Ferrochina reports a rise in turnover and net profit

China based steel processor FerroChina reported that turnover for 1Q06 increased to RMB784.2 million by 96.2% compared to last year. It also reported that net profit increased by 38.4% to RMB41.7m after providing for a RMB 6.3m income tax payment. In addition, the company expects that acquisition of a 35.45% stake in Changshu Everbright Material, that will be completed by April 06, would contribute positively to the group. FerroChina's share of Everbright's 1Q06 net profit would have been RMB25.5m. This would have boosted FerroChina's overall net profit to RMB67.3m and with two additional production lines coming on-stream this year and four more in 2007, Everbright's profitability is expected to increase significantly and further contribute to the group's bottomline. Furthermore, both Everbright and Ferrochina produces a different mix of products that caters to different customers.

However it should be noted that operating and selling costs have risen, while domestic prices of processed steel have dropped as demand drops due to the effect of China's clampdown on construction. Thus Ferrochina could be pressured by higher operating costs and could see its margins shrink by next year. At the last traded price of S$0.88, it has risen considerably against the IPO price of S$0.50 though P/E ratio based on FY2005 earnings stands at around 9.1x which is still fair.