China Gaoxian’s proposed issuing of 600 million new shares for dual listing (although at not more than 10% discount) is clearly not favourable to the shareholders or the company because –
the EPS will be diluted and its latest additional production capacity will, at best, restore its EPS to pre-dilution level.
After the dual listing, there will be 2.04 billion shares. For Gaoxian to increase its EPS by just 10 cts(RMB) [or 2 cts(S)], Gaoxian would need to increase its nett profit by RMB 204 million. Is this readily achievable? Stocks with such huge number of shares usually have little profit growth potential or capital gains for investors, unless the stock have exceptional profit-generating business.
Gaoxian’s dual listing in Korea is likely to improve its valuation but the dilution in earnings & the massive number of shares could reduce the attractiveness of the stock to potential investors after the dual listing excitement is over.
USEFUL REMINDER “ DO NOT FALL IN LOVE WITH A STOCK AS TO LET IT BECOME YOUR RELATIVE FOR WHEN LOVE BECOMES BLIND, OPPORTUNITIES GET LEFT BEHIND.”
dear observer, thank you for sharing your wisdom. I too have noted that the challenge to grow EPS is great after the dilution.
However, assuming the dilution is balanced off by profit growth, then we are back to square one - ie, the valuation of the stock is still dirt cheap at 4X.
Assuming the valuation goes up in Korea, Gaoxian shares in Singapore would follow suit because they are fungible.
If the valuation goes up to 6X, the stock upside from here is 50%!
That's worth the wait!
If the valuation goes up to 12X, which is the range for the peers there, then ......
I agree with you, Neontet, that the valuation of Gaoxian is still dirt-cheap. Gaoxian’s EPS for 9 months is 21.22 cts(RMB) or 4.2 cts(S). Assuming its full year EPS is 6 cts(S), the EPS would be adjusted down to 4.2 cts on dilution of earnings following the dual listing. In the event the stock is re-rated to a PE of 12x after the dual listing, its share price would then be about 50 cts or double that of Monday’s closing price of 25.5 cts. The question then is – IS GAOXIAN STILL A GOOD INVESTMENT AT THIS PRICE LEVEL?
The answer would then really depend on each individual’s perception & comfort level. Personally, I would want to be out of this stock and look for another with more attractive valuation and growth prospects.
Interesting points of view from observer and neonet, etc.
Just to add....
#1. The current orderbook of Gaoxian will be fulfilled in 1.5 months time. The biz does not have much visibility. The management seems confident of the demand, ok, fair enough but investors need to be mindful of the low visibility.
#2. yes, there is going to be big dilution from the Korean listing - but the money raised will go towards increasing production capacity. I have not seen the EGM documents, but I presume there is going to be massive production capacity increase.
If the demand is there for Gaoxian to capture, then this capacity increase will be fantastic.
however,when the demand turns down in a recession, the pain will be intense.
Anyway, at PE of 4X currently, the stock has a higher upside potential currently than the downside, IMHO
UOBkayhian rise TP to 32cents after reviewing gaoxian Q3 results. They advise buy on dips and express confidence over its long term prospect.
See below Updates on Potential KDR Listing
· The company held an extraordinary general meeting on 12 Nov 10 and successfully passed a resolution amongst its shareholders to issue new shares for its KDR listing.
· We believe the fungibility of a KDR dual listing will be a potential catalyst for the share price.
· Higher valuation multiples on the Korean bourse could bolster its valuations on the Singapore Exchange.
· Peers on the KRX are trading at an average 2009 PE of 32.7x, at a premium to China GaoXian’s 2009 PE of 3.85x.
Valuation/Recommendation
· We increase the target price of the stock to S$0.32 from S$0.29 previously, based on a discounted cash flow model. This is on the back of higher expected demand and ASPs for its products.
· Our valuation of S$0.32 will implicitly yield a 2011F forward PE of 4.27x and forward P/B of 1.0x. This is relatively undemanding and we see possible further upside for the stock.
· Although the stock has seen a 34.2% upside since our report on 14 Oct 10, we believe it is still highly undervalued given its strong growth prospects and track record of producing solid results. We advise investors to adopt a buy-on-dips strategy to ride on the long-term prospects of the company.
UOBKH’s TP of 32 cts appears overly conservative as Gaoxian recently hit a high of 29 cts. If Gaoxian Korean listing is in January 2011 and coincides with a likely traditional New Year Rally, my guess is that a TP of around 40 cts [PE of around 10x after earnings dilution] may be attainable. In the event the PE gap between Gaoxian and other under priced stocks becomes too wide, many shareholders may want to switch out from Gaoxian into stocks with lower downside and more attractive valuation. That could cause Gaoxian’s share price to under perform for some time.
Regarding Gaoxian’s expansion program, Gaoxian has raised its production capacity for polyester yarns from 180,000 tons to 210,000 tons [+16.7%] and later to 240,000 tons; and for WKF, from 17,000 tons to 81,000 tons [+376%]. The impact of contribution of WKF to the bottomline is not clear. However, in Gaoxian’s 3Q 10 results, its management stated that following the capacity expansion, its capacity utilization rate is now at 70%.
The EPS of Gaoxian is likely to drop to around 4 cts after the earnings dilution. Assuming Gaoxian’s capacity expansion is 100% all round & business-operating conditions remain unchanged; its EPS could then be expected to double to 8+ cts at best – which is not really too fantastic.
Since Gaoxian’s capacity utilization rate can increase by only 30% bringing it to 100% [or 43% above its current production level], it is difficult to foresee its EPS increasing by more than 50% (or 2.5 cts) unless the WKF segment can contribute the bulk of its profits.
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