Results largely in-line. In FY08, Li Heng's revenue came in at RMB3.7b (RMB3.72b forecasted) while NPAT registered RMB814.5m (RMB836.8m). The 34.2% YoY growth in top line boiled down to a larger production capacity and a growing customer base, whilst the 10.0% YoY fall in NPAT was due to lower gross margins and onset of income tax.

Extraordinary item and gross margins. The Group incurred a forex loss of RMB48.1m for 4Q08 due to portions of its IPO proceeds being held in Singapore dollars, which depreciated against the Chinese Yuan. Due to PA chip prices falling in 4Q08, and nylon yarn prices falling by an even greater extent (as much as 50%), the Group's gross profit margin came in at 9.3% (we forecasted 7 ? 8%), down 24.7ppt YoY. Frantic de-stocking in Nov and Dec 08 depressed prices quickly and severely.

Uncertainty in price direction. Nylon feedstock and yarn prices bounced quite strongly from late Dec 08 to Jan 09 due to excessive destocking in the market and a simultaneous rush by participants to purchase stock. PA chip prices stood at around US$1,540/t in end Feb 09, achieving a healthy 28% bounce from its US$1,200/t low. However, nylon yarn prices have lost further ground from 4Q08's ASP of RMB22,000/t, by as much as 20%. This depicts a situation of continued price competition in the midst of slackening demand in today's market.

Management takeaways. Management is still fairly certain the company's capacity utilisation can still be kept at least at the 90% level for FY09. It has, however, reduced its sales order cycle to as low as 10 days versus two months during the good times. Order visibility currently stretches out to end March 09 and management is confident to hit 11,000 tonnes of sales per month. Management has approved a share buyback mandate (up to 10% of share capital), which will need approval during Li Heng's AGM in late April 09.

Valuation and recommendation. We have lowered our ASPs and gross margin assumptions for FY09 and FY10 by as much as 20% and 7ppt respectively due to subdued nylon prices and a bleaker outlook. Production volume has also been lowered by 15%. Our updated DCF model gives us a new target price of S$0.235, down from S$0.49 previously. Maintain BUY.