China Sky Chemical Fibre - Acquisition proved to be a wrong move

China Sky’s full year net profit of RMB392.8m grossly missed our expectations by 22% as a result of impairment loss on goodwill of RMB56.4m. Full year revenue declined 8% yoy while net profit declined 40% yoy, reflecting the lower sales volume and ASPs of the nylon yarn products, and the expiration of tax concession enjoyed by the Group.
Revenue contribution from newly acquired QZ represented just 8% of total revenue. It contributed an impairment loss on goodwill even before contributing meaningfully to the bottomline. QZ will continue to weigh on China Sky’s profitability given its low operating efficiency and poor business outlook brought about by the economic crisis.

The Group’s cash balance was reduced by RMB476m to RMB880m, as a result of its investments in QZ and new production facilities for the new SR-HOY/FDY products. Net cash per share as of Dec-08 was S$0.22

The management expects profitability in FY09 to be affected and does not foresee any improvement in 1H09. Against the backdrop of weakening demand for textiles, the management will focus on streamlining its operations and containing costs. We also do not expect the SR- HOY/FDY products to contribute meaningfully in FY09 given the current conditions. The Group did not declare any dividend in FY08. We are reviewing our forecasts and target price pending further updates from the teleconference tomorrow.

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