Sound Global's net profit fell 25% to Rmb61.5m

Blame it on skyrocketing finance costs.

According to DBS, a net profit of Rmb61.5m (-20% y-o-y, -25% q-o-q) was 10% below forecast despite higher sales. If excluding Rmb5.3m forex gain, core profit would be Rmb56.2m. 

Here's more:

A key shortfall was finance costs which skyrocketed to Rmb76.8m from Rmb30m because the interest for the US$ senior notes surged to S$41.7m vs our forecast of S$29.3m, because of withholding tax.

The tax rate was also higher at 25% vs our assumption of 15%. 1Q13 gross margins were higher at 32.9% compared to 30.4% in 1Q12 and 29.2% in 4Q12.

All business segments improved. Sales grew 17% y-oy to Rmb519.3m, c.20% above our estimates. O&M grew the most, up 164% y-o-y to Rmb41.6m, forming 8% of group sales from <4% previously. After deducting 1Q13’s revenue, we estimated that SGL’s current EPC orderbook would be c.Rmb3b.

Cut FY13/14F. Finally, growing O&M would contribute to a good base of recurring income. Unfortunately, high finance costs have negated the benefits as reflected by 1Q13 results.

Unless future sales can generate substantially higher returns or higher margins, O&M can offset steep borrowing costs, earnings growth would be compromised. We have cut FY13F/14F to reflect higher finance cost. In view of deteriorating earnings outlook, we have also reduced valuation peg to 11xFY13 (-0.5 SD).