FFHL - Fuwei Films

[king888]

Here is my second post here.  I just want to share my investment thesis on this small chinese company.

 

Fuwei has market capt about $23 million. They went IPO in Dec 2007 with $9 a share and has been trading lower and lower since then.

 

The Co. is be hated by investor due to

1. The downtrend in BOPET demand. The film industry is very cyclical business

2. The vague future about the Company .Because there major shareholder which comprise 65% stake in the company has been sentenced to death penalty by Chinese government.And the 65% will be seized by goverment. Currently,these three mgmt still making an appeal and they are not related to company management board anymore . It takes next 2 years for Govn to finalise the verdict and takes 65% from them

http://finance.yahoo.com/news/Fuwei-Films-Announces-Final-pz-2250051451.html?x=0

3. The unfinished production plant .It has $35 "contruction-in-progress" in balance sheet. Because they do not have enough fund to pay for further construction. If finished, these plant will increase production capacity of the co by 67% . (Page 6 in company presentation here -> http://www.fuweiholdings.com/UserFiles/007091427421151.rar)

4. It is small chinese listed on Nasdaq which is hated by investor for its transparency

 

Here is the catalyst that I feel it is very compelling to invest in this company .I divided it into two categories.

- External Catalyst.

And some of you guys might knew. The film industry is in the uprising trend since this year. The profit for Indian film producer are rising up astonishing. And these trends has affected on the Fuwei's Q2 report. The margin expand of fuwei but the last Q for fuwei is still in red due to "litigation fee" with Class action lawsuit which costs about $1 million  .

 

Industry News

Jindal Poly Films strikes record high after robust quarterly earning

 

Jindai is PET ,BOPET ,BOPP film producer in India .

 

Jindai Quarterly report from money control

 

Here is analyst report for Uflex another Indian manufacture for BOPET and BOPP .

And this is excerpt from report above

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Agarwal said Jindal Poly Films, which posted robust results for the quarter ended September 2010, witnessed a sharp rise in demand and resultantly the prices for its products starting from May-June, especially in BOPET.

 

He said a major chunk of demand was seen coming from three new products which came in vogue in the last few months - the photo voltaic cells used for solar power generation, flat-screen televisions like the LEDs and LCDs and new-generation cellular phones. “These led to an additional demand of 10% in the market,” he said.

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The product for Uflex and Jindai is both BOPP and BOPET and the rising demand happen in BOPET but their gross margin is still very high .  Fuwei is pure BOPET manufacturer. It upcoming quarterly report should be impacted by uptrend more than these companies.

 

-Internal Catalyst

1.Fuwei has settled with Class action lawsuit and the loss is $1 is already reserved in previous quarter .So no more expense on this anymore . Sep 20, 2010 News

 

2. The company is in transition from Privately-held Chinese company to Stated-own . And this will result in PE expansion. This is because more transparency.On one want to commit fraud in stated-own company because the penalty for white-collar crime is death.

 

3. They have got a small loan from Chinese Government in dec 2009 after the final verdict for major shareholder (about 10 million RMB) .It is positive sign that Government is willing to help funding for its future-own company. And if the industry is still in this good shape .I do not think it will hard for management to find resource for funding its plant construction.

 

Previous quarter Fuwei made the margin at around 17.5%. The coming report should yield higher margin than this ( I expect 24% or higher)  .Because the material costs was almost the same ( You can see that in Jindai report). And it should have very stunning quarter .  And I heard the management in Poplyplex Thailand (another film manufacturer ) The management called for the uptrend in industry in 2007 but they missed. They said that if the uptrend comes it should last for about 3 years. Because it takes time for manufacturer to build new plant and expand. I do not have link for this argument it just served from my memory.

 

The stock climbed 20% yesterday. This is very illiquid stocks so it is not easy to takes a position. And it has no moat except it is located in China which is closer to buyer market than Indian companies. But the technology of Fuwei can't match those Indian companies .Those Indian companies are leaders in this industry the cost of production is lower.  But due to the fact above I saw opportunity for this very small Chinese company.

 

 

Disclosure: Long FFHL