Thursday, September 10, 2009

Multi Sports, Xinquan - Post mortem



Red chips in Bursa. The first couple were hard to swallow, who will dare bring more in.
Investment bankers were patting themselves before the listings, now they wondered if they are doing the right thing.

Why these shares almost immediately trade below IPO price:


a) the usual question, why choose to list in Malaysia, that in itself is a difficult question to answer, how to dispel the rumours that they are too small to list back home


b) the pricing will have to be fair relative to what other red chips are being priced in SGX, Xinquan was priced too high at IPO


Does that mean we should forget about bringing red chips over to list on Bursa? No, but we need to rethink our strategy.


1) Investors will be concerned that they have never seen the operations and that they may never get "good research coverage" or even corporate news analysis on the counter. The investment banker should be coming out with decent research reports for at least 2 years (updates on each quarterly results). Any red chip listing on the Bursa should have to pay RM100,000 a year to two other brokers research house to cover their stock for two years.


2) Bring in respected investors or institutions when applying for IPO - e.g. get EPF, LTAT or influential investors such as Quek or Kuok or other interesting outfits such as "private equity firms" or "respected long term asset management firms" to take substantial stakes pre-IPO. These shareholders should have a minimum holding period of not less than 12 months before they can sell.


If you don't implement these two measures, I can safely bet you that all upcoming red chips to be listed on the Bursa will drift below IPO price almost immediately upon listing, unless you manage to bring in those red chips that are sufficiently big enough (e.g. market cap more than RM1bn).


The final question mark is that there is still the sneaky suspicion that these smallish red chips may be packaged to list on Bursa or other overseas exchanges by "amalgamating a few smaller companies as one" - this lack of long term cohesion is a worry.


The other way confidence could return to these red chips is if these companies continue to show good results quarter after quarter for a substantial period, and/or these companies were to be "bought aggressively" by institutional investors or private equity firms with the intention of taking them private (because they traded so cheaply). Once these things happen, you will find investors regarding these smallish red chips with a different and improved mindset. You cannot blame investors for being cautious with so many unknowns.

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Shoe sole maker Multi Sports Holdings Ltd was the second China-based company to debut on Bursa Malaysia’s Main Market on Aug 19. The group, known in the industry as the provider of the Huoxing brand of shoe soles, prides itself on being the “one-stop shoe sole specialist” for China’s sports footwear industry as it is “vertically integrated” and is able to process raw materials to produce components needed as well as design and develop shoe soles.

The company operates in Jinjiang city in Fujian province, China’s sports shoe manufacturing capital and one of the world’s largest sports shoe manufacturing centres. In 2007, Jinjiang accounted for 20% of the world’s total sports shoe production. There are an estimated 3,000 shoe manufacturers in Jinjiang producing an estimated 700 million pairs of shoes per year, according to Multi Sports’ initial public offering (IPO) prospectus, citing the China Leather Industry Association. In 2008, Multi Sports Group had a 1% market share of China’s 2.1 billion pairs of rubber/plastic shoe soles production and 0.2% market share of the 10 billion pairs in the footwear soles sector in China, based on its output of 22 million pairs of sports shoe soles.

The group, one of the five largest shoe sole-makers in Jinjiang, currently has a 1,929-strong workforce, of whom 64% or 1,241 are skilled workers. The group has 300 customers, including Guohui, 361 degrees and Xdlong, manufacturers of well-known local sports shoe brands. Between 2005 and 2008, its annual production grew from about 4.9 million to 22.1 million pairs of shoe soles, with some 300 designs across four main product lines.
Multi Sports’ production capacity is set to triple over the next two years as some RM30 million of the RM48.96 million gross proceeds from the IPO has been earmarked for the expansion of its production capacity within 24 months.

