Sino Hua-An

Sino Hua-An: With the Chinese Government’s huge fiscal spending and introduction of various measures to spur steel demand, Sino Hua-An’s earnings may surprise on the upside given the higher installed capacity, new coal washing facilities to reduce cost, stronger by-product prices and the appreciation of the RMB. At the current price, the stock’s valuations are undemanding. With our newly-revised earnings and valuation of 7.8x FY10 EPS, our fair value is raised to RM0.87 (RM0.66 previously, 5x FY10 EPS), or a 52.6% upside. Reiterate BUY recommendation.

China’s stimulus packages. The focus of the Chinese Government’s RMB4trn stimulus package on infrastructure spending has given a boost to construction activities, and in turn steel demand. Also the measures introduced to spur domestic spending in a broad range of goods from property and automotive to white goods has led to flat steel demand exceeding expectation. The robust steel requirements have prompted steel mills to ramp up production, with crude steel production from June 2009 surpassing its historical peak. Despite the higher output, steel prices continued to climb, which suggests strong underlying demand. Coke prices have started to recover, that leads us to believe that margin may return to healthy levels from 2HFY09.

Earnings may surprise on the upside. While we do not expect miracles in the FY09 earnings, we suspect the FY10 numbers may surprise on the upside. The potentially strong earnings is supported by: (i) 50% more capacity compared with FY07, (ii) a coal washing facility to reduce costs, (iii) recovery of crude oil price, which may boost byproduct contribution, and (iv) an appreciation in the RMB, which will partly mute the impact of higher corporate tax. With that, we have decided to revise upwards our FY10 estimates by 10.3% to RM125.6m although it is significantly higher than consensus.

Maintain BUY. Sino Hua-An’s share price remains undemanding, trading at 5.1x FY10 EPS and 0.8x P/NTA compared with Chinese steel mills’ 16.5x to 22.9x forward PER and 1.5x to 3x P/NTA. The share prices of the steel companies first peaked in May 2009 but have since surged past their earlier peak after a short consolidation, except for Hua- An. The solid catalysts and earnings drivers lend weight to our belief that Sino Hua-An’s share price may soon catch up, thus reinforcing our BUY call. Our fair value is raised to RM0.87, which is derived from a 30% premium to our newly revised and higher steel sector PER valuation from 5x to 6x FY10 EPS.

52 week H | L Price (RM) 0.59 0.18

Major Shareholders (%)
Rock Point Alliance 25.39
Liu Guo Dong 15.86
Rise Business 9.09

Principal Activities : Production of coking coke and its by-products.

By OSK188
Analyst: Law Mei Chi, Ng Sem Guan, CFA