S & P Results Review & Earnings Outlook

? Hua-An?s 1Q10 net loss of MYR2.5 mln (vs. 1Q09 net loss of MYR23.6 mln) was below consensus and our expectations. 1Q10 revenue rose 20.1% YoY to MYR373.6 mln, driven by favorable prices of coke and its by-products. The average selling prices of coke,
ammonium sulphate, crude benzene, tar oil, coal slime and middlings (ore by-products) have seen YoY increases of 23.0%, 4.0%, 157.0%, 80.0%, 57.0% and 13.0% respectively.

? However, the higher revenue was not sufficient to offset the higher raw material prices (coking coal), which rose approximately 29.0% YoY. As a result, Hua-An registered a gross margin of 1.5% in 1Q10, which was not enough to cover its operating expenses. Nonetheless, we note that this is an improvement from a negative gross margin of 4.3% in 1Q09. Furthermore, utilization rate of its plant in 1Q10 was healthy at 90.0% (vs. 88% in 1Q09).

? Management expects steel prices to rise going forward during the summer months (when steel demand is higher) and this should benefit Hua-An. It was reported by The Edge that Hua-An may consider setting up a new coke manufacturing plant in Malaysia. Given that the plan is likely to be at its preliminary stage, we believe that it would not contribute to Hua-An?s bottomline in the near term.

? We reduce our net profit forecasts for 2010 and 2011 by 30.0% and 27.9% respectively, taking into account the slower-than-expected recovery in coke prices.

Recommendation & Investment Risks
? We maintain our Buy recommendation on Hua-An with a lower 12-month target price of MYR0.50 (from MYR0.55), after revising our earnings forecasts.

? We continue to use a relative PER approach to arrive at our target price. The target price is based on assigning an 8.0x PER multiple (unchanged) to our estimated 2011 EPS (rolled over from 2010), in line with our target PERs for companies in the steel sector. There are no direct local peer comparisons for Hua-An, given that the group is purely involved in the coke business. As such, we have used the steel
sector as a proxy.

? Given the strong operating leverage, we believe Hua-An?s results could turn around significantly, once the recovery phase for China?s steel industry sets in.

? Hua-An?s balance sheet remains healthy (net cash of MYR34.5 mln as at Mar. 31, 2010) and in the longer term, we believe it is well-placed to benefit from development needs in western China.

? Risks to our recommendation and target price include political and regulatory issues that could seriously affect Hua-An?s business operations in China, volatile raw material prices, and a downturn in China?s steel industry.