China Haida - Higher cost

Haida FY08 revenue fell 16.5% to RMB371.4m due mainly to the fall in demand from both the domestic and export markets. With cost of sales reduced at lower rate than revenue, Gross profit fell 41.3% to RMB46.2m, slightly better than our estimate of RMB44.3m.

However, with selling and distribution expenses falling at a slower rate of 15.7%, and higher administrative expenses and finance costs, profit before tax fell at a higher rate of 71.8% to RMB14.6m, much lower than our estimate of RMB18.2m. Net profit dropped 73.9% to RMB9.4m due to higher taxation.

According to the group, administrative expenses increased 28.3% to RMB19.7m due mainly to higher allowance for doubtful trade receivables, staff related costs, property tax expenses of land use rights and depreciation expenses arising from the additional assets acquired in second half of FY2007. Finance costs increased due to higher interest rate.

NTA per shares increased from RMB0.99 to RMB1.022 while cash on hand fell slightly from RMB69.2m to RMB68.0m. Despite the strong cash position, no dividend was declared for the second consecutive year.

Due to the deteriorating global economy, we have adjusted down FY2009E and FY2010E earnings to RMB3.5m per year. The share is currently trading at 25 times FY2009E earnings. Although its NTA per shares were at a higher value of S$0.21, we based our valuation on higher discount of 70% to its NTA due to no dividends. Thus, we lowered our target price to S$0.065 and maintain our Hold recommendation.

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