China Fibretech: Cash Over Valuation.

This morning we saw interest in Chinese fibretech companies – Li Heng (+6.8%), China Sky Chemicals (+4.3%) and China Gaoxian (+6.1%).

Apart from recent share price catalyst from China Gaoxian’s KDR listing, we believe there could be growing interest in cheap Chinese fibretech companies due to a potential turnaround in the Chinese fibretech industry. We believe that earnings could have bottomed out, and companies may resume strong yoy earnings growth in 2011. We highlighted these in our AM Trader on 30 Nov, and stated that buying Chinese textile companies as a potential rewarding bet.

Of the incumbents in the Chinese textile industry, we would like to highlight China Fibretech as a potential outperformer. 4Q10 performance is expected to pick up. At S$0.085, the stock’s net cash per share of S$0.145 is 1.7x higher than its existing share price. China Fibretech is also trading at 0.43x P/BV. The strong net cash per share offers a high margin of safety for investors, as China Fibretech will be able to withstand external shocks with a strong cash balance. At such attractive valuations, we expect China Fibretech to receive strong interest from the market going forward.