Auction to buy out textile company. China Jishan announced two days ago that it will stake out RMB100m to acquire the assets and related bank loans of a Zhejiang-based textile company, Zhejiang Nan Fang Technology. China Jishan has already paid a refundable initial amount of RMB50m as a condition for the auction. The Executive Chairman is giving an irrevocable undertaking to the Company and the SGX-ST that he will vote in favour of the proposed acquisition during the general meeting with his 62.49% stake in China Jishan. The Group is proposing to finance the deal through a cash and long-term debt combination.

Details of the target. The assets of Zhejiang Nan Fang include industrial land worth RMB60m, a factory and office premises worth RMB100m, and plant and equipment worth RMB210m. Its liabilities are bank loans of around RMB270m, which will form part of the proposed acquisition so as to reduce the cash consideration outlay. The industrial land measures around 148,073sqm and has a remaining tenure of 45 years.

Rationale of the acquisition. The Group is looking to expand its existing processing capacity of dye and print garments and textiles, as well as expanding its existing services to the dye and print of home furnishing products, such as curtains and bed linen domestically and to overseas markets. Zhejiang Nan Fang fits this bill. China Jishan’s management is certain this increase in scale will help the Group attract bigger customers and achieve cost savings. The target will also provide another 170m metres of annual processing capacity.

Our thoughts. With a widely expected economic slowdown in China for at least the next 12 months, coupled with the fact that textile industry in China has probably been one of the worst hit in recent months, due to sluggish demand and a weak export market, this may not be the right time for China Jishan to carry out such an exercise. We do recommend prudence with regards to expansion plans or excessive capital expenditure in times when credit is very tight, and cash conservation is important. We have also seen examples of peers already signalling plans to put off any expansion plans for FY09 due to poor market demand and the need to maintain a strong balance sheet.

Moreover, the Group has already reported net losses of S$3.5m for 2Q08 and S$6.9m for 3Q09, signalling its relatively quicker decline in financial performance among its peers, amidst a weakening business environment and deteriorating margins.

No clear details are given on the value of acquisition of the target in P/E terms, although from the scant information, it seems China Jishan is attempting the acquisition at 1x book value after simply calculating the difference between assets and liabilities. As of 3Q09, China Jishan has a net cash balance of RMB70.5m, which equates to approximately 5.0 S¢ per share.