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.

Aug. 1 (Bloomberg) — China is restricting approvals for share sales to keep new supply of equities from putting additional pressure on the world’s worst-performing major stock market, two people familiar with the matter said.

The China Securities Regulatory Commission is delaying the issuance of written approval documents, the final regulatory stage, to companies preparing initial public offerings, said the people. They declined to be identified because they aren’t authorized to speak publicly on the matter.

Shang Fulin, chairman of the securities watchdog, is trying to cushion a market that plunged 47 percent this year, making the CSI 300 Index the worst performer among the 20 biggest benchmarks. About a third of IPO applications were rejected last month, compared with 8.3 percent when stocks peaked in October, based on data from the regulator’s Web site.

“Controlling share sales is an important tool for CSRC, and it’s effective in the short term,” said Leo Gao, who helps manage the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai. “More stock sales in a bear market is bad news” for investors.

There were 91 billion yuan ($13.3 billion) of IPOs in China in the first half, a 26 percent drop from the same period a year earlier, according to data compiled by Bloomberg. The CSI 300 fell 0.9 percent at 9:35 a.m. local time today.

Great Wall Motor Co., China’s largest maker of sport- utility vehicles, had its application for a secondary sale in Shanghai rejected by regulators on July 14.

Olympic Jitters

Olympic jitters may have added to the urgency of supporting the stock market, said Leslie Phang, Singapore-based head of investment at the private-client unit of Schroders Plc, which oversees about $260 billion globally.

“The CSRC is trying to stabilize the market ahead of its hosting of the Olympics this summer for reasons of face,” Phang said. “But these measures can only provide a short-term boost and it’s fundamentals, such as higher oil prices and production costs, that will affect China’s stock market.”

The Olympics, China’s $70 billion coming-out party, kick off on Aug. 8 with the opening ceremony. The run-up to the games has been marked by complaints about air pollution and restrictions on press freedom.

Shang vowed July 30, during the regulator’s semiannual supervision working meeting, to make the market more stable. He said in June that he will “rationally balance supply and demand in the capital market and adjust the pace of financing in an orderly way,” without elaborating.

A CSRC spokesman, who declined to be identified, said he had no comment.

Share Sale Queue

Stock markets around the world have been falling as global growth faltered, a 60 percent gain in the price of crude oil in the past year fanned inflation, and the subprime crisis led to about $470 billion in losses and writedowns at financial firms.

The Chinese government has implemented measures to curb inflation and rein in liquidity. The government capped the amount banks are allowed to lend this year, and the central bank raised the proportion of deposits banks must set aside in reserve five times in 2008 to a record 17.5 percent.

There is a queue of companies waiting for written approval documents from the CSRC’s general office before they can proceed with share sales, and no timetable for giving them the go-ahead, said the people. The watchdog applies these internal controls based on its perception of market performance and the outlook.

Still, the CSRC is open to letting smaller share sales proceed, one of the people said.

Tepid Demand

On top of delays to the final approvals process, the CSRC has also stepped up scrutiny of share sale clearance given by the Public Offering Review Committee, one step before the final document that allows the sale to go ahead is issued.

CSRC’s listing panel on April 14 rejected the IPO application of Jincheng Blue Flame Coal Industry Co., according to a statement posted on the regulator’s Web site. China’s second-largest anthracite coal producer by 2006 output had planned to sell shares to help fund 9.5 billion yuan of investments.

China State Construction Engineering Corp. has yet to obtain the green light to start its Shanghai IPO after gaining the CSRC listing panel’s approval June 5.

Sales that were approved have met flagging demand. Haitong Securities Co. ended up the biggest shareholder of Shanghai Pudong Road & Bridge Construction Co. last month after failing to sell three-quarters of a stock offering it underwrote.

Citic Securities Co., China’s second-biggest brokerage by market value, had to buy 407.4 million yuan of shares in Shanxi Taigang Stainless Steel Co. this week that it couldn’t sell in an additional stock offering.