HUA-AN ... Aug09

ANALYST BULLISH OVER COKE PRODUCER SINO HUA-AN OUTLOOK

Metallurgical coke producer China-based SINO HUA-AN INTERNATIONAL's diversification into downstream production will enhance its overall profitability, says RHB RESEARCH in an update Jul 26, 2009.

BY PRODUCTS UNDER STUDY
SINO HUA-AN's plans for value-added products using by-products from metallurgical coke production was far more profitable than mergers or acquisitions as a means to expand capacity. SINO HUA-AN's ED - CEDRIC CHOO told STARBIZ in an e-mail that the Company was at the exploring stage and conducting viability studies on the by -products expansion plan and was unable to comment further on this matter.

Metallurgical coke is used as an energy source for the smelting of iron ore in the manufacturing of steel. Earlier reports said SINO HUA-AN had put on the backburner its plans to diversify downstream and become a steel player, in view of the financial crisis.

PLANT UTILISATIION & MARGINS
Instead, SINO HUA-AN chose to ramp up its production to the maximum. According to RHB RESEARCH, SINO HUA-AN's plant utilisation rate had stabilised at about 90% since Jan 2009 while the price gap between metallurgical coal (input) and metallurgical coke (output) had normalised to the average of Yuan 450 per tonne since May 2009.

The Brokerage opined that both plant utilisation rate and price gap would sustain at current levels (if not increase further) in the medium term as global crude steel consumption was expected to recover in 2010, underpinned by stimulus package plans implemented by various economies that would translate to downstream demand. Besides that, the Chinese Government's ongoing efforts to consolidate the metallurgical coke industry in China by phasing out inefficient and small-scale metallurgical coke plants, would boost Chinese metallurgical coke producers' pricing power (including SINO HUA-AN) over the longer term, it noted.

RHB RESEARCH added that although prices of SINO HUA-AN's major by-products such as tar oil and crude benzene (that collectively contributed 5% to 8% of SINO HUA-AN's total revenue), had started to ease in Jul 2009, the pullback in these prices was likely to be temporary.

The brokerage said that they project crude oil prices to hover at USD50-USD70 per barrel for the second half of 2009 before rising to USD60-USD80 and USD80-USD100 in 2010 and 2011 respectively, underpinned by stabilising demand from the United States and a pick-up in China's manufacturing activities (which collectively contribute about 30% of global oil demand).

NET LOSS RECORDED FOR 1QE MAR 2009
SINO HUA-AN recorded a Net Loss of RM23.6m for 1QE Mar 31, 2009 compared with a Net Profit of RM35.5m in the previous corresponding period. The decline was due to high prices of coking coal, which increased manufacturing costs. Besides that, Operating Costs such as additional workforce and depreciation charges on new coking ovens, further inflated cost of sales in 1QE Mar 2009. Its Revenue, however, increased 7% to RM310.9m from RM290.8m previously, mainly attributed to higher metallurgical coke prices.