Li Heng Chemical Fibre Technologies Limited ("LHCF")

We recently visited LHCF's plant and witnessed the production of its high-end nylon yarn products at Jinfeng and Binhai Industrial zone, PRC. LHCF, based in PRC, is principally engaged in the manufacture and sale of high-end nylon yarn products. Its two production facilities in Changle City, Fujian Province are strategically located amongst clusters of textile and garment manufacturing industries and related supporting service industries.
The Group's revenue grew at CAGR of 54% from FY04~06 and achieved gross profit margin of above 34%.

Sales and GPM Breakdown
Breakdown (%) FY05 FY06 1H07
Revenue RMB 'm % RMB 'm % RMB 'm %
HOY/POY 978.7 100.0 1,540.1 90.8 1,100.3 76.2
FDY - 0.0 55.5 3.3 161.4 11.2
DTY - 0.0 101.0 6.0 182.4 12.6
Total 978.7 100.0 1,696.6 100 1,444.1 100
GPM (%) % % %
HOY/POY 34.1 34.8 33.0
FDY - 38.4 38.2
DTY - 36.9 39.9
Total 34.1 35.0 34.4

Source: Prospectus

Production Capacity and Utilization – LHCF's maximum annual capacity increased 81% to 167,000 mt in 1Q08 from 92,400 mt in FY07. The group intends to further increase its capacity to 257,000 mt by 3Q09. The Group consistently achieved utilization rate of above 90% for FY04~06, as shown in the table below.
We understand from management that LHCF supplies between 20~50% of the each customer's demand and with each customer accounting for less than 5% of the Group's total revenue, we believe LHCF will be able to maintain a reasonably high utilization rate in FY08~09.

Year 2004 2005 2006 2007E 2008E 2009E
Maximum Annual Capacity (mt) 20,300 40,500 92,400 92,400 167,000 257,000
Utilization Rate (%) 91.2 93.7 95.8 - - -

Source: Prospectus

Upward integration - Polyamide Chip Plant with capacity of 80,000 mt by 3Q09. The Group plans to construct a polyamide chip plant, an essential feedstock for the production of nylon yarn, to reduce reliance on external suppliers of polyamide chips. We believe this will allow LHCF to have better control over the quality of polyamide chips used for the production of LHCF's nylon yarn products, leading to overall costs efficiency as well as better quality of LHCF nylon yarn products.

Valuation – LHCF, intends to pay dividend of at least 20% out of FY08~09 net profits, has the largest market capitalization and production capacity, which we believe LHCF should command a premium over its peers. We do not have a rating for this counter.