Winsome Moves

♦ Strategic focus pays off

3Q07 earnings rose 27% on a 23% increase in revenue to RMB25.7m. 3Q07 earnings reached 69% of our full-year forecast, on track to meet our forecast. With increased sales to both new and existing customers, sales volume of fabrics rose 9% Y/Y to 7.8m yards in 3Q07. The increasing focus on the more profitable functional fabrics is evident in a continual double-digit rise in average selling prices (+16% Y/Y). The improved product mix also explains the consistent uptrend in gross margin which rose sequentially from 37.2% to 38.7%. Strong demand for its products has led the group to raise its projected production capacity in FY07 from 36.9m yards to 38.2m yards.

♦ New acquisition comes ahead of relocation plan

The group also announced the acquisition of Zhongshan Yisheng, a fabric manufacturer located in Guangdong Province. The net consideration for the acquisition is estimated to be RMB43m, and they will spend another RMB85m to acquire new equipment and to modify its existing infrastructure. The acquisition and capital expenditure will be financed using part of the RMB120m IPO proceeds, internal resources and bank borrowings. The proposed acquisition is expected to be completed by 31 January 2008, and commercial production should start shortly after. This acquisition comes ahead of the group?s initial plan to move to a bigger factory, and could potentially add to future production capacity.

♦ Expanding geographic footprint

Assuming this acquisition will commence production by 2Q08 (expected annual production capacity of 30m yards), and with full-year contribution from the expanded production facilities at the existing factory in Jinjiang, we expect FY08 capacity to increase from 59.7m yards to 61.4m yards. This lifts our FY08/09 earnings estimates by 7% and 23% respectively. The benefits of the acquisition include: 1) entry into the Guangdong market which is the key hub for apparel products; 2) complementary infrastructure such as the wastewater treatment and methylbenzene recycling facilities; and 3) enable the group keep up their production expansion plan despite the delay in the new factory. In addition, the group will continue to roll out value-added fabrics to defend its margins and growth. They recently developed a biodegradable compound fabric for high performance function such as mountain-climbing and skiing.

♦ Lots of bang for the buck

Foreland currently trades at 7x FY08 PER, a discount to its comparables which are trading at 11x FY08 PER. We have raised fair value estimate to 72 cents/share, based on the average of our PER (8x FY08 PER) and DCF valuation. Valuation is very attractive not withstanding the group?s above-20% growth momentum, outstanding industry gross margins and high ROE. Maintain BUY.