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PP 7767/09/2010(025354)

21 June 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Com pany Upda te


21 June 2010
MARKET DATELINE

Sino Hua-An International Share Price


Fair Value
:
:
RM0.335
RM0.21
Unlikely to Turn Around in FY12/10 Recom : Underperform
(Maintained)

Table 1 : Investment Statistics (HUAAN; Code: 2739) Bloomberg: HUAAN MK


Net Core EPS Net
FYE Turnover Profit EPS EPS Growth PER# C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 1,280.3 -20.6 -1.8 -1.8 NM -18.2 - 0.6 Cash -5.0 -
2010f 1,606.7 -7.4 -0.7 -0.7 NM -50.8 4.4 0.6 Cash -1.1 -
2011f 1,887.6 33.1 3.0 3.0 >100 11.3 6.4 0.6 Cash 4.9 -
2012f 2,002.9 34.7 3.1 3.1 4.8 10.8 - 0.5 Cash 4.9 -
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

Issued Capital (m shares) 537.0


Turnaround hope is becoming frail. We now believe that Sino Hua-Ans Market Cap (RMm) 1,686.3
hope of returning to the black in FY12/10 is becoming frail, as: Daily Trading Vol (m shs) 0.6
52wk Price Range (RM) 1.99 3.36
1. The weakening steel consumption and prices, coupled with still-high
Major Shareholders: (%)
inventory in China, indicate that steel producers in China may soon cut
Rock Point Alliance 25.4
production, and this will result in weaker metallurgical coke Liu Guo Dong 16.0
consumption and prices. Not helping either, is the production cost
pressure that is likely to remain given the strong pricing power of the
metallurgical coal miners; and FYE Dec FY10 FY11 FY12
EPS chg (%) -118.9 -16.7 -17.7
2. Prices of by-products (in particular, crude benzene and tar oil, which Var to C.EPS (%) NM -53.9 -
prices track the crude oil price movement) are likely to remain soft on
Share Price Chart
the back of the still-lacklustre demand (both financial and
fundamental) for crude oil arising from heightened concerns on a
sharper-than-expected slowdown in global economy in 2H10 that will
result in soft crude oil price movement.

Risks. The risks include: (1) Higher-than-expected crude steel output,


which will boost demand and prices of metallurgical coke; (2) Lower-than-
expected input cost (i.e. metallurgical coal).

Earnings forecasts. We are now projecting Sino Hua-An to register a net


loss of RM7.4m (vs. net profit of RM39.2m earlier), mainly to reflect: 1) a Relative Performance To FBM KLCI
narrower spread between metallurgical coal and metallurgical coke prices;
and 2) Lower by-product (in particular, crude benzene and coal gas)
prices. FY12/11-12 net profit forecasts are also cut by 16.7-17.7% to
FBM KLCI
RM33.1m and RM34.7m respectively, largely to reflect a lower spread
between the prices of metallurgical coal and metallurgical coke.

Investment case. Following the downgrade in our FY12/10-12 earnings Sino Hua-An

forecasts, indicative fair value is lowered by 16% from RM0.25 to RM0.21


based on 7x revised FY12/11 EPS of 3.0 sen. Maintain Underperform.

Chye Wen Fei


Please read important disclosures at the end of this report. (603) 92802172
chye.wen.fei@rhb.com.my

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21 June 2010

Company Update

Turnaround hope is becoming frail. We now believe that Sino Hua-Ans hope of returning to the black in
FY12/10 is becoming frail and this is mainly due to:

1. The spread between the prices of metallurgical coal (input) and metallurgical coke (output) is likely narrow in
the near term; and

2. Prices of by-products, in particular, crude benzene and tar oil, are likely to remain soft on the back of the
lacklustre crude oil price movement.

Margins at metallurgical coke operations to narrow. Despite the spread between metallurgical coal (input)
and metallurgical coke (output) has widened since Mar 10 (see Chart 1), we believe the spread between the two
will likely narrow in the near term, and this is mainly on the back of:

1. The weakening steel consumption and prices (see Charts 2-3), coupled with still-high inventory in China (see
Chart 4), which indicate that steel producers in China may soon cut production, and this will result in weaker
metallurgical coke consumption and prices; and

2. Prices of metallurgical coal are likely to remain high, given the coal miners flexibility in adjusting
metallurgical coal output, which will in turn help metallurgical coal prices from falling sharply.

