Celestial Nutrifoods - In dire need of cash

1Q09 core net profit of Rmb73.1m was below expectations, forming 19% of our initial expectations and consensus. Deviation was due to lower-than-expected gross margins and higher-than-expected operating expenses. Revenue declined 22.5% on the back of a decline in sales volume and overall ASP. Gross margin slipped to 35% from 38% as the decline in sales volume and ASP was partially offset by a fall in soybean prices. Despite the potential S$274m CB redemption on 12 June 09, the company reported a further cash drain of Rmb200m mainly due to higher inventories, higher receivables and capex. With lower cash levels, weaker profits and lack of a re-financing agreement, default risks remain high. We are ceasing coverage of the stock with immediate effect due to lack of institutional interest. Our forecasts have not been updated with the latest 1Q09 numbers. Our last rating on the stock was Underperform with a target price of S$0.08, based on 0.11x P/B.

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