Both top and bottom lines hit. 4Q08 revenue came in at S$338.2m, down 31.9% YoY from S$496.5m. Net losses ballooned from S$7.9m in 4Q07 to S$129.2m in 4Q08. All this boiled down to a fall in demand for crude steel and steel-related products in the PRC, coupled with steel prices that fell 35% QoQ in 4Q08. The Group also recognised a one-time impairment loss of S$20.9m on its fixed assets, which were mainly drop in values of its furnaces and sintering equipment. Stripping out this impairment would have added back 3.9S¢ to its loss per share of 24.1S¢.

Sales were surprisingly strong in 4Q08. The Group had sold approximately 350,000 tonnes of 850mm hot-rolled coils (HRCs) and 260,000 tonnes of 1,250mm HRCs during the quarter, which in total was only 40,000 tonnes or 6% lower than 3Q08 sales tonnage of around 660,000. This was unexpected given that the entire Chinese steel industry was facing oversupply and lack of demand. Sales of 1,250mm HRCs had fallen notably by around 22% QoQ for 4Q08 whereas 850mm sales remained firmed during the period. We reckon this boiled down to the 1,250mm HRCs having more designated uses towards infrastructure projects, which slowed tremendously in China during 4Q08.

Full year performance suffered mainly due to 4Q08. Revenue grew 47.4% from S$1.54b in FY07 to S$2.27b in FY08, mainly due to higher production capacity and also higher average steel prices. However, due to a loss of S$129.2m in 4Q08, this pulled the Group’s FY08 bottom line into the red with a net loss of S$75.8m compared to a NPAT of S$93.8m in FY07. We had also been too conservative with our 4Q08 forecasts, underestimating top line by around S$160m and overestimating net losses by around S$32m, as we had anticipated much weaker sales in 4Q08.

Valuation and recommendation. We believe the Group was profitable in Jan 09 due to stable steel prices, but much remains to be seen if it can maintain such a performance throughout the year with so much uncertainty in the global economy and continued oversupply in the Chinese market. We also exercise caution on the Group’s 1.5x net gearing level. We hence lower our previous FY10 P/E rating from 4.4x to 4.0x to attain a new target price of S$0.595 (previously S$0.655). Maintain NEUTRAL.