China Linen Textile Industry, Ltd.a.eqcdn.com/chinalinen/media/443943fe612121c0e4895… · · 2011-01-05China Linen Textile Industry Ltd. is a leading China-based manufacturer,

© RedChip Visibility, a division of RedChip Companies, Inc. | 500 Winderley Place, Suite 100, Maitland, FL 32751 | 1-800-RED-CHIP | www.RedChip.comFor analyst rating defi nitions, research coverage universe and other disclosures, please refer to page 15 of this report or write to [email protected]

TMTM

V i s i b i l i t y

DISCOVERING TOMORROW’S BLUE CHIPS TODAY TM

COMPANY OVERVIE W

China Linen Textile Industry Ltd. (“CTXIF” or the “Company”) is a leading China-based manufacturer and distributor of linen products. The Company manufactures over 50 types of linen yarn and 100 varieties of linen fabric and products. Roughly 55% of CTXIF’s production is exported to Europe, North America, the Middle East and South America with the remainder sold in China. The Company enjoys a 5% market share of China’s total linen industry and ranks among the top 5 companies in China’s linen textile industry.

INVESTMENT R ATIONALE

Strong near-term revenue growth and operating performance projected. CTXIF has posted annual revenue and net profi t growth of about 40% on average for the last fi ve years. The Company has maintained a healthy EBITDA margin of greater than 19% in the last few years with return on assets greater than 10%. The Company is running its plants at peak utilization and still requires outsourced production to meet excess demand. With capacity additions expected in the next few years, we are projecting 20% year-over-year growth in the short-term and 15% year-over-year growth in the mid-term.

Long-term customer base. The Company’s long-term loyal customers represent more than 70% of total revenue. Moreover, the Company claims that its larger customers increase their order size by 10-20% every year. The Company’s customer base includes premium brands such as Zara, Orion, Hugo Boss, Laurus Miani, Max Mara, Perego, Merco Aorel and Max & Co.

Aggressive multi-pronged growth strategy. CTXIF is aggressively adding capacity for spinning yarn as well as fabric dyeing with an objective to double capacity over the next fi ve years. The Company is expanding its domestic marketing efforts and plans to integrate forward and backward as it seeks to have a presence across the industrial value chain via a series of planned mergers and acquistions in the next few years.

Strong R&D leadership and focus on high-end market. CTXIF distinguishes itself from competitors through technological superiority and a focus on high quality products. The Company established a provincial level enterprise technology center in April 2005. The center has cooperative ties with the Tianjin Institute of Technology and Donghua University to research and develop online textile technology. The center has has 110 technical staff conducting various R&D projects, including development of high-count fl ax yarn, multi-fi ber blended fabrics, yarn dyeing and linen fabric bleaching and dyeing technologies.

ANALYST Aditya Khandekar, CFA

MARKET DATA

APRIL 12, 2010 | TARGET PRICE: $4.00 | RATING: BUY

China Linen Textile Industry, Ltd.(OTC BB: CTXIF)

I N I T I A L R E P O R T

TICKER CTXIF

FISCAL YEAR DECEMBER

SECTORLINEN/

TEXTILES

RECENT PRICE $1.67

TARGET PRICE $4.00

MARKET CAP $33.7M

52-WEEK HIGH - LOW $1.99 - $0.15

PRICE/EARNINGS (TTM) 5.6X

PRICE/BOOK (MRQ) 1.6X

PRICE/SALES (TTM) 1.1X

SHARES OUTSTANDING 20.2M

FLOAT 11.3M

AVG DAILY VOLUME (3 MOS) 29,862

INSIDER OWNERSHIP 44.0%

As of April 12, 2010

REVENUE (TTM) $30.1M

REV (TTM)PER SHARE $1.49

QRTLY REV GRWTH YOY 90.0%

GROSS PROFIT (TTM) $9.0M

OPERATING MARGIN (TTM) 24.5%

EBITDA $8.16M

NET INCOME (TTM) $6.02M

DILUTED EPS (TTM) $0.30

QRTLY EPS GRWTH (YOY) 225.4%

CASH & EQUIV (MRQ) $2.3M

CASH (MRQ) PER SHARE $0.11

TOTAL DEBT/EQUITY 67.3%

BOOK VALUE PER SHARE $1.07

ROE (TTM) 32.2%

ROA (TTM) 16.6%

FINANCIAL DATA

RedChip Visibility | 2 | China Linen Textile Industry, Ltd.

China Linen Textile Industry, Ltd. (OTC BB: CTXIF)INITIAL REPORT

Cost advantages over competitors. CTXIF claims that its cost of production is 15% lower than that of its domestic competitors. We believe that this is due to unique technologies for middle-end yarn spinning, manufacturing fl ax fi bers with low-cost raw materials, thus minimizing the cost of production.

Undervalued. We are initiating coverage of CTXIF with a Buy rating and a 12-month price target of $4.00. With strong growth expected in the domestic Chinese market and the superiority of the Company’s product backed by core R&D, we estimate revenue to grow strongly at a CAGR of 16.1% for the period FY10-FY16. Despite the assumed equity dilution to fund growth plans, we believe the stock is undervalued. Our fair value for the stock is $4.00, a weighted average of our DCF valuation of $3.20 per share and P/E valuation of $6.49.

FINANCIAL SNAPSHOT

Company financials FY08 actual FY09 actual FY10 Company Guidance* FY10 RedChip Estimate*Revenue ($ million) 22.95 30.11 38.07 37.93Gross profit ($ million) 5.3 9.03 12.67 12.52Gross margin 23.10% 29.90% 33.30% 33.00%Net profit ($ million) 4.47 6.06 9.31 8.83Net margin 19.50% 20.10% 24.50% 23.28%EPS ($) 0.22 0.3 0.39 0.36*

Historical performance

14.52

20.7822.95

30.11

1.944.02 4.47 6.06

0

5

10

15

20

25

30

35

FY06 FY07 FY08 FY09

In $ m

illion

0%

5%

10%

15%

20%

25%

Revenue Net profit Net margin

Profitability ratios

10.6%13.8%

10.9%

20.2%

43.4%

36.1%

28.6% 27.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

FY06 FY07 FY08 FY09

Return on assets Return on equity

Government subsidies

0.79

1.411.32

0.86

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

FY06 FY07 FY08 FY09

In $ m

illion

Margin development

0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%

FY06 FY07 FY08 FY09

Gross margin Operating margin Net margin



COMPANY OVERVIE W

China Linen Textile Industry Ltd. is a leading China-based manufacturer, distributor, researcher and developer of linen products and ranks among the top 500 textiles and apparel enterprises in China as well as the top 5 in China’s linen textile industry. The Company manufactures over 50 types of linen yarn and 110 varieties of linen fabric and products. CTXIF’s main products include linen yarn, linen gray fabric, linen/cotton interwoven fabric, linen/rayon interwoven fabric and other linen products. Roughly 55% of CTXIF’s production is exported to Europe, North America, the Middle East and South America with the remainder sold in China.The Company is also heavily involved in research and development of linen technology and linen products to maintain its competitive edge. The Company has its own trademark “Fairy Deer”. The Company plans to get listed on NYSE Amex in 2010.

