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August 10, 2010

SINGAPORE EQUITY
Investment Research

Initial Coverage Private Circulation Only

CONSUMER
BUY Initiate
James Lim
+65 6232 3892
FUXING CHINA Price S$0.150
james.lim@dmgaps.com.sg
Target S$0.255

Terence Wong, CFA


+65 6232 3896 Trading below net cash
terence.wong@dmgaps.com.sg

Earnings poised to more than double; Initiate with BUY and TP of


Stock Profile/Statistics S$0.255. With FY10 net profit forecasted to jump 121% while its share price
Bloomberg Ticker FUXC SP presently trades at a 5.3% discount to its net cash position, we view Fuxing as
STI 2,955.06
Issued Share Capital (m) 206.2 a gem that is severely undervalued. Presently in an earnings recovery mode
Market Cap (S$m) 124.7 where orders from its customers have been flowing in, we are also estimating
52 week H | L Price (S$) 0.21 | 0.08 2Q10 net profit to hit RMB13.5m, representing a 22.7% QoQ increment and a
Average Volume (6m) ‘000 2,514 176% YoY jump. We thus start coverage on Fuxing with a BUY
YTD Returns (%) 3.5
Net Cash
recommendation and target price of S$0.255, based on a target net cash P/E
Net gearing (x)
Altman Z-Score 3.5 of 6.0x which represents the average of our DMG S-chip universe and also
ROCE/WACC 0.3 taking into account its current net cash hoard of S$0.158.
Beta (x) 0.9
Book Value/share (RMB) 0.01
Company profile. Fuxing is China’s second largest zipper maker with an
estimated 4% market share. It has a diversified customer base of around
Major Shareholders 1,200 while its largest customer is sportswear player Anta Sports which
Hong Qing Liang 59.96 contributes around 4% of its revenue.
Hung Wo Chiu 5.00
2G Capital Pte Ltd 3.50 Fuxing’s valuations are lower than its peers. Valuations for China’s largest
zipper maker, Fujian SBS Zipper, are much higher than Fuxing’s. Additionally,
Share Performance (%) the balance sheet of Fuxing is also stronger than the industry average. We
Month Absolute Relative believe these issues show that Fuxing is a much more worthwhile investment
1m 20.00 17.56 than its competitors, as its micro fundamentals are ahead of the benchmark.
3m 3.45 -1.03
6m 7.14 -2.38
76.47 63.40
Outlook is bullish. With the macro picture for Fuxing looking positive as
12m
China seeks to increase the purchasing power of its domestic consumer while
the China Zipper Association also expects business to pick up further, the
6-month Share Price Performance micro trend for Fuxing is similarly bullish as it engages in more initiatives to
0.16 boost earnings. These would include potential M&As in the electroplating and
dyeing segments and a continued focus on R&D to increase margins.
0.15

0.14
FYE Dec (RMBm) FY07 FY08 FY09 FY10F FY11F
0.13 Turnover 883.9 829.4 475.9 549.3 618.6
Net Profit 197.0 136.5 30.7 67.9 87.1
0.12
% chg YoY 26.6% -30.7% -77.5% 121.1% 28.3%
EPS (S¢) 6.09 3.41 0.76 1.63 2.10
0.11
10-Feb-10 12-Mar-10 11-Apr-10 11-May-10 10-Jun-10 10-Jul-10 9-Aug-10 DPS (S¢) 1.00 0.60 0.40 0.65 0.85
Div Yield 6.7% 4.0% 2.7% 4.4% 5.7%
ROE 20.2% 12.9% 2.8% 6.0% 7.3%
ROA 16.3% 9.9% 2.4% 5.2% 6.6%
P/E (x) 11.5 6.8 12.7 12.4 9.1
P/B (x) 0.6 0.6 0.6 0.5 0.5

