FERROCHINA, uob maintain BUY with target price $2.12

FERROCHINA, uob maintain BUY with target price $2.12
-FerroChina Limited (FerroChina) has reported its 2Q08 results. Sales
went
up 250.2% yoy and net profit grew 211.0% yoy to Rmb230.4m, in line with
our
expectation.
-Gross margin improved on better product mix. The strong top-line
growth
came mainly from Superb Team, which contributed 65.7% of FerroChina’s
total
revenue in 2Q08. In addition, FerroChina continued to upgrade its
product
mix by introducing more high value-added products eg cold roll coil
through
the acquisition of Superb Team. Since quarterly sales were to deliver
the
contracts signed in the previous quarter, 2Q08 results mainly reflected
the
pricing in 1Q08, when prices of galvanised steel were cushioned by the
strong demand and high steel prices. Gross profit per tonne (GP spread)
therefore further expanded to over Rmb530 in 2Q08, up from Rmb519 in
2007
or Rmb523 in 1Q08 on the back of firm ASP. Gross margin for 2Q08 also
managed to remain stable as compared with that for 2Q07 at 9.3%, or
improved from 8.8% in 1Q08.
-Introduction of new higher value-added products to further lift
profitability. FerroChina is well on track with its expansion plans for
three additional lines whose annual capacity amount to 900,000 mt and
whose
commercial operations are expected to start in 4Q08. The new equipments
allow FerroChina to produce higher value-added products such as galfan,
galvalume, and alumicoated coils in a more efficient manner. These
products
could find wide application such as auto parts, and could charge a
better
gross margin at around 13%. The management expects the steel market to
become slightly weaker in 4Q08, and its ASPs to fall as steel prices
declines. However, with the increasing contribution from the higher
value-added products, the management is confident to maintain the GP
spread
at over Rmb530/mt for 2008, which coupled with a falling ASP, would
suggest
a higher gross margin.
-Additional capital needs. FerroChina will have to raise another
Rmb1.6b to
finance its capacity expansion and working capital requirements. The
company is undertaking three projects to raise the funds.
-The first project is to raise the funds from its strategic investors
by
issuing new shares and convertible bonds. FerroChina is still
negotiating
with these investors, and expects to finish the negotiation before the
end
of this year. The second project is to borrow from domestic banks as
the
company felt the credit policy has loosen slightly.
-The third one is to do off shore borrowings as the company did a
couple
month ago to leverage on the appreciation of Rmb. Both the second and
third
projects are expected to be finished by the end of September 08.
-Valuation. FerroChina is trading at undemanding 5.4x 2008 PE. Our
target
price remains at S$2.12 based on 9x 2008 PE. Maintain BUY.