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Sunday, April 09, 2006

Asia Dekor @ 18.5 cts (Flooring / China) 0 comments

Final Poll Results: 11:7

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Main issues

1.Industry is volatile and subject to pressure historically

2.Questionable placement mechanics

Asia Dekor is one of those stocks that have been quiet for the past 1-2 years and have burst into life recently on the back of the China theme. Some might note that it recently did a share placement recently at 14.5 cents.

On a sidenote, I often think that share placements by companies and associated share price rise is a chicken-and-egg thing. Which one comes first, which is cause, which is effect? One never really knows whether the company decides to make a placement following the share price rise, or whether it's the other way: the company wants to raise cash through a placement, and someone helps to ramp the price to a suitable level to optimise the amount of cash they could raise. One may call me cynical, but I have seen enough to conclude that we cannot innocently assume the first possibility all the time.

Asia Dekor, in my view, were probably quite desperate to raise cash. Why else would they place out shares that were actually NTA-dilutive? The placement was done at 14.5 cents while the company's pre-placement NTA per share was 16 cents. If one looks at their balance sheet it is understandable: marginally positive working capital (current assets - current liabilities) of only RMB2M, with most of their assets (~80%) tied up in fixed capital. The declared usage of the payment funds was to pay back long-term debt, but it could easily be used to help tide over tight cash flow situations given their persistent high investments that overwhelm operating cash flow.

Let's take a look at the overall industry to get an idea of the prospects. I don't have any figures for the flooring industry in China but it would obviously be dependent on general economic growth in China and the property sector in particular. Demand is always going to be there. However, the intensity of the competition can be seen in the dismal performance of two peers similarly listed on the SGX: Eagle and ASA. These two companies deal mainly in ceramic tiles, not exactly laminated flooring like Asia Dekor, but in terms of the general market base I believe one may compare the three with the same broad brush (the two products may be seen as substitutes for each other). Eagle has had three money-losing years out of four, while ASA has seen declining margins since listing until it finally went into the red in FY05. Asia Dekor itself has seen up and down years (it made a loss in FY03) and revenue has been largely stagnant --- that is not a good sign when you see its huge investment outflows, because it just suggests the company has to keep running on the treadmill to stay on the same spot. Note that the three companies are comparable in terms of operational scale, with revenue base hovering around the RMB500M mark.

Granted that Asia Dekor's flooring brand "Power Dekor" appears to be well-recognised, having won award recognition for the past few years; however one wonders how much brand equity can be attributed to a product that consumers would probably only explore when they are buying/renovating a house. The profit margins appear pretty strong (>15%), yet the blip in FY03 (money-losing year), the heavy investments year after year, and the state of the flooring industry as reflected in the other two peer companies above underline my view that the stock should not be trading at more than 10X trailing PE. That's roughly what Asia Dekor is trading at now (9.9X). Anything more and one would be attributing growth stock status to Asia Dekor which it definitely is not.

One question that investors will ask in any placement exercise is as willing as the company are to sell, there must be a ready buyer, which leads to the question of the reasons for their purchase. That, in the case of the recent placement, could well be the completion of their new particleboard production plant in Guangdong which is touted as the new growth driver as it serves the lucrative furniture raw materials market. Investors may well want follow and buy in on the basis of this growth driver, but in the absence of any track record (its current fibreboard segment contributes only 1/9th of revenue and 1/10th of profit) it may not be advisable. Not when the company is seeking to diversify in order to escape from a core business which is stagnant or declining. One might as well buy a company whose core business is thriving, don't you think?




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