Qian Hu Corporation Ltd posts 3Q10 net profit of $1.2 million

Qian Hu Corporation Ltd’s 3Q10 net profit of $1.2 million and revenues of $22.9 million were dismal compared to a year ago showed things are improving although still lower-than-expected, Phillip Securities Research Pte Ltd. said on Wednesday.

In a statement, the research company said they Qian Hu’s revenues and net profit came in below their forecast of $25 million and $1.7 million respectively owing to the remnant effects that had affected 2Q10 still visible in 3Q10.

Phillip Securities said the drought that had affected the supply of self-bred dragon fish; cutback in spending which also affected exports into the Europe; the strong Sing$ also had a dampener effect on the export of ornamental fish.

Phillip Securities said numbers were largely unchanged from the second quarter, the bright spark being the plastics division which is deemed to be an auxiliary business. Revenue from ornamental fish was $11.3 million (-5.5% y-y, +0.1% q-q) and contributed 49% to total revenue. Accessories sales was $8.6 million (-5.3% y-y, +0.8% q-q) and contributed 38%. The plastic business improved in the quarter with revenue of $2.9 million (+8.0% y-y, +5.1% q-q) and accounted for 13% of total revenue.

Gross profit margin was 34.5% while net profit margin was 5.9%. Profitability margin of the fish segment improved 2ppt over the previous quarter to 9.0%, as sales of self-bred dragon fish resumed. The drought occurred in 1Q10 and it takes 3-6 months for off-springs to grow to a marketable size. Thus profit margin for fish is expected to rebound to double-digits figure in the next quarter. Both the accessories and plastics segments showed improvement in margins.

Europe and Singapore saw revenue decreased compared to a year ago, while Other Asian Countries and Others regions are still registering growth. Europe sales were badly affected in 2Q10 due to airport closure from the volcanic ash and the World Cup. Although sales recovered somewhat in 3Q10, it is still lower y-y as an economic condition in the European region is still uncertain.

Phillip Securities said they had originally expected things to normalize in 3Q10, although things did pick up, but we had overestimated the rate of normalization. The drought occurred in the early months of 1Q10 and given the gestation period of 3-6 months, we had initially thought supply would have normalized by 3Q10.

Sales of self-bred dragon fish resumed in the quarter, according to Phillip Securities they think supply did not reach the normalized level. At the normalized supply level, profit margin for fish should be in the mid-teens region. The profitability of the fish segment was also impacted by the strong Sing$ whereby export customers sourced for cheaper alternatives.

Qian Hu also recorded 2 straight quarters of losses from its Indian associates which Qian Hu had invested back in 3Q09.

Phillips Securities said they are also scaling back their FY10E revenue and net profit forecasts by 1% and 10%, and that they think catalyst to 4Q10E earnings would be the contribution from self-bred dragon fish since ornamental fish sale accounts for almost half of total revenue, as well as roll out of the new “Hydro-Pure” filtration system.
“We are forecasting a dividend payout of 30% of FY10E net profit in line with the payout ratio in FY09, which translate to 0.35cents per share. We are rolling forward and pegging out target price to 10x FY11E earnings which gives us $0.14. In view of the limited upside, we are downgrading to Hold,” Phillip Securities said.