CIMB maintains ‘buy’ call on Hu An Cable after strong 3Q
Analyst: Leong Weihao
• Maintain BUY; target price of S$0.64 unchanged, still pegged at 8x CY11 P/E, a 50% discount to its China-listed peers and a 15% discount to S-chips under our coverage.
We have raised our FY10 net profit forecast by 7% as we fine tune our operating margin assumption, while leaving FY11-12 estimates intact.
• 3Q10 net profit of Rmb78.3m (+20% yoy) was above our expectation, forming 48% of our FY10 forecast.
9M10 net profit of Rmb134.1m (+30% yoy) represents 82% of our full year estimate; with 3Q10 net profit exceeding 1H10 net profit by 40%.
Variance was a result lower-than- expected operating expenses, as well as a write-back of impairment provision for receivables due to successful collection.
• Second half of the year has traditionally been the stronger half, with both 3Q and 4Q typically expected to perform better than 2Q due to seasonality effects; with 1Q usually the weakest quarter of the year due to the long festive holidays and cold weather condition.
We see no exception to this situation for 2010, expecting 4Q’s net profit to better the Rmb36.5m recorded in 2Q10.
Potential upside to our earnings estimate for FY10 could come from front-loading of power infrastructure projects by Hu An’s customers before the winter season enters its peak in 1Q10 (cold weather condition may disrupt work progress).
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CIMB says Eratat Lifestyle has ‘strong fundamentals ahead’
Analyst: William Tng
• Eratat’s Corporate Focus Series Lunch Talk yesterday was well received.
• While fundamentals remain strong, the lack of prominent investors in this stock has meant muted interest. Realistically, what can Eratat do?
1. Continue to focus on delivering strong profits.
2. Increase IR efforts. Other than regular lunch talk at CIMB, the Company has also been giving talks at other brokerages and Invest Fair.
3. Continue to pay dividend.
4. Explore dual listing on other markets where investors are willing to pay higher P/Es. TDR may be another option and Eratat has time to study Xingquan’s performance to see if TDR can help raise valuations.
• Eratat has been conservatively managed so far and clearly faster growth could spur interest in the Group. However, for faster growth, Eratat will need to raise cash and at current share price, it makes little sense to raise equity.
Q&A1. Capex? Not much capex as factory has already been built.
2. Dividends. Company will seriously consider paying dividends.
3. Tax rate. Paying normal China corporate tax rate.
4. Can raw material price increase be passed on? Yes, pass on raw material price increase through higher ASP.
5. Will you do formal wear? Eratat notes that consumers in China now favour wearing smart casual which is the segment that they are targeting. No plans to do work wear.
6. How to improve share price performance. Company will work on improving results and having more interaction with the investment community. Other means such as placement will also be considered if appropriate.
7. Do you export? No exports and no plans for export market for the moment.
8. Trade fairs. Doing 2 trade fairs a year now. May do more in future.
9. Inventory management. Once orders are placed, inventory risk vests with distributors. However, if certain distributors have problem selling their stock, Eratat will see if these can be sold in another region through a different distributor. Company will then link the distributors together. Eratat will not take back the goods and make any provisions.
Recent story: ERATAT LIFESTYLE: 108% net profit growth in 2Q, best quarter ever
Analyst: Jacky Lee
* Initiate coverage with Buy recommendation. We view Foreland to be on track for strong recovery in the coming quarters following the upgrade of production lines. The share price performance has lagged the stock markets due to its delayed recovery. By applying a 20% discount to industry average (for its smaller size) of FY11 PER of 8x, we derive a target price of $0.18, representing 112% upside potential.
* Strong customer orders until 3Q2011. Enquiries by customers have been strong since the beginning of 2010. However, the company is prudent when it comes to customer selection. The prudence translated into the shorter collection days compared to the industry, as evidenced in its past results. Now, the company is busy fulfilling customer orders as textile retailers are piling up stocks ahead of Chinese New Year.
The orders are mounting and the capacity allocation has been stretched until 3Q2011. We forecast utilization rate to hit 90% in 4Q2010 and to remain high in 2011, ranging between 85% and 90%.
We forecast ASP to rise to RMB9.7 per yard in 3Q2010 and RMB10.7 per yard in 4Q2010 and the uptrend to continue in 2011, supported by global economic recovery and trading up by increasingly affluent Chinese consumers. We expect ASP in 2011 to range between RMB10.8 and RMB11.2 per yard.
* Margins to jump, but achieving pre-crisis level a daunting task: We expect margins to improve, but achieving pre-crisis level is a challenging target. We estimate gross profit margin to improve from 11.2% in 1Q10, the lowest since listing, to 27% in 4Q10. Although that would be a tremendous improvement, it is still below the more than 35% GPM achieved before the crisis.
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