Sino Huaan’s (Huaan) 1QFY12
results disappointed, although
the weak numbers were expected. The poor performance was again due to
heightened coal prices, a decline in metallurgical selling prices as well
as weaker contribution from byproducts.
The prolonged structural problems in China and sluggish steel demand further
dampened the company’s performance. We
are discontinuing our coverage on Sino Huaan. Our last call was NEUTRAL, with a
FV of RM0.235.
Losses widen.
Huaan posted a net loss of RM19.9m (-34.2% q-o-q, >-100.0% y-o-y) in 1QFY12
and revenue of RM382.1m (-5.3% q-o-q,
+0.6%y-o-y), both of which are below our
estimates. The losses were mainly attributed to the lower average selling price
of metallurgical coke (-2% y-o-y) amid stubbornly high raw material costs. The
contribution of by-products also declined, falling by some 6% y-o-y, which further weakened Huaan’s bottomline (tar
oil -20%, coal slime -3% middlings
-6%, ammonia sulphate +36%, crude benzene +10% and coal gas +0.3%).
Operating conditions
have not improved. We think Huaan will be facing another tough year in FY12
as the operational environment for an independent metallurgical coke manufacturer has not improved. The industrial structural
problems in China have been working against
Huaan and the company has not managed to extricate itself from its disadvantaged position of being hemmed
between coal miners and steel mills. In addition, the outlook for the steel sector remains challenging as steel
prices have not shown any significant signs of recovering.
Discontinuing
coverage. Although Huaan has been
trying very hard to improve its operating performance, the macro conditions
have unfortunately worked against it. We are discontinuing our coverage on Sino
Huaan International and take a re-look
at the company later when conditions
become more benign. Our last recommendation for Huaan was NEUTRAL, with a FV
RM0.235.
Source: OSK
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