HOW does one explain such huge discrepancies in the way markets value similar businesses?

All are broadly doing the same thing - producing PolyethyleneTerephthalate (PET) bottles for international drinks companies like Coca-Cola and Pepsi in the fastest-growing consumer market in the world, China.

But paradoxically, it is the most efficiently run company which has the lowest market value. The reason? It is listed in Singapore, while its two rivals are listed in mainland China.

The three companies in question are Singapore-listed Full Apex, and China-listed Shanghai Zijiang Enterprises and Zhuhai Zhongfu Enterprise. They are the only three approved PET bottle suppliers to Coke and Pepsi in China.

In focus: The business of Full Apex has Mr Guan's full attention, as it is his only business in China

Full Apex was listed on the Singapore Exchange in 2003. Granted, in terms of market share for the supply of bottles to Coke and Pepsi, it is the smallest, at about 15 per cent. The percentage has stayed pretty constant in the last few years, according to company officials.

All three companies have more or less expanded at the same pace. Back in 2003, when Full Apex was listed, it had a production capacity of 800 million PET bottles in three plants.

Today, it has eight plants with an annual capacity of two billion bottles. That's a 150 per cent capacity expansion in the last three to four years. Shanghai Zijiang expanded its capacity by a similar proportion, from two billion bottles to five billion.

But in terms of profitability, Full Apex is superior.

Last year, it raked in a net profit of $27.3 million on a turnover of $187.5 million. For the first quarter of this year, it generated $9 million profit from revenue of $52 million. Its operating profit margin is about 20 per cent, while its returns on assets and equity worked out to 14 per cent and 17 per cent respectively.

In contrast, Shanghai Zijiang Enterprise managed a net profit of $15.3 million on a turnover of $739 million last year, according to Bloomberg. Its operating margin is a poor 8 per cent, while its returns on assets and equity came to a mere 1.1 per cent and 2.8 per cent respectively.

Zhuhai Zhongfu's figures are only slightly better. Its return on assets was 1.9 per cent, and return on equity was 5.5 per cent.

But despite its healthier numbers, Full Apex is trading at about nine times its 2006 earnings. Shanghai Zijiang is valued at a staggering 94 times its 12-month trailing earnings, while Zhuhai Zhongfu is trading at 79 times.

Perhaps Shanghai Zijiang's rich valuation is in anticipation of its bumper profits this year. Early this month, the group said that 'it is likely to experience a net profit increase within the range of 150 per cent to 200 per cent for the first half of fiscal 2007'.

Jordan Hou Bojian, executive director of Full Apex, noted that a foreign fund recently bought a 25 per cent stake in Zhuhai Zhongfu at 65 times earnings.

Margin squeeze

Full Apex has somewhat fallen out of investors' favour in the last few years because high crude oil prices have squeezed its profit margin - the raw materials for PET bottles are PET chips, which originate from crude oil. To mitigate that, the company invested US$90 million to build its own 200,000-tonne PET chip plant. The plant, the biggest in Guangdong province, started operating a couple of weeks back.

The PET chip production is expected to be at full capacity from now onwards. The next two months' output has already found buyers, said Mr Hou. Some 20 per cent of the PET chips will be used by Full Apex's bottle factories. The rest will be sold to other Chinese PET bottle makers. The long-term plan is to export to the US and Europe.

Hence, PET chips will be a new stream of income - and a big one at that - for Full Apex.

Mr Hou expects half of the group's revenue for 2007 will be from sales of PET chips. Net profit margin for PET chips, however, will be at a lower 3 per cent.

On the PET bottles front, utilisation of its seven established plants is expected to increase while the new plant in Hangzhou will start operating in September.

'This will be a significant year for Full Apex,' said Mr Hou. 'Three factors will significantly boost our profit and loss account this year. We'll have the maiden contribution from the PET chips plant and the Hangzhou PET bottle factory. And the utilisation of our PET bottles plants is expected to improve by 5 to 10 percentage points, leading to improved margins.'

On average last year, the utilisation rate of the group's PET bottle plants is less than 50 per cent.

UOB Kay Hian, the only broking firm to cover Full Apex, expects the group's net earnings to jump 30 per cent to 178.1 million yuan (S$35.7 million) for the current year. This means Full Apex is trading at about 7.3 times this year's earnings. The broking firm has a target of 55 cents for the stock.

'In the last few years, we've been busy expanding,' said Mr Hou. 'Only now are we communicating with investors more. And in the next few years, we'll get a chance to enjoy the fruits of our hard work.'

He pointed out that Full Apex has no bad debts and generates strong cash flows every year.

There have been suggestions that Full Apex's founder Guan Lingxiang, who is now chairman and managing director, should place out some shares in order to improve the liquidity of the stock. Mr Guan and his wife now own 65.8 per cent of the company.

Mr Hou said that Mr Guan has shot down the idea as he deemed Full Apex under-valued at current levels.

Mr Guan started Full Apex in 1996 to make corrugated paper packaging products, and according to Mr Hou, he was invited by Pepsi and Coke in 1999 to set up PET bottle plants.

The business of Full Apex has Mr Guan's full attention, as it is his only business in China, said Mr Hou.

Meanwhile, given the extremely rich valuations enjoyed by China-listed entities, Mr Hou added that the group is exploring the possibility of spinning off some Full Apex units for listing on the mainland. But no decision has been made yet.

All things considered, it would appear the odds are favourable for the group to deliver decent returns for investors in the short to medium term.

The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg.