Story: China Sky ("CSCF") announced that it has entered into an agreement
to acquire Qingdao Zhongda Chemical Fibre ("Zhongda"), a leading producer
of nylon DTY, for RMB450m.
Point: CSCF's horizontal expansion put the Group on the fast growth track
as the move would: (I) give an immediate boost to the Group's earnings;
(II) open up the market in Northern China and Europe by leveraging on
Zhongda's strong branding; and (III) provide the Group with additional land
space for further expansion into DTY and SR nylon.
Relevance: We have raised FY08 and FY09 earnings by 8% and 12% respectively
to account for new contributions from the acquired plant, which will come
onstream from Mar08. Nonetheless, in view of the recent textile sector
de-rating amid US's sub-par growth and high oil price environment, we have
lowered our PE multiple to 12x as opposed to 15x previously. Consequently,
our target price is reduced to S$2.85, still pegged to blended FY08/09
diluted EPS (factored in maximum new share issued based on price of S$1.70
for the acquisition). Maintain Buy.
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