Goodpack Ltd (OCBC)

Downgrade to HOLD
Previous Rating: BUY
Current Price: S$2.05
Fair Value: S$2.12

Cautious on the demand for rubber

Rubber prices have risen YTD.... High demand has driven rubber prices higher by 57% from the past year and reached a record of US$574.4/tonne in Feb. Rubber's stellar performance came on the back of strong automotive sales in China, which had spiked 32% last year and surpassed the US as the top auto market for the second year running. The surge in crude oil prices have also helped push natural rubber demand higher as synthetic rubber uses crude oil as a principal raw material. Al though pr ices may have cooled of f recent highs, tyre manufacturers and analysts are expecting prices to remain elevated after global production estimate for rubber by the Association of Natural Rubber Producing Countries (ANRPC) was amended downwards from 10.025m to 9.936m tonnes after output revisions from Indonesia and Philippines.

… but is demand sustainable? China auto sales in Apr was down 0.25% YoY (-16% MoM) at 1.55m units. The decline was attributed to the removal of government subsidies on the purchase of smal l vehicles as wel l as the supply chain disruptions arising from Japan's earthquake. Vehicle purchase limits in certain cities and higher oil prices also had an effect on overall auto sales. Despite the decline, China's auto sales still rose about 6% YoY for the first four months of the year. Going forward, analysts have lowered earlier full-year estimates on the back of higher fuel prices and the Chinese government is likely to continue pursuing cooling measures with the further r e m o v a l o f s t i m u l u s m e a s u r e s a n d i m p l e m e n t a t i o n o f restrictions to control traffic. The China Automotive Technology & Research Center has even forecasted a decline as large as 10% for auto sales this year. However, with supply disruptions caused by Japan's ear thquake determined to be largely confined to 2Q 2011, auto sales globally are still expected to post modest gains as demand from other Asian countries like India will remain relatively resilient to offset potential declines from China, barring any sudden interest rate hikes to combat high inflation that may dampen demand.

Downgrade to HOLD. Goodpack currently enjoys about 82% revenue contribution from the natural and synthetic rubber segments (34% and 48% respectively). While we believe that rubber demand will remain supported from tyre replacements for existing vehicles, and continue to like Goodpack for its growth opportunities, we have adopted a cautious stance in the event of overzealous tightening measures from inflation-threatened countries like China and India that might curb demand drastically. Furthermore, on valuation grounds, the recent run-up in Goodpack's share price has reduced our upside potential. As such, we downgrade Goodpack to HOLD at an unchanged fair value of S$2.12 and will turn buyers at S$1.88.