Wednesday, April 05, 2006

Stock of the day! China Sun Bio-chem - Sweet Prospects from UOB Kay Hian

High sugar prices are driving demand for corn sweeteners, andconsequently corn starch. Separately, the PRC government reiterated itscommitment to develop renewable energy resources during the recent NationalPeople's Congress.Ø Point: CSBT should benefit from higher corn starch sales, butmodified starch margins could be affected with rising corn costs. We alsoremain optimistic about CSBT securing the fuel ethanol license although thedecision may take longer than expected.Ø Relevance: CSBT is trading at attractive 50% discount to global cornstarch players. We reiterate our BUY recommendation, with a raised targetprice of S$0.95.High sugar prices driving corn starch demand. Sugar prices in China havedoubled over the last year, which led to increased usage of corn-basedsweetener, a cheaper substitute. This in turn, led to higher demand andprices for raw materials i.e. corn starch and corn. Historical datasuggests CSBT had been able to adjust its corn starch prices to match thefluctuations in corn costs to maintain profitability. However, modifiedstarch prices are more resistant to change, which may lead to marginsqueeze in a rising corn price environment. An improving product mix shouldnevertheless help CSBT mitigate the potential negative impact.Still optimistic about fuel ethanol license. The PRC government reiteratedits focus on renewable energy resources during the National People'sCongress in March 2006, but there were no specific discussions on fuelethanol licenses. The government could be taking more time to explore theuse of other crops like potato and tapioca, given the tightening cornsupply in China. Nevertheless, we remain optimistic that it willeventually award corn-based ethanol quota to support corn prices andfarmers' income. CSBT also has limited competition for the license inLiaoning, which enhances its chances of securing the quota.1Q06 earnings growth expected to exceed 20% y-o-y. CSBT should see profitgrowth supported by higher sales although margins are likely to decline.Its valuation remains undemanding at 8x FY07F PE ? it could re-rate up withthe fuel ethanol license or new acquisitions. With the successful executionof CSBT's capacity expansion, we lower our WACC assumption from 18% to 16%to derive a new DCF-based price target of S$0.95. This excludes potentialupside of S$0.25-0.50/share if CSBT were to secure the fuel ethanollicense. Key risks could be unexpected margin squeeze due to sharp spike incorn prices and the rejection of CSBT's fuel ethanol license application.

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