Source: Company and DMG estimates

Disclaimer: DMG & Partners Securities Pte Ltd may have received compensation from the companies covered in this
report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report.
Please refer to important disclosures at the end of this publication.
DMG Research
See important disclosures at the end of this publication 1
August 10, 2010

TABLE OF CONTENTS

Company Profile 3

Industry Background 4

Investment Merits 6

Key Risks 8

Peer comparison / Valuation 9

Financial Table 10

Appendix 1: Products 11

Appendix 2: Key Management 13

Disclaimer 14

DMG
OSK Research
See important disclosures at the end of this publication 2
COMPANY PROFILE

The second largest zipper player in China. Founded in Fujian (China) in 1992, Fuxing
China is one of the few vertically-integrated zipper producers in the PRC. It boasts of the
ability to manufacture the entire zipper product from mould-making for the production of
zipper sliders to manufacturing of fabric tape for zipper chains and the entire finished
zippers. Since listing in Sep 07 on the SGX at S$0.46/shr, Fuxing has expanded its
production facilities to Shanghai and QingDao and now has a plant area spanning over
88k square meters. Fuxing also employs around 3,000 workers while it is estimated to
have a 4% market share of the zipper industry in China.

The three main business segments that make up more than 95% of earnings are:-
(i) Finished Zippers, (ii) Zipper Chains, and (iii) Zipper Sliders. Finished Zippers are
mainly sold to manufacturers of apparels such as jeans, jackets and sportswear while
Zipper Chains and Sliders’ main customers are producers of footwear products, camping
equipment, bags, upholstery furnishings, trading companies as well as other zipper
manufacturers in the PRC.

On the other two business divisions, Knitting Wool and Trading, we understand from
management that they would be reducing their focus on them as margins are typically
low.

Figure 1: Estimated segmental gross profit contributions in FY10

Knitting Wool Trading


1% 1%

(i) Finished
(iii) Zipper Slider zipper
19% 12%

(ii) Zipper Chain


67%

(i) Finished zipper (ii) Zipper Chain (iii) Zipper Slider


Knitting Wool Trading
Source: Company & DMG estimates

Biggest customer is Anta which contributes around 4% of turnover. Fuxing’s zipper


products are sold mainly to PRC manufacturers of apparel and textiles. Customers
number around 1,200 with renowned local brand names such as Anta, Samsonite,
Septwolves, Fujian Peak and Northpole China, which covers a wide variety of end-
products such as apparels, shoes, bags and camping equipment. Recently, the company
has even included international sports apparel giants such as Nike into its end user
group.

DMG Research
3
INDUSTRY BACKGROUND

Riding on the Chinese domestic consumption theme. Recently, China has overtaken
Japan to become the world's second-largest economy. As seen from the figure below,
people in China are now willing to spend more for a better quality of life with the retail
sales of consumer goods growing steadily in the last ten years.

Figure 2: The rapid growth of retail sales of consumer goods in China

Source: CEIC

According to the figures released by the Chinese Customs, the Chinese textile and
apparel industry has posted rapid growth in 1H10. A total of US$88.9b worth of textiles
and apparels have been exported from China, representing an increase of 22% in 2009
YoY. Exports in 2009 for the Chinese textile industry have appreciated 32% YoY, while
apparels and other accessories have went up by 16%.

China is on course to overtake the United States and vault into the No.1 spot sometime
around 2025, according to projections from various industry watchers. As the economy of
China will continue to grow, we expect that the textile and apparel industry and upstream
manufacturers like Fuxing will be able to tap on this strong local demand that would
resultantly follow.

Big potential for the China zipper industry. In 2003, China became the world's largest
zipper manufacturing country while the "Made in China" brand presently accounts for
90% of the world’s zippers. Market research firm Global Industry Analysts believes that
the world zipper market will reach US$7.7bn by 2015 and we expect China will be
responsible for much of this growth.

