CG Technologies: Better than guidance, as expected
By Rachel Ng
Mon, 26 Feb 2007, 15:50:48 SGT
Summary: CG Technologies (CGT) previously guided for a 50% YoY growth in net profit, but as expected, it outperformed its own guidance with growth standing at 61.2%, bringing net profit to RMB134.8m. This was on the back of a 52.1% increase in revenue to RMB707m. The strong growth was due to an increase in the production capacity for products as such bright and semi dull PET chip, alkali soluble PET chip and yarn products. Introduction of new products such as high shrinkage PET chip and combed yarn also fuelled growth. Despite fluctuations in oil prices, CGT achieved better margins mainly due to the introduction of the new products which yielded higher margins than most of the existing products. Gross profit margin (GPM) increased from 25% to 26% in FY06. GPM was the strongest in 4Q06 at 27.5% compared to 24.9% in 3Q06 and 25.7% in 4Q05. Prospects for FY07 remain promising and CGT is well on its way to launch polyester short fibre by 3Q07 which will help to maintain its high margins since CGT has to currently procure PSF for use as raw materials for its various products. Management has proposed a final dividend of 1.5 Singapore cents per share and a 1-for-2 bonus share issue. The bonus share issue could potentially cause a 33% decrease in our EPS estimates, but we have yet to factor this in our earnings forecast. CGT share price has performed very well, rising 32% since our initiation two weeks ago. We continue to like CGT and believe in the strategies and plans it has in place for the next few years. . In terms of valuation, we will continue to use a price earning ratio (PER) of 7.5x for FY07/08 (previously only FY07) to capture the growth in FY08 as well. This translates into a fair value of S$0.98 (previously S$0.89) and we maintain our BUY rating.
Better than guidance. CG Technologies (CGT) reported its FY06 results with net profit growth of 61.2% YoY at RMB134.8m beatings its own guidance of 50% YoY growth but inline with our estimate. This was on the back of a 52.1% YoY increase in revenue to RMB707.0m. The strong growth was due to an increase in the production capacity of bright and semi dull PET chip, alkali soluble PET chip and yarn products. Introduction of new products such as high shrinkage PET chip and combed yarn also fuelled growth.
Margins are on the rise. In 4Q06 and FY06 CGT achieved better margins mainly due to the introduction of the new products which enjoy higher margins compared to most of its existing products. Gross profit margin (GPM) increased from 25% in FY05 to 26% in FY06. GPM was the strongest in 4Q06 at 27.5% compared to 24.9% in 3Q06 and 25.7% in 4Q05. This margin growth was mainly on the back of pro-active strategy by CGT to introduce and switch to new and better quality products.
Future continues to be promising. Prospects for FY07 remain promising. CGT is well on its way to start production of polyester short fibre (PSF) by 4Q07. The PSF production in turn will reduce CGT's reliance on externally sourced PSF and help to maintain its high margins for its various products. In 2007 CGT also intends to phase out the production of bright and semi dull PET chips and utilize the production lines for higher margin high shrinkage and dye absorbing PET chips. We expect these initiatives to boost absolute gross profit by approximately 19% YoY to RMB221.5m and GPM to increase from 26% to 29% in FY07.
Maintain BUY with higher fair value. To reward shareholders as well as to increase share base, CGT has proposed a final dividend of 1.5 cents per share and a 1-for-2 bonus share issue. The bonus share issue could potentially cause a 33% decrease in our EPS estimates, but we have yet to factor this in our earnings forecast. However we see the dilution as a one-off effect. Finally in terms share price performance, CGT has done very well, rising 32% since our initiation two weeks ago. We continue to like CGT and believe the strategies and plans it has in place to drive earnings for the next few years. As for valuation, we have revised up our fair value from S$0.89 to S$0.98 on the same PER multiple of 7.5x but on FY07/08 earnings. We maintain our BUY rating.
