China Taisan Technology Group - More water in the ship

China Taisan Technology Group (China Taisan) has warned that its 2Q FY09 net profit may be significantly lower than that of the previous year, due to deteriorating demand for its products and services. While this is no surprise given the 47.5% YoY fall in net profit for 1Q FY09, we think the gap may have widened further to warrant the issuance of a profit warning.

The continued deterioration in the results of China Taisan and its peers suggests that the synthetic-fabric manufacturing sector is still struggling from intense competition due to weak export sales and over-expansion. We have cut our earnings forecasts for FY09 by 52.8% to Rmb83.4m, to factor in further pressure on the company’s sales volume and profit margins, instead of the bottoming-out in 2Q FY09 that we had envisaged previously.

We have lowered our rating for China Taisan to 4 (Underperform) from 3 (Hold), as we recommend that investors stay cautious ahead of the coming 2Q FY09 results. We have also cut our six-month target price from S$0.13 to our estimated net cash per share of S$0.08 for June 2009. In our view, weak results would limit the company’s ability to pay out a dividend for FY09, and this would point to a lower payoff despite the increased uncertainty.

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China Taisan - Poor 1Q FY09 results were a forgone conclusion

We maintain our 3 (Hold) rating and six-month target price of S$0.13 for China Taisan Technology Group (China Taisan), in view of its weak 1Q FY09 results and uncertain outlook. Our target price is based on an improved peer-average PER of about 3x (from 2.5x) on our revised-down earnings forecast for FY09.

China Taisan recorded a 1Q FY09 net profit of Rmb33.9m, down 47.5% YoY and 11.3% below our estimate. The company’s performance was affected by a decline in sales volume and product margins, as a result of slower demand for sports-apparel products in China, as well as an increase in domestic competition. The bottom-line was affected by a foreign-exchange loss and higher depreciation charges. Consequently, we have revised down our earnings forecasts for FY09 by 14.5% to factor in the prospects of further weakness over the near term.

However, China Taisan’s net-cash balance improved to S$0.10 per share at the end of March 2009, from S$0.06 per share at the end of December 2008, due to a decline in trade and other receivables. We expect the company’s strong cash position and a forward dividend yield of about 9.2% (based on a commitment to pay out at least 30% of its FY09 net profit) to provide support for the share price in the absence of a positive earnings-growth outlook.

China Taisan Technology Group - how bad can it be?

China Taisan Technology Group (China Taisan) is due to announce its 1Q FY09 results on 15 May. We forecast a 40.8% YoY decline in net profit for the period to Rmb38.2m.

While there is no doubt the company’s 1Q FY09 performance will be weaker than for 1Q FY08, as management has said that orders for the first two months of 2009 declined by 20% YoY, we think the key items to watch for should be: 1) the degree of impact on the gross-profit margin and the sales volume, and 2) the orderbook outlook (for signs of a recovery).

Our 1Q FY09 net-profit forecast of Rmb38.2m factors in a 25% YoY fall in sales volume, a 10% QoQ decline in the average selling price, and a 4.8-percentage-point drop in the gross-profit margin as a result of our expectation of a lower capacity-utilisation rate and higher depreciation for new equipment.

Our six-month target price of S$0.13 for China Taisan is based on a peer-average PER of 2.5x on our 12-month earnings forecasts to 2Q FY09. We will publish an update after the 1Q FY09 results have been announced.Catalysts and action

We maintain our Hold rating for China Taisan. While the market has become more positive on the textile segment, we believe that any upside for this stock will be capped until clear signs of an earnings recovery emerge.

China Taisan - Heavily Oversold

China Taisan - Paying Dividend on 20 April, RMB0.0815 or S$0.018 per share. Yield at 18.11%. Its Advisor Felix Ong held 4,394,000 shares and Singapore 12th richest man, Tan Boy Tee held 6,200,000 shares. Conservative management.

China Taisan Technology Group - Losing stamina

More cautious in view of the difficult environment We have downgraded our rating for China Taisan to 3 (Hold) from 1 (Buy), and lowered our six-month target price to S$0.13 from S$0.24, as we believe its latest results reflect the increasingly difficult environment faced by companies operating in the PRC sports-apparel market. Our target price is based on a peer-average PER of about 2.5x on our 12-month earnings forecast to 2Q FY09.

China Taisan recorded a 4Q FY08 net profit of Rmb70.2m, down7.7% YoY, on the back of a 9.6% YoY increase in sales. The netprofit was 31.5% below our forecast, and showed that even with a strong customer base comprised of leading sports brands, including Nike, Adidas, Anta, and Xtep, the company was still vulnerable to the industry downturn. We have revised down our FY09-10 earnings forecasts by 36-42% to factor in potential consolidation of the sports-apparel market.

China Taisan declared a dividend of Rmb0.0815 per share, which amounts to a yield of around 14% at the current share price. The company has committed to pay out at least 30% of its net profit for FY09 as dividends, and we would expect the attractive yield and net cash of S$0.063 per share to help support the share price in the absence of meaningful growth.