Located in Lanxi County (known as the “famous textile town” in China), CTXIF carries out its business activities through its subsidiary Heilongjiang Lanxi Sunrise Linen Textile Industry Co, Ltd. (95% owned), which is a privately owned business enterprise. Its manufacturing facility is located in the Heilongjiang Province in the northeast region of China near the city of Harbin. CTXIF imports high quality fl ax primarily from France, Belgium and Egypt and processes it to make yarn. Only a small portion of this yarn is sold directly to customers, while the majority is used by the Company to weave various types of linen fabric.

The Company has the ability to produce 50 types of yarn and 110 types of linen fabric with an annual capacity of 1,600 tonnes of fl ax spinning and 8 million meters of fabric using its advanced spinning and weaving production equipment. It has 1,500 total employees out of which 110 are technical staff.

CTXIF has adopted a direct marketing strategy to build long-term relationships with its clients. The end-customers include big brand names such as Marks & Spenser, MaxMara, Hugo Boss and H&M though it sells its products through intermediaries (refer to section on customers and distributions for more details).

GROUP STRUC TURE

As can be seen in the chart below, CTXIF has a wholly owned subsidiary, Bright International Group (“Bright”). Bright owns 95% of Heilongjiang Lanxi Sunrise Textile Industry, Ltd. (“Lanxi Sunrise”). CTXIF conducts its business operations through Lanxi Sunrise.

China Linen Textile Industry, Ltd (fromerly Aquasol Envirotech, Ltd)

(a Cayman Islands B.W.I. corporation)

100%Bright International Group Co., Ltd,(a Republic of Vanuatu Corporation)

("Bright")

95%China Linen Textile Industry, Ltd

(Heilongjiang Lanxi Sunrise Linen Textile Industry Co, Ltd.)("Lanxi Sunrise")



PRODUC T SEG MENTS

CTXIF manufactures and sells various types of linen products such as linen clothing, linen yarn, linen hemp and blending linen. The Company produces 50 different types of yarn and 110 types of linen fabrics. The Company generates most of its revenue from the sale of fi nished fabric while revenue from the sale of yarn accounts for only 1% of total revenue.

Gray fabric is the Company’s largest selling product contributing 42% of total revenue in FY09. Other major products include semi-bleached fabric and yarn-dyed fabric which accounted for approximately 29% and 13% of total revenue respectively in FY09.

SAMPLE IMAGES OF LINEN PRODUC TSProduct Image/description Loom State

Bleached

Yarn Dyed

Printing

Jacquard

Linen Yarn



PRODUC TION VALUE CHAIN

The linen industry production value chain is depicted as a fi ve step process as shown below. The Company’s current operations are focused on only two of the fi ve steps: yarn spinning and fabric weaving.

Import of raw materials. Despite being strategically located in Lanxi County where most of the Chinese fl ax is typically grown, CTXIF usually can’t use domestic fl ax due to its poor quality (Heilongjiang province where the Company is located, has experienced a dryer climate relative to the climate in areas of Europe where fl ax is grown, which has caused the Chinese fl ax to be of lower quality). The Company instead imports high quality fl ax from France, Belgium and Egypt through its affi liate company Harbin Sunshine Linen Textile Co., Ltd., which is controlled by CTXIF’s President Gao Ren. Harbin Sunshine purchases and imports some fl ax for CTXIF’s at a price equal to cost plus 6% as per Company sources.

Production facilities and capacity utilization. CTXIF owns a production facility spread across 52,000 square meters in Lanxi County, China. The facility includes a fl ax-spinning factory and two fabric-weaving factories as well as offi ce facilities. The annual production capacity of the Company’s yarn-spinning factory is approximately 1,600 tons of pure semi-bleached linen yarn and gray yarn in various specifi cations, while the Company’s two fabric-weaving factories have an annual cumulative production capacity of approximately 8 million meters of linen gray fabric used for linen face fabric.

CTXIF’s factories comprise 7,680 wet-spinning spindles, 192 sets of rapier looms and more than 300 sets of other types of textile processing equipment capable of producing yarn using various specifi cations ranging from Nm 8.5 to Nm 42 to meet the needs of its clients. The Company currently does not have its own yarn-dying facility, but instead subcontracts this portion of the production process whenever required.

Apart from fl ax yarn and gray linen fabric production in these factories, the Company also designs and produces other linen fabrics as per customers’ specifi cations including interwoven or blended fabrics including both a cotton/linen blend and a rayon/linen blend, semi-bleached fabric, piece-dyed fabric and jacquard fabric. In its yarn-spinning factory, the Company processes raw fl ax into yarn through an automated multi-step process.

The Company’s two fabric-weaving factories have an annual production capacity of approximately 8 million meters of fabric including linen gray fabric, hemp linen fabric, blended or interwoven fabric such as cotton/linen and rayon/linen blends and semi-bleached linen fabric. Most of the yarn production is used for manufacturing linen fabric and only 1% of the yarn produced is sold to other fabric manufacturers.

In terms of capacity utilization, the Company claims that its production facility are running at peak

Outsourced if need arises

Dyeing and finishing

Fabric weaving

Yarn spinning Fiber production

Raw material planting

High quality flax imported from France, Belgium and Egypt

Company’s current operations



utilization levels (100% capacity utilization) and that it has actively sought outsourcing excess demand. In that context, the Company is planning to acquire one bleach plant and one 3000 spindle production line (refer to our growth strategy section for details).

R&D facilities. CTXIF has a technology center for research and development (R&D) activities related to production of linen products. This center carries out various R&D projects, which include development of high-count fl ax yarn, multi-fi ber blended fabrics, research related to linen yarn dyeing and linen fabric bleaching and dyeing technologies. This center has 110 technical staff including 5 senior professionals. This technology center was established in April 2005 and has ties with the Tianjin Institute of Technology and Donghua University.

Moreover, the Heilongjiang provincial government has formally approved Lanxi Sunrise to establish China’s fi rst linen R&D center “Heilongjiang Provincial Linen New Products Research and Development Center.” This center will be located at the Lanxi Sunrise Linen mill.

CUSTOMERS AND DISTRIBUTION

Nearly 70% of CTXIF’s revenue comes from long-term loyal customers with whom the Company enjoys long and stable business relationships. CTXIF’s main customers are related parties of Harbin Sunshine and Harbin Zhongyi. Both of these related party companies have many customers in both domestic and export markets. CTXIF’s other customers, include Shaoxing Yinxiang Cotton and Linen Textile Co., Ltd., Shaoxing Hongda Linen and Cotton Textile Co, Ltd. and Zhejiang Shaoxing Xinsanjiang Printing and Dyeing Co, Ltd. The loyalty of large customers results in upsell orders of 10%-20% each year.

From a distribution perspective, the Company distributes its exports through Harbin Sunshine which is also involved in raw material procurement. Under the terms of the contractual agreement between the parties, Harbin Sunshine does not charge an export fee due to special export licenses held by Harbin Sunshine.

