Let's Take A Walk With The New "Apek" On The Block

I will go through the entire exercise of reading the prospectus and noting the important points of this China-company listing on Bursa, K-Star Sports. This way, we all can discuss on how we should be evaluating the whole thing.

Yes, you guessed it correctly, its another shoe maker. Why is it that shoe making industry is the only industry being keen to list on Bursa? That's another question for another time.

K-Star will offer 15.32 million new shares at an issue price of RM2.15 per share with 3.4 million shares allocated for the Malaysian public and the rest of 11.92m for selected investors. OK, the size of the offering is not too big at all. The thing to watch out for is the placement to selected investors - if its a huge allocation to selected investors compared to the public, then maybe the promoters and lead underwriters are NOT THAT CONFIDENT on the issue at all. A large sized placement to selected investors may be negative as well, remember MultiSports and Mr. Quek.

Some may think that its a good thing that its all new shares issued. I think if its an ACE company, then that is OK, but for an established company churning decent profits, that is myopic and naive. You should have some sort of moratorium but you should also be upfront with shares that owners might want to sell. I would rather that they sell 20% of their shares to the public and 5% to selected investors - and then the rest of the shares be placed on a moratorium for 6 months, and only sell another 10% from 7-24 months. That way, they can go and concentrate on running the business but with some sort of buffer on being listed. You cannot and should not deny entrepreneurs from some cashing out after having growing the company to a listing.

The IPO exercise is expected to raise RM32.94mil out of which RM9mil will be used for raising the company's production capacity, RM5mil for sales and marketing network expansion, RM4.5mil to enhance product design and development capabilities, RM3mil on branding and advertising efforts and the rest for working capital and listing expenses.

The company, scheduled for listing this May 31, recorded a revenue of RM294.4mil and a pre-tax profit of RM45.54mil last year (StarBiz made an error in taking the RMB figures for RM). Here is the key, it makes RM45.54m a year, and yet it is only raising RM32.94m??? There is absolutely no need to get listed, is there? Generally, a company should be making much less than what it is trying to raise - that way, it is to channel additional capital to fund growth. When you already make more than what you are trying to raise, you MUST HAVE OTHER BIGGER OBJECTIVES on your agenda.

Hence, the bullshit about increasing capacity, marketing network expansion, enhancing product design, branding and working capital are all plain bullshit (and it smells too).

I am not saying you cannot list when the amount you are raising is a lot less than your annual profit but you got to be more upfront-la, not so many idiots running around. I would be a lot happier if the company says that its also to allow for some early investors to cash out - there is nothing wrong with that at all, but don't try to pull a fast one. We all need entry and exit strategies, and its an accepted process for capital to invest and divest, so that the process can be repeated, its the whole mantra of investing and capitalism.ol

K-Star has been in the apparel industry for twenty years and its product range include athletic footwear and leisure wear. They are also the original design manufacturer (ODM) and original equipment manufacturer (OEM) for international brands including Umbro, Diadora, Kappa, Le Coq Sportif, Die Wilden Kerle, Canguro Cosby and Bridgestones, as well as PRC footwear brand, Double Star. This is good stuff, proven deliverables across a wide section of reputable clients. It has four production lines and produces four million pairs of shoes in-house annually.

Back to valuations, RM45.54m based on 89m shares is a net EPS of 51 sen. At IPO price of RM2.15 thats a remarkably cheap PER of 4.2x. However, we should do a comparison: Xinquan, for year ending June 2010 should be making 35.7 sen, at RM1.17 it is trading at 3.27x PER. Why do you want to list on Bursa when you get PER valuations between 2x-5x???

Look at the 2010 PER valuations for similar China sports apparel companies: Anta in HKSE 17x; Dongxiang in HKSE 15x; Li Ning in HKSE 19x; Hongxing in Singapore at 8x. The key difference besides the different exchanges is the size of the companies. Anta, Dongxiang and Li Ning all have a market cap of above $3bn. Even Hongxing in Singapore has a credible market cap of $338m. Xinquan's market cap is just $103m. As for K-Sports, its market cap on listing 89m x 2.15 =RM191.4m / 3.2 = $60m.

Realistically, I think Xinquan is more interesting because if you ascribe an 8x PER (like in Singapore) for Xinquan, its market cap would be close to Hongxing. But even at 3.2x PER Xinquan only paid out 5.3 sen in dividend, presenting a yield of just 4.7%. If you are really generating so much cash flow and you are concerned on your share price, then maintain a strong dividend policy. Xinquan should make RM109m for year ending June 2010 and is only likely to pay out 5.3 sen gross dividend. They have 307.3m shares but they are paying only RM16.3m in dividends. Do this, declare that you will pay 50% of net profits as annual dividends. RM109m x 0.5 = RM54.5m = 17.7 sen. At RM1.17, thats a gross dividend yield of 15%. Once you declare a firm dividend policy, watch your share fly. I am sure using 50% of net profits is more than sufficient to grow the business.

K-Star directors said in the prospectus that they intend to pay 10%-20% of profits in dividend. At RM45.54, assume 20% = RM9.1m / 89m = 10.2 sen. At RM2.15 thats a yield of 4.7%. So tell me what K-Star is doing that is any different from Xinquan??? The controlling shareholder will retain 58.4% of shares upon listing, the key again is who holds the rest?

