gsg_stock discussion

Stockwatch- China Sky (Singapore): Merrill Lynch initiate coverage with $1.82 price target

Merrill Lynch initiate coverage on 6 Oct 2006 and China Sky closes at $1.17 up from $1.07 the closing price on the first posting:

China’s leading nylon fiber producer, set to stay ahead

Doubling of market share in three years
We initiate coverage on China Sky with a Buy and price objective of S$1.82. Nylon fiber consumption is expected to continue growing at more than 15% pa in China. As the largest producer, China Sky is well-positioned to outpace industry growth by grabbing market share from both foreign imports and domestic competition.

EPS CAGR and ROE of more than 30% in FY05-09E
China Sky is expanding through new products and capacities. It increased its nylon FDY/HOY capacity by 85% to 72,000 tpa in June 2006. Its new 16,000 tpa nylon ATY/DTY facility is on track for completion by 1Q07. We also expect the launch of 30,000 tpa nylon SR fiber capacity to contribute significantly from FY08.

Potential M&A to accelerate earnings growth
China Sky has identified potential acquisition targets to help it break into new markets. It is also considering moving upstream into caprolactam/nylon chips over the medium term to become an integrated nylon player. These prospects have not been factored into our earnings forecasts.

Our PO suggests 63% potential upside
China Sky was listed at S$0.55 in October 2005 and reached a high of S$1.32 in May 2006. It is now trading at an attractive 6.3x FY07E earnings, implying a low PEG of 0.2x. Our PO is based on a blended valuation approach using P/E, EV/EBITDA and DCF. We also project China Sky to grow 3Q06 earnings by 50-60% YoY and see the strong result delivery as a price catalyst in the near term.

Risks to growth and our PO
China Sky has been able to pass on higher raw material costs to customers but failure to do so in the future would hurt margins. An unexpected decline in selling price would also dent profit margins.

posted by gsg @ 1:21 AM