Chart 1: Price Gap Between Metallurgical Coal & Coke Chart 2: China Domestic Rebar Price

RMB/tonne RM B/ tonne

2,100 4,800

4,600
1,900
4,400
1,700 4,200

1,500 4,000

3,800
1,300
3,600
1,100
3,400
900 3,200

3,000

Metallurgical Coal Metallurgical Coke

Source: Bloomberg Source: Bloomberg

Chart 3: China Domestic Hot Rolled Steel Sheet Price Chart 4: Finished Steel Inventory in China

'0 0 0 t o nne s
RM B/ tonne
10,000
4,800
9,000
4,600

4,400
8,000

4,200
7,000
4,000

3,800 6,000

3,600
5,000
3,400

3,200 4,000

3,000
3,000

Source: Bloomberg Source: Bloomberg

By-product prices likely to remain weak (if not weakening further). We believe the prices of Sino Hua-
Ans by-products (in particular, crude benzene and tar oil) are likely to remain weak (if not weakening further),
due to the still-lacklustre demand (both financial and fundamental) for crude oil arising from heightened concerns
on a sharper-than-expected slowdown in global economy in 2H10 and ample supply (witnessed by the glut of
crude oil built up in offshore tankers recently), which indicate that crude oil prices are likely to remain weak, and
this does not augur well for Sino Hua-Ans by-products, which track the crude oil price movement.

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Risks

Risks. The risks include: (1) Higher-than-expected crude steel output, which will boost demand and prices of
metallurgical coke; (2) Lower-than-expected input cost (i.e. metallurgical coal).

Earnings Forecasts

FY12/10-12 net profit forecasts cut. We are now projecting Sino Hua-An to register a net loss of RM7.4m (vs.
net profit of RM39.2m earlier), mainly to reflect: 1) a narrower spread between metallurgical coal and
metallurgical coke prices; and 2) Lower by-product (in particular, crude benzene and coal gas) prices. FY12/11-
12 net profit forecasts are also cut by 16.7-17.7% to RM33.1m and RM34.7m respectively, largely to reflect a
lower spread between the prices of metallurgical coal and metallurgical coke.

Investment Case

Indicative fair value cut by 16% to RM0.21. Following the downgrade in our FY12/10-12 earnings forecasts,
indicative fair value is lowered by 16% from RM0.25 to RM0.21 based on 7x revised FY12/11 EPS of 3.0 sen.
Maintain Underperform.

Table 2: Earnings Forecast Table 3: Forecast Assumptions


FYE Dec (RMm) 2009a 2010f 2011f 2012f FYE Dec 2010F 2011F 2012F
Average Selling Prices
Turnover 1,280.3 1,606.7 1,887.6 2,002.9 Coke (RMB/tonne) 1,820 1,950 2,048
Turnover growth -12.0 25.5 17.5 6.1 Tar (RMB/tonne) 3,003 3,453 3,453
Crude benzene (RMB/tonne) 4,920 5,904 5,904
Ammonium sulphate
EBITDA 17.1 17.9 72.3 75.2 (RMB/tonne) 680 680 680
EBITDA margin (%) 1.3 1.1 3.8 3.8 Coal gas (RMB/ 10,000 m3) 3,800 4,000 4,000
Depreciation -37.9 -27.4 -28.1 -28.8
Production Capacity For Coke
EBIT -20.9 -9.5 44.2 46.3 ('000 tonnes) 1,800 1,800 1,800
EBIT margin (%) -1.6 -0.6 2.3 2.3 Sales Volume For Coke
Interest expense 0.0 0.0 0.0 0.0 ('000 tonnes) 1,560 1,620 1,650
Exceptionals 0.0 0.0 0.0 0.0 Utilisation Rate 87% 90% 92%

Pretax profit -20.9 -9.5 44.2 46.3


Pretax margin (%) -1.6 -0.6 2.3 2.3
Taxation 0.2 2.1 -11.0 -11.6
Discontinued
operations 0.0 0.0 0.0 0.0
Minority interest 0.0 0.0 0.0 0.0

Net profit -20.6 -7.4 33.1 34.7


Net profit margin (%) -1.6 -0.5 1.8 1.7
Source: RHBRI Source: RHBRI

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21 June 2010

Chart 5: HuaAn Technical View Point


The share price of HuaAn staged a powerful
rebound in Apr 2009, but hit a strong resistance at
the RM0.56 level.

The stock started a sideways trend after failing to


penetrate the RM0.56 resistance level and
fluctuated between RM0.435 and RM0.56 for most
of the time during Jun 2009 to early May 2010.

But, when it fell to below the RM0.435 support level


in May, it turned into a lower trading range, and
headed towards a support of RM0.31.

For the past few weeks, the stock has been


trending sideways near RM0.33, above the RM0.31
support level. It also seems to find a firm support
at that level.

If it continues to form its base here, it may collect


enough momentum to launch a technical rebound
towards RM0.435 in the near term.

But, in our view, it mustnt breach below RM0.31,


as it will trigger another round of retreat towards a
lower support at RM0.185 if that happens.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investors individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the RHB Group) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

Connected Persons means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the Connected Persons are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRIs previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the Connected Persons, including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

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Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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