gsg_stock discussion

Stockwatch- CHT Holdings (Singapore) S$0.615

SBI-E2 Capital Not Rated Report on CHT Holdings 23 Oct 2006

CHT: All set for strong recovery

Key points:
*CHT is one of the world’s leading producer of PVC adhesive tapes for the automotive, industrial and consumer markets.
*CHT is the largest producer in the PRC, accounting for estimated 60% of all domestic production capacities.
*Strong customer base with end-customers consist of leading MNCs in automotive and electrical appliance segments.
*Strong profit growth expected in 2H, led by turnaround in Shanghai JV, lower raw material costs and new capacities.
*FY06 results are likely to beat consensus. Based on our initial estimates, CHT is deeply undervalued at 5.4x FY06 and 4.3x FY07 P/E given its dominant position in PRC.

Company background. Listed in 2003, CHT is one of the world’s leading producer of PVC adhesive tapes for the automotive, industrial and consumer markets. CHT is believed to be the only integrated adhesive tape producer in the PRC to manufacture from machinery and equipment for the production of adhesive tapes, PVC film, pressure sensitive adhesives (PSA) to the adhesive tapes. CHT derived close to 40% of revenue from automotive segment while the remaining from industrial and consumer segments. In FY05, 66% of revenue was derived from the PRC markets. CHT’s production facilities are based in Hebei province and Shanghai, PRC.


The largest PVC adhesive tape producer in the PRC. Based on management’s estimates, of the total 40 PVC adhesive tape production lines in the PRC, 24 lines (or 60%) are owned by CHT. Other PRC producers are much smaller in size and have less than 3-4 production lines each.

Strong customer base. CHT’s products are sold through 63 sole distributors and more than 300 dealers in 30 provinces in the PRC with more than 1,000 customers. CHT’s customers in the automotive industry are manufacturers of component parts for automobiles, including MNCs such as Lear, Vistaone and Delphi. The adhesive tapes are being used to insulate and color-code the different wires and cables that are used in automobile wire harness. The end-customers are auto makers such as DaimlerChrysler, Volkswagon, General Motors and Ford. In the PRC market, management believes that CHT has giant market share (>90%) of PVC adhesives tapes used by all Chinese auto makers. CHT’s industrial customers include electrical appliance manufacturers such as the Lenovo Group, Haier and TCL.

Strong profit growth in 2H. CHT made net profit (ex. exceptionals) of RMB 52m (+22% YoY) in 1H06, partly affected by RMB6.3m losses in its 75%-owned Shanghai JV with US-based Plymouth and higher costs of its oil-based raw materials. 2H profit recovery will be led by four factors:
*turnaround in its Shanghai JV, which is expected to contribute strongly with estimated RMB5m net profit/quarter from 3Q06;
*turnaround in its 39%-owned BOPP (Biaxially Oriented Polypropylene) associate which has been loss-making since 2003;
*5-6% QoQ drop in raw material costs, which accounted for 65% of COGS; and
*maiden contribution from 2 new production lines added in Aug06.

4Q is expected to see sequential growth from 3Q as the 2 new production lines will be ramped up quickly with current utilization rate already high at 85%.

FY06 results to beat consensus. We believe CHT will beat FY06 consensus profit estimate of RMB 129m. Given the strong turnaround in 3Q and strong sequential momentum in 4Q, we expect CHT to make net profit of RMB 140-150m. For FY07-09, management also targets 20-30% net profit growth per annum. Assuming RMB150m net profit for FY06 and 25% profit growth for FY07, CHT is currently trading at undemanding 5.4x FY06 and 4.3x FY07 P/E. We believe CHT is undervalued given its dominant position in the PRC’s PVC adhesive tapes market and strong earning recovery momentum.

posted by gsg @ 5:31 PM