Plant expansion and commencement of the new plant face further delays. Given weak demand, Synear continues to defer its expansion plans and suspend construction of new plants and cold warehouses. Synear has delayed the construction of its new Zhengzhou plant by another two years and now plans to complete it by 2012. Synear has also deferred the commencement of its new plant in Guangzhou. At the margin, sales trend(julaug) has been stable yoy on a relatively low seasonal quarter but costs could be on the upside.

The utilization rate remains low. Utilization at the Zhengzhou plant dropped to about 50% in 1H09 (vs 80% in 1H08) while utilization rates at the two plants in Chengdu and Huzhou remained at less than 20% in 1H09. We remain concerned about the intense competition in the sector and management's lack of strategy to tackle rising competition.

Margin pressures persist. Synear could continue to see margin pressure on the back of management's initiative to broaden the range of mass market products and increase commercial sales in 2H09. Synear has launched 20-30 new products to focus on the mass market and plans to increase commercial sales to 7% in FY09E from 5% in FY08.

Inflationary pressures have resulted in short-term headwinds; Sell. Our China Economist, Jun Ma, believes that inflation (CPI of 4% yoy) in China could rise faster in 2010, and this could compress margins for F&B companies.

We believe that the impact of El Niño could continue to push up agricultural prices (pork has increased by +20% on higher animal feed prices over the past two months) in 2H09. This could be partially offset by the 5% discount to spot prices that Synear has secured for its key raw materials (~80% of COGS).