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Lee & Man Chemical Summary

Core Content

Lee & Man Chemical (LMC) is a chemical company with a focus on chloromethanes and by-products, operating in the personal goods sector. The report is an interim result update, highlighting the company's performance and future outlook.

Main Points

• Interim Earnings: LMC reported an interim net profit of HK$150 million, which is 25% lower than the previous year. After excluding "other income," the core profit dropped by 61% year-over-year to HK$66 million, significantly below expectations.
• Earnings Drivers: The decline in earnings is attributed to a drop in ASP (Average Selling Price) for chloromethanes and overall gross margins. The ASP for methylene chloride fell by 31%, and for chloroform by 44% year-over-year.
• New Jiangxi Plant: The new Jiangxi plant is expected to start operations in Q4 2013, which could boost FY14F earnings by 30%, even after the revision in assumptions.
• Valuation: The price target has been revised to HK$4.00, based on a 9.2x FY14F P/E ratio, in line with the company's historical 1-year forward average.
• Dividend Yield: The dividend yield is estimated at 3.5% for FY13F and 4.5% for FY14F, with a dividend payout ratio of 38.5%.
• Financial Health: LMC has a low net debt-to-equity ratio of 9%, indicating strong financial position and capacity to fund expansion.
• Industry Outlook: The industry ASP has bottomed out, and the share price is expected to stabilize, offering a good entry point.

Key Information

• Market Cap: HK$2,772 million / US$357 million
• Issued Capital: 825 million shares
• Free Float: 25%
• Major Shareholder: Lee Wan Keung (75%)
• Interim DPS: HK$0.07, implying a 38.5% payout
• Gross Margins: Declined by 4.6 percentage points year-over-year
• Net Profit Margin: Reduced to 20.5% in FY13F and expected to be 15.1% in FY14F
• ROAE: 13.9% in FY13F and expected to be 16.4% in FY14F
• Net Debt/Equity: 0.1 in FY13F and expected to be 0.3 in FY14F
• Earnings Growth: Expected to grow by 29.8% in FY14F

Catalysts

• The bottoming out of ASP in the industry presents a good entry point for the stock.
• The successful start of the Jiangxi plant in Q4 2013 is expected to drive a 30% increase in FY14F earnings.

Peer Comparison

Valuation Metrics

Financial Highlights

• Revenue Trends: Revenue fell by 33.9% in 1H13 compared to 1H12, but is expected to grow in FY14F.
• Gross Margin: Reduced by 4.6 percentage points year-over-year, mainly due to a smaller drop in raw material costs compared to ASP declines.
• Net Profit: Declined by 24.9% in 1H13, but is expected to improve with the new plant's contribution.
• Cash Flow: Free cash flow per share is expected to be negative in FY14F, while operating cash flow is positive.

Analyst Recommendations

• Maintain BUY: Based on the belief that the worst is over and the new plant will drive earnings growth.
• Price Target: HK$4.00 for 12-month period, reflecting a 9.2x FY14F P/E ratio.

Summary

The report highlights that while LMC's interim earnings were below expectations, the industry ASP has stabilized, presenting a good entry point. The new Jiangxi plant is expected to significantly boost earnings in FY14F, supporting the BUY recommendation. Despite a drop in core profit, the company's financial health remains strong, with a low net debt-to-equity ratio and sufficient cash reserves. The overall outlook is positive, with the potential for earnings growth and a favorable valuation.