Contribution of exports to total revenue

73.1%56.2% 56.0% 58.9%

26.9%43.8% 44.0% 41.1%

0%

20%

40%

60%

80%

100%

120%

FY06 FY07 FY08 FY09

In $ m

illion

Revenue from exports Revenue from domestic sales

Major CustomersRevenue in

FY09Percentage of

revenueRevenue in FY08 Percentage of revenue

Harbin Sunshine Linen Textile Co., Ltd. $4,169,833 13.90% $4,161,201 18.10%Harbin Zhongyi Sunshine Linen Co., Ltd $8,008,506 26.60% $1,554,289 6.80%Three unrelated customers $16,299,625 54.10% $16,274,719 70.90%Total $28,477,964 94.6% $21,990,209 95.8%



Revenue mix for domestic and export market. CTXIF exports 55% of its production to more than ten countries including France, Korea, Italy, Belgium, Greece, Turkey, Egypt, Brazil, Canada, Japan and the U.S. Exports accounted for approximately 59% of CTXIF’s FY09 revenue. In FY09, the Company’s revenue from exports was $17.7 million, growing at greater than 18% CAGR during FY06-FY09.

MARKET OVERVIE W

Global textile and apparel market size. The global textile market has grown at a moderate pace of 9.1% annually on average during the period 2004-2008 and was valued at $1.138 trillion in 2008. The textile market includes yarns, fabrics, apparel and non-apparel fi nished products with the fabrics segment representing 50.2% and the apparel segment equivalent to 30.3% of the total market size in 2008.

The global textile and apparel market is expected to grow at a much lower pace of 6.4% compound annual growth rate (CAGR) during the period 2008-2013. Global market demand for linen clothing and products is estimated at approximately $20 billion annually through 2014.

China is the largest exporter of apparels and textile products globally. China’s apparels and textile exports in 2007 were valued at $115.2 billion, a 33.4% share of global exports. In these exports, $28.4 billion worth of apparels were exported to Europe, $27.4 billion to the North America, $32 billion to Asia

Global textile market 2004‐2008

804.1 857.4965.1

1051.31138.3

0

200

400

600

800

1000

1200

2004 2005 2006 2007 2008

In $ billion

0%

2%

4%

6%

8%

10%

12%

14%

Market size % Growth

Global textile market 2008‐2013E

1138.3 1177.3 1267.5 1349.7 1445.3 1553.6

0

500

1000

1500

2000

2008 2009 2010 2011 2012 2013

In $ billion

0%

2%

4%

6%

8%

10%




and the rest of world contributed $27.4 billion. Some key commentaries on the major textile markets to which CTXIF is exposed are:

• United States: Valued at $123.1 billion in 2008, the U.S. textile market is likely to grow tepidly in the mid-term post recovery from recession. The apparel segment accounted for sales of $69.3 billion in 2008 and the non apparel segment accounted for sales of $26.9 billion in 2008.

• Europe: Valued at $269.1 billion in 2008, the European textile market is expected to grow at a

faster pace than the U.S. in the mid-term. Also, Europe’s domestic market has some strong pockets of growth which offsets other declining markets within Europe.

• Italy: Valued at $47.7 billion in 2008, the textile market in Italy is expected to grow at a 5-year CAGR of 4.0%. For 2008, the apparel market was roughly worth $18.1 billion.

• Spain: Valued at $29 billion in 2008, the textile market in Spain is likely to grow at a 5-year CAGR of 2.0%.

• China: Valued at $309 billion in 2008, the Chinese textile market has grown at a 24.3% CAGR during the period 2004-2008. Although growth in the Chinese market is expected to decelerate with an anticipated CAGR of 12% during the period 2008-2013, as a percentage of global demand, China’s domestic market is expected to increase and account for roughly 20% of global textile sales over the next four years.

Rising share of Chinese linen manufacturers in the global market. China is the largest linen textile producer in the world with Chinese linen manufacturers holding a greater than 70% market share of the global market in 2008. Only a few combed fl ax spinning mills and a dozen dry tow spinning mills still operate in the international market. India and Russia are present in the middle to low-end market segments with India still being a nascent linen producer in the global market. Italian and French producers play in the high-end products, but their scale is small. Even though the share of Chinese players is increasing, some large customers of Chinese textiles (like Adidas) have been diversifying their sourcing from other cheaper manufacturing locations like India, Vietnam, Pakistan and parts of Africa.

Slowing growth of Chinese textile exports during the economic crisis. China’s textile products and clothing trade recorded a substantial decrease in growth rate in the second half of 2008 as a result of the deteriorating overseas economic environment. According to the China Customs, China’s total exports of

Chinese textile market 2008‐ 2013E

309 326378.9

423.1479.2

544.3

0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013

In $ billion

0%

5%

10%

15%

20%

25%




textile products and clothing for 2008 amounted to $185.2 billion, representing a slower increase of only approximately 8.2% as compared to approximately 18.9% in 2007. Exports of cotton textile products and clothing amounted to $71.8 billion in 2008, representing a decrease of 0.4% as compared to the previous year. Furthermore, in the fi rst half of 2009, China’s textile exports declined by 15.2% to $26.9 billion while apparel exports dropped by 8.5% to $45.9 billion (Source: China General Administration of Customs statistics).

Rapidly growing home linen market in China. China’s home linen market is witnessing a rapid increase in demand on the back of increasing urbanization and spurt in housing (500 sqm of residential blocks are being built every year). Further, more than 80% of the Chinese customers are willing to purchase home textile items for home decoration versus reusing old items (based on the study of Chinese consumption pattern by the China Home Textile Association).

Despite the recession, investments in capacity expansion continues in China. Despite a drop in demand in 2009, the investments in fi xed-assets in the Chinese textile industry increased by 9.53% to RMB270.8 billion year-over-year. China’s textile industry registered 6,995 new projects in the same period. (Source: China National Textile and Apparel Council).

Removal of trade barriers in 2009 to boost exports in the mid-term. In late 2005, the United States and China came to terms on a contract that established 21 quotas covering 34 different textile products. Beginning January 1, 2009, these quota restrictions on Chinese textile imports have expired. Textile companies in China should see positive impact on revenue and profi t from the removal of quota restrictions as developed economies recover from the recession and global demand improves.

Increased focus on green initiatives by the Chinese government and corporate social responsibility by customers. Environmental policy initiatives and customer mandates are likely to put pressure on Chinese textile producers to become more environmentally compliant. Customers like Marks & Spencer have established 100 social and environmental targets to be met by 2010, which essentially focus on sourcing products from textile companies. In addition, during 2009-2011 periods, the Chinese government has set a target of reducing energy consumption per unit of value addition by 5% annually, a decrease of water consumption by 7% each year and a drop of wastewater discharge by 7% per year. The Chinese government has also mandated that high energy machinery and outdated printing/printing capacity should be replaced with modern energy effi cient machinery by 2011.