Currently, the zipper market in China is highly fragmented with over 2,000 local players.
While there are worries that this might mean the barriers to entry are low for the industry
in which Fuxing operates, we note that the company’s customers include renowned
brands that would prefer to work with the bigger zipper manufacturers. This is thus the
premium that Fuxing has over its much smaller competitors.

DMG
OSK Research
See important disclosures at the end of this publication 4
Figure 3: The rapid growth of retail sales of consumer goods in China

Source: China Zipper Association

According to the China Zipper Association, the industry has already bounced back from
the crisis low as the price index which measures the price of the average zipper product,
has stabilised at above 110 against the benchmark price of 100 in year 2005.
Furthermore, the Business Climate Index which measures the enterprises’ confidence of
the performances on their respective businesses’ future, has also improved significantly
from 97 in Aug 09 to 1486 in Jul 2010.

DMG Research
5
INVESTMENT MERITS

Profit to more than double in FY10; 2Q10 earnings expected to increase 176% YoY.
As a cyclical business, Fuxing has been severely impacted by the crisis in 2009. Even
though management has managed to keep the company from going into the red,
profitability has been on a downtrend until 3Q09.

Fueled by the recovery in consumer sentiments while orders from Fuxing’s customers
have also been flowing in, we are expecting revenue of RMB140.1m and net earnings of
RMB13.5m in 2Q10. This profit number would equate to a 22.7% QoQ increment and a
176% YoY jump.

Figure 4: The recovery trend of Fuxing’s quarterly earnings

2Q10F 1Q10 4Q09 3Q09 2Q09 1Q09

Revenue
(RMBm) 140.1 108.1 146.7 127.8 120.9 80.4

Net Profit
(RMBm) 13.5 11.0 10.3 9.9 4.9 5.6

Source: Company and DMG estimates

Global events like the Shanghai Expo had caused a spike in international travel which we
opine would in turn benefit luggage manufacturers like Samsonite. On the other hand,
sports apparel producers like Nike and Anta are expected to benefit from sporting events
like the World Cup – this would resultantly serve to underpin Fuxing’s 2Q numbers. Going
ahead, events like the Asia Games in Nov 10 would also generate demand for these
companies. This will only mean greater earnings visibility for an upstream player like
Fuxing.

Coupled with the increase in disposable income of the Chinese consumer and the
aforesaid issues, we therefore believe that Fuxing is set for a blockbuster 2010. With
margins also set to improve due to higher utilisation rates, we are forecasting FY10
revenue of RMB549.3m and net earnings of RMB67.9m. Our bottomline estimate
represents a 121% increment YoY, which is one of the highest among our DMG S-chip
coverage list.

Figure 5: Fuxing China’s plants production capacity & utilisation rate

Source: Company

DMG Research
6
Extremely robust balance sheet – trading below its net cash position. As last
reported by Fuxing’s 1Q10 numbers, we believe that the stock presents a great
opportunity for investors at its current price of S$0.15. This is because there is a clear
margin of safety in buying a business that has S$0.158 in net cash, another S$0.133 in
assets, S$0.046 in liabilities and a total of S$0.266 in owner’s equity. Without considering
any earnings, and even after providing a token 50% discount to all assets other than
cash, Fuxing is still worth S$0.20 after netting off all liabilities. This figure is still above
Fuxing’s present share price.

Additionally, Fuxing’s strong cash balance also allows them to be flexible about their
dividend policy without having to compromise any growth opportunities. The recent
adoption of a dividend distribution policy of at least 40% net profit will set shareholders’
mind at ease. With an estimated EPS of S$0.016 in FY10, we expect a dividend payout of
S$0.0065 per share which translates to a 4.4% dividend yield.

Probable M&A opportunities to drive non-organic growth. We understand from


management that they are currently considering acquiring firms with electro-plating and
dyeing capabilities as these are the only two processes which are presently being
outsourced. Once the entire production process can be carried out in-house, the Fuxing’s
profit margin will continue to climb even further. We would be increasing our earnings
forecast should this take place.

