The Great China Sales

(Courtesy of CIMB)

China Energy Limited
(S$0.615, OUTPERFORM, CEGY SP)

Concerns with mismatch in methanol and DME expansion. Clients were generally concerned about China Energy’s increasing exposure to volatile methanol (key raw material) prices over the next two years, due to a mismatch in its DME and methanol expansion. While methanol prices have declined in recent months, translating to a more favourable DME-methanol margin spread, some clients were less comfortable with the lower margin visibility. Questions also centred on the company’s cost structure and competitive positioning amid potential new competition following the official take-off of DME in China.

Methanol self-sufficiency target of 50-70%. Its 500,000-tonne p.a. methanol plant expansion in Shandong is on track for completion in 3Q08. Post-completion, China Energy would be about 33% self-sufficient in its methanol requirements in FY09. Management reaffirms plans to increase its methanol plant capacity and self sufficiency to 50-70% by 2010.

DME fuel market looks increasingly promising. The official DME standard in China has been released by the National Development and Reform Commission and effective from 1 Jan 08, DME would be recognised as a legitimate alternative fuel in China. Following the successful completion of its pilot DME bus project in Shanghai, management is hopeful that DME could star as one of the alternative fuel choices to reduce air pollution during the Shanghai Expo 2010.

China Fishery Group
(S$1.70, OUTPERFORM, CFG SP)

Rationale for diversification into fishmeal operations. Clients questioned CFG’s rationale for diversifying into fishmeal operations given the paltry 3.3% net margins compared with the 29.2% for trawling operations. Management explained that its entry into fishmeal was a long-term strategic decision, as a presence in Peru would give the company access to the world’s largest wildcatch fish resource, with the potential for price appreciation if Peruvian anchovies could be used for human consumption instead of fishmeal. It has also allowed the company to establish a logistical presence in the South Pacific to support Chilean Jack mackerel trawling scheduled to resume in 2Q08. In addition, the company is striving to improve the efficiency of its fishmeal operations and aims to lift net margins to around 10% over the next 2-3 years.

Prepayment of fourth VOA. Negotiations on the prepayment of the fourth vessel operating contract are likely to be completed in 1H08, with prices and the effective period expected to be similar to those of the third VOA (prepaid US$150m, period 18 years). The company plans to prepay its fourth VOA with staggered payments from internal cash flow, plus a bank loan of about US$50m. The prepayment will lift trawling margins as the amortisation of the prepayment is significantly lower than the total daily charter of US$72,000 for the six supertrawlers under the agreement.

Sino Techfibre Ltd
(S$0.565, OUTPERFORM, SINOT SP)

Main PMP machinery has arrived. Investors asked whether there would be another delay to the start-up of the pattern moulding paper (PMP) facility. Management replied that the key piece of machinery responsible for the delay has arrived at its plant. It is currently installing the equipment and should begin trial production shortly. Its previous guidance of trial production in 2Q and commercial production from 2H08 remains unchanged. An early commencement of commercial production would be a bonus. Guidance of 40-50% utilisation in 2H08 remains valid. This would equate to PMP revenue of Rmb160m-200m in 2008, or about 10% of our full-year group revenue forecast.

Expect utilisation to edge towards 60% for leather products. There are also no major issues with its existing products. Management guides that it is able to handle raw material price movements as it focuses on high-margin products. Management highlighted that China’s military budget had increased by 17.8% in 2007 and the military had been a key pillar of support for its products, especially after the uniform upgrading exercise last year. An example is the belt used by the military. In the past, only high-ranking officers used genuine leather belts but after the upgrade, all soldiers have been given microfibre leather belts. Management expects the proportion of army-related sales in 2008 to grow slightly from the 14.4% in 2007.

No major capex in 2008, despite new product TPU. Sino Techfibre also clarified that the bulk of its capex had been spent in 2007. Total capex of Rmb675m was 66% driven by PMP expansion, 30% by PU and microfibre capacity addition and the rest by new products such as TPU. Capex planned for 2008 is only Rmb250m. This consists mainly of the remaining payment for two more PMP lines that the company had prebooked in advance.