Li Heng Chemical Fibre - Still declaring a final dividend

Li Heng’s FY08 revenue and net profit were below consensus estimates. Full-year revenue of RMB3.7b came in higher than our forecast, driven by higher sales volume. An unrealized forex loss of RMB51m resulted in a net loss in 4Q08, bringing full year earnings down 10% yoy. Stripping off exceptional items, 4Q08 would have been profitable, even as 4Q08 revenue and gross profit suffered steep declines of 31% and 80% qoq.

For FY08, the ASPs of its nylon yarn products decreased 8.4% compared to FY07, mainly due to severe price pressure since Sep-08. During the last four months of 2008, ASP of nylon yarn products dropped by 28% from that of Jan-Aug period. As a result, gross margins declined to 28.7% from 34.4 % in FY07.

Li Heng typically keeps two months worth of raw material inventory while nylon yarn products are priced based on current prices of nylon chips, resulting in margin pressure. To minimize the exposure to inventory losses due to declining raw material prices, the Group is working its inventory turnover, which has improved to 17 days in FY08 compared to 24 days in FY07.

Li Heng is going ahead with the construction of its polyamide chip plant, which is scheduled for completion in 3Q09. RMB484m from IPO proceeds remain unutilized. Its cash position as at Dec- 08 stood at RMB1.3b. The Group also declared a final dividend of S$0.01, bringing the total dividend declared in FY08 to S$0.04 cts, representing a payout of close to 40%.

The management has seen improvement in sales volume in the first two months of FY09 and has indicated that its capacity will be kept fully utilized until Mar-09. However, earnings visibility has deteriorated and an order book beyond Mar-09 has not been secured. We are reviewing our forecasts and target price pending further updates from the analyst briefing this afternoon.

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