Full Apex - Positive on vertical integration

Full Apex (FA) is transforming itself from a pure downstream PET bottles maker
to a one-stop packaging service provider through moving upstream to PET chips
operation. Its primary businesses include PET chips, PET bottles, shrink film and
corrugated paper packaging. We are positive on its vertical integration move,
which we believe will reduce FA’s operating risk, improve operation efficiency
and enhance its margins in the long run.
The 200k/p.a PET chips plant is set to commence operation in 2H07. Given that,
we expect both sales and net profit of the company will increase substantially in
FY07-09. We raise our net profit estimate by 8% and 24% for FY08 and FY09
respectively. Based on a DCF model, we raise our 12-mth target price to S$0.55
from previous S$0.38, which represents 9.4x and 7.6x FY08 and FY09 earnings.
Maintain Buy.
Positive on vertical integration. Since it was listed, FA mainly focused on PET
bottle business in FY04-06. Yet, the margins have kept falling. This is primarily
because the company had no control of PET chips, which price is correlated to
crude oil price. Entering into PET chips operation will allow FA to smooth
margins yoy and improve its operating efficiency.
PET chips segment—engine for further growth. The 200kt/p.a. PET chips
plant will commence operation in July 07. Management indicated that it has
received orders from a variety of clients, not only from PET bottle makers, but
also from construction material producers. Given the wide usage of PET chips,
we are optimistic about its long-term prospects. In FY07-09, we expect the
utilization will reach 70%, 80% and 85% respectively. Gross margin will remain
low at 7% in FY07, and gradually rise to 10% in FY09. We expect PET chips
segment would contribute 1/3 of total gross profit in FY09.
PET bottles segment—capacity and utilization expansion. FA’s Hangzhou
PET bottle plant would commence operation 3Q07, which will add another 400m
capacity to the portfolio. By end-07, the total bottle production capacity will reach
2,031m, which has already doubled that of FY04. The utilization will increase as
well, we expect it to reach 67% in FY09 from 51% and 60% in FY07 and FY08
respectively.
Our optimistic estimate of FA’s bottles utilization improvement is attributable to
the strong demand of PRC soft drink market. According to China Soft Drink
Association, the total output of China soft drink reached 42.2mt, a 21.5% yoy
growth. And the Association expects the similar growth in 2007-09. FA, as the
3rd largest PET bottles maker, should grow in line with the industry growth, in our
view. Currently, FA has secured the orders by signing 5-yr supply agreement
with Pepsi in Tianjin, Shenzhen, Jiedong and Zhejiang. In the meantime, It also
develops new products, such as beer bottles, to solicit new clients.
Attractive valuation. We expect FA’s earnings to grow a CAGR of 28% in
FY07-09. For FY07 and FY08, the earnings drivers are PET chips capacity
release and PET bottles utilization improvement. While for FY09, the catalyst
would be operating margin increase. As such, we raise our net profit forecast by
8% and 24% correspondingly. Dased on a DCF model(cost of equity of 15%,
and terminal growth of 2.5%), we derive our price target of S$0.55. This
represents 9.4x and 7.6x for FY08 and FY09 earnings. We believe our target
price is undemanding given its 28% net profit growth in FY07-09. The target
price offers 46% upside from current level, which looks very attractive. Reiterate
BUY.