From CIMB:-
C&G Industrial (S$0.32) - 1QFY08 results - Padded by forex gains, again
Within expectations. 1Q08 net profit of Rmb43.9m was 27% of our FY08 forecast and 26% of consensus. The results look strong again, only because of an exchange gain of Rmb12.2m (4Q07: Rmb11m). The gain emanated from a US$20m loan taken out in FY06 and the strong Rmb appreciation over the US$ in the quarter. Excluding the boost, core operating profit would be only 24% of our FY08 operating profit forecast.
Revenue fell 8% yoy, 17% qoq.
Sales weakened due to:
1) snow storms in early 1Q08; and
2) an end in production of normal yarn products since Feb 08.
Lower yarn sales are worrying as management previously warned about a more pessimistic outlook for the downstream yarn market.
On the bright side, a new high-margin compact combed yarn product commenced production in Mar 08. Overall, 1Q revenue was weaker than expected.
Gross margins higher as product mix improved. Gross margins improved 190bp to 30.4% as reduced low-margin yarn sales contributed to a better product mix. Lower sales, however, hurt core profitability. 1Q08 gross profit (Rmb56m) fell 3% yoy and 11% qoq on the back of weaker sales; core operating profit turned out equally weak. EBIT managed to grow 24% yoy only because of the Rmb12.2m gain, attributed to the falling value of US$-denominated debt. Without the forex boost, EBIT would have been 4% lower yoy.
In need of new products. The production of compact combed yarn has commenced and should help prop up margins. Management guides that the construction of a new plant for industrial bi-component fibre has started. The additional 20,000 t.p.a capacity for this new product should kick in from 1Q09. We have built in 45% utilisation for this in FY09.
No change to EPS estimates. Earnings look fairly in line, though artificially propped up by forex gains in the past two quarters.
Ceasing coverage due to lack of institutional interest. A weak S-chip market has depressed sector valuations to 4x CY09 P/E. C&G Industrial has also fallen down to a micro-cap level. Although the stock not expensive, we believe investors would be keeneron the bigger alternatives, especially given the weak outlook for C&G’s downstream products.
We withdraw our previous target price of S$0.78 and Outperform rating, on lack of investor interest. In the near term, we prefer Sino Techfibre for its PMP re-rating catalysts.