Delong Holdings: In the red

Margins hit heavily. Despite posting a 59.7% gain in revenue YoY for 3Q08 from S$399.3m to S$637.5m due to higher sales volume from expanded production capacities and higher ASPs, Delong’s gross profit fell a hefty 85.4% from S$39.7m to S$5.8m during the same period. This also meant that gross profit margins plummeted YoY from 10.0% to 0.9% for 3Q08. Consequently, it slumped into net losses of S$11.9m for 3Q08, against profits of S$24.7m.

Comparison of exceptional gains. Almost 73% of the S$11.2m exceptional gains comprised of a foreign exchange gain of S$8.2m, which resulted from a revaluation of bank borrowings denominated in USD as it weakened against the RMB during the third quarter. This was against a foreign exchange loss of S$2.7m in 3Q07. Therefore, stripping out these differences, the Group’s slump would have been more pronounced - a net loss of S$20.1m in 3Q08 versus NPAT of S$27.4m in the previous corresponding period.

Increase in finance costs. Total debt (interest-bearing only, hence the convertible zero-coupon bonds are excluded) as of 9M08 stood at S$340.2m versus S$188.0m a year ago, which represents an 81.0% increase YoY. As a consequence of taking on more debt, finance costs surged by 140.7%, from S$6.9m in 3Q07 to S$16.6m in 3Q08. The huge increase in borrowings brings the Group’s gearing to 77.7%, and provided another drag to its bottom line for 3Q08.

Our synopsis. The Group sold 650k tonnes of HRCs and 32k tonnes of steel billets in 3Q08, versus 601k HRCs and 10k tonnes of steel billets in 3Q07, representing a small gain in tonnage sold of 11.7%. This was an underachievement on the back of production capacity having increased from 2.4m tonnes in Jan 07 to 3.0m tonnes in Jan 08. There has been a considerable slowdown in the Chinese steel industry, exemplified by the shutting down of production by as much as 20% by the largest players, lower raw material prices, and battered prices of steel products.

Another obvious reading of a deteriorating operating environment is the Group’s gross profit margin, which slumped from 10.0% to 0.9% in the third quarter. This boiled down to higher input costs locked-in or procured earlier in the year versus falling ASPs of steel products as prices started coming off from late Jul 08 onwards

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