(BUY, S$0.23, TP S$0.28)
2Q11 net profit of RMB16m (+40% YoY) was slightly below our RMB18m projection mainly due to slower ramp up in farm equipment revenue of RMB130m (our estimates: RMB144m), which was affected by severe drought and flood in central China in the quarter, and lower diesel engine sales. GPM was stable at 28% compared to a year ago. We revise our earnings estimates down by 13% and 26%, and peg a lower target multiple of 8x P/E, or -0.5SD to its historical mean of 10x, to factor weak general sentiment towards small cap counters. We now expect 3Q11 and 4Q11 earnings to come in at RMB21m and RMB4m respectively, adding up to RMB42m for the full year. Maintain BUY at lower TP of S$0.28 (old: S$0.43), pegged to 8x FY11F P/E (old:11x).
28% YoY revenue growth. Revenue increased 28% YoY to RMB130m as higher farm equipment sales, in particular plough machines, compensated for lesser diesel engines sold. In 2Q11, we estimate CFE delivered 2,800+ units of farm equipment (compared to 2400+ in 2Q10).
Stable GPM. Despite higher raw material prices e.g. steel and rubber in 2Q11, GPM was relatively stable presumably due to better product mix towards ploughing machines that commanded higher margins. Also, CFE enjoyed lower effective tax rate of 13% (2Q10: 18%).
A tight balance sheet. Cash balance was low at RMB11m (2Q10: RMB20m) due to working capital requirement to cater for higher sales in 2Q and 3Q. Inventory and accounts receivables were RMB94m and RMB195m (2Q10: RMB85m and RMB170m) respectively.
Key risks. These include lower demand from natural disasters and delays in state subsidy disbursement, and greater-than-expected margin pressure and working capital requirements from surging raw material prices like steel.
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