CRITIC AL GOVERNMENT DRIVEN SUCCESS FAC TORS

During the fi nancial crisis period of 2008-2009, the domestic sales of textiles products in China have compensated for the fall in exports based on the government launching a series of policies measures to spur domestic demand. Domestic demand is expected to receive further impetus from the government spending on expanding infrastructure to support the domestic development of industrial textiles.

Economic stimulus package: In April 2009, China’s Ministry of Industry and Information Technology (MIIT) announced a stimulus and adjustment program for the textile industry. The Chinese government has raised the export tax rebate rate for certain textile products during the second half of 2008 and the fi rst quarter of 2009 to 15% and increased the export tax rebate rate to 16% in the second quarter of 2009.

In February 2009, China approved an Adjustment and Revitalization Plan of Textile Industry with the objective of boosting textile exports, increasing employment and income in the rural base and promoting



textiles as a major national industry. The Chinese government has supported incentives for enterprises to acquire technologically advanced equipment to drive higher productivity and has also supported M&A activities to structurally revitalize the textile industry in China.

Catering to domestic demand: The State Council announced 10 policies for expanding domestic demand and promoting economic growth in November 2008 and promulgated a two-year economic stimulus plan with a total amount of RMB 4 trillion, which was aimed at stimulating the Chinese economy by expanding domestic demand. The Group believes that these measures will be benefi cial for the development of the domestic consumer market and partly offset the adverse effect of the global economic recession.

GOVERNMENT SUBSIDIES

The Company’s subsidiary, Lanxi Sunrise, is considered to be a leading manufacturer by the local Lanxi Government, which has a long-term desire to encourage Lanxi Sunrise to expand its production capacity and to create more job opportunities for local residents. For that purpose, the local government has granted various subsidies to Lanxi Sunrise. Following are the various subsidies granted to Lanxi Sunrise:

• Income Tax Refund Grant: On May 19, 2006, the local government ran an incentive program exclusively for Lanxi Sunrise. Among other things, the program provided Lanxi Sunrise government grants equal to Lanxi Sunrise’s income taxes for the years 2006, 2007, and 2008, and the local income taxes for the years 2009 and 2010. To be eligible for the grants, Lanxi Sunrise needs to pay income taxes to the tax authority as required by the tax laws and regulations and then submit proof of payment to the Lanxi Government, which will deposit the grants to Lanxi Sunrise’s bank account. The Lanxi Government further granted Lanxi Sunrise the deferral of income tax payments for 2006, 2007 and 2008 until 2009, 2010 and 2011, respectively.

• Land Subsidy: The local government provided $333,321 (RMB 2,600,000) subsidy for Lanxi Sunrise to purchase a land use right which Lanxi Sunrise purchased in August 2006. The local government refunded the full amount of the purchase price to Lanxi Sunrise. Land subsidy from the local government is scheduled to continue till July 2056.

• Building Subsidy: In January 2005, the local government granted the buildings attached in the adjacent pieces of land to Lanxi Sunrise as a government subsidy. Lanxi Sunrise obtained the title documents of these buildings in Feb’06. The Management valued the fair value of these buildings at $794,345 (RMB 5,793,572.), based on an appraisal report issued by an independent appraiser certifi ed by the local government. Building subsidy is scheduled to continue till Nov 2027.

• Sewage Facilities Improvement Subsidy: In December 2008, the local government granted $776,045 (RMB 5,300,000) to Lanxi Sunrise for sewage facilities improvement. This subsidy is regarded as a deferred government subsidy where the primary condition for qualifi cation is to improve the sewage facilities of the production plant. No subsidy income was recognized in the year of 2008 as the sewage facilities and equipment were then under construction and installation. Sewage subsidy is scheduled to continue till July 2029.

• Monetary Grant: The local government has also granted various funds to Lanxi Sunrise, such as leading enterprise fund and fi nancial supporting fund, though amounts of grant were not disclosed.



• Interest-free Loans: The local government provided certain unsecured interest-free loans to Lanxi Sunrise with no fi xed terms of repayment and therefore deemed payable on demand. The loan amounts were not disclosed.

GROW TH STR ATEGY

Increase production capacity for spinning in the short term. CTXIF’s main goal is to double its production capacity in the next fi ve years. For capacity expansion, CTXIF has planned to acquire a production line in Lanxi County with 3,000 spindles and a production capacity of 600 tons linen yarn and a bleach plant with capacity of 10 million meters per year. This textile mill will primarily be used to increase production of spinning yarn with high yarn count with linen fi ber in a cost effi cient manner.

Forward and backward integration to secure supplies as well as enter high margin markets. CTXIF has stated its strategic objective to have a presence across the industrial value chain based on a series of M&A activities planned in the next few years. The Company plans to have presence in high quality fl ax fi ber raw material to end production lines of linen dyeing, home textile and garments. The Company will also enhance its value-add products based on the extension of the production chain.

In addition from a supply perspective, the Company is actively seeking to establish a stable production base for raw materials in Europe. The Company is also planning to construct a yarn-dyed factory to increase its presence in the profi table home textile market.

Tap into the surging demand in the domestic market. The Company is actively focusing on tapping into the growing demand in the local Chinese market. As evidence, the Company may acquire a garment company which qualifi es to manufacture military supplies in China.

Focusing on technology innovation and cost optimization opportunities. The Company has developed unique technologies (including a patent) to spin middle and low-end yarn in a cost effi cient manner. It is also investing in R&D efforts around process technologies for dyeing and bleaching and developing new yarn and fabric products. The Company setup its technological center in April 2005 with ties into the Tianjin Institute of Technology and Donghua University.

POTENTIAL GROW TH OPPORTUNITIES

Domestic market growth: During the fi rst three quarters of 2009, the domestic textile market exhibited a positive upward trend. Despite sluggish exports, investment and production continued to rise as domestic demand surged. On the other hand, China’s textile industry, which still relies on exports, is recovering from the negative impact of the demand cut during the peak of recession from the developed economies.

Government mandates could be benefi cial to some textile manufacturers: The Chinese government is controlling the end-use of fi ber consumption in terms of three major end products of garment, home textiles and industrial textiles respectively. The target consumption ratio is set at 49:32:19 respectively. In addition, as per the Chinese government mandate for 2011, the industrial output of the textile industry in the western region of China would be increased to roughly 20% of the country’s total textile output. About 100 well-known enterprises with proprietary brands will be supported to grow their export markets.

Application of R&D to the textile industry to boost exports: In the sectors of spinning and weaving, an



increased focus on developing fi ne raw materials, advanced monitoring instruments and the manufacture of high-end yarns and functional chemical fi bers will reposition China in the textile export market.

FY09 FINANCIAL PERFORMANCE

Signifi cantly higher revenue growth in FY09 as compared to FY08. In FY09, CTXIF reported revenue of $30.1 million, a strong increase of 31.2% year-over-year. This compares to a moderate year-over-year growth in FY08 of 10.4%, which was primarily due to the appreciation of the Chinese currency (RMB) against the US Dollar. The Company achieved signifi cant growth in FY09 due to aggressive sales and systematic entry into new markets.

