Pls see attached the full PDF research report, below is a highlight:
AJC sector faces challenge
A trade fair held in Dalian revealed weak sentiment from overseas clients. AJC prices were forced below US$1,000 per tonne with low trading volume. Although future prices may recover to some extent due to over-pessimism at the moment, our earlier price expectation of over US$1,200 per tonne could be a bit aggressive. At US$1,000 per tonne in the 08/09 season, AJC profit per tonne may collapse from nearly US$300 last crushing season to merely US$100, even assuming apple purchasing prices fall to Rmb450 per tonne.
2H08 may still deliver positive earnings
Due to its more than 80k tonne AJC inventory at end-1H08, we expect selling price decline to have a negative impact on earnings. Management is trying to sell at favorable prices and raise production volume in the new season to lower the raw material cost on average. We believe Haisheng may still be able to generate limited positive earnings in 2H08.
Expecting earnings recovery after 2009
Other than worries over collapsing unit profit, weak demand may also suggest a lower chance for AJC export volume to generate growth YoY in the new season. We thus revised down 08~10 sales and earnings forecasts for the company. We assume apple purchasing prices, AJC prices and export volume will keep stable in the 09/10 season. Suspension of future capacity expansion and a collapse of apple purchasing prices and AJC prices may offer the chances to lower bank borrowings in the coming two years. We thus expect earnings recovery in 2010 due to a cut in finance costs.
Downgrade to HOLD
Over-aggressive pricing of AJC in the 07/08 season and the global economic downturn may set near term earnings back, but recovery is expected after 2009. As we believe the company faces little risk of negative earnings, and China’s AJC sector should remain competitive with a monopoly position in the long run, the share price may have limited downside pressure due to overreaction in recent months. We lower our rating from BUY to HOLD with an end-08 price target of HK$0.53, derived from 0.54x 09e BPS, still a 30% discount to the global average.
 UctHAJFc.rar (80.01 KB)
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发表于 2008-11-13 09:50
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