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Hefei Fengle Seed:Below expectations, margin pressures continues; reiterate Sell

发布时间:2011-10-25    研究机构:高盛高华证券

Fengle reported 9M11 net profit of Rmb27mn (-70% yoy), below our Streetlowestimates and Wind consensus, accounting for 35% of our prior 2011Eestimate and 23% of consensus, vs. c.80% for a typical 9M. Stripping out aone-off investment gain of Rmb14mn from Fengle’s property segment in3Q10, 9M11 net profit would still have declined 64% yoy. Key variancecame from lower-than-expected gross margins, higher-than-expectedSG&A expenses and higher-than-expected effective tax rate. We believethe margin disappointment came from continued shift in sales mix fromseeds (higher margins) to agrochemicals (lower margins).

What to do with the stock。

We cut our 2011E/12E/13E EPS by 29%/30%/27% to reflect lower margins,higher SG&A expenses and income taxes. We roll over our valuationmethodology to 2012E, and following our earnings cuts, we lower our 12-month price target to Rmb10.90, based on 2.7X 2012E P/B vs. 7% average2012E-13E ROE (previous: Rmb11.20, 2.9X 2011E P/B vs. 8% average2011E-12E ROE), a lower multiple reflecting lower returns. We reiterateSell on Fengle on expectations of further seed market share losses toforeign corn seeds, and we are 46%-51% below consensus for 2012E-13Eearnings. Key upside risks are better-than-expected rice seed sales andimproving agrochemicals profitability.

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