One hint, the conversion of a S$6.105m loan into 13.32m K-Star shares. This amount may be fluid and could be early sellers, maybe.

Sales to two major customers, namely Xiamen-Waitu Import Export and Qingdao Double Star Celebrity Industrial accounts for 40% of sales. I need not tell you that that is a significant risk, but still acceptable. Other financial metrics such as inventory turnover period of 13 days and receivables turnover period of 80 days are quite positive.



Overall, its valuations are attractive but will suffer the same fate as the rest. Initially you probably have to clear 15.32m + 13.32m shares = 28.64m shares. After that, maybe the share price can find some traction.

I would strongly advise that these companies come out and declare 50% profits payout as dividends; and Bursa put in my recommended moratorium on the owners and promoters. Only then will confidence be back in these shares, and you need confidence to be back if we are to be a viable alternative. You can have hundreds of meetings and brain storming sessions - these will be your best weapons.

Let's be honest here, even if we do all the right things, these shares will probably get between 7x-10x PER valuation max because:
- they will always be benchmarked to those listed in Singapore and HK
- the discounts for smaller China companies listed overseas are justified judging from the "shenanigans" concocted by some of the red chips in Singapore
- they list in Malaysia usually because someone had the bright idea of either cleaning up the books and/or inject fresh capital to dress up the company and/or hammering together a few smaller companies to make it listable and/or ... you get the drift ... when that's the case, usually the ideas man would want to cash out quick

China Moving To The Big Stage

Jan. 9 (Bloomberg) -- China took a “big step” toward opening its capital markets by approving stock index futures, paving the way for increased investment in the world’s fastest- growing major economy.



The China Securities Regulatory Commission said yesterday it may take three months to complete preparations for index futures, agreements to buy or sell an index at a preset value on an agreed date. The government also approved margin trading and short selling, when investors seek to profit from declines in shares, according to a commission statement on its Web site.

“They’re taking a big step forward in developing their capital markets and allowing people to express their positive and negative views on stocks,” Invesco said in a statement. Invesco, which invests in China as part of its Asia Pacific business that had $26.8 billion of assets as of Sept. 30. “You’ll have more people participate in the market and thus greater efficiency.”

Increased investment in Chinese equities may help narrow the gap between prices of shares traded in both Hong Kong and the mainland. Companies in China’s benchmark Shanghai Composite Index trade at 33.9 times 12-month trailing earnings compared with 20.9 times for the Hang Seng China Enterprise index in Hong Kong. A potential long-term development is more clarity in the market now that there’s more liquidity in the market for the true valuations of the companies that are dual listed.

China, whose economy grew 8.9 percent in the third quarter of 2009, currently bars overseas investors from trading yuan- denominated stocks and bonds on the mainland except through a so-called qualified foreign institutional investors program, which has approved 94 international firms. Foreign ownership of fund management companies is restricted to 49 percent.

Index futures may help ease fluctuations in the world’s third-largest equity market by value after the Shanghai Composite Index doubled in 2007, then slumped 65 percent in 2008 before rebounding 80 percent last year. Until now, Chinese investors could only profit from gains in equities.

China is going to the direction of freedom for its markets and more flexibility for its investors so it’s good news. More liquidity in the futures leads to more investors as you have a bigger pool of tools. You can be long on the future and short on the stock.



Allowing short-selling in China probably will spur the start of more hedge funds in Asia. Short selling is when investors sell borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.

Rules for the index futures will deter participation by retail investors, said JPMorgan Chase & Co. Investors will be required to put up 10 percent of a contract’s value to buy, sell or short CSI 300-based futures as collateral, according to rules published on China Financial Futures Exchange’s Web site in 2007. The bourse has been conducting mock trading in the securities since October 2006. The value of the futures contracts will be points of the CSI 300 multiplied by 300 yuan, according to the trading rules the exchange set.

Investors will need to spend 105,000 yuan ($15,379) to buy a single futures contract when the CSI 300 is at the 3,500 level, establishing a “cost barrier to retail participation. These initiatives will provide tools for institutional investors to hedge risks and should reduce market volatility in the long-term. Citic Securities Co., China Merchants Bank Co., Ping An Insurance Group Co., Industrial Bank Co. and Shanghai Pudong Development Bank Co. are the most-heavily weighted stocks on the CSI 300.

Comments: The article basically says it all. As things stand, with so much restrictions on foreign funds participation, coupled with a monolithic broking business (i.e. relatively benign equity margin business and minimal leverage by participants) - China equity markets is already very huge. The combined daily turnover for China exchanges is nearly US$25bn.

In comparison, HK's figure is around US$5.7bn. Seoul's figure is US$3.2bn. Taiwan's at US$3.7bn. Can you imagine when markets in China opens up a little bit more to foreign participation??!! HK is getting a lot of attention from large companies wanting to list overseas because their legal infrastructure and transparency are a lot better and is of global standard. You and I know that China will take a looong time to do both well. To companies, HK is as good as listing and tapping into China funds swell.

Back home, the smaller exchanges have to carve out their own niche. I have said this for the umpteenth time, let investors do day-trading short selling - meaning they have to cover by end of day or face buying in consequences. What's so bad about that? I think it will boost daily turnover by at least 20% on Bursa. What is so bad about selling first, since that same person will have to cover by end of the day. It is not the same as short selling and holding that short for an extended period of time, which presents a higher risk to the markets.


p/s photos: Sharon Xu