Sino Hua-An - BUY - 16 Apr 2008

Sino Hua-An International – Malaysia’s First Red Chip Resource Company (Initiating Coverage)



Price: RM0.655

Target Price: RM0.96

Recommendation: BUY



· A proxy into China’s coke-steel industry. Sino Hua-An (Huaan) is the largest independent and third largest coke producer in Shandong commanding a market share of 10%. Coke is an energy source as well as a reducing agent for the manufacture of steel.

· High steel prices continue to support high coke prices and margins. Locking in electricity and transport requirements on a long term basis protect margins which at 20%-22% margin is better than its peers.

· Aggressive capacity expansion. We expect continuing growth in China’s steel sector to fuel coke demand. Huaan is constructing 2 more ovens by May 2008 to boost its current capacity to 1.5m MT in 2H 2008 and to 1.8m MT p.a by 2009.

· Future downstream expansion into a 49%-stake Shandong’s largest independent pig iron producer for RM500m provides stable off-take for its coke but current high coke prices and demand makes it more profitable to sell to third parties.

· Rising coke prices. We are assuming coke price of RMB1,760/MT for Huaan vs. the current regional spot price of RMB2,000/MT. Our price assumption is at a conservative level given coke prices at certain regions of China have reached as high as RMB2,350/MT in April 2008.

· Compelling valuation at 3.0x FY09. Fair value at RM0.96 based on 6.5x PER represents 20% discount to the steel industry’s average 2008 PER of 8.0x – discount is warranted to account for the execution risk of its overseas operation. Note however, Huaan is trading at a substantial 83% discount to its Chinese peers. We expect with investors’ increase familiarity and proven execution, the discount factor will be narrowed. BUY with a 60% upside from the current RM0.655 level.





KENANGA INVESTMENT BANK BERHAD (15678-H)