Monday, 4 August 2008

Zhongguo Pengjie Fabrics Limited

Zhongguo Pengjie Fabrics Limited is offering 88.8m new shares (nice no.) in its initial public offer that will close on 7 Aug 2008 (12pm) of which 2m shares are for public and the rest via private placement. (Finally we see a company that is not selling vendor shares).

The Company did not bother to set up an IPO booth at Raffles Place so no photograph of it this time. The Company specialise in the manufacture and production of yarns and fabrics and its products are sold mainly in PRC to apparels manufacturer. (Not another yarns and fabrics company?!). Investors may want to take note that the IPO is being advised by Omega Capital Limited which was recently barred by SGX from handling IPOs until it can get its act together. This IPO must be one of the remaining few IPOs managed by them.

The IPO is priced at 23 cents per share and is priced at 6.27x FY2007 PE. The market cap post-ipo is S$81.4 million. Pre-IPO investors got in at 19.1 cents and were not allowed to sell any vendor shares, so i think the pre-ipo investors must have gotten in during the "peak cycle" in July last year. The Manager's asset management firm is also a pre-ipo investor.

The sales and net profit for FY2007 is RMB 486m and RM67.2m respectively. Assuming net profit grow by 20% into FY2008, the net profit will be RM80.64m. Based on Post-IPO shares of 353.8m shares, the EPS is RMB 22.8 cents or Singapore 4.56 cents. At the IPO price of 23 cents, it is priced at 5x PE.

The peers listed on SGX includes C&G Industrial, China Sky and Li Heng. C&G just announced a poor set of results and the price gapped down 25% today. It is trading at 2.5x rolling PE and below its NAV right now. China Sky is trading at 5.13x rolling PE with S$680m market cap. Li Heng is trading at single digit 6x historical PE and is a billion dollar company. With valuations so low for bigger and more established company, Zhongguo Pengjie is just one of the many small fabrics SMEs in China. Investors who like this sector will be better off investing in China Sky and Li Heng instead. C&G slower-than-expected growth for Q1 might be an indication of slow-down and consolidation in this sector. Give this counter a miss.

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