Strong margin improvement. The Company’s gross margin also improved to 30% in FY09 as compared to 23.1% in FY08. The improvements in gross margins potentially came from improvements in production technologies leading to cost effi ciency and better utilization of the production capacity which was running at peak utilization levels. Furthermore, gross margin in FY08 was negatively affected by the Chinese currency appreciation.

CTXIF reported an increase in net margin of 390 bps from 16.1% ($3.7 million) in FY08 to 20.0% ($6.0 million) in FY09 which is in line with the rise in gross margin. The operating leverage from the SG&A expenses which are quasi-fi xed in nature would have contributed to this improvements in net margin. EPS increased by 62.3% in FY09 from $0.18 in FY08 to $0.30 in FY09.

Performance improvement in FY09

0

5

10

15

20

25

30

35

FY07 FY08 FY09

In $ m

illion

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Revenue Gross margin

Increase in EPS and net margin in FY09

0.300.36 0.39

0.480.57

0.67 0.690.79

‐0.100.200.300.400.500.600.700.800.90

FY09 FY10E FY11E FY12E FY13E FY14E FY15E FY16E

In $

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

EPS Net margin



OUTLOOK

Aggressive revenue growth in the mid-term based on improving global markets and strong domestic demand. For FY10, we project CTXIF to achieve a 26% revenue growth year-over-year which takes into account both Company guidance and CTXIF’s current sales capacity which is 50% greater than the current production capacity. We estimate roughly 10-15% of the growth can be achieved organically through subcontracting; the rest would come from planned capacity increase in FY10. Furthermore, the acquisition of a bleach plant will substantially increase the Company’s production capacity, facilitating revenue growth.

Substantial improvements in margins based on process improvements and economies of scale. The Company has given guidance for further improvement in gross margin to 33% in FY10 which we believe is achievable based on:

• Further improvements in the process technology leading to cost reduction and economies of scale

• Entering into new profi table product segments such as home linen (a stated Company objective)

• Capacity addition and high utilization after the acquisition of a bleach plant

• Potential long term procurement contracts for raw material using Europe as a base

Higher net margin and EPS expected. The improvement in the gross margin is expected to translate into net margin improvement for the Company and hence higher EPS. We expect net margin to improve from 20% in FY09 to 23.3% in FY10 and further to 25.2% in FY14. Conservatively we have assumed that the Chinese tax refund subsidies fade away after FY14 (after the end of fi ve year plan 2009-2014), which will reduce the net margin in FY15 and FY16 by around 200 bps. We forecast the Company’s EPS to improve from $0.30 in FY09 to $0.36 in FY10 (after equity dilution) and further to $0.79 in FY16.

Source: Company Filings, Red Chip Estimates

CXTIF projected performance

0

20

40

60

80

100


In $ m

illion

10%

15%

20%

25%

30%

35%

Revenue Operating margin Net margin



Construction of yarn-dyed mill and acquisition of a bleach plant to increase production capacity. We expect the Company to complete the construction of a yarn-dyed mill in FY10 at a cost of $11 million. The Company also intends to acquire a production line with 3,000 spindles and a bleach plant with capacity of 10 million meters to increase its production capacity in the next 2-3 years. The Company is likely to fund this acquisition through a private placement.

Debt swapping in FY10 to result in lower interest expenses. The Company has stated its intent to replace its current debt with a lower interest rate debt in FY10. The Company is expected to pay-back the existing debt of about $4 million in FY10 and replace it with a debt of $3 million at a lower interest rate of 6.903% which will result in reduced interest expenses in future years. Interest expenses are projected to reduce from $0.4 million in FY08 to roughly $0.2 million in FY10 and onwards, resulting in improvements to net margin.

Improvements in working capital management to generate higher free cash fl ows. We expect the Company to make improvements to working capital management which would positively impact the free cash fl ows. We have modeled the major working capital contributors of account receivables and inventory to go down as a percentage of revenue, hence lowering the working capital requirements.

COMPETITIVE L ANDSC APE

Some of the key Chinese competitors of the Company are profi led below:

• Anhui Huamao Textile Co., Ltd: Anhui Huamao Textile Co., Ltd is principally engaged in the processing and production of cotton, wool, linen, silk and synthetic fi bers, blended fi ber yarns, knitted goods and clothing, the printing and dyeing business, the sale of textile equipment and parts and household textiles as well as the purchase of cotton. The company’s major products are yarns under the brand name of Chengfeng and grey cloth under the brand names of Yinbo and Jiangbo. Jiangsu Province, Zhejiang Province and Guangdong Province are the major domestic markets of the company. The company currently has 6,557 employees.

• Henan Xinye Textile Co., Ltd: Henan Xinye Textile Co., Ltd is a China-based company engaged in processing and distribution of medium-end and high-end cotton textile products. The company’s major products include grey cloth series products, yarn series products and colored weaving cloth

PRICE CHART & FINANCIAL STATEMENTS

Increase in EPS and net margin in FY09

0.300.36 0.39

0.480.57

0.67 0.690.79

‐0.100.200.300.400.500.600.700.800.90


In $

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

EPS Net margin



series products, among others. It distributes its products in the Guangdong province, Fujian province, Jiangsu province, Zhejiang province in China as well as the overseas markets. As of December 31, 2009, the company had one subsidiary and two affi liates, which were involved in the manufacture of cotton yarns and chemical fi bers. The company currently has 8,832 employees.

• Binzhou Huarun Textile Co., Ltd: Binzhou Huarun Textile Co., Ltd was established in November 1998 in Shan Dong. The company specializes in cotton and chemical fi ber spinning and weaving processing. Main products include yarn, cloth, cotton knit, synthetic fi laments mixed with cotton, woven fabrics, polyester staple fi bers and yarn. The company currently has 1,582 employees.

• Shandong Liaocheng China Resources Textile Co.,Ltd: Shandong Liaocheng Huarun Textile Co., Ltd was established in August 2000 in Shan Dong. The company specializes in cotton and chemical fi ber spinning and weaving processing. Main products include combed pure cotton yarn and chemical fi ber fabric. The company currently has 2,166 employees.

• Zhejiang Golden Eagle Co., Ltd: Zhejiang Golden Eagle Co., Ltd is principally engaged in the textile, machinery and garment industries. The company primarily provides silk fabric products, textile machinery and related components, injection machinery and related components, garments, cashmere products and die casting machinery, among others. The company’s textile machines are classifi ed into four categories: machines for woolen gilling and roving, whole-set machines for linen spinning, new-type whole-set machines for spun silk and machines for silk spinning. The company distributes its products in China’s domestic market and to overseas markets, under the brand name of Golden Eagle.

• Keshan Jinding Linen Textile Co., Ltd: Keshan Jinding Linen Textile Co., Ltd is amongst the leading linen and hemp textiles producers and exporters in China as well as the main importer of scutched fl ax. It has equipped itself with 46,000 wet-spinning spindles, 100 sets of knitting machines, 2 production lines for bleaching and dyeing and 10 sets cone dyeing machines. It has annual production capacity of 10,000 tons of linen/hemp yarn and 10 million meters of linen fabric. The company currently has 4,200 employees.

