April 12, 2010

RHB: Sino's valuations remain undemanding

Sino Hua-An International Bhd
(April 9, 49 sen)
Maintain outperform at 48.5 sen, fair value reduced to 59 sen
: Despite rising crude steel output in China that will boost metallurgical coke consumption in China, we believe the depressed price gap between metallurgical coal (input) and metallurgical coke will remain over the medium term, as rising metallurgical coke capacity will continue to cap the pricing power of the independent metallurgical coke producers.

Not helping either is the acute shortage of metallurgical coal, which boosts prices of metallurgical coal and weakens metallurgical coke players' bargaining power.

On a brighter note, we believe prices of by-products are likely to inch up further on the back of the rising crude oil prices, which will in turn help alleviate the depressed margins for metallurgical coke.

According to reports, Sino Hua-An is mulling to set up a coke manufacturing plant in Malaysia to increase its capacity and tap into the rising demand for metallurgical coke in the Southeast Asia region.

While there is no further details on the expansion plan, we believe the above mentioned move, if it is true, will make sense to Sino Hua-An.

Nevertheless, we note that Sino Hua-An will need to fulfil several conditions before investing into a metallurgical coke plant in Malaysia.

These include increases in China's export tariff for steel that will hurt demand for metallurgical coke, higher-than-expected metallurgical coal (input) prices that will erode metallurgical coke producers' margins, and lower contribution from high-margin by-products.

We are cutting our FY10 and FY11 net profit forecasts by 21% and 98.2% to RM55 million and RM53.6 million respectively, to reflect narrower price gap between metallurgical coal and metallurgical coke.

Following the downgrade in our net profit forecasts, indicative fair value is lowered by 16.9% from 71 sen to 59 sen, based on 12 times revised FY10 earnings per share (EPS) of 4.9 sen. Despite having downgraded our indicative fair value, we are maintaining our outperform rating on the stock as valuations remain undemanding even after our fair value downgrade. - RHB Research, April 9

This article appeared in The Edge Financial Daily, April 12, 2010.

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