Strong brand name. The company has received more than 20 awards and accolades
over the past 10 years including the “PRC Top 10 Famous Zipper Brands” award as well
as the “Symbolic Brand of China” award for its “3F” brand. More notably, in 2008, Fuxing
was named one of the 200 companies in Forbes “Asia’s Fourth Annual Best Under a
Billion List”, which focuses on Asia Pacific companies with under US$1b in sales. It is
only with such a strong brand moat that Fuxing is able to attract customers with renowned
brand names.

Focus on continued innovation to improve margins. Led by CEO Hong Qing Liang,
the management team has over 60 years of experience in the zipper business.
Recognising that innovation is the key for the company to sustain its growth and margins,
the management team have placed strong emphasis on the R&D activities. Ever since
Fuxing’s collaboration with Xiamen University in setting up its R&D facilities, the company
has been awarded 22 patents.

Recently in Jun 10, Fuxing announced that the application of patent for its latest
invention, Super Durable Zipper, has been approved. According to the management, they
are confident that this new product will be well received in the higher-end market and
would be earnings accretive.

With the recent “New and High Technology Enterprise” award, which will lower Fuxing’s
corporate tax from 25% to 15% for three years, the company will continue its focus on
R&D activities in enhancing production efficiencies and automation in the manufacturing
of zipper products.

DMG Research
7
KEY RISKS

The possible slowdown of the Chinese economy. There is growing concern that the
appreciation of the Chinese RMB would cause the Chinese economy to slow and in turn
affect the textile and apparel exports. Also, the Chinese housing market that seems to
have hit its peak is yet another factor that could derail economic growth. While Fuxing
may be negatively impact as a result, we believe that the company’s large cash hoard
should allow them to tide through any short-term downturn.

Risk of intensive competition. As mentioned, there are over 2,000 players in the
Chinese zipper market. Many of these competitors are small enterprises which mainly
compete on price. On the other end of the market, the Japanese zipper corporation, YKK,
dominates over 70% of the high end market while we regard Fuxing as being placed in
the middle. As the company has yet to truly break into the high end market, it is thus
susceptible to price competition in the low to mid range market. On the positive front,
Fuxing enjoys economies of scale, technical advantage and branding compared to the
smaller players.

Market Risk. Transparency issues are being regarded as a problem to investors when it
comes to S-chips and this has thus led to their generally lower valuations as compared to
their peers in Hong Kong and Shanghai. Not surprisingly, this is also seemingly the case
for Fuxing although we do believe otherwise. Additionally, Fuxing’s dividend policy
differentiates it from the other S-chips as it is one of the few that actually has one.

Direction of raw material prices. The raw materials that Fuxing uses include zinc,
polyester chips and DTY. As these collectively account for over 80% of their COGS, any
pronounced increase in prices could lead to lower margins. While management had
mentioned that they are able to pass on these costs to their customers during an upturn,
we do believe that it would be a different story in a downturn.

See important disclosures at the end of this publication 8


PEER COMPARISON / VALUATION

A value play as compared to its peers. As reflected in the figure below, the balance
sheet of Fuxing is much stronger than its competitors as the cash/share price equates to
1.13x. This is much higher than the industry average of 0.43x and also compares
favourably against China’s biggest zipper maker, Fujian SBS’ 0.10x. Nevertheless, we
would not be obtaining our target price through comparing Fuxing’s relative valuations
against the sector due to the lack of sufficient data points although we do note that the
company’s valuations are obviously more attractive than the industry average.

