China Taisan Technology Group - More water in the ship

China Taisan Technology Group (China Taisan) has warned that its 2Q FY09 net profit may be significantly lower than that of the previous year, due to deteriorating demand for its products and services. While this is no surprise given the 47.5% YoY fall in net profit for 1Q FY09, we think the gap may have widened further to warrant the issuance of a profit warning.

The continued deterioration in the results of China Taisan and its peers suggests that the synthetic-fabric manufacturing sector is still struggling from intense competition due to weak export sales and over-expansion. We have cut our earnings forecasts for FY09 by 52.8% to Rmb83.4m, to factor in further pressure on the company’s sales volume and profit margins, instead of the bottoming-out in 2Q FY09 that we had envisaged previously.

We have lowered our rating for China Taisan to 4 (Underperform) from 3 (Hold), as we recommend that investors stay cautious ahead of the coming 2Q FY09 results. We have also cut our six-month target price from S$0.13 to our estimated net cash per share of S$0.08 for June 2009. In our view, weak results would limit the company’s ability to pay out a dividend for FY09, and this would point to a lower payoff despite the increased uncertainty.

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