China’s Maxwell buys land to set up factory in expansion

THERE are currently nine China-based companies listed in Malaysia
and you'll be hard pressed to find one that is trading above their
initial public offering (IPO) price.
Of course, some did trade above their IPO price soon after they were listed but none proved sustainable.
It's
somewhat perplexing that they are not. These companies are cash-rich,
have profits that grow year-on-year and almost, if not, all are trading
at huge discounts to their net cash per share.
Sure, not all of
their businesses are terribly sexy. Most are shoe manufacturers but
given the growing population and income levels the world over, there
remains growth potential.
So, what is the problem?
Perhaps
there is the stigma attached to China stocks given what has happened to
some Chinese companies listed in Singapore. Known as S chips, many of
them were tainted by corporate scandals during the financial crisis of
2008/2009, as a result of which investors and punters got their fingers
burnt badly.
“Also, we are not able to understand and follow
exactly what these companies are doing in China and normally these
companies are small and medium enterprises which will hardly attract
state funds' interest,” says Lim Teck Seng, deputy managing director of JF Apex Securities Bhd.
“Without support from these funds, it is quite impossible to see stock price appreciation or support,” he adds.

[You must be registered and logged in to see this image.] Tan:
‘We cannot control the perception Maxwell has bought Hong Kong based
retailer Lim Ying Ying Ltd which is in the garment business. of others
but we do hope it can change’. Still, some investment
bankers have chosen to be a little more optimistic. “We believe that in
time to come, people will gain more confidence in China companies
listed in Malaysia.
“They have to demonstrate more to prove
their attractiveness, maybe work a little harder than the rest in
getting their story out there,” says one.
Maxwell International Holdings Ltd is one such company riding on such optimism.
The
company was listed in January 2011 at an IPO price of 54 sen. At last
look, it was trading at 31 sen, a 42% discount to its net assets per
share of 95 sen as of Dec 31, 2012.
Since it was listed, it has paid out dividends to its shareholders twice.
“It is business as usual for us. We cannot control the perception of others but we do hope it can change,” chief financial officer Tan Swee Song says of Maxwell which specialises in the design and manufacturing of sports shoes.
It
does this as an original equipment manufacturer and original design
manufacturer for the domestic and international markets and
manufactures for brands like Li Ning, FILA, Mizura, Yonex, Kappa,
Brooks and Diadora.
According to Tan, Maxwell's net margins of
between 18% and 20% are “one of the highest” among Chinese shoe makers
listed here as the company does not manufacture its own brands and
therefore saves on advertising and marketing costs.
It sells
whatever shoes it makes to trading houses which will then sell them to
overseas markets across Europe, the United States and Asia.
“Currently, demand outstrips supply,” Tan says.
That
is why Maxwell has bought 171,580 sq m in Henan province for RM17.2mil
cash. It plans to build a factory on that land by the end of 2014. The
new factory will enable Maxwell to make more shoes to cater to the
growing demand, he says.
Currently, it only has one factory in Fujian province which makes some 8 million pairs of shoes per year.
“With our new factory we hope to more than double this,” says Tan.
Although the company has said before that it hopes to negotiate with top labels like Nike
and Adidas to manufacture shoes for them directly, Tan says this is
“not so easy” even with outsourcing and the new factory coming on board.
“Because
their (Nike and Adidas) orders are very big as in a few hundred million
pairs of shoes per year while Maxwell is a “mid-sized” company in China
and hires about 1,500 workers at its current factory.
“But this clearly shows that demand is there...”
So
as to not depend on shoe manufacturing, Maxwell in December last year
spend about RM6mil to buy up 92.5% in Hong-Kong based retailer, Lim Ying Ying Ltd, which has been in the garment business for decades and has its own brands.
Maxwell
via its Hong Kong subsidiary has also bought exclusive rights to sell
European and American apparel, which can command higher margins, in
China.
Foreign brands
Profits from Ying Ying will
kick in after the completion of the purchase of the firm, which is by
next year, while profits made from the foreign brands such as Thomas
Dean, Punto Blanco should come in immediately, Tan says.
He says
Maxwell, which has more than RM200mil in cash with zero debt, is not
planning to utilise its cash for any other assets for now but will use
it to build up the businesses that it has just acquired.
With
all these plans afoot and growth intact, isn't the Bursa-listed company
which is currently trading at 1.59 times price to its earnings
frustrated that its valuations are not reflective of these?
Tan says it is quite obviously so but says the company will not go for dual listing as a solution.
“But there is a possibility of a privatisation. However, we feel that even if this happens, it will not be too soon.”
Maxwell is 58% controlled by its founder and executive chairman Li Kwai Chun and her son. A further 10%-11% is being held by funds and private banking clients.
“A
lot of fund managers and bankers from Hong Kong, Singapore, China and
even some private equity funds from Malaysia have talked to us about
the possibility of such an exercise but as far as we are concerned, it
is too fast to privatise. We just got listed but we will consider it in
the longer term.”
“For now, we are just listening to proposals
because after all, the main reason why we chose to list was because we
wanted to raise our profile so that we are able to work with
international partners.”
For the year to Dec 31, 2012, Maxwell
saw a 6.8% increase in revenue to RM412.286mil from RM386.032mil a year
earlier. Higher sales were attributed to higher quantity of sports
shoes produced in that year, higher average selling prices and the
group's ability in securing stable orders from existing customers
during the year.
It also registered a higher net profit
attributable to shareholders of RM77.679mil in financial year 2012
compared with RM69.856mil in the previous year.
“What we want people to know is that we are serious about our business. The rest we can't control.”