Qian Hu Corporation

Strong 3Q07 results in line with expectations. Qian Hu Corporation Ltd (Qian Hu) reported its 3Q07 results yesterday, where the numbers were largely in line with our expectations. