Li Heng: Cautiously more upbeat for 2H09

2Q09 results suggest fragility still. Li Heng Chemical Fibre (LHCF) reported its 2Q09 results , where 2Q09 revenue fell 61.2% YoY to RMB453.3m, while net profit tumbled 88.8% to RMB38.0m. But on a sequential basis, we note that revenue was just down 4.1%, and was also 0.4% above our estimate; net profit was also up 272.8%, just 2.6% shy of our forecast. While there were some signs of stability, the situation remains quite fragile as we had highlighted in our earlier report. LHCF still has to absorb most of the higher raw material costs to help its customers, hence overall ASPs only rose 0.2% QoQ. For the half year, revenue fell 53.1% to RMB925.8m and net profit slid 91.5% to RMB48.2m, meeting 45.3% and 23.7% of our FY09 revenue and earnings estimates, respectively.

Cautiously improving outlook. As the macro economic picture continues to improve in recent months, management said it noticed a gradual stabilization in order volume and ASPs of its nylon yarn products and also raw material prices. While this may signal that the worst is probably over, the persistent margin pressure may be the biggest challenge facing not only LHCF but also other industry players. Nevertheless, it believes the gradual ASP increase will help gross margin recover to around 15% in 2H09.

PA chip plant almost done. While it is progressing cautiously with its planned expansion, its PA (polyamide) chip plant is almost completed. LHCF expects to start full trial production of the PA plant soon and begin full production by Sep. LHCF has also started the preliminary installation work for its additional yarn capacity but expects it to come on-stream in 1H10. Last but not least, we understand that the planned major overhaul of its old Li Yuan Phase 1 and 2 will be pushed back to 2Q10 as opposed to 2H09; this will also be done over a period of 4-5 years. As such, it expects to spend no more than RMB200m in capex in 2H09.

Maintain HOLD. In view of the margin squeeze in 1H09 and the still cautious recovery in 2H09, we have cut our FY09 earnings forecast by 23.7%; our FY10 estimate by 8.8%. However, in view of the recent market re-rating, we have eased our discount rate from 22.0% to 16.8%, which bumps up our DCF-based fair value from S$0.25 to S$0.26 (translates to just 5x FY10 EPS).. Maintain HOLD.

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