Companies venturing into New Products/Businesses

As I was monitoring the market today, the sight of Sino Techfibre (AD8.SG) caught my eyes. This company had hit a high of $1.77 in Oct 2007, but have been trending down since and it actually plunged to $0.90 today, resulting in an almost 50% loss.

I have taken notice of this stock since Nov 2007. Sino Techfibre is principally engaged in the production and sale of PU synthetic leather and microfibre synthetic leather in China. It sells mainly to manufacturers and trading companies operating in the fashion apparel, sports apparel and equipment, luggage and travel accessories and upholstery industries. In addition, the company is supplying clothing materials to certain China government departments. It surely sounds like a good business to me as having the government as your customer is like a diamond discovered.

As such, I spent more time digging into the company's financials and details. But to my dismay, my brief forecasting of the financials landed me an intrinsic value of $0.65 for 10 years of DCF. Interested readers who want to know more of my forecast can drop me a comment. A few reasons which saw such a low intrinsic value are as follow:
1. Visible future plans only up till year 2009, which comprises of only the new PMP (paper pattern moulding) production.
2. As PMP is a new product to be introduced, the forecasted profits can only be derived using public sources, which is not a very good indicator.
3. Income taxes will be climbing yoy as tax holidays expire and margins get eroded gradually.

The stock price was actually hovering around $1.20 during my research. The company has an appealing PE of 13x for FY07 with that price given that it has achieved more than 30% bottomline growth over the past few years. For most investors, this will look like a really good buy. But as I have promised myself to research into a company for every buy, I prevented myself from entering. This is one of my investing rule too. Never buy into a company until ample research is done.

On top of the intrinsic value which I derived, I decided not to purchase this counter because a lot of future plans are based on new products, i.e. the PMP business. Even though this is a niche business in China, there is no track history or evidences that the company can profit from it. Personally, I do not like uncertainties and I do not feel good holding companies which cannot be forecasted comfortably. I am a pretty boring person when it comes down to business as I like stable businesses. So for me, I rather miss out a chance of getting into a cheap niche business, than to risk losing money if the new business does not meet expectations. So another investing rule of mine. Avoid buying into companies which have bulk of its future plans in new products/businesses.

Again, I am glad that I have adhered to my investing rules. Today, Sino Techfibre announced again that the PMP production is delayed to the second half of FY08. Previously, it plans to start production by FY07, then it delays it to early FY08, now turns out to be second half of FY08. There is still uncertainty looming around. On the other hand, it also announced a piece of good news, which is a new production capability of TPU. I am not able to comment much of this new production as I do not have much knowledge on it, but does this sounds familiar to an earlier post by me titled 'Sell on Good News?' A good point to ponder upon?

Nevertheless, I am still impressed by this company's ability to have the China government as their customers. This company will still be on my watchlist, though I will just monitor by the side for now.