China Sky – Likely To Turn Profitable In 2Q09

Thanks to stronger order flows in 2Q09, a production line that was shut down in 4Q08 and 1Q09 has been put into operation since mid-May. The utilisation rate of CSky’s continuing operations has recovered to over 80% currently compared with 61% in 1Q09, while we estimate the average utilisation rate at over 70% for 2Q09.

Average selling price (ASP) for 2Q09 went up by 10-15% relative to the low level in March, but ASP was generally flat in 1H09.

We expect CSky’s sales for 2Q09 to record a 20% qoq increase to Rmb220m mainly on the back of higher sales volume.

We expect gross margin to expand to 15% in 2Q09 due to the higher utilisation rate.

The operations at Qingdao Zhongda (QZ) did not see any material improvement in 2Q09 as the utilisation rate was similar to that in 1Q09 (28%). Major reasons behind QZ’s unfavourable performance: a) production equipment is old and thus less efficient, and, b) direct exports originally constituted 20% of QZ’s revenue but their contribution is currently almost zero.

CSky recorded Rmb72m in maintenance and recalibration expenses in 1Q09. Excluding these expenses, CSky would have made a net profit for the quarter. In 2Q09, CSky is likely to have recorded another Rmb20m- 30m in these expenses in its P&L account, but we expect the company to have made a thin profit owing to the improvements in its sales and gross margin. Starting from 3Q09, CSky will not incur such expenses any more.

Sponsored Links