Stock Downgraded: C&O target price cut to 0.26 by CIMB-GK

CIMB-GK Research has downgraded its call on C&O Pharmaceutical Ltd to "underperform" from "outperform" and slashed its target price to 0.26 sgd per share from 0.60 after the company issued a profit and sales warning for its its first quarter performance ending Sept 30. The China-based drug manufacturer and distributor yesterday said it expects to report lower first-quarter profit and sales figures as it reduces inventory at newly-acquired unit Shenzhen Liancheng Medicine Co Ltd, a distributor of its products, to one month from three months currently to better utilize its working capital. "The sales and profits of C&O would be adversely affected by the inventory adjustments and Liancheng's restrictions to sell other non-C&O products, at least in first half 2007, which typically form 35-40 pct of full-year earnings," CIMB-GK said in a note to clients. The brokerage has slashed its earnings forecasts for the company for the year to June 2007 by 51 pct to 71.3 mln hkd, for the following year by 33 pct to 120.2 mln, and for the year after that by 29 pct to 164.5 mln. "While the earnings weakness from the inventory adjustment could be short term, we are disappointed that the group did not articulate the potential execution risk relating to the acquisition much earlier," CIMB-GK said. " As it pans out, we do not see any earnings accretion from the Liancheng acquisition, which was management's rationale for the acquisition," it added. At 10.14 am, C&O Pharmaceutical was sharply lower, falling 0.04 sgd or 12. 5 pct to 0.28 with 7.55 mln shares traded.