Naibu smashed as dividend axed

Naibu Global International, the Chinese maker and supplier of branded sportswear, has lost half its value after axing the dividend amid fierce competition from foreign brands. There are a host of other problems, too, which raise further doubts about the wisdom of investing in Chinese companies listed over here.

Shares in Naibu have been on a downward trend since they floated on AIM in April 2012 at 124p. They soon hit 165p, but now languish at 30p, a record low. There has been the usual scepticism about local business practices, but this latest sell-off is driven by something equally worrying.

"Due to the competitive pressures that the group is currently seeing as well as the significant future capital requirements for the Dazhu Industrial Zone Project, no interim dividend will be paid this year to enable the group to conserve cash," explained executive chairman Huoyan Lin.

According to Naibu, the company has almost £32 million in cash on the books and no bank loans or overdue debts. But that's down from £45 million in December. It also extended credit terms to its distributors by an additional month, which meant trade receivables rose by almost half to RMB 917 million. Management is clearly in no mood to reward shareholders.

It is also spending about £29 million over the next two years on a new facility in Dazhu. But it won't be up and running until the second quarter of 2016. Naibu has also failed to start the six production lines at its factory at Quangang due to a lack of skilled workers, which have driven labour costs up in the coastal regions.

That's why the company is now renting out the facility. Original equipment manufacturer suppliers will supply the shoes, instead. But the higher unit purchase cost affects margins, and it was that which forced house broker Daniel Stewart to downgrade profit forecasts in August.

Surprisingly, it leaves those forecasts unchanged after these half-year results. Revenue rose by 8% during the six months ended 30 June to almost RMB 1,030 million (£98 million), but pre-tax profit fell by 4% to RMB 206.5 million (£19.7 million). Daniel Stewart expects Naibu will generate full-year revenue of just over RMB 2 billion and profit of RMB 385 million, giving earnings per share of 47.6p.

However, the broker has reined in price target expectations from 200p to 50p, and downgraded its rating from buy to hold. "Although the full-year price/earnings is just 1.1x and the current market cap is in line with cash, the uncertainty over the timing of the next dividend payment removes the catalyst for any early rerating," it said.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.