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Sunday, 13 April 2008

China Zaino International Ltd

China Zaino International Ltd claims to be the No.1 backpack company in China with the largest market share of 35.8% in terms of revenue for 2006. The Company designs, develops, manufactures and sells backpacks and luggages under the "DAPAI" brand.

The IPO is managed by Sterling Coleman, underwritten by UOB Kay Hian and DBS. It is issuing 145m shares at S$0.60 each and the offer will close on April 16 at 12pm. The revenue growth figures are pretty impressive with FY2006 revenue at RMB 930 million and net profit of RMB 193 million. Based on the 9 months results for 2007, its revenue was RMB 1.04 billion and net profit is RMB 211 million (growth of more than 50%). It will be pretty difficult to get from the public tranche as 143m shares were for private placement and only 2m shares were for public offering. The Company also intends to distribute >20% of its net profit for the financial years ending 2008 and 2009. This is a decent market cap company at S$567 million post its IPO.

Financial Projections:

Assuming revenue in 2007 is RMB 1.4 billion and net profit is RMB 281 million. The EPS will be around RMB 29.7 cents or Singapore 5.95 cents. Based on IPO price of 60 cents, it is priced at 10x FY 2007 PE.

Assuming EPS for FY 2008 grow by another 30%, the EPS will be Singapore 7.735 cents. Based on the current depressed valuation matrix for S-Chips at 8-10x PE, the fair value of China Zaino will be between 62 cents and 77 cents. Based on the IPO price of 60 cents, it is very close to the lower end of the fair value range. The upside from this Company will come only if there is an upward re-rating of S-Chips in Singapore. Due to the uncertainty in current investment climate, investors will be better off not applying for this IPO as the risk reward is current not favourable.

Saturday, 12 April 2008

China Eratat Sports Fashion Limited

China Eratat Sports Fashion Limited is a "leading" branded sportswear enterprise based in Fujian Province, PRC. It is engaged in the design, manufacture and distribution of sports footwear and sports apparel under the "ERATA" brand. As you can see, the Company has "spared no efforts" in trying to convince the public that it is a "leading" brand. The IPO will close on 15 April 2008.

The Company is issuing 163m shares where 124.88 m shares are new shares and the rest are the pre-ipo vendor shareholders that are cashing out. The genuine pre-ipo investors' cost is around 22.5 cents (versus the IPO price of 30 cents).

The Company generated sales of RMB 286.4m and net profit of RMB40.6m for the FY2007. FY 2007 being 31 March 2007. In other words, the Company had just ended FY2008. The EPS based on post invitation share capital for FY2007 is RMB 9.79 cents or Singapore 1.94 cents. The 1H2008 grew by around 25% in terms of revenue and net profit compared to 1H2007. Assume this growth rate for the full year, FY2008 revenue will be around RMB 358m and net profit will be around RMB 50.8m. The EPS will be around RMB 12.23 cents or Singapore 2.43 cents. Based on the IPO price of 30 cents, this means that China Eratat is valued at 12.3x FY2008 EPS.

Peer Comparison

Revenue for China Hongxing is around RMB 2.87 billion and net profit of RMB 525m for FY2008 (31 Dec 2008). EPS is around 3.6 cents based on DBS research report. Based on today's share price of 61 cents, that imply China Hongxing is valued at around 16.9x PE. However, a premium is warranted as China Hongxing is such a giant compared to China Eratat.

China Sports's estimated revenue for 2008 will be RMB 1.659 billion and net profit will be RMB 222 million. Again this is a much bigger company than China Eratat. The EPS for FY2008 is estimated around 12.8 cents (source: DBS Securities) and at 91 cents today, it is valued at 7.1x PE.


With a bigger and better rival trading at single digit PE of 7.1x, there is no reason for China Eratat to be priced at 12.3x PE and with all pre-ipo vendors cashing out at 33.3% return over their cost, investors would be better off buying the shares of China Sports. China Sports offer better over both China Hongxing and China Eratat. My advice is to avoid China Eratat on valuation basis and dont be distracted by the big IPO booths or Michelle Chia (who appeared at the IPO booths).

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