China Farm Equipment : Tough year ahead

China Farm Equipment (CFE) earnings weakened below expectations. CFE reported a net profit decline of 99.5% to RMB377k in FY08. This was tremendously lower than our RMB40.4m forecast (RMB42.3m forecast based on consensus). Lower sales volume for farm equipment, diesel engines, agricultural trucks and driver cabins were the major reasons for the lower net profit achieved. The termination of its leasing and management arrangement with Hunan Juzhou Automobile Manufacturing Co. Ltd during 4Q08 also contributed to the decrease in revenue from the sales of agricultural trucks and driver cabins.

Core net profit for FY08 would have been RMB32.4m in FY08, if not for its recent other expenses item in the income statement. Other expenses were due to the impairment of receivables and inventories written down of RMB31.0m pertaining to the termination of leasing and management arrangement entered between CFE and Human Juzhou Automobile.

Management has indicated to us that collection of these receivables has been delayed due to the current economic situation. The remaining RMB1.0m was attributed to the impairment of receivables arising from sales of farm equipment.

As of 31 Dec 2008, CFE is in a net cash position of RMB40.2m and has a short term loan of RMB10m. We believe that the company has enough cash to cover its loan. However, CFE’s interest coverage ratio of 1.4x is low. We are currently revising our earnings forecast for CFE.

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