Sino Huaan's (Huaan) 1QFY12 results disappointed, although the weak numbers were expected. The poor performance was again due to heightened coal prices, a decline in metallurgical selling prices as well as weaker contribution from byproducts. The prolonged structural problems in China and sluggish steel demand further dampened the company's performance. We are discontinuing our coverage on Sino Huaan. Our last call was NEUTRAL, with a FV of RM0.235.
Losses widen.Huaan posted a net loss of RM19.9m (-34.2% q-o-q, >-100.0% y-o-y) in 1QFY12 and revenue of RM382.1m (-5.3% q-o-q, +0.6%y-o-y), both of which are below our estimates. The losses were mainly attributed to the lower average selling price of metallurgical coke (-2% y-o-y) amid stubbornly high raw material costs. The contribution of by-products also declined, falling by some 6% y-o-y, which further weakened Huaan's bottomline (tar oil -20%, coal slime -3% middlings -6%, ammonia sulphate +36%, crude benzene +10% and coal gas +0.3%).
Operating conditions have not improved. We think Huaan will be facing another tough year in FY12 as the operational environment for an independent metallurgical coke manufacturer has not improved. The industrial structural problems in China have been working against Huaan and the company has not managed to extricate itself from its disadvantaged position of being hemmed between coal miners and steel mills. In addition, the outlook for the steel sector remains challenging as steel prices have not shown any significant signs of recovering.
Discontinuing coverage. Although Huaan has been trying very hard to improve its operating performance, the macro conditions have unfortunately worked against it. We are discontinuing our coverage on Sino Huaan International and take a re-look at the company later when conditions become more benign. Our last recommendation for Huaan was NEUTRAL, with a FV RM0.235.