China Sky Chemical Fibre

[winston]

From Kim Eng:-

China Sky 1Q08 results (Pauline LEE, DID: 64321453)
Previous Day Closing price: $1.13
Recommendation: Buy (maintained)
Target price: $2.21 (maintained)

1Q08 earnings on track, at 21.8% of our FY08 earnings forecast

1Q08 earnings rose 16% Y/Y to RMB 163.4m on the back of a 24.7% Y/Y increase in revenue led by an increased production capacity from 72,000 tonnes to 88,000 tonnes, an increase in ASP from RMB33,810 to RMB34,600, and lower operating expenses.

Compared to 4Q07, earnings fell 8.8% on a 1.7% decrease in revenue. We reckon the weaker revenue could be due seasonality while higher tax rates eroded earnings.

The tax holiday enjoyed by its subsidiary has expired in FY2007 and it is now taxed at the new CIT rate of 25% starting from 1 Jan 2008.

Improvement in operating margins led by strong demand & lower operating expenses

Gross margins improved to 35.8% as the group is able to pass on rising raw material costs to customers amid strong demand.

Operating margins improved to 35.6% underpinned by a sharp decline in operating costs.

The fall in selling and distribution expenses (-33.9% Y/Y) was due to lower sales commission, while the sharp decline in administrative expenses from RMB12.5m to RMB3.6m due to the absence of the RMB8.5m share option expense charged in 1Q07.

With the higher margin and distinctive SR yarns in the pipeline, we are positive that CSCF can continue to strengthen its margins.

All geared for a more rewarding year against rising industry challenges

The group expects demand for nylon fibre to remain strong in FY08 due to growing demand for high nylon content products in the domestic and export markets.

The completion of Qingdao Zhongda acquisition by 2Q08 will add another 20,000 tonnes to its existing capacity of 88,000 tonnes.

Furthermore, the new super resilient (SR) FDY and HOY production facility is being constructed with 15,000 tonnes ready to come on-stream in 3Q08.

CSCF will be the only producer of SR yarns in PRC and the second in the world.

Undemanding valuation for market leader who consistently delivers

We have kept our forecasts and target price of S$2.21 (12x FY08 PER) unchanged.

CSCF’s current valuation of 6.2x FY08 PER is undemanding considering its market leadership, steady earnings track record and strong growth pipeline. Maintain BUY.

[winston]

From CIMB:-

China Sky Chemical Fibre (S$1.14) - 1QFY08 results - Lower SG&A

China Sky’s 1Q08 net profit of Rmb163m was above our expectations, making up 19% of our full-year numbers and 21% of consensus. We were expecting a mere 17-18%. The good performance was spurred by better-than-expected topline, gross
profit improvements and much lower SG&A.

The results show no adverse impact from cost pressures and competition. That said, we have cut our FY08-10 EPS estimates by 4-7% on slight execution delays (in FY08) and a more cautious stance
on margins (for FY09/10).

Our target price accordingly falls from S$2.80 to S$2.62, and implies a conservative 8.7x CY09 P/E. Maintain Outperform,

[winston]

Not vested. I'm still not convinced that they can pass on the high raw materials cost from the high oil prices..

================================

From DBS:-

Story: China Sky (“CSCF”) has again demonstrated its ability to deliver stable margins in 1Q08 results. Net profit grew 17% yo-y to RMB163.4m on 25% higher sales. This was mainly driven by higher sales volume and contribution from the
consignment of nylon DTY/ATY that commenced in 2Q07.

Gross margin expanded by 1.6ppt y-o-y to 35.8%, thanks to better sales mix to include finer yarn and nylon DTY/ATY as
well as timely price adjustment to pass on price increases in nylon chip (feedstock for nylon fibre) to customers.

Point: CSCF should continue to perform well in 2Q08 given stable material cost and robust demand. Looking into 2H08, nylon chip cost (accounts for 90% of COGS) could increase by 4%-6% if crude oil price stays high at US$120/barrel. Based
on recent price negotiation with customers, management remains confident it can pass on most (if not all) of the cost to
customers. In any case, we imputed 0.7ppt margin erosion this year for nylon FDY / HOY in anticipation of CSCF absorbing the
entire 2% increase in nylon chip cost.

Contribution from Zhongdao Qingda was postponed to April 2008, while the rollout of nylon SR is also delayed to July 2008
owing to external factors. Nonetheless, we are retaining our estimates as we have conservatively imputed a one-month
“allowance” in our estimates.

Relevance: The excellent execution of nylon DTY and SR products should serve as catalysts for the stock price. Maintain
Buy and TP of S$1.70, pegged to 9x FY08F PE.

