Synear - Very Challenging Outlook

Synear Food’s (SF) 1Q ‘09 net profit fell 55% yoy (to RMB48.3mln) on the back 24% yoy decline in sales to RMB518.9mln. Sequentially, sales rose 3.4%, weaker than last year’s 13.8%, but net profit surged 269% qoq, much faster than last year’s 67% due to the low base effect in 4Q ’08 (profit was only RMB12.6mln). Overall the weak set of results were in line with market expectations and management’s guidance, reflecting dampened consumer sentiments due to the global financial crisis, especially as the company focuses on mid-high end products which suffered the most.

Due to these same factors as well as uncertainties relating to the recent H1N1virus (resulting in overallfactory utilization rate in the region of 50% for Zhengzhou and 20% for Huzhou and Chengdu), management expects business conditions to be very challenging for the rest of the year, and will bedeferring all capital expenditure plans for the time being except the acquisition of land and production facilities in Zhengzhou in 3Q ‘09. But it will require 4 years to complete the construction of the new facility.

Fortunately, the company remains well capitalized with cash of RMB875.88mln (albeit down from RMB2bln last year) versus zero debts which should be able to help fund their expansion plans as well as working capital requirements.

At 25 cents (market cap is S$343.75mln, trailing PE is 10.5x, price to sales is 0.9x and price to book is 0.6x), the stock is unchanged since our last update in Nov’08, vindicating our HOLD recommendation.

Since mid-late 2008, the stock has been stuck in a trading range between low teens to high twenties and with management’s cautious outlook (reflecting challenging yoy comparisons) but stabilizing sequential performance we expect the stock to remain stuck in this range. This implies selling on further strength as it moves close to the upper end of the trading range.

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