Production and sale of yarn and fabric. China Gaoxian Fibre Fabric Holdings Ltd. (China Gaoxian) is principally engaged in the production and sale of premium differentiated fine polyester yarn and warp knit fabric. The group's products are sold under its HuaGang and DaHuaWei brand names, while production plants are in located in China's Zhejiang and Fujian province. With an IPO price of S$0.26, China Gaoxian will raise about S$78.2m in net proceeds, which will be used to (1) expand its downstream fabric manufacturing business (S$35m); (2) expand production capacity (S$33m); (3) strengthen brand recognition and expand sales network (S$3m); (4) increase product development capabilities (S$3m); and (5) for general working capital (S$4.2m).

Higher revenue and margins. China Gaoxian reported a 36.8% YoY rise in revenue to RMB1.8b and a 47.9% increase in net attributable profit to RMB390.4m in FY08. Revenue is primarily generated from the manufacture and sale of products, which can be broadly classified into five series. The group started branching out into new products in Jan 08, and the change in product mix has resulted in higher revenue. Gross profit margins have also trended higher in the past three years (28.9% in FY06, 29.5% in FY07 and 30.4% in FY08).

Certain inherent risks. The group is highly dependent on the PRC market as all its products are sold to textile and garment manufacturers in the PRC. Hence a decline in consumer demand of the group's customers' end products in China (e.g. garments, home furnishings) will affect the group's business. An important raw material in the group's production is PET chips, which is derived from crude oil. Fluctuations in oil price will therefore affect the group's cost of production.

Relatively optimistic. The group is relatively optimistic about the prospects of the domestic PRC market given its government's initiatives to stimulate domestic consumption, higher export rebates for the textile industry as well as initiatives to increase the income levels of the rural population. Management also expects gross profit margin to remain generally stable till the end of FY09, barring unforeseen circumstances. As at 31 Aug 09, the group has purchase orders on hand amounting to about RMB291m to be delivered over the next two months. We do not have a rating on China Gaoxian.