Sino Huaan - BUY - 26 May 2008

Sino Hua-An International - 1Q08 within expectations (Results Note)



Price: RM0.73

Target Price: RM0.96

Recommendation: BUY



· Results in line. 1Q08 net profit of RM35.6m represents 21.1% and 24% of our full year forecast and consensus. 1Q results are typically lower on the

· Excluding the one-off restructuring cost incurred in 1Q07, 1Q08 net profit increased by 33.9% YoY driven mainly by: (1) stronger contribution from additional by-products, namely middling and coal slime following the commissioning of the coal washing facility in May 2007 and (2) rising prices of metallurgical coke (65% YoY) and by-products except coal gas.

· QoQ, 1Q08 net profit however, decreased by 5.0%. Although coke and coal prices were rising in tandem, the more substantial spike in coal price as compared to coke price has eroded its profit margin. As a result...

· ...EBIT margins were lower YoY and QoQ as coal price (key raw material) which was rising at a faster pace than coke price (63% YoY and approx. 39.0% QoQ) has offset the favourable pricing trend of coke. Higher transportation cost has also lowered EBIT margin.

· Maintain earnings estimates. Substantial spike in coal price remains as the key risk to our earnings forecast. Hua-An has the ability to pass on the additional cost immediately to its customers as long the spike in coal price (weekly basis) is within 3-5%. Moreover, Hua-An is expected to commence production of its 600,000 MT new oven by mid-June 2008 to 1.8m MT p.a. due to high demand for coke from the robust steel industry.

· Maintain BUY, Target Price of RM0.96 based on 6.5x PER, which is of about 20% discount to the Malaysian listed steel companies' average 2008 PER of 9.0x.





KENANGA INVESTMENT BANK BERHAD (15678-H)