Fuwei Film IPO: Solid Growth, Reasonable Multiple

Dec.19.06 | About: Fuwei Films (FFHL)

A promising little China IPO debuted earlier today. Note that we do have a position in FFHL at approximately $8.55. Happy Holidays from tradingipos.com!

Original publication date: Dec. 17, 2006

FFHL - Fuwei Films Holdings

FFHL - Fuwei Films Holdings plans on 4.3 million shares(assuming over-allotment) at a range of $8-$10. Maxim Group will lead underwrite the deal, with WR Hambrecht and Chardan Capital Markets co-managing. Post-offering FFHL will have 13 million shares outstanding for a market cap of $117 million on a pricing of $9. IPO proceeds will be invested in a new production line and to further FFHL's technology and operations.

From the prospectus:

We develop, manufacture and distribute high quality plastic film using the biaxial oriented stretch technique, otherwise known as BOPET film (biaxially oriented polyethylene terephthalate). Our BOPET film is widely used in consumer based packaging (such as the food, pharmaceutical, cosmetics, tobacco and alcohol industries), imaging (such as masking film, printing plates and microfilms), electronics and electrical industries (such as wire and cable wrap, capacitors and motor insulation), as well as in magnetic products (such as audio and video tapes).

FFHL, which commenced operations in 2003, believes they are one of the top BOPET manufacturers in China. FFHL sells to over 300 customers in China, The United States, Japan and Southeast Asia. Customers include some of the largest companies engaged in flexible packaging, including Alcan.

Printing film, stamping film and metallization film accounts for 65% of revenues. Specialty products such as anti-counterfeit film, laser holographic base film and single/double surface matte account for 15% of revenues. The largest segment of revenues comes from the packaged foods industry. Majority of sales are to packaged goods companies in the eastern section of China. Companies in China account for 80% of 2006 revenues, outside of China 20%. FFHL estimates that revenues outside of China will continue to increase as an overall % of revenues.

Not being an expert on BOPET, I'm going to quote from the prospectus on FFHL's BOPET film:

BOPET is a high quality plastic film manufactured using the biaxial oriented stretch (transverse and machine direction) technique. Our advanced production process improves the physical properties of the plastic film such as its tensile strength, resistance to impact, resistance to tearing and malleability. The high dimensional stability of the film over a wide range of humidity and temperature fulfills the basic requirements for flexible packaging. The film is light-weight, non-toxic, odorless, transparent, glossy, moisture-resistant, and retains high barrier resistance, making it suitable for many forms of flexible packaging, printing, laminating, aluminum-plating and other processes. In addition, it retains high dielectric strength and volume resistance even at high temperatures, which are essential qualities for electrical and electronic uses. The three-layer structure of CBOPET gives the film added properties which enables us to develop high quality BOPET products...BOPET film is manufactured from polyethylene terephthalate [PET] resin, which is a petrochemical product. BOPET film is produced by melting the granulated PET resin and extruding it into a flat sheet. This sheet is stretched to 3.0 to 3.6 times its original length, and then horizontally to 3.6 times its width, before being heat-set and finally wound into reels.

Products: 1)Printing base film used in printing and lamination; 2)Stamping foil base film used for packaging of luxury items to increase the aesthetic presentation of an item; 3) Metallization or aluminum plating base film used for vacuum aluminum plating for paper or flexible plastic lamination; 4)Laser holographic base film which may be used as anti-counterfeit purposes and can also be used in packaging to help enhance the aesthetic appeal of food, medicine, cosmetics, cigarettes and alcohol; 5) Matte film used for printing, metallization, stamping and transferring; 6) High-gloss film used for aesthetically enhanced packaging purposes. 6) Thick BOPET film to targeted to replace the the higher priced imported thick BOPET film. FFHL will commence manufacturing of thick BOPET film after ipo.

FFHL has a 100% market share in China for their Matte film and Laser Holographic base film.

As noted in #6, FFHL will be utilizing ipo monies to invest in new production lines capable of increasing the capacity of the production as well produce thicker films of 50 to 200 microns. FFHL expects to expand into the electrical and electronic film markets with these thicker films. Targeted will be thin film LCD screens. Currently much of the film used in LCD screens in China is imported. FFHL believes they can use their low cost production capabilities in China to manufacture and sell their new films cheaper then the imports.

FFHL is seeing an increase in their raw materials costs, namely polyethylene terephthalate [PET]. Raw materials costs were 81% of total product costs through 6 months of 2006, up from 77% in 2005.

Financials
$2 1/2 per share in cash post-offering.

2 X.s book value on a $9 pricing.

Since inception in 2003, revenues have grown steadily...although revenues were flat year to year from 2004-2005. Revenues both years came in at approximately $43-$45 million US. Revenues have picked up in 2006, although the third quarter was relatively a weak one for FFHL.

Production utilization was approximately 87% in 2005.

2006 - Full year revenues appear on track for $51-$54 million, a 20% increase over 2005. Gross margins are rather slim at 23%. Due to rising costs of raw materials gross margins for '06 are actually down a bit from '05's 25%. FFHL has a very low tax rate currently. That should continue for the foreseeable future hitting no higher then 7% the next 3 years. Net margins for FFHL in 2006 appear as if they will be in the 15% range. Earnings per share for 2006 look to be in the $0.55 - $0.60 range. On a pricing of $9, FFHL would be trading 15-16 X's 2006 earnings.

Looking into 2007, I would expect revenues to accelerate a bit more then 20% due to FFHL's new production capacity coming on line. In addition FFHL will be manufacturing thicker film for the electronics industry, I would expect at least 25%-30% revenue growth in 2007. I would expect earnings per share to increase at approximately the same pace as revenues. I would not be surprised to see FFHL earn $0.75+ per share in 2007. If FFHL does earn $0.75 in 2007, at $9 it would trade 12 X's forward earnings.

FFHL is a small Chinese microcap showing solid growth and ipo'ing at a very reasonable multiple. The initial market cap of $117 million on a $9 pricing really leaves a lot of potential longer term upside should FFHL continue to perform. I like the initial valuation here and recommend FFHL in range and a bit above.

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