HUAAN ... Mar10

S & P Results Review & Earnings Outlook

• Hua-An reported a 2009 net loss of MYR20.6 mln (vs. 2008 net profit of MYR545,000). The results were below consensus and our expectations, mainly due to lower coke price and higher cost of sales.

• 2009 revenue fell 12.0% YoY to MYR1.28 bln on the back of a 27.4% YoY decrease in the average selling price of coke. However, the average price of coking coal (raw material) only dropped by 21.1% YoY. As a result, Hua-An registered a gross margin of 0.4% in 2009, which was not enough to cover its operating expenses.

• On a positive note, Hua-An has returned to profitability since 2H09. Stripping out the one-off asset write-off of CNY5 mln, Hua-An should have registered a minor net profit of MYR306,000 in 4Q09 (vs. net profit of MYR18.5 mln in 3Q09).

• Although China’s steel industry was affected by a temporary oversupply in China in 4Q09 (Hua-An’s earnings are highly dependent on demand from steel manufacturers), management has since seen signs of improvement and expects steel rebar prices to gradually recover.

• We reduce our net profit forecast for 2010 by 16.4% to MYR73.9 mln, taking into account the slower-than-expected recovery in coke price. We also introduce our 2011 earnings estimate of MYR95.2 mln.

Recommendation & Investment Risks

• We maintain our Buy recommendation on Hua-An with a lower 12-month target price of MYR0.55 (from MYR0.63), 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 2010 EPS, 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. Furthermore, Hua-An’s balance sheet remains healthy (net cash of MYR24.4 mln as at Dec. 31, 2009).

• 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.