China stocks pounded on fears over earnings, costs

S-SHARES, which refer to stocks of China companies listed in Singapore, took a beating yesterday, with many plunging to fresh lows. The fear in the stock market is that these companies are now facing severe profit margin squeeze because of growing raw material costs.

These worries were compounded by a profit warning from Synear Food and recent analysts' downgrades of S-shares, signalling weaker earnings for these companies.

Among those that fell to all-time closing lows yesterday were Synear, which slumped 6 per cent to 39.5 cents, China Energy (1.3 per cent to 38 cents), China XLX Fertiliser (9.8 per cent to 50.5 cents), and China Sun Bio-Chem Technology (8 per cent to 23 cents).

Frozen food producer Synear issued a profit warning on Wednesday. Besides saying that sales for the first quarter ending March 31 were expected to be up to 10 per cent lower than a year ago due to the recent snowstorm in China, it also said that prices of raw materials such as pork, flour and packaging materials continued to trend upwards.

This triggered a rating downgrade from CIMB-GK from 'trading sell' to 'underperform' and a cut in target price for Synear from $0.77 to $0.35. It also cut its FY08-FY10 earnings per share estimates by 7.3-8.2 per cent on lower sales volume and margins assumptions.

'In light of the dismal near-term outlook and execution risks from the company's aggressive expansion plans, we have lowered our target valuation to six times CY09 P/E (price/ earnings) from 12 times, now valuing the company on a par with Pine Agritech, which we also think has a challenging near- term outlook,' the brokerage said. CIMB-GK has an 'underperform' call on Pine Agritech, with a $0.16 price target.

CIMB-GK also cut its recommendation on China XLX from 'outperform' to 'neutral' and more than halved its target price from $1.20 to $0.57, citing rising coal prices and an estimated fall in Q1 urea gross margins. Its earnings forecast was also pared down by 15-39 per cent for FY08-10.

In the recent earnings downgrades by analysts on Singapore-listed companies, S-shares suffered the biggest earnings downgrades after disappointing results for FY07.

Earlier this week, Merrill Lynch cut its FY08/09 earnings forecasts for China Energy by 39-47 per cent and lowered its target price from $1.68 to $0.62 due to production delays and rising competition. But it is keeping its 'buy' call on the stock on belief there is limited downside from here.

Similarly, CIMB-GK cut its earnings per share estimates for the company by 6-10 per cent and target price from $1.76 to $1.44 while keeping its 'outperform' rating.

China Energy's shares were also battered yesterday on concerns over a potential overpayment for its acquisition of Jiutai Energy (Guangzhou).

Cost concerns clouding the market prompted starch producer China Essence to release an update on its business operations yesterday. It said its raw material costs have not been impacted despite rising costs of other commodities as prices of its potato supply has been locked in contracts with local farmers.

The snowstorm for the past three months also did not affect the group's production and distribution of potato starch as the potato were already converted to starch before the onset of the snowstorm and distribution of the starch was shifted to sea transport during the snowstorm.
'It is unlikely to be a problem for us to continue achieving double-digit growth in earnings,' the group's chairman and CEO Zhao Libin told BT. The price of potato starch remains on an uptrend and gross margins are likely to stay steady around 40 per cent, he added.

But shares of China Essence fell 5.7 per cent to a 52-week closing low of 50 cents yesterday.

Where is the bottom for some of these shares?