[winston]

Not vested. Not convinced that they can pass on the higher cost of raw material and that the slowdown in the US & Europe will hurt them later..

==================================================

From OCBC:-

China Sky Chemical Fibre: Nylon demand still strong

Business as usual. We met up recently with China Sky Chemical Fibre (CSCF) for an update. Its factories are running at 90% capacity utilization, which is around the maximum, and the company has not seen any cutback in orders from its 70-odd customers, despite worries that its business could be affected by the economic slowdown in the US and Europe.

One reason for its resilience is due to its established brand name, which services mainly the higher-end fabric segment, and because its products can be used in a wide range of products, this tends to even out fluctuations in orders.

Sustaining gross margin. Yet another key reason for its competitive edge arises from its continued focus on R&D, both to increase its operational efficiency and also introduce new products. As such, CSCF has consistently been able to pass on increases in raw material prices to customers, thus allowing it to keep its gross margin above 34% for the last nine quarters, except for a dip to 33.3% in 2Q06.

CSCF believes it can sustain its gross margin with the launch of two new product lines - Super Resilient FDY and Super Resilient HOY in 3Q08, which comes with higher value-add and margins, and also makes it the only producer of such fibres in the PRC and only the second producer in the world.

Still buoyant about nylon demand. CSFC also expects the demand from its products to remain strong in FY08, driven by the continued demand growth for high-nylon content products and the PRC government's initiatives to grow domestic nylon fibre production. Management believes that the usage of nylon has a direct relation to society affluence, hence it is likely
that the current low ratio of nylon to polyester consumed of just 10:90 will rapidly approach the 45:55 ratios seen in developed countries like Japan.

And with the completion of the Qingdao Zhongda Chemical Fibre (QZCF) acquisition in April 08, its combined capacity of 108,000 tons/annum (prev. 88,000 tons) will put CSCF in a strong position to cater to the increasing demand. In addition, the move will open opportunities to expand into Northern China and gain greater exposure to foreign markets. QZCF accounts for nearly half of the total PRC nylon export. We do not have a rating on the stock. (Carey Wong)

[yeokiwi]

These textile companies always report record profit but the $$$ does not flow back to shareholders' pocket.
Ultimately, all the cash generated is going back to invest in new machines, new factories, new plants.

I think they are hoarding so much cash simply because their capital expenditure is high.

[winston]

Not vested. From DBS:-

Story: China Sky (“CSCF”) reassured us that the expansion plans are on track and management remains confident in passing on bulk (70%-80%) of the foreseeable increase in material cost to customers.

Point: CSCF’s newly developed product, SR nylon is expected to undergo trial production by early July 2008 and commercial production by early August. We could also expect growth coming from the new acquisition, Zhongda, which has begun to contribute positive earnings since Apri 2008.

As the prices of raw material, nylon chip (account for 90% of COGS), have been stable in 1H08, it helps to soothe worries over margin pressure in the near term and boost our confidence in CSCF’s earnings momentum into 2Q08 and even 3Q08.

Although we expect nylon chip prices to rise by 3% qoq next quarter, the bulk of it would be absorbed by timely ASP increase. In any case, we have conservatively imputed 0.7ppt margin erosion this year for nylon FDY/ HOY assuming CSCF were to fully absorb the 2% increase in
nylon chip cost.

Relevance: The appreciating oil prices and RMB against USD would put Chinese textile industry in an unfavorable position. We believe CSCF to be among the better player in the textile space to weather the unfavorable macro trends.

In addition, the stock is trading at a historical low of 4.4x PE and bolstered by net cash per share of S$0.34. Maintain Buy and TP of S$1.70, pegged to 9x FY08F PE. We see further evidence of smooth cost pass-on to customers and retreat in crude oil prices as key catalysts for the stock price.

[winston]

Not vested. From DBS:-

Story: China Sky (“CSCF”) reassured us that the expansion plans are on track and management remains confident in passing on bulk (70%-80%) of the foreseeable increase in material cost to customers.

Point: CSCF’s newly developed product, SR nylon is expected to undergo trial production by early July 2008 and commercial production by early August. We could also expect growth coming from the new acquisition, Zhongda, which has begun to contribute positive earnings since Apri 2008.

As the prices of raw material, nylon chip (account for 90% of COGS), have been stable in 1H08, it helps to soothe worries over margin pressure in the near term and boost our confidence in CSCF’s earnings momentum into 2Q08 and even 3Q08.

