With reference to the half-year financial earnings reported on 6th Aug 08, following is a brief summary of the result.
1. Revenue for 1H FY08 dropped 2.2% to RMB 1.235b as compared with 1H FY07 of RMB 1.263b.
2. Cost of Sales for 1H FY08 increased 10.1% to RMB 898.3m as compared with 1H FY07 of RMB 815.8m.
3. Gross Profit for 1H FY08 dropped 24.7% to RMB 337.5m as compared with 1H FY07 of RMB 447.9m.
4. Gross Profit Margin for 1H FY08 dropped 8.1% to 27.3% as compared with 1H FY07 of 35.4%.
5. Net Profit for 1H FY08 dropped 48% to RMB 181.6m as compared with 1H FY07 of RMB 349.6m.
6. Cash flow for 1H FY08 dropped 32.4% to RMB 1.335b as compared with 1H FY 07 of RMB 1.931b.
7. EPS for 1H FY08 is 13.2 RMB cents as compared with 1H FY07 of 26.8 RMB cents.
8. NAV for 1H FY08 is 160.2 RMB cents as compared with 1H FY07 of 167.6 RMB cents.
The decrease in revenue was contributed by decrease in sales of savoury dumpling products and glutinous sweet dumpling products by 5% and 4.6% respectively as compared with 1H FY07. Main reason was due to the snowstorm occurred at the beginning of the year that affected transportation and sales in certain areas in China. The increase in cost of sales was due to increase in pricing for raw materials ( pork, flour and packaging materials ) by approx 35% for 1H FY08 as compared with 1H FY07. The dip in gross profit margin was mainly due to increase in the average price of main raw materials and labor costs which were only partly offset by the increase in the average selling price. There was also decrease in cash flow due to mainly net cash used in investing activities offset by net cash generated from the operating activities during first half of 2008. Selling and distribution expenses rose 55.9% mainly due to higher advertising expenses in view of the Beijing Olympic Game. Administrative expenses was also up 60.2% mainly due to increase in salaries, welfare and commencement of operations of the 2 new plants are Chengdu and Huzhou.
The company also presented its outlook for the remaining of FY08. The company will continue to focus on its strategy to drive sales of its premium products, which command higher selling prices and also looking actively to partially automate its production processes to reduce labour reliance in long term to curb the rising inflation, labour and raw material costs.
In response to the result, the followings are analysts' view
1. UOB-KH cuts Synear target price to $0.72 from $0.83, maintains buy rating
2. Deutsche Bank maintains sell rating with target price $0.35
3. CIMB-GK maintains underperform rating with target price $0.35
At closing price of $0.43 on 11th Aug 08, it is trading at 8.1x FY08 PE ( assuming FY08 EPS = 26.4 RMB cents, company is able to sustain from further profit margin squeeze for the remaining half of the year ). Personally, the company could be fairly valued at 10x FY08 PE which translates to $0.53 if it could not turn in a better second half performance. Alternatively, if the selling pressure is able to cause the price to drop to 5x FY08 PE of $0.265, this could be a good buy at undervalued price for the future.
Below listed some of the valuation base on FY08 EPS = 26.4 RMB cents assumption.
5x PE -- $0.265
6x PE -- $0.320
7x PE -- $0.370
8x PE -- $0.425
9x PE -- $0.475
10x PE -- $0.53
11x PE -- $0.580
12x PE -- $0.635
13x PE -- $0.685
14x PE -- $0.740
15x PE -- $0.795
