Here, something about Best decade.CHINESE companies in general...

Here, something about Best decade.

CHINESE companies in general have to overcome the negative perception investors have of them. It is worse if they get on board the Singapore Exchange via the backdoor. Which is why the chairman of Delong Holdings, the China-based manufacturer of hot-rolled coils, felt that the market is yet to accord his company a fair value despite it delivering on its promises in the last two years.

Delong Holdings entered the Singapore market via the reverse takeover of Teamsphere in 2005. For financial year 2005, it chalked up net profit of $121.5 million on turnover of $861 million. And last year, it managed a net profit of $131.2 million on a turnover of $945.3 million.

To signal that its cash flow is real, it has declared a 1.5 cents dividend per share, or a 61 per cent of all its net profit last year. Based on its last traded price of 22 cents, that's a dividend yield of 6.8 per cent.

From its financial statements, the numbers look pretty good. Cash flow generated from its operations amounted to $176 million. Net profit margin has been steady at 14 per cent in the last two years. Meanwhile, return on equity was 41 per cent and return on assets 17 per cent. The only concern is its relatively high short-term borrowings relative to its liquid assets.

Its chairman Ding Liguo, a young man at just 37 years, has grand plans for the group. And he is realistic enough in his time frame: 'We intend to be the top 500 global companies in 30 years.'

The immediate step towards that goal is to grow domestically. Delong put in place a new production line at the end of last year, and that will add 800,000 tonnes to its production capacity this year. Its annual capacity will therefore increase to 2.4 million tonnes, and to three million tonnes next year. The expanded capacity is expected to contribute to its bottom line as demand from its customers - manufacturers of pipes and machinery and infrastructure builders - continues to be strong, and Delong is expecting its net profit margin to remain stable.

In addition to organic growth, Delong will also buy up other steel mills as the industry is going through a mandatory consolidation. China's national steel industry is to have 10 mills producing 50 per cent of the national total by 2010, with that number rising to 70 per cent of the output by 2020. Currently, the industry is still quite fragmented with over 800 players.

In recent years, private enterprises encouraged to take part in the steel sector by the government have grown into an important player, accounting for more than 36 per cent of the national output, according to a China Daily report.

And Delong is one of those private enterprises that have proven their mettle. According to China Iron and Steel Association, Delong is the second lowest-cost steel producer in China, after Taiyuan Steel, with a yield of 98.5 per cent. And it doesn't stint on investing in technology in order to climb up the value chain.

It has a company-wide incentive scheme tied to profitability and its worker welfare standards are above those required by law. On top of that, it has embarked on three green initiatives, including establishing a coal gas emission recycling facility and an operation to recover iron and steel sludge for reuse as raw materials.

Based on its performance record, it is logical to think Delong will be able to add value to the mills it acquires. Mr Ding estimates Delong will require four billion yuan (S$785.2 million) - to be funded by internal resources, bank loans and new capital - for its acquisitions.

According to Mr Ding, since uber-investor Warren Buffett announced that he has a stake in Korea's steel maker Posco, a lot of people are looking at steel companies. He's had an offer to take Delong private at 50 per cent higher than its recently traded price. He was unwilling to sell, because 'I don't know how the market value shares, but I know what I can make next year and the year after.'

At its last traded price, the market is valuing Delong at nine times its earnings last year and 6.7 times its expected earnings this year.

In a fast liberalising market like China, an astute entrepreneur can really make serious money for himself or herself and those who bet on them. Yan Cheung, chairwoman of Nine Dragons Paper, and Zhong Sheng Jian of Yanlord are two good examples.

However, an hour's interview is barely enough to form an opinion about someone, and a few punches of the calculator hardly adequate to tell one the investment merits of a company. But the first impression and the quick facts do suggest that Delong is definitely worth doing further research on.