Wed, May 15, 2013 - Page 14 News List

Cheng Shin’s margin may continue to rise: analysts

RESULTS:The tire maker’s net profit from last quarter increased 27.9 percent due to foreign exchange gains on baht-denominated bank loans, a UBS analyst said

By Kevin Chen  /  Staff reporter

Tire maker Cheng Shin Rubber Industry Co (正新橡膠) may see its gross margin continue to expand this quarter due to lower rubber prices, analysts said yesterday.

However, falling raw material costs may cause some downstream customers to feel less eager to restock their warehouses too early, leading the company to see modest, but sub-par sales growth this quarter, they added.

“May to September has historically been Cheng Shin’s strongest sales months of the year,” Credit Suisse strategist Jeremy Chen (陳建名) said in a note yesterday. “We remain hopeful of a China recovery to underpin an encouraging pick-up into the high season.”

Chen’s comment came after Cheng Shin released its first-quarter results on Monday, which showed its gross margin improved to 24.3 percent, up from 20.5 percent a year earlier, but down from 25.9 percent in the previous quarter.

The company’s net profit was NT$4.25 billion (US$142.1 million) in the January-to-March period, or earnings per share of NT$1.51, down 14.5 percent from NT$4.96 billion in the previous quarter.

However, last quarter’s net profit increased 27.9 percent from NT$3.32 billion for the same period last year.

“This is mainly due to foreign exchange gains on Thai baht and Japanese yen-denominated bank loans,” UBS Securities analyst Ally Chen (陳玟瑾) said in a separate note yesterday.

However, Chen said the company would continue to benefit from low rubber prices, while sustaining its margin expansion momentum.

“The natural and synthetic rubber prices have been down 24 percent and 30 percent respectively year-to-date and we expect the downward trend to maintain due to supply surplus,” she said.

The latest results also showed Cheng Shin’s consolidated revenue in the first four months of the year declined 0.7 percent to NT$41.88 billion year-on-year, although that has improved from a 2.2 percent annual contraction to NT$30.1 billion registered in the first three months, as the company managed to overcome sluggish demand in the US and European markets.

Analysts forecast Cheng Shin’s sales would slowly resume growth starting from this quarter, thanks to a gradual recovery of Chinese tire demand and Cheng Shin’s gaining new orders in the original equipment business with various car manufacturers.

Credit Suisse yesterday retained its "outperform" investment rating on Cheng Shin's shares, with a target price of NT$105. UBS Securities also maintained its "buy" rating and a target price of NT$110, while CLSA Asia-Pacific Markets lowered its target price to NT$120 from NT$125, along with a "buy" rating.

Shares of Cheng Shin closed 3.5 percent lower at NT$96.5 yesterday.

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