Sound Global

DBS Group Research, May 8

Q1 2013 was hurt by higher interest expenses and taxes. A net profit of 61.5 million yuan or $12.3 million (-20 per cent y-o-y, -25 per cent q-o-q) was 10 per cent below forecast despite higher sales. If 5.3 million yuan forex gain is excluded, the core profit would be 56.2 million yuan.

A key shortfall was finance costs, which skyrocketed to 76.8 million yuan from 30 million yuan because the interest for the US-dollar senior notes surged to $41.7 million versus our forecast of $29.3 million because of withholding tax. The tax rate was also higher at 25 per cent against our assumption of 15 per cent. Q1 2013 gross margins were higher at 32.9 per cent compared to 30.4 per cent in Q1 2012 and 29.2 per cent in Q4 2012.

All business segments improved. Sales grew 17 per cent y-o-y to 519.3 million yuan, about 20 per cent above our estimates. O&M grew the most, up 164 per cent y-o-y to 41.6 million yuan, forming 8 per cent of group sales from less than 4 per cent previously. After deducting Q1 2013's revenue, we estimated that Sound Global's current EPC orderbook would be around three billion yuan.

Finally, growing O&M would contribute to a good base of recurring income. Unfortunately, high finance costs have negated the benefits as reflected by Q1 2013 results. Unless future sales can generate substantially higher returns or higher margins, O&M can offset steep borrowing costs, earnings growth would be compromised. We have cut FY2013/2014 estimates to reflect higher finance cost.

In view of deteriorating earnings outlook, we have also reduced valuation peg to 11 times FY2013 (-0.5 standard deviation). Consequently, target price is lowered to $0.63. Downgrade to "hold" given limited upside to the new target price.

HOLD