Persistent drop in ASPs in 4Q08. We recently met up with Li Heng Chemical Fibre (LHCF) for an update, and 4Q08 is shaping up to be quite a dismal quarter, given the poor sales numbers in Oct and Nov. As mentioned in our previous report, the persistent slide in ASPs (Average Selling Price) due to the continuous drop in raw material prices is the main culprit. We understand that ASPs have fallen by some 30% YoY. While the raw material prices have stabilised somewhat in December, crude oil prices are currently holding around US$30-40/barrel, management is not optimistic of any meaningful rebound in ASPs any time soon.

Earnings likely to be hit in 4Q08. With LHCF still having to work through some of its inventory bought at a much higher price in 3Q08, where it typically holds about one month's worth of stock, the declining ASPs have also impacted its gross margin. However, LHCF believes it should still be in the black as utilization rate remains at a relatively healthy 90%. According to management, orders are still coming in, albeit in smaller quantities and more frequently. In part, this is due to LHCF's efforts to get smaller customers to order in smaller quantities (two weeks' worth of stock versus one month previously) so as to both reduce its credit risk exposure and also to help manage its inventory risk. Still, we see the need to pare our FY08 revenue and earnings estimates by 3% and 7% respectively.

2009 outlook still very muted. With the global economy widely expected to slow further in 2009, management may be looking to delay its capacity expansion to late 2009, although it will still go ahead with its PA (polyamide) chip plant. This move - decision due in 1Q09 - is expected to shave some RMB400m off its 2009 capex budget. Besides the expected delay, the muted outlook for ASPs is the other reason for us shaving another 29-47% off our FY09 top and bottom line estimates. This also drops our DCF-based fair value from S$0.54 to S$0.44. But we expect things to recover by end-2009 and LHCF to resume >30% earnings growth in 2010. The overall financial position is still very healthy, with LHCF sitting on RMB1.8b of net cash (end-Sep), which works out to S$0.23/share. Maintain BUY.