Figure 6: Peer comparison

Cash Cash / Mkt PER (x) P/B (x)


Company per Share Cap
Share price (S$m) FY10 FY11 FY10 FY11
Fujian SBS
Zipper
(002098 CH) 0.20 0.10 293.3 16.1 13.9 2.6 Na
Max Zipper
(8932 TT) 0.06 0.13 24.7 Na Na 1.3 Na
CMZ
(CMZ SP) 0.06 0.34 50.3 Na Na 1.2 Na
Fuxing China 0.17 1.13 124.7 9.2 7.2 0.5 0.5
Average 0.12 0.43 123.3 12.7 10.6 1.4 0.5

Initiate with BUY recommendation and TP of S$0.255 based on 6.0x net cash P/E.
Excluding Fuxing’s present net cash position of S$0.158, we are valuing its business at
6.0x P/E which represents the average of our DMG S-chip universe. After taking into
account its cash hoard, however, we arrive at a target price for Fuxing at S$0.255.
Additionally, we also note that at our target P/E of 6.0x, this is still way below its historical
P/E average of 11.1x. We thus initiate Fuxing with a BUY recommendation.

Figure 7: Historical P/E band of Fuxing since listing in Sep 07

Source: Bloomberg

See important disclosures at the end of this publication 9


FINANCIAL TABLE

Year End 31 Dec (RMBm)

Income Statement Balance sheet


2008 2009 2010F 2011F 2008 2009 2010F 2011F

Turnover 829.4 475.9 549.3 618.6 Trade payables 33.5 7.1 7.5 8.3
Cost of sales -564.9 -401.4 -417.3 -459.8 Short-term bank loans 111.5 13.0 13.0 13.0
Gross profit 264.5 74.5 132.0 158.8 Others 152.3 96.9 80.0 68.9
Other operating income -1.6 4.4 2.2 1.9 Total current liabilities 297.4 117.0 100.5 90.2
Distribution and selling
-5.2 -5.0 -4.9 -4.9
expenses
Administrative expenses -42.9 -17.5 -24.7 -26.6 Total liabilities 318.9 190.5 167.3 141.0
EBIT 214.8 56.4 104.5 129.1
Depreciation and
20.0 24.5 28.0 30.3 Cash flows
amortisation
EBITDA 234.8 81.0 132.5 159.4 2008 2009 2010F 2011F
Interest expense -9.2 -6.5 -3.8 -3.7
Profit before taxation 198.8 52.4 104.5 130.1
Interest income 0.4 2.7 3.3 4.3
FX gain / (loss) -7.3 -0.3 0.5 0.3 Adjustments for:
Profit before income
198.8 52.4 104.5 130.1 Others 30.2 -6.3 0.8 -0.5
tax
Depreciation of property,
Income tax expense -62.3 -21.7 -36.6 -42.9 20.0 24.5 28.0 30.3
plant and equipment
Operating profit before
Net profit attributed to
136.5 30.7 67.9 87.1 working capital 248.9 70.6 133.3 159.8
shareholders
changes
Inventories 13.4 -0.5 -4.4 -9.3
Trade and other debtors -7.9 131.1 -30.9 -30.4
Trade and other
2.0 -26.5 0.4 0.8
creditors
Balance sheet Others -182.8 357.7 16.9 -2.5
Cash generated from
2008 2009 2010F 2011F 73.6 532.4 115.3 118.4
operations

Net cash generated


Property, plant and
167.6 188.4 191.6 194.3 from operating -7.0 512.3 78.2 76.1
equipment
activities
Others 44.2 97.0 118.3 128.3
Total non-current
211.8 285.4 309.9 322.6 Purchase of PPE -20.1 -46.3 -31.2 -33.0
assets
Trade receivables, net 285.6 161.4 192.3 222.7 Others -62.5 -47.5 0.0 0.0
Net cash used in
Inventories 42.0 41.5 45.9 55.2 -82.6 -93.8 -31.2 -33.0
investing activities
Cash balance 361.3 709.8 674.6 648.5
Proceeds/(repayment) of
Others 474.0 87.2 80.2 79.5 14.9 -101.2 -9.8 -11.1
loans
Others -0.2 36.9 -25.0 -23.0
Total current assets 1162.9 999.9 993.0 1005.8
Dividends paid to
-56.0 -7.9 -27.2 -35.3
shareholders
Net cash used in
Total assets 1374.7 1285.3 1302.9 1328.4 -41.3 -72.2 -62.0 -69.4
financing activities

