While there is no doubt the company’s 1Q FY09 performance will be weaker than for 1Q FY08, as management has said that orders for the first two months of 2009 declined by 20% YoY, we think the key items to watch for should be: 1) the degree of impact on the gross-profit margin and the sales volume, and 2) the orderbook outlook (for signs of a recovery).
Our 1Q FY09 net-profit forecast of Rmb38.2m factors in a 25% YoY fall in sales volume, a 10% QoQ decline in the average selling price, and a 4.8-percentage-point drop in the gross-profit margin as a result of our expectation of a lower capacity-utilisation rate and higher depreciation for new equipment.
Our six-month target price of S$0.13 for China Taisan is based on a peer-average PER of 2.5x on our 12-month earnings forecasts to 2Q FY09. We will publish an update after the 1Q FY09 results have been announced.Catalysts and action
We maintain our Hold rating for China Taisan. While the market has become more positive on the textile segment, we believe that any upside for this stock will be capped until clear signs of an earnings recovery emerge.
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