Fujian Zhenyun Plastics (Singapore: FZPI SP) is a Singapore-listed manufacturer and distributor of water and energy infrastructure products in China that we believe trades at a 60% discount to intrinsic value. It trades at a ’06 P/E of 4.7x, has a 2-year net income CAGR of 22%, has generated ROEs in excess of 20% each of the past three years, holds net cash on its balance sheet, AND pays a 4.4% dividend yield. The company stands to benefit from China’s massive water and gas infrastructure buildout, and is highly undervalued even on a trailing basis.
Founded in 1993, Fujian Zhenyun Plastics (“Fujian”) is among the ten largest manufacturers of polyvinyl chloride (PVC) and polyethylene (PE) pipe and fittings in China. The primary applications for its products are (% of ’06 revenue): water transmission (51%), gas transmission (11%), and communications conduit (22%), and electrical conduit (14%). The company is not vertically integrated as it does not manufacture its own PVC and PE resins, but it handles everything else: R&D, pipe and fitting manufacturing, and sales/distribution. Fujian began trading on the Singapore Stock Exchange in August 2007, selling 35 million shares at S$0.62. Its market cap today is S$66 million (USD$ 46 million).
Fujian operates five manufacturing plants in mainland China, encompassing 38 PVC (ann. capacity: 35,000 tonnes) and 35 PE (ann. capacity: 13,000 tonnes) production lines. As one of the ten largest PVC and PE manufacturers in China, Fujian benefits from economies of scale and geographic proximity to customers, thereby lowering production costs, shipping costs, and delivery times. It is also ISO9001:2000 certified. Given the value-to-volume ratio of plastic pipe, it is only economical to serve customers within a 500 km radius of a plant, as is the case with U.S. plastic pipe manufacturers. Fujian has been steadily increasing its production capacity, with combined annual PVC and PE capacity increasing approximately 5,000 tonnes each year. Current capacity utilization is in excess of 90%.
Fujian has an extensive sales and distribution network within China, with 15 sales offices in key strategic such as Beijing, Shanghai, Wuhan, and Guangzhou. Fujian’s distributor network encompasses over 150 distributors in over 20 provinces throughout China.
Nothing demonstrates the quality of a company’s business or management skill like their numbers, so here they are:
Cash less debt
Revenue, operating income, and net income all growing north of 20% annually. Fujian generates exeedingly high ROE and ROA, has negative net debt, serves a rapidly growing Chinese infrastructure market, and trades at an ’06 P/E of 4.7x.
Fujian’s primary growth drivers are China’s infrastructure buildout and continued urbanization. The Chinese plastic pipe industry has experience strong growth for several years, growing at a CAGR of 14% from 1999 to 2004. We expect this to accelerate. The Chinese government’s 11th five-year plan calls for RMB$1 trillion in spending on water distribution and treatment infrastructure. In addition, several large scale infrastructure projects are underway (South to North Water Diversion Project, West to East Gas Transmission Network, Five Vertical and Seven Horizontal Highways, and the 2008 Olympics) that should continue to drive demand for PVC and PE pipes, resulting in continued high capacity utilizations and margin strength.
Fujian is positioning itself for this growth, using the S$8 million in IPO proceeds to increase its PE and PVC production capacity by 80% and 25%, respectively.
Assuming no growth, we estimate Fujian’s earnings power value to be S$0.71, which represents an 11% premium to today’s share price. EPV assumptions below (in RMB, millions):
After tax EBIT
Less: minority interests
+/- Capex adjustment
Adj. after tax EBIT
Shares outstanding (mm)
Clearly the company can not grow at 20% into perpetuity. However, given the company’s backlog of nearly RMB$500 and China’s long-term infrastructure needs, we believe that a 5% growth rate is reasonable, especially in light of our use of a 14% WACC. Assuming 5% growth, we believe Fujian is worth S$1.01, a 58% premium to the current price.
- no specific catalyst beyond increased investor attention garnered by continued strong financial performance