Company Symbol Country of domicile Price ($) Market

Cap $ M P/E (X) Fwd P/E Price to Sales (X)

Price to Book (X)

Revs(TTM) $

M

Revs/Share

(TTM) $

Book Value/ Share $

Luolai Home Textile Co -A

002293 CH Equity China 6.21 872.14 34.47 27.36 4.58 4.82 129.61 1.23 0.41

Zhejiang Golden Eagle Co-A

600232 CH Equity China 6.63 354.27 NA NA 3.05 2.11 NA NA NA

Ruby Mills Ltd RUBY IN Equity India 905.55 83.31 23.09 NA 3.56 5.09 25.04 5.99 3.77

Kingdom Holdings Ltd 528 HK Equity China 0.07 42.53 NA 8.98 0.56 0.45 22.16 0.04 0.14

De Licacy Industrial Co Ltd 1464 TT Equity Taiwan 6.59 32.56 NA NA 0.83 0.70 49.25 0.30 0.34

Taiwan Taffeta Fabric Co Ltd 1454 TT Equity Taiwan 7.00 29.46 53.21 NA 0.41 0.64 74.46 0.58 0.35

Anhui Huamao Textile Co-A

000850 CH Equity China 9.61 885.76 139.30 NA 4.05 3.94 NA NA NA

Henan Xinye Textile Co -A

002087 CH Equity China 6.95 286.39 74.71 NA 1.22 2.02 74.10 0.26 0.57

Huafu Top Dyed Melange Yar-A

002042 CH Equity China 2.65 624.16 26.78 17.90 1.27 4.01 106.98 0.46 0.78

Weiqiao Textile Co Ltd-H 2698 HK Equity China 0.71 851.44 7.94 NA 0.49 0.52 933.48 0.78 1.66

China Linen Textile Industry CTXIF US Equity China 1.65 31.42 6.34 NA NA NA NA NA NA

Median 6.61 320.33 34.47 17.90 1.25 2.07 74.28 0.52 0.49



VALUATION We have used DCF as well as the P/E relative valuation methods for valuing CTXIF. On a DCF basis, we have arrived at a fair value of $3.20 per share which represents a 94% upside. We have assumed a cost toequity of 17% and cost of debt of 7% to arrive at a WACC of 15%. We have assumed a terminal growthrate of 3.5% in our valuation model based on the small revenue base and growth potential of the Company.Using P/E methodology, we have arrived at a fair value of $6.49 per share using a median forward P/E of17.9x FY10 EPS of $0.36. Applying proportional weights to these valuation results, we derive an adjusted fair value of $4.02 which we round to $4.00 as our 12-month target price.

MANAGEMENT TEAM

Gao Ren, Chairman/CEO: Mr. Gao became the Chairman of the Company in 2002. Prior to his position as the president and general manager of the Company, he served as a workshop director and section manager (quality management) of Heilongjiang Lanxi Linen Textile Industry United General Corp. and marketing manager of Harbin Import & Export Group Corp. He has graduated from Heilongjiang Radio and Television University and has also studied in the President Management Program of Tsinghua University.

James Shaofeng Qi, CFO: Mr. Qi replaced Huang Xiaofang in Feb 2010 as the CFO of the Company. Prior to joining CTXIF, Qi worked as an independent consultant on several pre-IPO projects with a focus on restructuring and private placement for information technology infrastructure, human resource outsourcing and real estate development in 2008-09. In 2007, he was nominated as the CFO of China Sunergy Co., Ltd., a solar cell manufacturing company.

Ma Yongfeng, General Manager: Mr. Yongfeng is a general accountant and currently serves as the General Manager of the Company. His prior experience includes serving as a general accountant and fi nancial offi cer of Heilongjiang Lanxi Linen Textile Industry United General Corp. He has graduated from the CEO Program of Tsinghua University.

Teng Yunhai, VP/Director: Mr. Yunhai is the Vice President and a Director of the Company. He was previously the director of the equipment department of linen processing factory, director of equipment repair branch factory, and director of processing branch factory of Heilongjiang Lanxi Linen Textile Industry United General Corp. and equipment principal engineer of Xinlong Holding Group Co., Ltd. He is a graduate of Qiqihar Light Industry Institute.

Zhao Chunfu, Company Secretary/ Director: Mr. Zhao currently serves as the Secretary and Director of the Company. He was previously Branch Factory Director, Technology Innovation Director and Manager (Import and Export) of Heilongjiang Lanxi Linen Textile Industry United General Corp., and Section Chief of Maintenance Operation Department of Xinlong Holding Group Co., Ltd. He is a senior engineer and has graduated from North-East Heavy Machinery Institute.

Basis Fair value Weightage Adj. fair valueDCF 3.20 75% 2.40

P/E relative 6.49 25% 1.62 Fair value 4.02



SHAREHOLDING PAT TERN

The shareholding pattern is dominated by management with the Chairman and CEO, Mr. Gao Ren owning about 40% of the Company’s shares. The other directors and employees own about 47% which leaves only 12% as a free fl oat.

Strengths

Well established and strongly branded linen manufacturer in China Aggressive growth strategy which includes vertical integration (backward and forward) through acquisitions Actively working on capacity expansion to fulfill expected future growth Strong operational focus to drive operating income and optimize cost structure Strong executive leadership with operational experience and close tie‐in to the Chinese government and policymakers

Weaknesses

Limited reserves currently to finance the construction of a yarn‐dyed mill Potential execution risks in raising financing in the private/public market

Opportunities

Market demand stabilizing in the developed markets of Europe and strong demand in the local Chinese market Acquisition opportunities of small and troubled companies in the local market

Threats

Withdrawal of government subsidies can hamper margins in the future Inability to acquire quality raw material domestically, and hence reliance on imports from Europe

SWOT ANALYSIS FOR THE COMPANY

Shareolder Number of Shares Owned % Holding Gao Ren (Chairman/CEO) 8,188,889 40.74% Teng Yunhai (VP/Director) 3,189 0.02% Li Songyun (Chief Marketing Officer) 143,858 0.72% Huang Xiaofang (Former CFO) 644 0.003% Zhao Chunfu (Director) 502,500 2.50% All Directors and Officers 8,839,080 43.98% Free Float 2,421,843 12.03% Total 20,100,003 100%



6-MONTH PRICE CHART


China Linen Textile Industry, Ltd. (OTC BB: CTXIF)INITIAL REPORTFINANCIAL STATEMENTS

Income StatementAll Figures in US$

FY Ending December 31, 2006 2007 2008 9M09 2009

RevenuesNet sales 14,518,393 20,782,804 22,945,122 20,570,248 30,110,000Costs of goods sold 9,779,872 15,075,310 17,648,852 14,854,716Gross profit 4,738,521 5,707,494 5,296,270 5,715,532

Operating expensesSelling expenses 559,320 305,422 393,348 284,103General and administrative expenses 643,919 1,047,292 947,541 341,228Total operating expenses 1,203,239 1,352,714 1,340,889 625,331Operating income 3,535,282 4,354,780 3,955,381 5,090,201 7,370,000

