Falling costs give Cheng Shin grounds for optimism

By Kevin Chen  /  Staff reporter

Mon, Apr 15, 2013 - Page 14

Shares of tire maker Cheng Shin Rubber Industry Co (正新橡膠) have outperformed the broader market by about 28 percent so far this year, but could rise further as the firm continues to benefit from steady growth in demand and lower raw material prices, analysts said.

The company’s shares closed at NT$97.6 on Friday after briefly reaching a yearly high of NT$98. They have risen 29.44 percent this year, compared with the TAIEX’s 1.59 percent increase.

Last week, UBS Securities Ltd raised its recommendation on the firm to “buy” from “neutral” and lifted its target price to NT$110 from NT$85, while Credit Suisse kept its “outperforming” rating on the company with an NT$105 target price.

Fubon Securities Co (富邦證券) also reiterated its “add” rating for Cheng Shin and raised its target price from NT$98 to NT$110.

The brokerages’ forecasts came after the Yuanlin (員林), Changhua County-based company told an analysts’ meeting on Wednesday that it was optimistic about this year’s outlook.

During the meeting, Cheng Shin said its new plants in China were running at nearly full capacity and that it was considering setting up production bases in India and Indonesia, according to brokerages.

As major raw materials costs for tire-making in the first quarter have declined by between 4 percent and 9 percent from the fourth quarter last year, and are likely to stay low this quarter, analysts said Cheng Shin could see continued margin improvement this quarter.

“With average selling prices remaining stable, while input costs continue to trend lower, we think Cheng Shin’s gross margin could surprise the market on the upside in the first half of 2013,” Credit Suisse analyst Jeremy Chen (陳建名) said in a note on Thursday.

Cheng Shin could also see annual sales increase by between 10 percent and 17 percent this year to a range between NT$143.27 billion and NT$152.6 billion (US$4.78 billion to US$5.09 billion), while net profit could expand by between 22 percent and 25 percent to between NT$19.45 billion and NT$19.57 billion, brokerages said.

Last year, Cheng Shin’s revenue rose 8.6 percent to NT$130.27 billion from NT$119.96 billion a year earlier.

The company’s profit jumped 85 percent to NT$15.9 billion from NT$8.59 billion the previous year.