�� Venturing into gummy sweets

China Lifestyle (CLF) is setting up a 50/50 JV with KLSE-listed Cocoaland Holdings to

manufacture and distribute fruit gummy candy products for the China market. The first

production line (annual capacity of 4,500 tonnes) in Fujian will be ready by Aug 07 with an

additional line coming onstream in 2008. The gummy products are set to hit stores in

2H07 contributing slightly to this year?s revenues. The group plans to ramp capacity to 10

production lines, increasing its gummy capacity by 45,000 tonnes within the next 3-5 years.

This coupled with new capacity additions in jelly production will effectively raise CLF?s total

capacity to ~200,000 tonnes (current: 80,000 tonnes) by end 2010.

�� Win-win tie-up will be profitable from FY08

Cocoaland is a market leader for fruit gummy in Malaysia; backed by >20-year track

record and a bottomline CAGR of 23.4% over 2002-2006. Its best selling products include

Lot100

expertise in fruit gummy candy production, CLF is poised to penetrate China?s gummy

candy market given its extensive 17,000 Point-of-Sales network. However, due to initial

start-up cost, earnings impact may only be felt in FY08. We forecast the JV to contribute

6.3% to the group?s FY08 bottomline and growing at a CAGR of 196% over FY08-FY10.and Sour+ range, which are well-received in Malaysia. Leveraging on Cocoaland?s

�� Capturing a slice of the fast growing China gummy market

According to Euromonitor, China?s pastilles, gums, jellies and chews market enjoyed a

CAGR of 8.47% during 2001-2006, reaching a market value of RMB4.3bn. Sales in this

segment is expected to grow rapidly at a CAGR of 12% for the period 2006-2011. Given

the highly fragmented nature of the confectionery industry in China, strong branding and

good quality products are two essential factors that would give a differentiating niche. CLF,

with its eye-catching packaging and aggressive A&P (~6% of sales), is set to become a

major player in the industry. Backed by

best selling products, CLF is well positioned to gain a significant share of the expanding

gummy market in China. This competitive advantage will be further enhanced in view of

the huge potential size and rosy growth prospects of the Chinese consumer market.Labixiaoxin?s popular branding and Cocoaland?s

�� Cheap exposure to China consumer market

CLF is a promising Chinese consumer play, supported by valuations that are completely

undemanding. The stock is trading at a forward PEs of 11.4/8.2x for FY07/08 respectively,

vs sector median of 16.9/14.4x. Based on 13x FY09 PE and applying a 10% discount to

account for low liquidity and visibility, we are pegging the stock at a target price of S$0.57.

The valuation is conservative compared to the 14-16x PE which the market is ascribing to

some of its peers given that CLF is enjoys significantly higher EBIT margin of 20.7% and

ROE of 29.2%. In the past, CLF?s growth has been constrained by capacity limitations

(FY06 utilisation: >90%) but this is set to change by 2009 when the new Tianjin plant will

double its core jelly product capacity to 160,000 tonnes. Liquidity and visibility should

increase over time given the growing interest from institutional investors. With a 43%

potential upside and an attractive PE valuation, we reiterate our long term BUY

recommendation on the stoc

Target price is based on DCF valuation assuming WACC at 12.2%, terminal growth at 2% and a nominal 25% discount to value for firm size and liquidity risk, representing 11.7x FY07 PE. Overall, attractive buy with strong operating cash flows and sound business fundamentals. Recommend BUY for strong EPS growth, highlighting contribution from tax incentives commencing from 2008.