HUAAN (FV RM0.235 - NEUTRAL) FY11 Results Review: Outlook Deteriorates Further

Sino Hua-An posted a net loss of RM14.8m in 4Q, despite revenue increasing 5.9% q-o-q and 8.5% y-o-y. The rise in revenue was mainly attributed to higher selling prices and sales volume but  its 4Q bottom-line was dragged into the red by escalating raw material costs.  Apart from gloomy steel industry outlook, the company also faces persistent  structural problems inherent in China’s steel industry.  To date, we  still  don’t see any  reasons to rerate this company  and therefore, we maintain  our  NEUTRAL  call  with a FV of RM0.235 based on 0.36x FY12 P/BV, which is -1 standard deviation of its historical trading band.

Sinks into  the  red.  Sino  Hua-An’s posted  net losses of RM14.8m  and  RM9.6m for 4QFY11  and full-year FY11 respectively, coming in way  below our estimates. Although revenue was maintained at a healthy level, growing 5.9% q-o-q and 8.5% y-o-y, the price increase of coking coal, which is the company’s main raw material, has outpaced that of metallurgical coke and hence, dragged Sino Hua-An into  the  red.  Although its byproducts’ selling prices have increased generally,  this  is still  not good enough to compensate for the losses from its core business.

Persistent problems, fundamentals remain weak.  The company  is facing  a  tough situation, by virtue of its value chain  position  between coal miners and steel mills. This causes Sino Hua-An to lose its bargaining power when it comes negotiating raw material and product selling prices alike.  To date, we have yet to see Sino Hua-An making any progress to get itself out  of this tricky situation as it does not seem to be moving  either upstream  or downstream. Other than that,  China’s unfavourable  industry structure for independent coke manufacturers exacerbates Sino Hua-An’s situation and near-term poor performance. All in all, we have yet to see any steps taken by Sino Hua-An to overcome the negative factors that are affecting its outlook.

Maintain NEUTRAL.  We have  always been  cautious  on Sino Hua-An’s performance given the structural problems faced by this company. For that reason, we have always pegged its valuation at a lower base, which is 0.37x P/BV or -1 standard deviation of its historical trading band. In view of the challenging economic environment and Sino HuaAn’s persistent structural problems, we are trimming our earnings forecast for FY12 and FY13 substantially. At its current price, the company is trading 61% below its book value and we don’t think any rerating for Sino Huaan is warranted, at least for now. Therefore, we maintain our NEUTRAL recommendation at a FV of RM0.235 based on 0.36x FY12 BV.

Source: OSK188