Sino Techfibre - Expect a recovery in 2H09

Continued weakness in 2Q09. Most chemical fibre manufacturers have benefitted from the industry’s recovery and seen increased selling prices and margins since Apr 09. In contrast, leading synthetic leather producer Sino Techfibre (Sinotech) continued to suffer from weak sales and low profitability in 2Q09 as a result of the industry downturn and sluggish demand.

Market is switching to low-end products. Due to the deterioration in the apparel/garments/shoes export market as well as the mass discounts offered in the domestic consumer market, the demand for Sinotech’s high-end synthetic leather products has largely evaporated. The market is switching to low-end products, which have wider applications.

ASPs remained low. To cater to the change in the market’s preferences, Sinotech has also taken up the production of more low-end products. As a result, the average selling prices (ASPs) of its products in 2Q09 remained low, and are likely to be similar to ASPs in 1Q09.

2Q09 sales likely to improve 10% qoq on higher sales volume. Owing to the adjustment to its product mix to include more low-end products, Sinotech witnessed a higher sales volume in 2Q09 relative to that in 1Q09. Revenue for 2Q09, therefore, is expected to rise 10% qoq on the back of the increase in sales volume.

Move to low-end market only a short-term strategy to retain market share. Sinotech would face much fiercer competition in the low-end market than it had faced previously in the high-end market, which would greatly reduce its margins. In addition, as a high-end synthetic leather producer, Sinotech is in a disadvantageous position in the low-end market due to its higher fixed costs and staff and administrative expenses, which would further drag down the company’s profitability. Thus, the penetration into the low-end market is merely a temporary move to help the company cover its fixed costs and part of its variable costs, as well as to retain customers and safeguard market share.

Another net loss likely to show up in 2Q09. Apart from the likely 10% qoq increase in revenue, Sinotech would not see any other material improvements in 2Q09. Demand for the company’s products was weak, keeping its operations running at below 50% utilisation rate. ASPs and margins would remain at low levels, similar to that in 1Q09. Thus, the company is likely to make a net loss again in 2Q09.

We expect a recovery for Sinotech in 2H09. Management says there was no sign of recovery in 2Q09 and expects the business environment to remain challenging in 2H09. We, however, do not expect such a negative industry outlook.

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