For polyurethane (PU) and microfibre products, customers continued to request for lower grades in 1Q09 as lower-grade products generally have lower average selling prices (ASP). In addition, as the rate of decline in the cost of goods sold for PU and microfibre products was less than the rate of decline in ASPs, this resulted in a significant drop in gross margin in 1Q09, as compared with that in 4Q08.
The adverse current economic climate has also affected demand for pattern moulding paper (PMP) as the overall market demand for PU and microfibre products has fallen.
We believe the market expects Sinotech to report a loss for 1Q09 as the company has disclosed that it has been running at a low utilisation rate, and selling prices and margins have been falling amid deteriorating business conditions. However, the market has high expectations of the PMP unit, and if it turns out that the segment did badly in 1Q09 due to plunging demand, share price could come under pressure.
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