Pls see attached the full PDF research report, below is a highlight:
 
AJC sector faces challenge
A trade fair held in Dalian revealed weak sentiment from overseas clients. AJC prices were forced below US$1,000 per tonne with low trading volume. Although future prices may recover to some extent due to over-pessimism at the moment, our earlier price expectation of over US$1,200 per tonne could be a bit aggressive. At US$1,000 per tonne in the 08/09 season, AJC profit per tonne may collapse from nearly US$300 last crushing season to merely US$100 this season, even if we assume apple purchasing prices fall to Rmb450 per tonne.
Marginal 3Q earnings
Andre delivered only 20k tonnes of AJC in 3Q, while average prices slid to below US$1,450 per tonne. Although production in the new season helped lower cost on average, gross margin declined significantly QoQ, leaving marginal 3Q earnings of Rmb8.1mn. The company recorded 1~3Q earnings of Rmb243mn, up 96% YoY.
Expecting earnings recovery after 2009
Other than worries over collapsing unit profit, weak demand may also suggest a lower chance for AJC export volume to generate growth YoY in the new season. We thus revised down 08~10 sales and earnings forecasts for the company. We assume apple purchasing prices, AJC prices and export volume will keep stable in the 09/10 season. Suspension of future capacity expansion and a collapse of apple purchasing prices and AJC prices may offer the chance to lower bank borrowings in the coming two years. We thus expect earnings to bottom out in 2009 due to a cut in finance costs.
Downgrade to HOLD
Over-aggressive pricing of AJC in the 07/08 season and the global economic downturn may cause near-term earnings setback, although recovery is expected after 2009. As we believe the company faces little risk of negative earnings, and China’s AJC sector should remain competitive with a monopoly position in the long run, we lower our rating from BUY to HOLD with an end-09 price target of HK$0.32, derived from 0.88x 09e BPS, in line with the global average.
 

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