Although we expect nylon chip prices to rise by 3% qoq next quarter, the bulk of it would be absorbed by timely ASP increase. In any case, we have conservatively imputed 0.7ppt margin erosion this year for nylon FDY/ HOY assuming CSCF were to fully absorb the 2% increase in
nylon chip cost.

Relevance: The appreciating oil prices and RMB against USD would put Chinese textile industry in an unfavorable position. We believe CSCF to be among the better player in the textile space to weather the unfavorable macro trends.

In addition, the stock is trading at a historical low of 4.4x PE and bolstered by net cash per share of S$0.34. Maintain Buy and TP of S$1.70, pegged to 9x FY08F PE. We see further evidence of smooth cost pass-on to customers and retreat in crude oil prices as key catalysts for the stock price.

[winston]

Not vested. From Kim Eng:-

1) China Sky – Company Update (Pauline Lee 64321453)
Previous day closing price: $0.805
Recommendation: Buy (maintained)
Target price: $1.66 (from $2.21)

Confident about weathering rising material costs
Our recent teleconference with the management affirms that the group’s business remains healthy for FY08. The impact of rising raw material prices looks to be well contained for CSCF. The price of nylon chips (key raw material) remains stable so far, in line with its average selling prices.

The group is confident about sustaining its gross margins for the next 2 years due to continual strong demand for its high-end nylon yarn products and the timely launch of its high-margin Super Resilient (SR) yarns in 2H08.

Trial production of super resilient yarns has started
The group has commenced trial production of its SR yarns in July, on track with its schedule to launch this new product from 2H08. The group aims to produce 15,000 tonnes of SR yarns annually during phase 1, at an utilisation rate of 50% by end-2008.

The gross margin of the group’s SR yarns is 5% higher than its existing nylon yarns. We expect the SR yarns to contribute 6% and 26% to FY08/FY09 revenues respectively.

Smooth progress in newly acquired Qingdao Zhongda
Contributions from Qingdao will be consolidated into the group’s account from April onwards. The group intends to step up Qingdao’s annual capacity from 20,000 tonnes to 25,000 tonnes by the end of 2008.

Strong orderbook for the rest of the year
Management said that demand for its high-end nylon yarn products remains resilient, as the improved quality of nylon yarn products in the PRC continues to replace the more pricy overseas imports. It continues to receive strong orders from customers in FY08 and will start to recognize annual orders for FY09 towards the end of 2008.

Price correction is too fast too furious. Reiterate BUY
CSCF’s share price has fallen by 64% YTD. We have lowered our target price to $1.66 pegged to a lower PER multiple of 9x FY08 PER (from 12x), in line with its Taiwan peers. Despite the more challenging business climate, we believe that this is also an opportune time to invest in established and well-managed market leaders. CSCF has been holding up well amid the turbulence and remains upbeat about its business. The key downside risk will be the execution of its SR yarns.

[gladiator]

Not vested. From CIMB:-

FY08P/E: 4.6x, P/BV: 1.0x

• Has broken out above its consolidation triangle. Current support at S$0.80 and S$0.75 while resistance at S$0.96, followed by S$1.05.

• MACD is still rising while RSI is now above its resistance.

• Both indicators suggest that there still room on the upside. Buy now with a stop at S$0.79 or S$0.74. The next upside target would likely be S$0.96.

China Sky is the largest private PRC producer of high-grade nylon. The group has 80,000-tpa capacity and a 7% market share in the PRC. Nylon is typically used in high-end apparel, garments, umbrellas, tents, ribbons, etc.

China Sky produces a few types of nylon products, namely, full drawn yarn, high oriented yarn, air texture yarn and drawn texture yarn. In 2008, it will start two new products, the super resilient full drawn yarn and high oriented yarn. M&As could add nylon capacity and allow it to expand upstream.

[winston]

Not vested.

China Sky Chemical Fibre Co. Ltd recorded revenue of the Group increased 11.5% to RMB634.8 million for 2Q2008 as compared with 2Q2007. The significant increase in revenue was mainly due to higher sales made possible by our increased production capacity from 72,000 tonnes to 88,000 tonnes since the end of the second quarter of FY2007.

Gross profit for 2Q2008 was RMB226.3 million, representing an increase of 14.3% over 2Q2007.

Gross profit margin for 2Q2008 improved marginally to 35.7% from 34.8 % in 2Q2007.

China Sky was able to adjust its selling prices to compensate for changes in raw material costs due to the fluctuations in crude oil prices. Profit for 2Q2008 was 4.3% higher at RM166.3 million over the comparable period in 2Q2007.

Net profit margin for 2Q2008 was 26.2% from 28.0% for 2Q2007.