Ferro China Research Report

by DMG & Partners (28 April)

FERROCHINA'S revenue for Q1 2008 grew 167 per cent y-o-y, from 1,123.6 million yuan (S$218.5 million) to 2,999.8 million yuan, mainly due to stronger demand for its products and also the additional production capacity obtained from Superb Team's acquisition in October 2007 of some 900,000 tonnes of galvanising and cold-rolling capacity.

The group managed to bag 502.6 million yuan's worth of sales from cold rolled coils, and increase sales from galvanised steel by almost an extra one billion yuan y-o-y. Net profit after tax (NPAT) also grew roughly in-line with the group's top line, from 72.2 million yuan in Q1 2007 to 188.5 million yuan in Q1 2008, up 161 per cent.

Gross profit margin y-o-y fell from 9.6 per cent to 8.8 per cent y-o-y, which demonstrates the effect of inflating steel prices. Compared with FY07 though, gross margins have been maintained for now.

The group's trump card will only be unveiled after H2 2008, when an extra 1.2 million tonnes of cold-rolled coils capacity, 600,000 tonnes of galvanised steel capacity, and one million tonnes of pickling capacity come on stream. This period will be highly imperative for earnings growth into FY09, and with this we expect H2 2008 to form 60 per cent of overall FY08 NPAT.

In addition, due to the snow storm occurring in China in Q1 2008, the group managed to enjoy higher processing fees as a result of supply cut and a one-off price shock. We estimate this to push up its gross profit margin by about one percentage point q-o-q.

The group is currently trading at book value, 6.6 times FY08 and 5.3 times FY09 PEs, which we believe to be attractive given its growth prospects. Trading up to nine times FY08 earnings, an average of its three-year historical PE, will yield a target price of $2.14.

-Research Report by DMG & Partners (28 April)