, Wahaha, Tsingtao Beer, and China Resources Snow Breweries.

Luzhou said it has benefited from favourable Chinese government policy, notably the restriction on importation of raw cane sugar in order to prop up domestic sugar producers. This has resulted in domestic food & beverage producers switching to corn syrup products as a substitute

Another positive: Raw corn prices have also been favourable in recent years due to ample supply from government stockpiles.

Nevertheless, Luzhou operates in an industry beset by stiff competition and a vulnerability to volatile raw material prices.

You know that from looking at Luzhou's 9M2015 gross margin of 10.1% and the net profit margin being ultra-thin at 1.1%, 

And its FY2014 and FY2013 were awash in red ink, with net losses of RMB340 m and RMB114 m, respectively. All that has hammered its stock price.

Its current valuation is not excessive, despite the sharp upturn in its stock price recently.

Its 2015 annualised earnings per share is 4.6 RMB cents, translating into 4.6 X PE (based on SGD4.6 cents stock price).

It currently trades at slightly above its net asset value per share of 20 RMB cents.

Bernard TohLuzhou Bio-Chem is a small-cap with a big-name shareholder who is also a long-time shareholder --- Bernard Toh Bee Yong, formerly the executive chairman and CEO of Unisteel Technology.

Mr Toh is a pre-IPO investor who has seen Luzhou's market cap crash -- an all-too familiar story with S-chips -- from S$90 million (based on its IPO price) in 2006 to S$28 million now, 10 years later.

Pre-IPO and post-IPO, he held 33.582 m shares of Luzhou.

He appears to have held his stake steadfastly through the years, except for 2009 when he sold 1.092 million shares, leaving him with 32.67 million shares. 

Then came a rights issue in Sept 2015, and he made a big move: He secured a tonne of rights shares.

is stake shot up from 8.27% to 17.59% after he subscribed for 71.8 million rights shares at 3 cents apiece, paying $2.15 million. 

With that, he effectively and sharply reduced the average cost of all his Luzhou shares but we reckon it is stil under water.

(Mr Toh stepped down as CEO from Unisteel in 2014 and was re-designated non-executive chairman. Listed on SGX in 2000, Unisteel was privatised by KKR in 2008 and subsequently acquired by SFS Group.)

Luzhou's 9M2015 results Powerpoint presentation is here.

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