HERE’S A tale of two companies which I picked up from a conversation with a company chairman in Yixing, about 3 hours’ drive from Shanghai.
The company chairman, Dai Zhi Xiang, met us on an analyst’ visit Thursday-Saturday to his company, Hu An Cable, which listed on the Singapore Exchange in February this year.
His peer in the business of manufacturing cable and wire, an industry for which Yixing is China’s hub, is Jiangsu Zhong Chao Cable (stock code: 002471), which listed in Shenzhen just recently on Sept 10.
Now, Hu An Cable is by far the bigger company. It had earnings of about RMB134 million last year, compared to RMB50 million by Zhong Chao Cable.
Despite its bigger earnings power, Hu An Cable currently fetches a PE of 7X in Singapore while its peer - the second cable manufacturer from Yixing to be listed anywhere - enjoys a vastly more lofty 70X in Shenzhen.
No matter.
Hu An Cable is now turning to the Taiwan market to raise funds, and has obtained two out of three levels of approval for a listing of its TDRs.
Presumably, Hu An Cable’s shares can be sold at a higher price than the current 41.5 cents traded on the Singapore Exchange.
The sale price, however, would not be anywhere near 70X its earnings, which is absurd valuation in the first place.
Mr Dai is undoubtedly confident that Taiwanese investors will appreciate better his company’s fundamentals.
After all, the Taiwanese market has accorded a number of similar Taiwanese companies listed in Taiwan with PE valuations which are a few multiples of Hu An Cable’s 7X.
In contrast, Hu An Cable does not have any peer listed in Singapore except for the low-key homegrown Tai Sin Electric which has a trailing PE of 12.7
All is not lost on the Singapore front yet.
If things pan out the way it has for Singapore-listed companies such as Yangzijiang, Super Group and United Envirotech that has taken the TDR route to raise funds, Mr Dai could well see his stock price in Singapore rise ahead of the TDR listing and post-listing.
What Hu An Cable does
It might seem strange that just months after its February listing in Singapore, Hu An Cable is now raising funds via the issue of 75 million new shares for a TDR listing.
A reason for that, as I surmised, is that the cable and wire industry is, to begin with, competitive: there are 4,000 such manufacturers in China.
To get to the top of the pile, a company needs capital to move up the value chain to produce higher-margin and high-technology products, such as cables used in power transmission networks.
The lowest-end products are the wires for household use, which are relatively simple manufacturing.
Hu An Cable, has over the years, made it to the top of its industry: It is already among the top 10 largest players in China, counting as its customers the likes of State Grids Corporation of China, China Huadian Group Corporation, Sino Petrochemical Corporation and China National Petroleum Corporation.
With its Singapore IPO proceeds of about S$45 million, it will mainly build a new plant and acquire sophisticated machines from Finland and Germany to manufacture mid- to ultra-high power cables.
This is a significant milestone, marking its entry into the elite club of less than 10 suppliers in all of China for ultra-high power cables of 500 kV - a shortage which is made up for by the import of foreign-made cables.
The company produces about 18,000 cable and wire products which conduct electricity, ranging from simple household wiring to power transmission cables that we saw criss-crossing the landscape on our drive from Shanghai to Yixing.
Then there are also electrical cables for petrochemical industries and mining companies, which require special insulation and other properties.
The key growth driver for Hu An Cable is the expansion of Chna's power transmission network as urbanisation progresses. More on this in our next report: Part 2, on Wednesday: Why Hu An Cable is set for a revenue surge in next few years
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