Takeaways from Foreland Fabrictech’s result briefings (DMG)

The news: Foreland recently reported another set of sterling results for 2Q11, with net profit rising more than 10-fold to RMB 38.8m, from just RMB 3.2m in 2Q10, and a 37% q-o-q increase. With this, the group would have registered five quarters of sequential earnings growth. And with its interim net profit for the six months ended June 2011 at RMB 67.1m, management is optimistic that the full year results is on track to surpass the previous peak of RMB 107m in 2008. Operationally, the results continued to impress, with top-line growth of 227% boosted by the group’s successful foray into the umbrella fabric segment in 2009. This has paid off big-time with the segment now contributing 45% of group sales. It has also clinched most of the top premium umbrella manufacturers in China as its customers over the past 2 years, including Hangzhou Paradize, Susino, Jin’ou, Angel and Yuzhongniao. ASP has also trended up to RMB 13.5/yard in 2Q11 and this is expected to remain stable going forward. The group’s focus on high-performance fabrics with more resilient selling prices coupled with higher sales volume has also resulted in gross margin expansion from 14.4% in 2Q10 to 29.4% in 2Q11.

Our thoughts: Foreland’s next phase of growth will be driven bv the additional capacity

expansion via its new production facility at Andong Industrial Area in Jinjiang, Fujian province, where the land area is 2.5x more than the existing factory. With the building infrastructure largely completed, Foreland will be moving its production machineries progressively to the new factory, with completion expected by year end. This will enable the group to take on additional business as the current factory is currently running at almost full capacity with utilization at 95%. Majority of the capex for the new plant has been committed, with the balance of some RMB 100m slated for dormitories and waste recycling facilities. The group remained financially strong with net cash of Rmb 200m and has declared an interim dividend of 0.027 Rmb/share.

Assuming a net profit of RMB 140m for the full year, the stock is currently trading at a bargain level of 2.2x FY11 P/E. The risk-rewards appear favorable, notwithstanding the current sentiments towards the S-chip sector.