3Q08 numbers in-line. Li Heng clocked RMB1.02b worth of revenue for 3Q08, up 53.7% versus 3Q07 of RMB666.7m. The stronger revenue YoY was achieved despite lower ASPs across all product segments, as it was more than compensated by higher production capacity due to its capacity expansion. As a result of weaker ASPs, gross margin was down from 34.2% in 3Q07 to 31.0% in 3Q08. NPAT grew 19.2% YoY for 3Q08 from RMB217.1m to RMB258.7m, a much lower quantum than its top line growth mainly due to inclusion of income tax after enjoying a tax-free status due to its WOFE status in the previous two years.
Our prognosis. In our recent company update report, we highlighted that the textile industry would be severely hit due to slowing Chinese exports and a relatively stronger RMB. This would impact Li Heng directly in terms of its ability to continue to secure future sales and also put further pressure on its ASPs and gross margins. Hence, especially in the next two quarters, we expect to see margins come under even more pressure alongside price drops in PA chips and nylon yarns, albeit at a slowing rate of decline. This will inadvertently result in quarterly financial performances taking further dips in light of the current crisis.
Management key takeaways 1: ASPs. Management concurs with our view that the global economic slowdown has posed very challenging times ahead for the company. Hence they expect ASPs of nylon products to continue their downward slide for 4Q08 and possibly into 1Q09.
Management key takeaways 2: Dividend policy. The dividend of 1.5 S¢ for 3Q08 represents a 45% payout of NPAT. Management mentioned that they will seriously consider maintaining this payout ratio going forward after carefully accounting for business conditions going forward. If this actually gets implemented, based on Li Heng’s last traded price of S$0.295, the dividend yield would jump from 10.8% to 19.4% for FY08 and from 11.4% to 20.5% for FY09. We have earlier based our assumption on a payout of 25%.
Management key takeaways 3: Phase III expansion. Management has been prudent enough in our view, to acknowledge the slowdown in its operating environment, and has hence recognised the point that it can afford putting off its target of expanding nylon yarn capacity by 3Q09. This possible move will allow them to cut back on capex (reduced from RMB600m to RMB 200m for FY09), increase working capital, and improve overall cash flow.
Valuation and recommendation. Li Heng has done quite well in terms of meeting the investment community’s expectations so far in terms of its financial performance. However, 4Q08 and beyond is proving to be an uphill battle for management due to the worldwide economic slowdown. Hence, we are cautiously optimistic of the Group’s ability to deliver on our already reduced FY09 estimates. We will wait till the Group announces its 4Q08 to see if further adjustments to our FY09 forecasts are necessary. For now, we maintain our BUY call with a 12-month price target of S$0.685, which is an undemanding 5.2x our FY09 EPS forecast. The stock currently trades at 2.5x FY08 P/E and 2.2x FY09 P/E, giving an attractive yield of 11.4%.
source:DMG
The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned
To my beloved friend CW8888
1 year ago
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