S-Shares Results Review Summary and Outlook

In summary, two-thirds of the S-share companies under review saw their earnings rose for 2008, although most of the growth came during the first half of 2008.

Discretionary consumer companies saw significant demand slowdown in the second half of 2008, which became even more apparent in the 4th quarter. Companies either faced a slowing of revenue growth (like China Hongxing) or had to sacrifice lower margins (Hongguo and China Sports) to maintain sales growth via product discounts or by keeping ASPs low.

Meanwhile, the earnings outlook for discretionary consumer companies is fairly muted. We expect companies to continue spending on A&P to maintain their brand visibility, whilst also likely to embark on discounts either directly or indirectly to consumers to induce spending, which would pressure margins.

Consumer staple companies like Pacific Andes, China Fish, and Celestial NutriFoods were less affected. While companies under this segment also saw a slowdown in second half of 2008, impact was less significant. We still saw a 7% and 19% growth for China Fishery and Celestial NutriFoods respectively. Raffles Education continued to deliver robust growth largely on operating efficiency.

Going forward, we believe the impact of a slowdown in consumer sentiment will impact more on branded staple food like Celestial NutriFoods.

Shipyards like Cosco and Yangzijiang were hit by provisions. In view of the deteriorating conditions for shipping industry, the shipyards have prudently made higher provisions for doubtful debts and cost overrun in 4Q08. In line with its profit guidance, Cosco plunged into losses of S$24m in 4Q08, due mainly to provisions for inventory write-downs, doubtful debts and cost overrun at its shipbuilding division. Yangzijiang’s FY08 earnings fell short of our estimate by 5%, blames on a provision of RMB200m. Stripping this out, its bottomline would have come in 5% above our expectation.

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