Strong cotton - Hongwei Technologies FY07 result

Revenue +41.1%
Cost of sales +39.6%
Profit after tax +30.2% (+163.8% of income tax)
Bank loan 45,000K
Cash generated +21.3%
Cash at end of year 130,840K (should be enough to cover loan)
EPS RMB 0.2889 +14% (dilutive effect of share placement)

For FY07, they issued new share to fund the expansion. As the factory is still under construction, there is a dilutive impact to the EPS. Synthetic cotton was the star performer. Gross profit margin increased to 30% from 29%. This is remarkable since the oil price has increased substantially. The new factory for synthetic cotton would be ready in second quarter of 2008, they expect the gross margin to improve.

This is generally a good result as revenue rise strongly and they manage to keep the cost down. Since the new production capability is going to come online soon, it would enhance the profitability. What I afraid is the margin erosion as oil price keep charging ahead. I think this is the major reason for the share price to under perform for so long. All the fiber related stock is trading at great discount. Assume they are able to increase EPS by 10% next year, which in my opinion should be achievable, the EPS would be 0.3178 RMB. At current price of 0.28, it is only trading at forward PE of 4.4 which I think is cheap in any measure. However, consider on the company size and uncertain oil price, it is not clear where it would go. If you are a deep value investor, this is a buy, otherwise a hold.