Tuesday, March 14, 2006

ROI on Yi-Lai: Part III

Review of Yi-Lai's outlook.

I reckon that there are three issues to consider.

(1) Economic impact on the building materials market.
(2) Massive capacity expansion by tiles manufacturers.
(3) Competition from importation of cheap ceramic tiles.

(1) The economic impact on the building material market. What is the likely impact of the higher oil prices, higher inflation and more important, what is the impact of higher interest rates on the property market?

As can be seen in their historical performance, Yi-Lai's performance has been pretty decent since 2002. The good fortunes happened as the property market enjoyed good fortune since 2002. But lately as the property market softened, sales and performance of most tiles makers had been sluggish. Yes, people do use tiles for renovation but the main meat is in the new property projects and once these projects slows down, the tiles markers would feel the impact of the slowdown.

For the investor, would one be comfortable holding a stock in a sluggish industry?
Is the company's product really durable and competitive enough to sustain a sluggish industry?
And what if the sluggishness continues for a prolong period?

(2) Massive capex by both Whitehorse and Yi-Lai. Taken from RHB notes in Feb 2006.

  • Looking beyond 2005, we believe the domestic ceramic tiles industry is bracing for tougher operating conditions on the back of: (1) The commissioning of new capacities in 4QCY2005, i.e. +28% to 63,000 sq meters/day by White Horse and +26% to 31,600 sq meters/day by Yi-Lai, that will further intensify competition.
Whitehorse increased its capacity by 28% while Yi-Lai increased by some 26%.

Would this be an issue for the tile makers?
Would this spell intense competition?
And what would happen if the property market continues to be sluggish!


(3) Cheaper imports.

Ok, so far, the China tiles have not been an issue, however what about tiles from Thailand?

Some players mentioned were Dynasty Ceramic, Union Mosaic Industry and Royal Ceramic. Do you see them competing with Yi-Lai?

How? How do you rate the outlook for Yi-Lai?