1QFY10 results showed sequential growth. Z-OBEE Holdings reported its 1QFY10 results, with revenue dipping 54.8% YoY to US$16.8m. The YoY decline in revenue was due to weakness within its Trading and Solutions business segments, which more than offset an increase in sales in its Assembly segment. While gross margin improved 1.1ppt over the quarter to 9.2% from 8.0% in 1QFY09 (4QFY09: 8.4%) due to a favorable segmental mix (lower contribution from Trading segment, which typically garners the lowest margin), administrative expenses did not keep pace with the decline in topline. As such, net profit fell by a larger 67.8% YoY to US$0.6m. On a sequential basis, we note that the results showed an improvement in business conditions, albeit below our expectations.

Specifically, revenue rose 22.6% QoQ and net profit reversed the US$5k loss in 4QFY09, while EBITDA margin rose to 7.4% from 5.0% in 4QFY09 (1QFY09: 5.7%). The quarterly sales and net income made up 19.1% and 14.2% of our FY10F sales and earnings respectively.

Swell in balance sheet items. Over the quarter, the trade receivables and prepayments had also increased 35.3% QoQ and 227.1% QoQ, hence resulting in unexpectedly lower receivables turnover. However, according to management, ~33% of the trade receivables were subsequently settled, and ~53% of the prepayments used to secure bulk purchasing of inventories were received as inventories. As such, we should not expect these balance sheet items to persist at such levels in the upcoming quarter.

Slightly more upbeat on prospects. As for outlook, Z-OBEE has generally become more upbeat on the China mobile handset market, citing positive news that the industry is showing signs of recovery and that it is expected to register mild growth in 2H09, driven mainly by 3G opportunities and China's economic policies. Nonetheless, the group notes that it will keep a close watch on the latest developments in the global and handset industry, and exercise due care in pursuing its business and development plans.

Maintain HOLD. We are revising down our FY10 forecasts by 9.9-20.4% to factor in the softer-than-expected 1QFY10 results. Despite that, we still see potential in the group to capture more sales and enhance its financial position in the upcoming peak season. In anticipation of such a recovery and a re-rating in mobile handset sector, we bump up our fair value from S$0.05 to S$0.07, based on 7x FY10F EPS (4x previously). We maintain our HOLD rating on Z-OBEE.