BJCorp/Cosway Corp Ltd

What’s Up? … dated March 2011

BJCorp owns 67% stake in Cosway Corp Ltd and is listed in HK.

Speculating that Cosway is unlikely to be privatized. Rather it could soon commence ground operations in China . The group may start with Guangzhou , which is geographically close to HK where Cosway already has a successful business.

Cosway’s management has been tightlipped in the company’s progress in China with HKSE or communication to shareholders on the status of its plan to set up shop in the mainland. However, the company had mentioned a plan to enter China is in the pipeline.

It is probably in relation to this that busloads of potential Chinese dealers have been visiting Wismas Cosway for introductory courses on the Cosway business model. Meanwhile, the group’s China website has been going all out to woo dealers, or better known as business partners. In the mainland with a list of frequently asked questions and information on Cosway.

In March 2010, Cosway ( China ) Daily Consumerables Ltd had been successfully registered in Guangzhou . A posting said this entity would allow Cosway to leap from its current web presence to commence ground marketing and selling activities in China within 12 months.

Cosway China is believed to be the vehicle of the Cosway group to commence ground operations in China . Cunrrently, purchases of Cosway products by China residents are made thorough the e-cosway online shopping website in HK/Macau and then shipped to China .

These transactions are booked as part of the revenue derived from HK, Macau and Taiwan , which are categorized as one geographical segment in Cosway’s financial statement. The two special administrative regions and Taiwan contributed 38.8% to Cosway’s revenue in the first six months of FY2011.

There are two other entities registered in Guangzhou – Guangzhou Cosway Comestic Products Mfg Ltd and Guangzhou Cosway Commerical Services Ltd. The former’s principal activity is the manufacture of personal care products while the latter provides support services.

These three entities are, however are not listed subsidiaries of Cosway in its FY2010 annual report.

Market observers may want to get everything ready before making a big bang in the China .

A big push into China may boost Cosway’s stock price, which lacks a China Story to justify its high valuation. Even at 80 sen, Cosway’s total market cap – taking into account the number of new shares to be issued via the conversion of the remaining ICULS – stands at HK$9.6 billion. This 41 times the group’s annualized net profit for FY2011.

To justify such a high valuation and to attract investors, market observers say Cosway needs to grow its earnings at a faster pace. This means coming up with a solid plan to penetrate and expand in China . At thus stage, the group has yet to commence operations China except to sell though the online channel, which is not creating as much growth as physical presence world.

As Cosway prepares to enter new market, especially China , its total expense have escalated 57% from 2010, outpacing the 47% growth in revenue in the first nine months of FY2011.

But it us possible that one the group commences ground operations in China, and with the pre launch expenses tapering off, earnings could grew in tandem with revenue expansion.

About PChem ...

What’s NEXT! … dated March 2011

It was born after 22 companies producing a wide range of petrochemical products were brought into its stable. The consolidation gave PCG control over the whole value chain and resulted in cost saving, estimated at rm130 million a year, due to economies of scale.

And now that PCG controls the value chain, it intends to move further downstream where the big money is. It would like to see PCG’s product portfolio having more speciality chemicals because they give better returns.

Expanding its product portfolio and moving into more downstream specialized roducts are part of PCG’s mid term strategy. Currently, the contribution of speciality chemicals to PCG’s revenue is insignificant and it is believed that the strategy will enable the group to benefit from enhanced margins.

Additionally, going further downstream is a less competitive market as products are more speciliased.

PCG will need to invest in new plants and partnerships hat have the expertise to widen its product range. But funding is no concern for cash rich PCG.

The group’s cash coffers ballooned to rm7.5 billion as at end Dec 2010, after its listing in Nov 2010 raised a whopping rm3.6 billion for expansion and acquisitions over the next five years. Meanwhile, its total borrowings were only rm3.8 billion. This gave the group a lot of headway to gear up.

Given its link to Petronas, it has always been assumed that PCG would be pretty much taken care of. This includes PCG’s supply of feedstock is sourced from Petronas on long term contracts, particularly its gas, which accounts for 80% of total feedstock.

Under its feedstock policy with Petronas, PCG obtains its main feedstock, ethane via two contracts. One is on fixed price basis while the other rises by 2% annually. The price of its other gas feedstock is based on market rates.

It is interesting to note that ethane, as a feedstock, is not an exportable product. Therefore, it makes sense for PCG to get its supply from its parent company. Petronas cannot sell it to anyone else and PCS cannot buy it from anyone else.

Because PCG is a gas based producer, it is in a better position to ride the cycles than naphtha based producers.

The other 20% of its feedstock is heavy naphtha, which PCG buys at market rates close to those of Middle East producers.

PCG is one of the two gas based petrochemical players in the region. Thailand based PTT Chemical PCL is the other. The advantage of being a gas based player us that PCG is not as exposed to volatility in crude oil price as naphtha based plants. Naphtha is derived from crude oil. This is one of PCG’s good selling point.

The petrochemical industry is very much a cyclical one as demand its tied to economic growth. But while industry wide earnings took a hit the last three years (2008-2010) due to softer demand, PCG’s diversified producer portfolio helped cushion the volatility.

The group made a net profit of rm874 million for 3QFY2010, more than double its net profit of rm337 million in 3QFY2009. Fir the cumulative nine months ended Dec 31, 2010, net profit grew 57% to rm2.1 billion from rm1.3 billion in the previous corresponding period.

In the longer term, PCG intends to expand its current capacity of about 11 million tones.

Petronas is also looking at an integrated refinery and petrochemical complex which will add steeply to capacity as well.

With rm7.6 billion cash in hand, rm3.8 billion net cash and a debt to equity ratio of only 0.2 times at end 3QFY2011, PCG is likely to pay a special dividend of 63 sen given its limited capex plan.