UNDERPERFORM Maintained
S$1.70 Target: S$1.78
Mkt.Cap: S$636m/US$524m
Industrial Machinery
• Below; maintain Underperform. 2Q11 core net profit of S$19.1m (-41% yoy) was below our expectation and the Street’s, at 21% of our FY11 forecast. 1H11 accounts for 41% of our figure. The shortfall stemmed from a weaker-than-expected Xinfei performance which barely broke even. We cut our FY11-13 core EPS estimates by 19-22%, incorporating cuts in margins and unit sales across the units. We are now expecting a loss for Xinfei this year. Coupled with lower P/E targets for Yuchai and Xinfei on wider discounts and as their peers are de-rated, we reduce our SOP target price from S$2.74 to S$1.78. While its share price has pulled back to near Sep 09 levels, we see more downside, expecting de-rating catalysts from weaker-thanexpected earnings from Xinfei.
• Xinfei barely broke even. Even though 2Q is warmer and seasonally its strongest quarter, Xinfei was unable to engineer a major turnaround from two quarters of losses, barely breaking even this quarter. Unit sales and ASP increases severely lagged behind peers, with industry figures now ranking Xinfei No. 7 by sales in China, down from No. 4 in Jun 10. Margin compression was aggravated by poor control of raw-material costs. We are now expecting a full-year loss for the unit with the arrival of colder seasons.
• Yuchai weaker yoy. Yuchai’s profit fell 14% yoy despite 5% unit sales growth, as margins fell on the back of a shift in the product mix to lower-end engines and higher raw-material costs. Plagued by industry destocking, weak commercialvehicle sales and higher raw-material prices, sales growth could remain moderate.
• Moderate performance from Building Materials. Sales fell due to slower deliveries of precast concrete though gross profits benefited from improved margins on sales of ready-mix concrete. Karrimun Quarry has been sold for a gain of S$26m. We have reflected this as a non-core gain in our forecast for 2H11.
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