Stop the Presses in China

01/14/2010 9:48 am EST

Focus: STOCKS

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says a Chinese printing company is a good way to profit from the country’s huge economic growth.

As the largest private-sector printing equipment supplier in China, Duoyuan Printing (NYSE: DYP) is also the sister company to our very own Duoyuan Global Water (NYSE: DGW) and was founded by the same entrepreneur, Wenhua Guo.

[But] while both companies are growing nearly 30% a year, Duoyuan Printing is selling at only eight times this year's earnings—the stock is 70% cheaper than its sister company!

[China] currently ranks as the third largest printing market in the world. But contrary to the West, the printing industry in China is growing rapidly even as more people use the Internet.

As a result of China's rapid economic growth, there is increased demand for publication [and] commercial printing needs, manuals and directories, conference and advertising materials, and printed packaging materials.

In fact, the total annual output of China's printing industry grew from $29.5 billion in 2002 to $64.4 billion in 2007, representing a compound annual growth rate of 17% per year. It is estimated that the market will continue to grow by 28% from 2009 to 2014.

And Duoyuan Printing is directly in line to profit from this growth. The company is the largest non-state-owned printing equipment company in China and a major industry leader.

Headquartered in Beijing, the company manufactures single-color small format, single color large format, multicolor single-format, and multicolor large-format printing equipments.

Its China-based manufacturing operations provide the company with a competitive advantage by leveraging low-cost technical expertise, labor, raw materials, and facilities. Therefore, Duoyuan's products are 40% to 50% cheaper than their foreign competitors, but are comparable in quality.

Not surprisingly, the company has a 50% gross margin and 30% net margin, which is very impressive and much better than its state-owned competitors and multinational companies.

Total revenue grew 32% from $67.8 million in 2007 to $89.6 million in 2008. It increased again last year, up 19% to $106.6 million. [Meanwhile,] net income grew 89% from $14 million to $26.5 million and 23% to $32.6 million last year as well.

DYP's position as a leading printing equipment supplier in China gives it advantages in distribution and favorable economies of scale. And the company will continue to increase its market share in this growing industry for years to come, especially when you consider that there are two major entry barriers that limit the potential competition.

DYP shares went public in early November; however, the stock dipped from $8.50 to as low as $6.61 right after the IPO. Currently, the company's market cap is around $300 million, based on

Wednesday’s closing price above $10]. Its earnings per share in fiscal 2009 was about $1, and I expect its EPS to reach at least $1.20 this year, making its forward P/E ratio of just [above eight times].

I recommend you to buy DYP up to $11.25. I'm targeting $15 in the next six months, which will give us a 50% return.

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