(BUY, S$0.091, TP S$0.140)
2Q11 net profit of RMB23m (+52% YoY; +28% QoQ) was below our RMB31m projection as Fuxing consolidated only one month of results from Fulong and Jianxin that totalled RMB1.7m (our estimates: RMB10m). Zipper segment revenue grew 21% to RMB154m driven by improved demand for its higher margin finished zipper products, which lifted the segment’s GPM by 3ppt to 31%. Management expects to consolidate Fuxin Electroplating’s financials from Aug11. On the back of uncertain operating outlook i.e. export market, we revise our FY11 and FY12 earnings estimates down by 25% and 31% respectively, and peg a lower target multiple of 6.6x P/E (old: 9x), or -0.5SD to its historical mean of 8x P/E. Maintain BUY with a lower TP of S$0.140 (old: S$0.255).
21% zipper revenue growth. Revenue contracted 13% YoY to RMB176m as 21% increase in zipper revenue helped to partially offset a 81% drop in the low margin trading-related revenue. Finished zipper revenue more than doubled to RMB45m and was the key revenue and margin growth driver for 2Q11.
11ppt GPM expansion. GPM expanded by 11ppt to 29% due to a) favourable product mix shift away from trading that has ~1% GPM, and b) better utilisation and ASP. Zipper GPM improved to 31% (2Q10: 28%).
Volatile share price. Fuxing’s share price is down 50% YTD due to concerns over a weaker balance sheet from a) high prepayment to suppliers of RMB158m in 2Q11, b) its proposed RMB250m headquarter in Xiamen and c) settlement of its RMB372m M&A purchase consideration. In addition, the company cautioned possible deterioration in its operating environment as a result of recent credit tightening in China and uncertainty over global economic outlook.
We note that out of its RMB302m cash balance in 2Q11, RMB114m has been committed for M&A outstanding payment and RMB200m will be used for land use rights and construction of its new HQ, subject to shareholders’ approval.
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