Fuxing China Group : Some More Comments

Edit: For those who want to read about YKK, the largest zipper manufacturer, you can click here. Though dated, it gives alot of insight to the zipper industry and how the Chinese are playing catch up.

Some time back, a reader asked me what I thought about Fuxing China Group but I did not give a thorough response. I'm revisiting the question because I happened to read an old article (below) on the same issue.

My response will still be the same, in that Fuxing is in a very competitive industry, whereby profit margins will remain thing in the long run as zippers are a commoditized product, with little possibility of creating barriers to entry.It is unlikely that it can do to zippers what Nike did to sports shoes.

Of course promoters of the stock will argue that it is trading at a sharp discount to book value with a high cash to share price percentage. Moreover, compared to its China-listed peers, valuations are very attractive.

I agree that Fuxing has a strong cash pile, but like the article below points out, doubts will surface unless more is done. That said, Fuxing has been distributing dividends consistently for the past 4 years. It is a confidence booster  to already depressed valuations, as investors here have become averse to small cap S-Chips.

However, in my opinion, it is unlikely to trade at 20-30 times earnings as the equity conditions in China are much different than Singapore. There are still plenty of capital controls in China, giving their local investors no choice but to invest locally, regardless it being the better choice.

If Fuxing's management thinks that its valuation is too low, perhaps it could take the advice of Tan Chin Hwee of Apollo Management (Singapore) who said in the article:

He added that if a company tells him that it has lots of cash and that its stock is undervalued, he is likely to challenge the company: 'Why don't you then privatise your company? You can relist it another time, or somewhere else.'

Teh Hooi Ling
427 words
31 March 2009
Business Times Singapore

Market talk has it that at recent analyst briefings, the investor relations officer of China Hongxing brandished a bank statement showing the amount of cash the group has in the bank.

That however did not quite do much to boost investors' confidence that the cash was indeed there.

After all, in the case of another company, Oriental Century, its auditor received a 'bank confirmation' of the group's cash balance, which the bank subsequently said it did not issue, adding that the earlier amount confirmed to be in the bank was far larger than the actual cash balance as at Dec 31, 2008.

Convincing investors that there is enough cash has become a challenge for Chinese companies listed here, following several accounting scandals.

'So what would you do, if you are an S-chip and you really do have this amount of cash in the bank? But in this environment, you know it's more prudent to conserve cash rather than distribute it to shareholders,' asked a participant at a seminar entitled Forensic Accounting in Asia - Ability to Pay does not Mean Willingness to Pay - conducted by Tan Chin Hwee who heads Apollo Management (Singapore).

Mr Tan's reply: 'First, I'd transfer my cash to HSBC in a bigger city like Xiamen or Quanzhou.' This can then be easily verified by the auditors, he explained. 'And then, for companies which don't have debts, if I were them, I'd borrow from the Chinese banks since the banks are still lending, and pay part of the cash out to shareholders as dividends.'

But observers noted that the first option may not be as easily implemented. After all, the companies may still want to maintain relationships with local banks.

Mr Tan added that S-chips look very cheap now, provided the announced cash values are accurate. 'Then they would be good long-term buys. But many times, such stocks proved to be liquidity traps. You can't get out later.

'I'm not sure whether the risk-reward of buying S-chips now is better than, say, buying Keppel Corp.'

He added that if a company tells him that it has lots of cash and that its stock is undervalued, he is likely to challenge the company: 'Why don't you then privatise your company? You can relist it another time, or somewhere else.'

Last Friday's seminar was jointly organised by Singapore's CFA Society and BNP Paribas Hedge Fund Centre.