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)

HLG: 26 May 2008 Sino Hua An International

HLG: 26 May 2008 Sino Hua An International - Q108 core net profit up +34%


Sino Hua An International BUY


Price target RM1.00



Share price at 23 May RM0.73



Investment summary


Reported Q108 core net profit of RM36m (+34%) was 22% of our full year forecast, despite new capacity coming in only after Jun08. We think our previous price assumptions are too conservative and raise our coke and coal price assumption by 23% and 22% respectively. We raise our FY08-10E EPS by 8-9% following the revision. The strong results re-affirm our BUY rating on the stock. We are bullish on Sino Hua An (SHA): (1) 5x FY08PE is a >70% discount to Chinese peers’ 14x-32x, and more than compensates for any perceived corporate governance risks, in our view. (2) 50% coking capacity expansion by H208 will boost recurring earnings by 50% pa (3) Strongly positive macro fundamentals for steel and coke manufacturing in China, given >10% pa demand growth and sector consolidation/ supply constraints.



Core profits +34% yoy

Share price has appreciated +21% since our initiation on 06Mar08. We think the key catalyst for re-rating is intact: (1) coke prices in China is up +50-60% YTD (2) commissioning of 50% new capacity by H208 will boost recurring income by 50% (3) >20% FCF yield in FY09E