LI HENG - Still Uncertain And Volatile Prospects

As warned by management in Mar ’09 1Q ‘09 net profit plunged 96% yoy on the back of 41% yoy decline in sales, reflecting the downturn in both domestic as well as export demand and lower selling prices.

Sequentially though gross margin improved 4% points to 12.9% due to lower cost of raw materials and stabilizing selling prices. And the forex loss narrowed from RMB48mln to RMB21mln sequentially, resulting in bottom-line turning around from a loss of RMB8.72mln to a profit of RMB10.19mln.

Looking ahead, management maintained their cautious stance due to the continued weakening in consumer demand, expecting 2009 to be a challenging year. While export demand which accounts for 50% of their business remains weak in the near term, management is hoping that China’s government stimulus package will help domestic demand to pick up thereby helping to take up part of the slack. They added 6 new customers in 1Q ‘09.

Fortunately the company is well capitalized with cash of RMB1.323bln versus debts of RMB200mln, giving a net cash position of RMB1.123bln, representing about 54% of its current market cap. But the company will be spending another RMB350mln on capex for this year.

While trailing PE is a low 3.5x, price to sales andprice to book is 0.6x, this likely reflects the weak prospects as warned by management.

While we maintain our HOLD recommendation, we believe the stock will remain stuck in its 9-10 month trading range (low of 10 cents and high of 30 cents) reflecting the weak and uncertain prospects, hence would be looking to sell on further strength as it approaches the upper end of its trading range.

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