By Carey Wong
Mon, 28 Jun 2010, 09:32:08 SGT

We recently visited Li Heng Chemical Fibre (LHCF) to have a look at their new production expansion as well as the existing operations. The new production capacity came on stream in early Jun and management expects it to make a full half-year of contribution this year. As for its existing operations, management reveals that it has been able to run these at above 90% utilization, buoyed by the gradual and continued recovery in demand. Meanwhile, LHCF will construct a new PA chip plant (100k ton design capacity costing around RMB715m) in 3Q10. Upon completion in 4Q11, LHCF expects to be fully self-sufficient in PA chips. As the capex is likely to increase to around RMB500m this year and the next, we note that it will reduce our DCF-based fair value from S$0.34 to S$0.32 (the rest of our estimates remain largely unchanged). As we believe that the worst is likely over for LHCF and given the attractive upside of ~42.2% from here, we maintain our BUY rating.

New production capacity up and running. We recently visited Li Heng Chemical Fibre (LHCF) to have a look at their new production expansion as well as the existing operations. The new production capacity came on stream in early Jun and management expects it to make a full half-year of contribution this year. However, given that most of its order book is for the finer yarns (30D and below), management expects the actual tonnage contribution to be closer to 25k ton versus the theoretical 45k ton (or half of its designed 90k ton capacity – calculated based on 70D yarn). While this would also result in a drop in its calculated utilization rate, management reassures us that the true utilization is above 90%.

Overall operations holding up well. As for its existing operations, management reveals that it has been able to run these at above 90% utilization, buoyed by the gradual and continued recovery in demand. Order book visibility continues to remain good (still mainly for finer yarns) and LHCF expects to remain busy until the end of the year. ASPs have also been holding up quite well although management does not expect to see a sharp recovery this year. Still, management remains confident that it can sustain its gross margin above 15% (achieved 15.9% in 1Q10) for the rest of the year – this as its PA (polyamide) chip plant (70k ton design capacity supplies about 55% of its requirements) should help to reduce the anti-dumping tax that the Chinese government has imposed on PA chip imports.

Building a second PA chip plant. And to further reduce the anti-dumping tax impact, LHCF will construct a new PA chip plant (100k ton design capacity) in 3Q10. Upon completion in 4Q11, LHCF expects to be fully self-sufficient in PA chips. Management estimates that the new plant will cost around RMB715m in total but believes that the actual cost could be lower as it can share some of the first PA chip plant’s existing infrastructure. As the capex is likely to increase to around RMB500m this year and the next, we note that it will reduce our DCF-based fair value from S$0.34 to S$0.32 (the rest of our estimates remain largely unchanged). As we believe that the worst is likely over for LHCF and given the attractive upside of ~42.2% from here, we maintain our BUY rating.