Business Times - 20 Jul 2010

Hock Lock Siew
China Taisan: a hidden piece of treasure

By VEN SREENIVASAN

THOUGH the market recovery of the past year has lifted most stocks, many S-chips - stocks of China-based companies listed in Singapore - have underperformed, no thanks to a series of corporate scandals involving these companies.

The textile fibre sector, in particular, has been heavily punished by the market for the misdeeds at two companies - Fibrechem Technology and China Printing & Dyeing. In both cases, senior officials were accused of fleeing after defrauding shareholders.

One company which has been suffering this collective punishment in silence is China Taisan Technology Holdings, a maker of synthetic performance fabrics for high-end sports and casual garments. This is despite boasting strong earnings, a solid balance sheet and good management.

After posting earnings of 107 million yuan (S$21.7 million) for 2009, China Taisan came into the current year with a strong first-quarter profit of 56 million yuan. This earnings momentum was maintained in spite of a two-week factory shutdown during the Chinese New Year in February.

Company officials said that sequential quarterly growth remains intact. Analysts who cover the company believe that its earnings would double this year.

Before the Fibrechem fallout, the Chinese specialty textile fibre sector was well regarded by the market, resulting in valuations rocketing from under four times earnings in 2005 to some 15 times earnings by 2007.

Today, valuations are back down at 2005 levels.

Meanwhile, some analysts have given up coverage of the sector altogether, citing low barriers, poor customer traction and cut-throat competition. No doubt, S-chip scandals have also been a turn-off for many market players.

But two years have passed since Fibrechem. And a lot has happened since, not least the concerted attempts by industry players to boost corporate governance and market confidence.

Today, there is a disconnect between market perception and the sector's business reality.

Fabric is a critical part of the supply chain in the Chinese textile market, and the Chinese sportswear apparel market has been expanding annually by 20-30 per cent. Brands such as Li-Ning, Meters/Bonwe and 361 Degree - which use China Taisan's fibres - are already boosting their distribution outlets by 15-25 per cent each year. And leading players such as China Taisan, and more recently-listed China Goaxian, have weathered the 2008/09 slowdown and emerged stronger.

In fact, China Taisan's gross profit margin is now 25-30 per cent, while net profit margins are at 15-20 per cent.

But then, this is not your average textile player.

Set up in 1996 by Taiwanese businessman Lin Wen Chang (who doubles as both CEO and COO) and his partner Choi Cheung Kong (non-executive chairman and a Hong Kong resident), China Taisan invests heavily in technological innovation. Last year, it introduced three new products - bamboo charcoal fibre and negative ion fabric; 'icy-cooling' fabrics; and integrated breathable windbreaker fabric. It is currently in R&D collaboration with Wuhan Textile University to develop more leading edge products over the next five years.

Its innovations have attracted the attention of the 'big-boys' in the garment industry, and helped boost its orderbook to 247 million yuan by May 2010. Meanwhile, the company was sitting pretty on net cash of about 359 million yuan or four cents per share.

With management committed to distributing over a third of earnings to shareholders (it paid out 0.0345 yuan per share in dividend last year), China Taisan boasts a dividend policy which sets it apart from other China plays.

Investors are beginning to take notice.

London-based boutique fund Atlantis Investments recently bought a strategic stake of 3.13 per cent in the company at 19.5 cents per share. Meanwhile, UOB Research reckons that the stock is worth 36 cents, or 7.7 times projected 2010 earnings.

But with its shares still stuck at a huge discount to cohorts in Taiwan and Hong Kong (where price-earnings multiples are 10-15 times), there is incentive for its two major shareholders to seek better valuation through a dual-listing in either of those two markets.

China Taisan could be a gem in the textile space. But, for now, it remains a hidden piece of treasure.

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