LHCF has coped well in this slowdown as the sales volume in 1H09 was just 3% lower than in 1H08. The overall ASP stabilized at RMB16,440/ton during 1H09, and has since rebounded to RMB21,000/ton due to higher raw material prices. The improving profitability of its customers has allowed the increased raw material costs to be passed on.
LHCF added five new Fujian-based customers in 2Q09, increasing its customer base to 195 and re-affirming its position as the market leader. The business outlook is likely to strengthen in the next six months based on stronger ASP and stable sales volume. The management expects gross margins to improve 5-ppt to around 15%.
As a sustainable recovery is still uncertain, the management remains cautious about inventory-stocking as raw material prices could be volatile. Working capital was well-managed. Long-term customers who have been given an extension in credit terms have so far been able to pay up. Net cash by end-FY09 is expected at RMB1.0b, with no major capex in FY10F.
We have raised our FY09 and FY10 revenue forecasts by 4% and 14% given the improved earnings visibility. The additional 90,000mt of yarn production lines are expected to be installed by 1H10. We are upgrading LHCF to a Hold with a target price of $0.24, pegged at 8x PER, a 50% discount to the regional sector average PER. LHCF has committed to paying out 20% of net profit as dividends for FY09F.
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