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Hengxin Technology Ltd
June 29, 2007, 8:43 am
Filed under: companies analysis

Hengxin Technology Ltd (SGX: I85)

As of 29 May 2007

  • 1 SGD : 5 RMB
  • EPS: 0.08/share
  • P/E ratio: 4.875
  • Earnings Yield: 20.5%
  • 52 Week High: 1.070
  • 52 Week Low: 0.360

The One Minute Story

Hengxin is a Jiangsu, PRC based manufacturer of radio frequency coaxial cables, which are used in the transmission systems of telecom operators and service providers, major equipment manufacturers and cable TV networks in the PRC.

Financial Analysis (in SGD)

YEAR

2006

2005

2004

2003

2002

Book Value Per Share

0.206

0.034

0.50

 

 

Cash Per Share

 

 

 

 

 

Cash Flow Per Share

-0.141

0.030

0.010

 

 

Earnings Per Share

0.080

0.044

0.021

 

 

Dividend Per Share

0.0071

0.0030

0.0010

 

 

Dividend Payout Ratio

8.75%

10.0%

2.38%

 

 

Net Profit Margin

15.2%

12.0%

7.2%

 

 

Return on Total Assets

13.6%

13.3%

6.5

 

 

Return on Equity

34.7%

100.0%

32.9

 

 

Current Ratio

1.4

0.8

1.1

 

 

Long Term Debt of Capitalisation

N/A

N/A

10.1

 

 

ROE is very high, while net profit margin has been steadily increasing over the years. Current ratio is satisfactory and there is no long term debt. Cash flow is negative for 2006, which is not a good sign.

Why Buy

  • Increasing profit margins: might be an indication of increasing competitive advantage.
  • ROE is high, which might be an indication of efficient capital allocation.
  • Hengxin supplies to major Chinese telecommunications firms, namely China Telecom, China Unicom, China Mobile and Huawei, amongst other major companies. This bodes well for its network of customers.
  • On top of China, India is another huge potential market for expansion; in 1Q FY2007, exports accounted for 12.8% of sales, much of which was sold to Indian companies.
  • Mobile phone penetration in China stands at about 30% according to AR2006; this leaves much room for growth in the telecoms industry, of which Hengxin is poised to feed off the growth, being the largest manufacturer of co-axial cables in the PRC with a 35% estimated market share.
  • Risk is diversified since Hengxin provides to telecom operators and equipment manufacturers. While all are related to the telecommunications industry, I can’t see how the industry would fail to grow given China’s expansion. Mobile phones are commodities in the modern world.
  • The opportunity to piggyback onto the possible boom in the Chinese telecommunications industry. While mobiles will fly off the shelves, telecom operators will be racing to wire up China, especially with 3G networks. Hengxin can benefit regardless of which telco wins, be it China Unicom or China Mobile.

Why Not Buy

  • To find out problems, I decided to investigate irregularities in the trend over the years for the financial performance of Hengxin.
  • Cashflow in FY2006 is negative (-0.141 SGD per share). This is largely due to a big increase in trade receivables, which might be an indication of the company not being able to receive its cash on time from customers. Hengxin does not explain why the cashflow is negative in the annual report. Hmmm.
  • Copper prices are through the roof. However Hengxin’s rising profit margins seem to suggest copper prices are not affecting it too much. However it would be interesting to see how the company deals with this problem.
  • Director Qian Li Rong has been reducing his holdings of Hengxin shares. This might be a negative indicator of company prospects, but its still a might, not a certainty.

Potential Problems

  • Regulations in the telecommunications industry.
  • Coaxial cables are not products I fully understand; it might be hard to assess competitive strength in terms of product design and functions. If Hengxin does more R&D, I might not understand the mechanics of new products.
  • A slow down in Chinese economic growth and an inability to let growth trickle out into the outer cities. Growth of the rural areas and smaller cities will bode well for the telecommunications industry.

Strategy

  • Watch for growth in market share
  • Look out for macro news on telecommunications industry
  • Monitor cash flow.
  • At a P/E of 4, it looks like a really good buy for a market leader.

Links

http://ir.hengxin.com.sg/misc/DBS_Vickers_24May06.pdf

http://www.ednasia.com/article-11413-imie2007revealsfivekeytrendsofchinamobilephoneindustry-Asia.html

Disclaimer: The author bears no responsibility for any financial losses caused by reliance on the author’s views. Investors are advised to do their own research before making their investment decisions.

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1 Comment so far
Leave a comment

hi I am interested in your view on this HengXin, which is now trading around 24 cents after much sell down over last few months.

Could you provide update ? I am interested to buy if the analysis is positive.

thanks a lot

Comment by tiandi




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