Li Heng Chemical - Average selling prices may not have bottomed

1Q09 revenue of RMB472.5m was down 41.2% yoy, grossly missing the market’s and our house’s estimates by about 30%. Net profit declined 95.5% to RMB10.2m due to lower revenue and gross margins, as well as an unrealized forex loss of RMB20.6m. Excluding the forex loss; 1Q09 net profit would still have missed expectations at RMB33.9m.

The disappointing topline performance was mainly the result of a lower 1Q09 average selling price (ASP) of its nylon yarn products at RMB16,420/ton, down 25% from 4Q08. Market prices are still trending lower. On a positive note, sales volume in the quarter declined only 9.8% sequentially and was 28.6% higher than in 1Q08 as LHCF added new customers during the quarter. New customers contributed about 6.5% to revenue.

Gross margin edged up to 12.9% in 1Q09 (9.3% in 4Q08) as a shorter inventory holding period of about one month effectively reduced the inventory’s exposure to fast-declining raw material market prices.

The consensus estimates puts FY09F revenue and net profit at RMB2759.6m and RMB448.4m, respectively. However, the ASPs of nylon yarn products in China are likely to continue to weaken and remain volatile. Pending further updates from the management during our conference call later, we are putting our forecasts and recommendation under review.

Sponsored Links