DBSVickers Report - 26 Nov 2007

China Sky No rude shocks with crude price spike

Story: We had an update with management with a particular focus on the crude price impact as crude prices climb towards US$100 per barrel level.

Point: China Sky (CSCF) should be able to pass on the bulk of the additional material cost, if not fully, to customers on the assumption that crude price does not remain above US$100 a barrel. As evidence, management stated that it has successfully raised product ASP by RMB300-RMB500 per tonne in 4Q07 and would gradually increase ASPs further to fully pass on the additional cost. The Group’s stable margins over the past four years and our industry findings suggest a positive correlation in pricing of nylon chip and nylon fibre, and this enhances our confidence in the Group’s ability to minimise raw material price impact.

Relevance: We continue to like CSCF as a key beneficiary of rising consumption and affluence among the Chinese. Apart from decent organic growth of c. 20%, we see further re-rating catalyst on the M&A front. We reiterate our Buy call on the counter with a TP of S$3.40, pegged to 15x blended 08/09 diluted EPS.