Investment Highlights
In-line set of 2012 results. Shenguan reported 2012 results with: (i) salesgrowth of 9.8% YoY; and (ii) adjusted net profit up 13.4% YoY, which was in-linewith the market consensus but 2% above our forecasts. In 2012, gross margindeclined 3.7ppts (to 58.2%) as a result of: (i) increase in raw material costs dueto the trial run of new production lines; and (ii) increase in electricity costs.However, increase in government grants and gain on disposal of equity; andstringent cost control on operating expenses helped offset the negative impactstemming from gross margin shrinkage. Adjusted net margin improved 1.5ppts(to 43.8%). A final dividend of HK6.5 cents/share and a special dividend ofHK3.3 cents/share were proposed, taking the full year pay-out ratio in 2012 to55% (vs. 40.5% in 2011).
Moderate sales growth momentum to remain in 2013E. We believe theCompany will continue to post moderate sales volume growth of 16% YoY in2013E; while ASP is projected to remain stable for the year. Gross margin isprojected to edge up 0.2ppt to 58.4% in light of improving efficiency after rapidinstallation of production lines in 2012 amid rising pressure on staff and rawmaterial costs.
Slowdown in pace of expansion during 2013-14E. After the aggressiveexpansions in 2012, the Company will slow the pace of its expansion during2013-14E but to ramp up its technology and to impart training for more skilledworkers after the installation of a number of new production lines in 2012. During2013-14E, Shenguan has budgeted yearly CAPEX of Rmb100-150mn toincrease its capacity by 10-15% per annum. We believe that the Company’sstrong operating cash flow is more than sufficient to finance its CAPEX internally.
2013/14E earnings forecast by -1.5%/-1.7%, respectively to reflect: (i) slowersales growth; (ii) higher production cost; and (iii) lower operating expenses. Afterconsidering the slower expansion prospects in 2013-14E, we forecast solid netcash of Rmb1,044mn and Rmb1,491mn for 2013-14E. A rising likelihood for theCompany is to maintain a high pay-out ratio for the next two years. Currently,Shenguan is trading at prospective 2013-14E PER of 13.2x and 11.5x,respectively. We fine-tune our TP slightly to HK$4.33 (prev. HK$ 4.40) based ona 2013E prospective PER of 13.8x (1-SD below the historical prospective PERsince its listing in Oct 2009 in view of moderate sales growth projected for2013-14E). All told, we maintain our OVEWEIGHT rating.
Investment highlights
In-line set of 2012 results. Shenguan profits 2012 results with: (i) sales growth of 9.8% YoY; and (ii) sales net profit up 13.4% YoY, which was in-line with the market consensus but 2% above our profits. In 2012, gross margindeclined 3.7 ppts (to 58.2%) as a result of: (i) trials in raw material costs dueto the trial run of new production lines; and (ii) purchased in boiling Costs.However, costs in government grants and gains on benefits of equity; andstringent cost control expenses on operating expenses offset the negative impactstemming from gross margin Shrinkage. Margin net margin margin 1.5 ppts (to 43.8%) A Final Expectations of HK6.5 Cents/Share and a Special Occasion of HK3.3 Cents/Share Were Stands, Taking the Full Year Payout Ratio in 2012 to 55% (vs. 40.5% in 2011).
Motivating Sales Growth Momentum to Growth in 2013 E. We believe the Company will continue to post increase sales volume growth of 16% YOY in 2013; while ASP is expected to maintain stable for the year. Gross Margin Issuance to Edge Up 0.2ppt to 58.4% in Light of Maintenance Efficiency After Rapid Installation of Production Lines in 2012 Amid Rising Pressure on Staff and Rawmaterial Costs.
Slowdown in pace of expansion during 2013-14E. After the aggressive expansions in 2012, the company will slow down the pace of its expansion during2013-14E but to ramp up its technology and to impart training for more skilledworkers after the Installation of a number of new production lines in 2012. During2013-14E, Shenguan has budding yearly CAPEX of RMB100-150mn toasting its capacity by 10-15% per annum. We believe that the company'sstrong operating cash flow is more than money to finance its CAPEX cash flow.
2013/14 E lower operating expenses forecast by -1.5%/-1.7%, revised to reflect: (i) slowersales growth; (ii) higher production costs; and (iii) lower operating expenses. Aftermath the Exhaustion Expansion Stops in 2013-14E, we forecast solid netcash of RMB1,044Mn and RMB1,491Mn for 2013-14E. A rising tide for theCOMPANY is to maintain a high pay-out ratio for the next two years. Sheng, Guan is trading at 2013-14E PER of 13.2x and 11.5x,. We fine-tune our TP shampoo to HK$4.33 (prev. HK$ 4.40) based on ONA 2013 E relaxation PER of 13.8x (1-SD below the historical symptoms PERSEINCE ITS LIST IN OCT 2009 IN VIEW OF PERSONS SALES GROWTH PERSONCE FOR 2013-14E). All told, we maintain our OVEWEIGHT rating.
