NEUTRAL
Price S$0.080
Previous S$0.140
Target S$0.085
3Q11 ne t profit of RMB45k (3Q10: RMB24m) was way below our RMB26m projection mainly due to a lower-than-expected RMB164m revenue (our estimate: RMB215m), a steep 9ppt fall in GPM to 19% (our estimate: 24%) and high professional fees pertaining to its recent three acquisitions and proposed dual-listing in Taiwan. Management cautioned on a deteriorating operating environment for 4Q11 and FY12 as a result of recent credit tightening measures in China and uncertainty over global outlook. Due to limited visibility, we revise our FY11 and FY12 earnings estimates down by 43% and 65% to RMB50m and RMB34m respectively, and switch to historical PBR as our preferred valuation methodology (old: forward PER). Downgrade to NEUTRAL with a lower TP of S$0.085 (old: S$0.140), pegged to 0.3x PBR (old: 6.6x PER), or -1SD to its historical mean of 0.5x PBR.
16% zipper revenue contraction. Overall revenue was up 9% y-o-y to RMB164m as RMB20m revenue contribution from its three new acquisitions partially mitigated a 16% fall in zipper revenue to RMB118m. Zipper output dropped by an est.13% due to an abrupt slowdown in customer demand and a 4% dip in ASP despite higher input material costs, which caused zipper GPM to decline by 9ppt to 19%.
New acquisitions disappointed. The cumulative RMB20m revenue from its newly acquired dyeing and electroplating businesses disappointed by 50% from our assumed RMB39m, although GPM was healthy at 30%.
A tight balance sheet. We note that out of its RMB321m cash balance in 3Q11, RMB113m and RMB70m have been committed for acquisition of land and construction of building for its new headquarter in Xiamen respectively. The remaining amount will be used for its working capital needs.
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