Li Heng: Stability will be the key

Stable operations since 1Q09. We recently catch up with Li Heng Chemical Fibre (LHCF) for a quick update and are pleased to note that things have largely stabilized after a weak first quarter. As a recap, LHCF recorded a 41.2% YoY and 32.9% QoQ tumble in revenue, while overall ASP declined by as much as 52.2% YoY and 25.7% QoQ to just RMB16.4m/ ton. And in line with the recent rebound in crude oil prices, we understand that the ASP has risen by some 10% from 1Q09, heralding a possible end to the year-long ASP slide. Capacity utilization has remained high at 90%, although customers continue to remain cautious - most are still placing between two weeks' to one month's worth of orders. And LHCF cautioned that a full recovery would still take some time (likely FY10 story) and its current focus is still on how best to ride out the still-fragile situation - this involves the active management of its inventory (holding about one month's worth of raw material) and watching its accounts receivables (all customers are still paying on time).

Cautious expansion on track. As mentioned in our previous report, management has prudently decided to go slow on its Phase III expansion plan, where it will push back the addition of extra capacity from 2H09 to 1H10. LHCF is also targeting to complete its R&D centre by 1H10, which makes sense since the new products are expected to be produced by the new facility. On the other hand, the construction of its PA chip plant (200mt daily production capacity) is on track to be completed in 3Q09 as guided; this will allow LHCF to be quite self-sufficient and afford it more flexibility in managing its inventory. Last but not least, we understand that the planned major overhaul of its old Li Yuan Phase 1 and 2 is likely to be pushed back to 1H10 as opposed to 2H09.

Maintain HOLD. While things have largely stabilized in 2Q09, suggesting that the worst is over, we note that positive near-term catalysts are still somewhat lacking - persistent margin pressure may be the biggest challenge facing not only LHCF but also all other industry players. And until we see better clarity (likely only in late 2H09), we prefer to maintain our HOLD rating and S$0.25 fair value.

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