1H13 to decline no less than 40% YoY
Shanshui reported after the market close on July 17 that its 1H13 NP willdecline by no less than 40% YoY. The degree of decline comes as a surpriselikely to come in lower than our estimated 1H13 EPS of RMB0.19/sh, down28% YoY. Assuming that Shanshui’s 1H13 earnings declined by c.40% YoY,that would mean Shanshui achieved only RMB0.15/sh or only 35%/27% of DBeand consensus estimates. We believe the earnings miss will lead furtherconsensus downgrades going into the results.
Why the earnings miss?
Both Shandong and Liaoning got off to a slow start in 1H13 with weakdemand and low utilization leading to higher fixed costs. Given the severeover-capacity in Shandong, price coordination was not successful andShanshui was unable to raise prices even during their peak 2Q season.Outlook?We believe the overcapacity in Shandong will not be resolved overnight andpricing in Shandong will likely stay weak for 2013. Shanshui continues toexpand aggressively in Shanxi, an area with oversupply and poor pricing. Thatwill likely place additional pressure on its already stretched balance sheet with150% in net gearing.
What to do with the stock?
We believe the stock will underperform in the coming months and valuationswill likely stay depressed until the supply-demand improves in its core marketof Shandong and Liaoning. We maintain our HOLD rating and TP of HKD3.19.