Lacklustre 2Q09 results as guided. Foreland Fabrictech posted a lackluster 2Q09 results as guided; revenue tumbled 25.9% YoY to RMB81.7m, while net profit tumbled 48.6% to RMB12.7m. According to management, its 2Q performance was still weighed by muted demand for its functional fabrics, especially products with higher grade, thus resulting in an accompanying slide in ASPs from RMB13.2/yard in 2Q08 to RMB11.7/ yard. For the first half, revenue slipped 35.0% to RMB136.4m, meeting about 37.2% of our full year estimate, while net profit tumbled 57.6% to RMB21.0m, or around 32.9% of FY09 forecast.

Sequential improvement from tough 1Q09. But we see good sequential improvement - with revenue up by a good 49.3% and net profit up by a larger 54.4% - following the extremely difficult 1Q09 quarter. But due to the higher sale of lower grade products, gross margin eased further from 27.5% in 1Q09 (37.5% in 2Q08) to 26.1%; but on a positive note, we understand that Foreland has been partially successfully in passing on the higher raw material prices to its customers. And thanks to its ongoing cost reduction measures, Foreland improved its net margin from 15.1% in 1Q09 to 15.6% in 2Q09, though still some way off the 22.4% seen in 2Q08.

Expansion on track but may delay operations. Construction of its new factory is on track for completion in 2H09; Foreland has since made prepayments amounting to RMB74.0m for land, piling work and new equipment. But the new factory will probably commence operations closer to the end of the year. This effectively means no increase in its production capacity this year - we have already articulated in our earlier reports that the capacity increase of 40% is likely to be very measured in light of the uncertain economic environment to maximize utilization.

Upgrade to BUY. Foreland remains in a strong financial position with a net cash of RMB216.1m, and has further reduced its cash conversion cycle to around 25 days from 55 days in 1Q09, mainly due to better AR collection. And with the global economic recovery picking up steam, we believe that Foreland's 2H performance will continue to be seasonally stronger, hence we are leaving our FY09 estimates unchanged. We have also raised our valuation from 3x FY09 EPS to 4x blended FY09/FY10 EPS, resulting a higher fair value of S$0.135 (previous: S$0.10). Upgrade to BUY.