Celestial Nutrifoods - High default risks

4Q core net profit of Rmb84.2m (-26% yoy) was below our expectations forming 74% of our estimate but in line with consensus. FY08 core net profit of Rmb408.4m formed 93% of our estimates. Main reason for divergence is lower-than-expected gross margins from higher-than-forecast soybean prices. There was no dividend declared for FY08. Sales remained stable while gross margins narrowed to 34.9% vs 37.6% in 4Q07 despite the fall in soybean prices. Core net margin fell to 15.7% from 27.6%. The company has moved from a net cash to a net debt position of Rmb414m, raising the risks of a default on the CB put date (June 09) unless they can find alternative financing. Our FY09-10 EPS estimates are lowered 3-16% on account of lower sales volumes and margins. Our target price is cut to S$0.08 is based on 0.11x P/B, from S$1.45 based on 8x CY10 P/E. Downgrade to Underperform from Outperform on high default risks.

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