Textile stocks might be cheap but the end products can be as pricey as a 4-digit sum for a swimsuit. Above: Li Heng's nylon is used to make swimwear.
THE HISTORICAL price earnings ratio (PE) of profitable S-chips now averages about 8X (based on Tuesday's closing prices), compared to an amazing average of 37X for the Shanghai Composite Index, Shenzhen Composite and Hang Seng Index.
One may argue that companies listed in mainland China and in Hong Kong may have more lucrative businesses, but even the FTSE ST Small Cap Index is trading at an euphoric valuation of 30X PE.
Is it now time to pick up lowly valued stocks? Of the 100-odd S-chips, we found 80-odd businesses to have reported profits in the past 12 months. Further, in the universe of S-chips trading at less than 5 times PE, we found 36 laggards, of which a third are from the textile industry.
The market appears to be slow in catching on to the upturn in China's textile and garment exports.
In June, it was up 13.3% over the previous month (albeit down 10% year-on-year), and reached US$13.95 billion. Cumulative export output between January and June amounted to US$72.8 billion, down about 11% year-on-year, according to China’s General Administration of Customs.
Two chemical fiber players, Li Heng and China Sky Chemical, have respectively gained 22% and 12.5% over the past month after UOB Kayhian issued its ‘Overweight’ call on China’s nylon industry on 22 July.
UOB Kay Hian analyst Allen Jiao believes that China’s chemical fibre industry has likely hit bottom after a downcycle from late-4Q08 to early-1Q09 that was plagued by plunging selling prices, lower production, decreased profitability, longer receivables and asset turnover, as well as heavy cutbacks in fixed asset investment,
| Textile S-chip | Historic P/E | Div Yield % | Price to Book | Close Price | Market Cap S$ |
| LI HENG CHEMICAL | 2.4 | 10.0 | 0.6 | 0.27 | 425,000,000 |
| SINO TECHFIBRE | 3.2 | 0.0 | 0.4 | 0.17 | 148,800,000 |
| CHINA SKY CHEMICAL | 3.9 | 0.0 | 0.2 | 0.185 | 146,623,808 |
| CHINA SPORTS | 3.0 | 3.4 | 0.7 | 0.185 | 117,897,504 |
| CHINA TAISAN | 2.0 | 14.4 | 0.7 | 0.13 | 115,987,504 |
| FUXING CHINA | 3.7 | 7.1 | 0.3 | 0.095 | 72,000,000 |
| ZHONGGUO PENGJIE | 3.3 | 5.6 | 0.7 | 0.14 | 63,684,000 |
| CHINA FIBRETECH | 2.2 | 0.0 | 0.7 | 0.14 | 62,511,352 |
| FORELAND FABRICTECH | 1.9 | 2.7 | 0.5 | 0.105 | 42,972,220 |
| QIAN FENG FABRIC | 1.0 | 0.0 | 0.6 | 0.085 | 41,650,180 |
| HONGWEI | 2.6 | 3.4 | 0.5 | 0.17 | 36,000,000 |
| CHINA HONGCHENG | 3.9 | 7.6 | 0.3 | 0.085 | 22,780,000 |
28 July 2009).
The analyst, who is based in Shanghai, has a “buy” call on Li Heng with a target price of 29 cents. He has a “hold” call on China Sky, with a target price of 22 cents.
Normally, synthetic yarns can be weaved into fabric with functionalities such as water-resistance, fire-resistance and chlorine-resistance, etc, and therefore fetch better prices.
As makers of synthetic yarn, Li Heng and China Sky are the most upstream on the textile supply chain. Its nylon yarn products used in apparel, hosiery, home furnishing, shoes, bags, umbrellas, etc.
What do other laggards in the textile industry do?
At 27 cents, Li Heng is close to UOBKH's target of 29 cents.
Other yarn makers
Sino Techfibre is also a synthetic fiber maker. It produces polyurethane (PU) and microfibre synthetic leather. Its products are used by makers of fashion apparel, footwear, sports apparel and equipment, luggage and travel accessories, as well as upholstery for furniture.
Zhongguo Pengjie is a yarn-maker, but focuses on cotton yarn, which is considered low-end relative to functional synthetic fiber. Part of this yarn is spun into loom-state cotton fabric, which needs to be treated and processed. The company also makes higher end yarns from fibers such as bamboo and wood, as well as synthetic fibres such as polyester.
Hongwei Technologies makes polyester differential fibers primarily for yarn and textile manufacturers.
Weave fabric from yarn
China Hongcheng makes home textiles. It produces cotton yarn and fabric, silk cotton fabric, yarn dyed cotton fabric, high-density broad-width cotton fabric, and jacquard cotton fabric.
China Taisan makes functional knitted polyester fabrics used for sports and leisure apparel. The company manufactures knitted fabrics, not the apparel itself.
Foreland Fabrictech’s weaving process embeds functional properties during its dyeing, coating and finishing.
Qian Feng Fabric Tech produces functional synthetic knitted fabrics and provides related dyeing and post-processing treatment services.
China Sky is now at 18.5 cents, with 19% upside to UOBKH target of 22 cents
Fabric processing and finishing
China Fibretech provides dyeing and post processing treatment services for cotton, polyester, and mixed knitted fabrics.
Sporting apparel and shoes
China Eratat Sports Fashion designs, manufactures, and distributes sports footwear. The Company also designs and distributes sports apparel.
China Sports designs, manufactures, and sells branded sports fashion footwear and apparel products.
Zippers
Fuxing China makes zipper sliders and zipper chains. Its products are mainly sold to local manufacturers of apparel and footwear products, camping equipment, bags, and upholstery furnishings.
Recent story: LI HENG: UOBKH's top pick among SGX-listed nylon makers
