Event:
According to the company’s 2008 earning forecast, net profit is reported to be lost in its 2008 annual report. This is due to the melamine scandal which caused negative impacts to the company such as product recall, sales volume reduction, increase in product promotion expenditure, etc.
Our Analysis and Estimation:
Performance of 2009 will profit, yet speedy growth to be ahead in 2010. Generally, we conjecture that sales of the company will be basically recovered in 2H2009. With increasingly fierce industry competition, descending cost of raw material and the change of consumption environment, unit price of sales will be unlikely to rebound accordingly. Annual turnover of main businesses will decrease by ~11% yoy to Rmb19bn; periodic expenses are to rise and net interest rate will be only ~1.1%, i.e. Rmb210mn; in 2010, turnover of main businesses will increase ~21% yoy to be Rmb22.8bn, meanwhile its periodic expenses will decline and net interest rate will rise to ~2.2%, i.e. Rmb500mn.
Investment Suggestion:
The company’s EPS in 2008-2010E is forecasted at Rmb-2.1, Rmb0.26 and Rmb0.62 respectively. We project that market will improve its expectation for the company, and “Cautious” rating is hereby given. As ST is to be implemented after issuance of 2008 annual report, investors should be cautious to buy in.