CG Technologies (S$0.63) - Initiation of Coverage - Integrated value

? CG Tech is in the middle of a China textile boom. CG Tech is a producer of PET

chips used to produce polyester fibres and spun yarns in the PRC. The textile boom

that China is experiencing has escalated demand for synthetic fibres. In particular,

polyester fibre demand is expected to grow by an annual rate of 8.3% from 2006 to

2010. Benefiting from this demand, CG Tech?s revenue and net profits grew by 70%

and 80% CAGR respectively, from FY02 to FY05.CG Tech is in the middle of a China textile boom. CG Tech is a producer of PET

chips used to produce polyester fibres and spun yarns in the PRC. The textile boom

that China is experiencing has escalated demand for synthetic fibres. In particular,

polyester fibre demand is expected to grow by an annual rate of 8.3% from 2006 to

2010. Benefiting from this demand, CG Tech?s revenue and net profits grew by 70%

and 80% CAGR respectively, from FY02 to FY05.

? Growth catalysts from high-value product mix. Since 2005, CG Tech has

developed a series of high-margin PET chips (alkali-soluble, high-shrinkage and dyeabsorbing

chips) and spun yarns (?breathable? and combed yarn) to stay ahead of the

competition. These products are used to make functional and high-quality textiles

greatly demanded by textile producers, given rising Chinese affluence and the recent

imposition of textile export quotas to the US and EU. Of CG Tech?s total capacity of

47,154 tonnes p.a. in 3Q06, premium-grade products accounted for 60%. Going

forward, the group will increasingly shed capacity for its less profitable bright and

semi-dull chips in favour of high-margin chip products by reconfiguring its existing

facilities. Earnings growth in 2008 is also expected to be powered by its latest

compact combed yarn, which will be introduced in 4Q07.Growth catalysts from high-value product mix. Since 2005, CG Tech has

developed a series of high-margin PET chips (alkali-soluble, high-shrinkage and dyeabsorbing

chips) and spun yarns (?breathable? and combed yarn) to stay ahead of the

competition. These products are used to make functional and high-quality textiles

greatly demanded by textile producers, given rising Chinese affluence and the recent

imposition of textile export quotas to the US and EU. Of CG Tech?s total capacity of

47,154 tonnes p.a. in 3Q06, premium-grade products accounted for 60%. Going

forward, the group will increasingly shed capacity for its less profitable bright and

semi-dull chips in favour of high-margin chip products by reconfiguring its existing

facilities. Earnings growth in 2008 is also expected to be powered by its latest

compact combed yarn, which will be introduced in 4Q07.

? Integrated value. CG Tech currently makes and sells PET chips and yarns only

(using polyester short fibres sourced from outside parties). The group will start to

produce polyester short fibre in-house by 3Q07. This will be used as raw material for

its yarn products. We expect cost savings of 3-4% yoy through the vertical integration

of all three stages of production under one roof.Integrated value. CG Tech currently makes and sells PET chips and yarns only

(using polyester short fibres sourced from outside parties). The group will start to

produce polyester short fibre in-house by 3Q07. This will be used as raw material for

its yarn products. We expect cost savings of 3-4% yoy through the vertical integration

of all three stages of production under one roof.

? Net profit CAGR of 33% projected for FY05-08. We expect 2006 to be a stellar year

for CG Tech, with net profit growth of 58% yoy on the back of capacity expansion for

its high-end functional products. Continued favourable market conditions, capacity

expansion and the introduction of new products are expected to support an earnings

CAGR of 33% through to FY08.Net profit CAGR of 33% projected for FY05-08. We expect 2006 to be a stellar year

for CG Tech, with net profit growth of 58% yoy on the back of capacity expansion for

its high-end functional products. Continued favourable market conditions, capacity

expansion and the introduction of new products are expected to support an earnings

CAGR of 33% through to FY08.

? Outperform, with target price of S$1.20. We initiate coverage with an Outperform

rating and a target price of S$1.20, based on DCF valuation (WACC 12.41%, terminal

grow rate of 0.5%). We see share-price catalysts from: 1) strong FY06 results

expected, with net profit growth likely to exceed management?s guidance of 50%; 2)

expansion of high-margin products both downstream and upstream; and 3) the

possibility of penetrating the international market, which should further boost its

earnings and margins.Outperform, with target price of S$1.20. We initiate coverage with an Outperform

rating and a target price of S$1.20, based on DCF valuation (WACC 12.41%, terminal

grow rate of 0.5%). We see share-price catalysts from: 1) strong FY06 results

expected, with net profit growth likely to exceed management?s guidance of 50%; 2)

expansion of high-margin products both downstream and upstream; and 3) the

possibility of penetrating the international market, which should further boost its

earnings and margins.