Other income (expense)Interest income 390 74,447 175,299 188,220Interest expense (519,135) (817,596) (540,203) (242,497)Government subsidies 998,579 1,407,967 1,324,225 636,517Other expense (14,260) (36,284) (6,819) (4,723) Total other income 465,574 628,534 952,502 577,517Income before tax 4,000,856 4,983,314 4,907,883 5,667,718 8,170,000

Income tax 1,287,766 1,606,443 1,206,914 1,364,814Net income 2,713,090 3,376,871 3,700,969 4,302,904 6,020,000Basic and diluted earnings per share 0.17 0.18 0.21 0.30



Balance SheetAll Figures in US$

FY Ending December 31, 2006 2007 2008 3Q09

AssetsCurrent AssetsCash 40,903 144,985 10,674 1,874,521 Bank checks and commercial paper 333,320 370,654 1,566,733 2,471,627 Accounts receivable, net 4,643,724 10,962,247 9,374,255 9,445,453 Inventory 10,727,203 9,328,163 8,335,042 5,431,421 Prepaid expenses 2,847,332 1,036,098 1,666,980 5,166,751 Other receivables 408,307 117,648 275,888 737,786Due from related parties 388,530 22,967 1,535,954 1,467,758 Governmental subsidy receivable 41,934 - 1,296,522 624,508Deferred tax assets 83,666 222,774 299,193 234,251Total current assets 19,514,919 22,205,536 24,361,241 27,454,077

Property, Plant and Equipment, net 5,550,937 6,626,980 8,817,291 8,624,096 Land Use Right, net 379,772 397,912 416,185 409,110Governmental Subsidy Receivable, non-current 892,546 2,197,554 2,387,837 2,324,445 Deferred Tax Assets, non-current 51,149 54,221 241,706 241,036Total assets 26,389,323 31,482,203 36,224,260 39,052,764

Liabilities and stockholders equityCurrent LiabilitiesBank loans 5,447,277 5,754,890 4,041,291 4,036,504 Accounts payable 2,254,609 2,724,846 2,709,566 3,782,013 Accrued expenses and other payables 1,037,828 1,709,692 1,559,459 1,950,946 Taxes payable 2,517,990 6,129,478 8,804,430 5,876,734 Deferred revenue 274,978 255,539 289,527 940,566Deferred governmental subsidy 6,666 46,846 88,834 22,182Loans from local government 296,746 317,349 295,001 -Due to related parties 6,527,796 1,584,179 56,470 -Loans from related parties 491,765 116,858 - -Deferred tax liabilities 47,016 62,015 324,130 118,648Total current liabilities 18,902,671 18,701,692 18,168,708 16,727,593

Deferred Governmental Subsidy, non-current 323,876 1,093,861 1,855,453 1,853,255 Deferred Tax Liabilities, non-current 223,137 549,389 596,959 581,111Total liabilities 19,449,684 20,344,942 20,621,120 19,161,959

Stockholders equityCommon stock - 40,200 40,200 40,200Registered capital 726,000 - - Additional paid-in capital 1,313,177 2,204,186 2,204,186 2,204,186 Statutory Reserves 427,005 630,573 1,019,595 1,019,595 Retained earnings 4,199,100 7,435,702 10,747,649 15,050,553Accumulated other comprehensive income 274,357 826,600 1,591,510 1,576,271 Total stockholders' equity 6,939,639 11,137,261 15,603,140 19,890,805Total liabilities and stockholders' equity 26,389,323 31,482,203 36,224,260 39,052,764



Cash Flow StatementAll Figures in US$

FY Ending December 31, 2006 2007 2008 9M09

Cash Flows from Operating ActivitiesNet income 2,713,090 3,376,871 3,700,969 4,302,904Adjustments to reconcile net income to net cashprovided by operating activities:Bad debt expenses 195,186 426,369 31,310 - Depreciation 333,336 346,918 442,381 331,481Amortization 3,732 7,925 8,671 6,576 Deferred income taxes 132,805 182,735 22,742 (155,155)Deferred governmental subsidy - - 650,299 (89,633)Changes in:Bank checks and commercial paper (194,990) (13,515) (1,155,604) (906,088)Accounts receivable (1,107,882) (5,776,736) 2,271,622 (82,242)Inventory (1,318,818) 2,065,370 1,606,161 2,891,632Prepaid expenses (2,374,103) 1,935,417 (553,109) (3,499,187)Other receivables (71,960) 309,880 (235,926) (461,884)Accounts payable (994,554) (124,142) (197,951) 1,074,871Accrued expenses and other payables 264,515 632,075 (208,028) 393,140Taxes payable 401,708 2,176,022 974,980 (4,182,968)Deferred revenue (950,834) (37,120) 16,394 650,907Government subsidy receivable - - - 2,021,476Due to/from related parties 4,453,303 (4,788,175) (3,105,746) 9,965 Net cash provided by operating activities 1,484,534 719,894 4,269,165 2,305,795

Cash Flows from Investing ActivitiesPurchase of property, plant and equipment (172,984) (289,171) (2,159,769) (148,865)Net cash used in investing activities (172,984) (289,171) (2,159,769) (148,865)

Cash Flows from Financing ActivitiesProceeds from bank loans - - 3,936,110 4,031,787Payments on bank loans (189,909) (67,998) (5,986,251) (4,031,787)Payments on loans from local government (86,210) - (43,353) (294,436)Payments on loans from related parties (803,821) (394,082) (124,804) - Dividend payments (125,800) (33,021) - - Net cash used in financing activities (1,205,740) (495,101) (2,218,298) (294,436)

Increase (decrease) in cash 105,810 (64,378) (108,902) 1,862,494Effects of foreign currency conversion on cash (75,788) (13,201) (25,409) 1,353 Cash at beginning of period 10,881 222,564 144,985 10,674 Cash at end of period 40,903 144,985 10,674 1,874,521


China Linen Textile Industry, Ltd. (OTC BB: CTXIF)INITIAL REPORTPROJECTED FINANCIAL STATEMENTS

Projected Income Statement 2010E 2011EAll Figures in US$ (ending in 000)FY Ending December 31, 2010E 2011E

Revenues 37,933 45,520Costs of goods sold (25,415) (30,498)Gross profit 12,518 15,021

Operating expensesSelling expenses (645) (774) General and administrative expenses (1,328) (1,548)Operating income 10,545 12,700

EBITDA 11,013 13,969

Interest income 85 130 Interest expense (243) (244) Government subsidies 1,385 1,660Total other income 1,227 1,547Income before tax 11,772 14,247

Income tax (2,943) (3,562)Net income 8,829 10,685

EPS - Basic and Diluted 0.36 0.39 Shares outstanding - Basic and Diluted 24,348 27,380



Projected Balance SheetAll Figures in US$ FY Ending December 31, 2010E 2011E

AssetsCurrent AssetsCash 4,601 11,587Bank checks and commercial paper 1,922 1,922Accounts receivable, net 12,518 14,566Inventory 6,828 7,738Prepaid expenses 3,035 3,642Other receivables 190 228 Due from related parties 2,870 2,870Governmental subsidy receivable 2,748 4,321Deferred tax assets 229 229 Total current assets 34,940 47,102

