Qian Feng Fabric Tech

Business Description

Qian Feng Fabric Tech Limited is engaged in the production, dyeing and post-processing treatment of synthetic knitted fabrics. The Company produces fabrics with functionalities, such as water-resistance, fire-resistance, chlorine resistance, and Ultra-violet (UV) protection, moisture wicking, anti-static, anti-mildew and anti-bacterial properties. Fabrics that it produces are used in a variety of products, such as casual wear, sportswear, shoes and bags. On February 3, 2008, the Company completed the acquisition of Fujian Jiamei. In July 2009, the Company announced that it has transferred its 100% interest in wholly owned subsidiary, Fujian Jia Mei Textile Co., Ltd to Qianfeng International Co., Ltd The Company also announced that its wholly owned subsidiary, Mega-Gain International Co., Ltd has transferred its 100% interest in capital of Fuzhou Jimei Textile Co., Ltd to Qianfeng International Co., Ltd. For the nine months ended 30 September 2009, Qian Feng Fabric Tech Limited's revenues decreased 33% to RMB223.8M. Net income decreased 50% to RMB42.6M. Revenues reflect a decreased in income from sales of luggage & bag fabrics and garment & apparel fabrics segment. Net income also reflects an increase in selling & distribution expenses, higher finance expenses and decreased gross & operating margin.

Revenue breakdown by products

Garment and apparel fabrics – 51.7%

Shoe Fabrics- 25.1%

Luggage and Bag Fabrics- 14.3%

Other Fabrics- 8.9%

Qian Feng Fabric Tech part 1

In general under value investing there are 2 types of stocks, Cigar Butts and Buffett stocks. Cigar Butts, named by Benjamin Graham the father of value investing, are companies that are so cheap that they are worth more dead than alive. Their liquidation value being more than their market capitalization. Warren Buffett explains it as “If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar-butt" approach to investing. A cigar butt found in the street, which has only one puff left in it, may not offer much of a smoke, but the bargain purchase will make that puff all profit."

Buffett Stock, named after Warren Buffett the greatest student of Benjamin Graham, is one of those rare companies that have an unassailable competitive advantage. These companies usually are the monopolistic dominant companies in their industry (Microsoft, Straits Times), or have a worldwide trademark (Coca Cola, Macdonald), or is the lowest cost competitor (Wal-Mart). Usually, their competitive advantage keeps getting stronger. Usually, one would buy these type of stocks when they are moderately priced and hold forever unless the economics of the business has changed or they are very over priced.

Recently I bought stocks in Qian Feng Fabric and I would list it as a Cigar Butt stock. Currently, Qian Feng has a market capitalization of US$ 28 million, and debt of US$ 6.1 million. But Qian Feng is sitting on cash reserves of US$ 41.7 million. This means that if I were to liquidate Qian Feng, after paying back all its debts and buying back all its stocks, I would still have an extra US$ 7.5 million.

Of course, nothing is certain in life and even less so in investing. Many things could go wrong, the company may not survive, the management could misuse the cash on bad investment, textiles have a bad economics or the stock price could remain very low for a very long time. Indeed, last year sales have fallen by more than 40% mainly due to the economic crisis. But I am confident that the company even though it may not prosper, will at least survive. Even though sales have fallen, Qian Feng still makes a profit, and has a positive cash flow.