CG Techologies is a recently listed company on 31 April 2005 at SG$0.31. Currently its share price is at SG$0.40 as I am writing. However fundamentals of the company definitely has improved significantly and proves irresitible at this low single PE ratio of 4.4XFY06 and 4XFY07. Not to be ignored is the fact that CG Tech is small in comparison to its other listed peers based on market capitialisation. A discount is expected.
As excerpted from their announcements:
CG Technologies Holdings Limited (CG Tech), a leading differentiated polyester product manufacturer, sells its functional PET (Poly Ethylene Terephthalate,(多乙烯对苯二酸盐) chips to the chemical fibre manufacturers and its functional yarn products to the textile manufacturers located in Fujian, Guangdong and Zhejiang Provinces in China. Production facilities are strategically located in Longyan City. The Group’s overall strategy is to consistently focus on research and development to expand the differentiated premium quality and functional product range to meet the fast moving textile industry in the PRC.
CG Tech existing product offerings are :
1) Akali Soluble PolyEthyalone Teraphthalate (PET) chips (April 2006)
2) High Shrinkage PET chips (July 2005)
3) Bright and Semi-dull PET chips (July 2005)
4) Dye Absorbing PET chips (August 2006)
5) Yarn (July 2005)
6) Combed Yarn (May 2005)
As part of its plan to complete its business model by vertical integration of the supply chain and move onto higher margin products, CG Tech moves to offer these new products in the foreseeable future that could be an earning catalyst from FY08 onwards.
New products
1) Polyester Short Fibre (PSF)~ 3Q07
PSF is a key upstream raw material used in CG's cotton yarn business which they currently purchase from suppliers. Due to their intention to expand from 7500 tonnes to 10,000 tonnnes. This equates to an approximate 33% increase in production. Production was slated to commence by 2Q07 but was dragged back a quarter due to this further increase in production volume.
2) Compact Combed Yarn. ~ 4Q07
What i gathered is that combed yarn is a high quality yarn with strength and added softness through the process of "combing" which removes the shortest fibres. Compact Combed Yarn uses a new spinning technique in addition to the combing to produce compact combed yarn which gives a higher gross margin.
Existing production capacity is 48,150 tonnes.By 4Q07, annual production would have increased by 35% to 49850 tonnes.
Take a look at this site for the lastest price trends in the textile industry: http://www.fibre2fashion.com
CG Tech competitors that are listed on SGX are
1) China Sky
2) FibreChem
3) Hongwei
1) China Sky Chemical Fibre ( current price SG$1.21)
China Sky aims to achieve an annual production of 88,000 tonnes. And they had recently completed a new facility to house their production of Air Textured and Drawn Textured yarn in 1H07.
They also began construction of facilities to produce high end Nylon Super Resilient Full Drawn (SR-FDY) and High Oriented Yarn (SR HDY)expected in 1H07.
China Sky possesses many technical capabilities which acts as technical barriers to entry. They are also the only manufacturer in China and second in the world capable of manufacturing these high end products. Which is clearly impressive. But one has to wonder how substainable is this technological edge they are enjoying now?
2) FibreChem ( current price at SG$1.86)
Recently announced a new contract with a distributor to supply 450,000 yards of microfibre synthetic leather every month starting from this month. (Dec 2006).
Their product offering includes differentiated nylon-polyester bicomponent fibre, core shealth fibre and intermediate non-woven fabric.
Other listed peers are :
1) Baoding Swan
2) Dandong Chemical Fibre
3) Guandong Kaiping Chunhui Co.
4) Jilin Chemical Fibre
5) Jiangsu Jianan
6) Liaoyuan Deheng
7) target=blank>Nanjing Chemical Fibre
8) Searrainbow Holdings
9) Shangdong Helon
10)Sinopec Yizheng Chemical Fibre
11)Xinjiang Chemical Fibre
CG Tech is obviously a small player in comparison based on market capital. CG Tech has a market cap of around 42.9 USD which is the smallest among the companies mentioned above. With peer China Sky Chemical Fibre almost 10 times as big than CG Tech based on market capital.
Management reiterated that they expect FY06 to rise by 50%. Since 9 months of contribution to net profits FY06 is 58.7%. Conservatively, I decreased 4Q contribution and conclude an EPS of 9.4 cents for FY06. I learnt the lesson from past experience to be especially conservative for the final 4Q performance and not to be misled by the past 3Q.
I did some bold adjustments (for obvious reasons) to my 3-stage DCF discount model using growth rate 20% for (1-5) years , 10% for (6-10) years and 5% (11-15) years with a terminal growth rate of 1% only. Coupled with a higher discount rate of 20% and margin of safety 30%. Assuming no debt and shares outstanding stays constant. I derived a fair value of $0.87 cents which means that CG Tech gives a terrific 117% upside potential.
Possible consolidation in the industry could make CG Tech an attractive proposition to acquire for organic growth by larger companies but this is just pure speculation for now.
Regards
Niversphere.
Please read the prospectus and perform your analysis before making any investment decision. The above does not constitute a recommendation to apply for this company. I will not be liable for any losses incurred by anyone who invests based solely on the above-mentioned information.