Property, Plant and Equipment, net 25,237 24,885Land Use Right, net 401 393 Governmental Subsidy Receivable, non-current 1,883 1,883Deferred Tax Assets, non-current 239 239 Total assets 62,698 74,502

Liabilities and stockholders equityCurrent LiabilitiesBank loans 3,007 3,007Accounts payable 3,812 4,575Accrued expenses and other payables 1,779 2,135Taxes payable 3,730 3,730Deferred revenue 452 452 Deferred governmental subsidy 89 89 Due to related parties 46 46 Deferred tax liabilities 362 362 Total current liabilities 13,277 14,396

Deferred Governmental Subsidy, non-current 1,792 1,792Deferred Tax Liabilities, non-current 471 471 Total liabilities 15,541 16,659

Shareholders' EquityCommon stock 55 55 Additional paid-in capital 18,858 18,858Statutory Reserves 1,623 1,623Retained earnings 24,998 35,683Accumulated other comprehensive income 1,624 1,624Total stockholders' equity 47,158 57,843Total liabilities and stockholders' equity 62,698 74,502



Projected Cash Flow StatementAll Figures in US$ FY Ending December 31, 2010E 2011E

Cash Flows from Operating ActivitiesNet income 8,829 10,685Depreciation 460 1,262Amortization 8 8 Changes in:Bank checks and commercial paper - - Accounts receivable (3,755) (2,048)Inventory (1,965) (910) Prepaid expenses (851) (607) Other receivables (89) (38) Accounts payable 1,247 762 Accrued expenses and other payables 677 356 Taxes payable - - Deferred revenue - - Government subsidy receivable (1,298) (1,573)Due to/from related parties - - Net cash provided by operating activities 3,261 7,896

Cash Flows from Investing ActivitiesPurchase of property, plant and equipment (16,501) (910) Net cash used in investing activities (16,501) (910)

Cash Flows from Financing ActivitiesProceeds from bank loans 3,000 - Payments on bank loans (4,041) - Proceeds from equity dilution 16,561 - Net cash used in financing activities 15,520 -

Increase (Decrease) in cash 2,280 6,986Effects of foreign currency conversion on cash - - Cash at beginning of year 2,321 4,601Cash at end of year 4,601 11,587


China Linen Textile Industry, Ltd. (OTC BB: CTXIF)INITIAL REPORTDISCLOSURES

Analyst CertificationThe analysts contributing to this report do not hold any shares of CTXIF. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. RedChip Companies Inc. certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst authoring this report.

RedChip Visibility Research UniverseRedChip Visibility, a division of RedChip Companies Inc., covers small and micro cap companies with market caps ranging from $5.5M to $1.2B. Each company is typically covered for at least 12 months. New companies may be added or removed at any time.

RedChip Rating System

STRONG BUYThe current price reflects a substantial discount from the market and from its peers, and the company does not possess significant financial risk within its risk category. Future growth potential is undervalued relative to the company’s stock price. The analyst believes the stock at current levels represents a compelling opportunity for capital gains over the time period to its target price.

BUYThe current price reflects a discount from the market and from its peers, and the company does not possess significant financial risk within its risk category. The analyst believes the stock at current levels will provide an opportunity for capital gains over the period of its target price. Several fac-tors can indicate an undervaluation of the company’s shares. SPECULATIVE BUYThe current price appears to offer potential gains though risk is considerably higher given its risk category. There may be insufficient historical data or clear-cut prospects to warrant a “Buy,” but the analyst believes that the long run prospects of the Company are positive. The analyst believes its risk reward ratio advocates purchase of the stock. In the short term, the stock may be subject to high volatility and continue to trade at a discount to its market.

HOLDThe analyst is unable to assign a buy rating due to a number of specified factors noted in the report. These include the stock being fairly valued rela-tive to its peers and the market, or the company may have risks that make it potentially unsuitable for investment within its risk category. Similarly there are no currently known compelling factors that would warrant selling. The analyst will remain neutral pending developments.

SELLThe analyst believes that the Company is overvalued based on its current status. The future of the Company’s operations may be questionable and there is an extreme level of investment risk relative to reward given its risk category. An investment in the company may produce below market returns and/or deficits.

About RedChipRedChip Companies is an international, small-cap research and financial public relations firm headquartered in Orlando, Florida; with affiliate offices in Qingdao, China; Paris and San Diego. RedChip delivers concrete, measurable results for its clients through its extensive national and inter-national network of small-cap institutional and retail investors. RedChip has developed the most comprehensive platform of products and services for small-cap companies, including: RedChip Visibility Research™, Traditional Investor Relations, Digital Investor Relations, Institutional and Retail Conferences, RedChip Small-Cap T V( TM), Shareholder Intelligence, Social Media and Blogging Services, Webcasts and RedChip Radio( TM). RedChip is not a FINRA member or registered broker/dealer.

None of the profiles issued by RedChip Companies, Inc., constitutes a recommendation for any investor to purchase or sell any particular security or that any security is suitable for any investor. Any investor should determine whether a particular security is suitable based on the investor ’s objec-tives, other securities holdings, financial situation needs, and tax status. All materials are subject to change without notice. Information is obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. China Linen Textile Industry, Ltd. (“CTXIF”) is a client of RedChip Companies, Inc. and of RedChip Visibility, a division of RedChip Companies. China Linen Textile Industry, Ltd. agreed to pay RedChip Visibility a fee of 100,000 shares of Rule 144 common stock in cash for RedChip Visibility Program services, which includes the preparation of the equity research report(s). The equity research report(s) are prepared for informational purposes only and are paid for by the company portrayed in the report. The equity research report(s) are not a recommendation of a solicitation to purchase or sell any security, nor do they constitute invest-ment advice. RedChip Companies, Inc., is currently engaged by this company to provide investor awareness services. Investor awareness services and programs are designed to help small-cap companies communicate their investment characteristics. These services may include investor conferences, digital and print distribution of CTXIF investor-related materials and radio programming. CTXIF agreed to pay the aforementioned stock compensa-tion to include twelve (12) months of investor awareness services. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein.

Additional information about the subject security, analyst, or RedChip Companies Inc. is available upon request. To learn more about RedChip’s products and services, visit http://www.redchip.com/visibility/productsandservices.asp, call 1-800-RedChip (733-2447), or email at [email protected]

Company Contact Info:Chengdong Street Lanxi County, Heilongjiang Province, PRCWebsite: www.china-linen.netPhone: 86-455-5636079 Email: [email protected]

RatingNumber of Covered

CompaniesPercentage of

Universe

Strong Buy 2 11.1%

Buy 12 66.7%

Speculative Buy 4 22.2%

Hold 0 0.0%

Sell 0 0.0%

RedChip Visibility Coverage Universe

China Linen Textile Industry, Ltd.a.eqcdn.com/chinalinen/media/443943fe612121c0e4895… · · 2011-01-05China Linen Textile Industry Ltd. is a leading China-based manufacturer,

Documents