Share capital 738.7 756.2 756.2 756.2 Net increase/(decrease)


in cash and cash -130.8 346.4 -15.0 -26.3
Reserve fund 37.8 42.6 42.6 42.6 equivalents

Cash at the end of the


Accumulated profits 357.6 375.6 416.4 468.2 318.8 665.1 650.1 623.9
year
Others -78.3 -79.6 -79.6 -79.6
Shareholders' Equity 1055.8 1094.8 1135.6 1187.4 Margins (%)
2008 2009 2010F 2011F
Total non-current
21.5 73.5 66.8 50.8 Gross profit 31.9% 15.6% 24.0% 25.7%
liabilities
EBIT 25.9% 11.9% 19.0% 20.9%
Net profit 16.5% 6.5% 12.4% 14.1%
Source: Company and DMG estimates

See important disclosures at the end of this publication 10


APPENDIX 1: Products

Figure 8: Overview of Fuxing China’s products

Source: Company

Figure 9: Metal Zip Figure 10: Plastic Zip

Source: Company Source: Company

See important disclosures at the end of this publication 11


Figure 11: Consumer End-products containing Fuxing’s zippers

Source: Company

See important disclosures at the end of this publication 12


APPENDIX 2: Key Management

Mr Hong Qing Liang


Chief Executive Officer and Executive Chairman
Mr Hong Qing Liang is the company’s Co-Founder and Chief Executive Officer and was
appointed to the Board on 19 Dec 06. Since co-founding Fuxing in 1992, he has played an
instrumental role in managing the business, operations and strategic directions of the
company. His responsibilities include formulating and executing the company’s business
strategies and policies. He possesses substantial experience and knowledge of the zipper
industry, having been involved with the zipper business for over 20 years. Prior to this, he
was running his own zipper trading business. In 2000, Mr Hong was named the Honorable
Chairman of Zipper Industry Association of Fujian Province.

Mr Hong Peng You


Director of Administration
Mr Hong Peng You is the the company’s Director of Administration and was appointed to
the Board on 19 Dec 06. He is responsible for all administration matters in the Group. He
had assumed the position of financial manager in Fuxing during 2004 and was
subsequently appointed as the company’s deputy general manager in 2005 and took
charge of all finance and admininistration matters. He was awarded “China Famous
Accountant” by the World Specialty International Center in 2001. He is also a registered
accountant with Jinjiang City Finance Bureau and a senior tax planner.

Mr Koh Choon Kong, CFA


Chief Financial Officer
Mr Koh CK joined Fuxing on 15 Nov 09 to head its Finance and Strategic Planning function
as well as investor relations. Prior to this, Mr Koh was the Group CFO of China Sunsine
Chemical Holdings Ltd since Nov 2006, and was appointed to its Board as non-executive
director as well as a member of Audit Committee on 15 Nov 09. Mr Koh began his career in
1995 when he joined Price Waterhouse Singapore in the audit and advisory services. In
1998 he joined the asset management division of Citicorp Investment Bank (Singapore)
Limited and became its assistant regional financial controller for Asia. He joined ICH
Limited as its financial controller in 2001 and helped set up ICH Capital Pte Ltd. In 2002, he
founded KRN Warren Advisors where he provided corporate financial consulting and
financial training services.

See important disclosures at the end of this publication 13


DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage

This research is for general distribution. It does not have any regard to the specific investment objectives, financial situation and particular needs of
any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser
before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor
accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to
change without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities, DMGAPS and its affiliates, their
directors, connected person and employees may from time to time have interest and/or underwriting commitment in the securities mentioned in this
report.

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See important disclosures at the end of this publication 14