by Aspellian » Fri May 23, 2008 9:39 am
Exciting phase for Shanghai Asia
BT
SHANGHAI Asia Holdings (SAH) is at an exciting phase of its development right now. Executed well, and things can become quite interesting from now on.
Currently, the bulk of its earnings is from the printing of paper packaging for the cigarette industry in China.
The business is a lucrative one. Gross margin is a fat 35 per cent, and operating profit margin is at 29 per cent in the first half of this year.
Cash flow from operations averaged just under $19 million a year over the last three years. Return on equity was about 24 per cent for the last financial year.
As the group's chief financial officer Tung Kum Hon puts it, the barriers to entry in the business is not the machinery. Capital investment is not huge. But it is the relationships with the cigarette companies which allow one to be in the business. The Liu brothers, who built up and are still playing key roles in running the business, have been in the industry for some 20 years.
But while the business continues to yield good returns, growing it is a challenge.
Since China's entry into the World Trade Organization in 2001, and particularly since the beginning of 2004, the Chinese government has been encouraging the numerous cigarette companies to consolidate in order to stay competitive against foreign rivals. The consolidation has seen the number of cigarette brands plummet from more than 1,800 to less than 400 in the past five years.
As some of the brands printed by SAH were discontinued, its revenue, too, has been hit.
So at best, the paper printing business is a cash cow. Which was why the group diversified into a new business - a thin gauge aluminium rolling mill - in 2005, in which it holds a 46 per cent stake.
In the words of the group's chairman John Cambridge: 'We are moving from an economy of scope business which gives us a gross profit margin of 30-plus per cent, to a volume business with gross margin of 10 per cent.'
But the move will open up opportunities for SAH to get into the packaging business for food stuff, electronics and pharmaceutical products.
'This gives us the opportunities to get out of the cigarette industry, into the high growth arena of fast moving consumer goods. We've got to go down to the consumer chain for the high margin.'
From a green field just two years ago, the mill has up till last month churned out 6,000 metric tonnes (MT) of aluminium foil, with thickness ranging from six to nine microns.
According to chief executive Liu Jian Zhong, the mill breaks even at 967 MT per month. So at an average production of 1,000 MT per month now, the mill is already profitable. For the six months to June 30, 2007, it recorded a small profit of 7.3 million yuan on a revenue of 163 million yuan.
The mill's output is targeted at 12,000 MTs for the whole of this year. This will be ramped up to 25,000 to 30,000 MTs by the next financial year.
The US$55 million mill has a full capacity of 25,000 MTs. Another 20,000 MTs capacity will be added by the end of this year at a cost of 100 million yuan ($20 million). Currently, about 70 per cent of SAH's aluminium products are exported.
At a market cap of $124.3 million, SAH is valued at about nine times its last year's printing business. This excludes the aluminium business, which if executed well is poised to contribute more significantly going forward.
Of course, the aluminium business is still in its infancy, and a lot more nurturing in terms of financing and business development is required.
The share price now is amply supported by the printing business, which provides shareholders with a dividend yield of about 5 per cent. So any upside from the aluminium business will be an extra bonus.
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