OSK Research, in a note dated Aug 7, says Jinjiang’s existing order book is three times its production capacity and reckons that the group’s earnings would see a compound annual growth rate (CAGR) of 18.3% over the next two years. In the past two years, the group registered a CAGR of 33.9%. OSK expects margins to improve on the back of higher production volume.
“Compared to the first Chinese IPO, we are slightly more positive on Multi Sports premised on its current order book which is three times its current capacity; high cash conversion cycle; less competition (about 100 shoe sole producers versus over 3,000 shoe manufacturers in Jinjiang). Previously, we pegged Xingquan International Sports Holdings Ltd’s FY2010 PER at 5.4 times based on S-share companies listed in Singapore rather than Hong Kong or China-listed companies. We believe it is more realistic given its lower earnings base and market capitalisation. Using the same FY2010 PER valuation of 5.4 times FY2010 EPS, we derive a fair value of RM1.03, with an upside potential of 21.5%,” OSK says.

The Quek family, who is a major shareholder of Multi Sports Holdings Ltd, has sold off a chunk of its equity stake in the Chinese shoe sole-maker. According to filings to Bursa Malaysia last Friday, the Quek family, via its Cayman Islands incorporated vehicle GuoLine Group Management Co Ltd, had disposed of a 3.6% stake comprising 12.97 million shares in Multi Sports on Aug 24. The Quek family had held about 15% of the company before selling down the shares. It now owns about 11.4% stake or 41.03 million shares in Multi Sports. Multi Sports IPO: 85 sen Now: 52 sen

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Xinquan International Sports

307.33m shares
IPO: 1.71
High: July 15 2009 (1.81)
Now: 1.39

The current Executive Chairman, Mr. Wu Qingquan established Jinjiang Xingquan in 1995, jointly with his wife, Mdm Zhuang Hongji, and his brother, Mr. Wu Lianfa, to engage in the manufacture of shoes and shoe soles for local and international shoe manufacturers. In 2009, they acquired the entire share capital of Addnice Holdings for a purchase consideration of USD21.503mn which was satisfied entirely by the issuance of the Consideration Shares at an issue price of USD1 per Consideration Share. The products under the 'Addnice' brand are distributed across 20 provinces, municipalities and autonomous regions within the PRC. Products which the Company manufactures as OEM are also distributed outside the PRC by its OEM customers. As at the Latest Practicable Date, the Company has appointed 29 authorized-regional distributors and 43 direct retailers to distribute its 'Addnice' products. The Company's 'Addnice' products are sold via 954 'Addnice' specialty stores and 464 retail stores totaling 1,418 point of sales. An aggregate production capacity for sports and leisure shoe products and shoe sole products in Quanzhou amount to approximately 5.9 million and 14 millions pairs per annum, respectively.
For its financial year ended December 31 2008, Xingquan posted RM323.56mn revenue and RM65.76mn profit after tax.This company is established in Bermuda.
RM2.10, OMG, it went downhill amidst a good bull run for most equity markets. Underwriter CIMB Investment Bank Bhd recently activated and completed the price stabilisation mechanism, a first in the local market since it was introduced in early 2008, in relation to Xingquan’s listing. But even CIMB said enough is enough, we should only take so much losses. The price stabilisation mechanism, which is not uncommon in other markets, was aimed at assuring investors that a party was backing the stock in the initial stages of its listing.
The IPO price was RM1.71. In terms of the attractiveness of the stock at the fundamental level, its IPO price of RM1.71, the valuation of roughly five times forward price-to-earnings ratio (PE) did not compare well with similar stocks listed in Singapore. China-based athletic footwear stocks in Singapore include China Hongxing Sports Ltd at 7.3 times 2009 PE, China Sports International at 3.1 times PE and Hongguo International Holdings at 5.7 times PE. Plus Xingquan was much smaller, hence CIMB was suckered into pricing it at RM1.71 - not the company's fault.

p/s photos: Hanako Takigawa

1 comment:

Stock said...

The problem with the red chips in Bursa Malaysia is that there are a group of early bird investors who get the share at significant discount to IPO price. This was done to finance the acquisition of the Chinese companies by the overseas holding company. When there is no control of selling the shares post listing, the shares will plunge just like the XG and MultiSports. The promoter need to manage the share price properly. How can they let Quek dispose so much so soon after Multisports get listed.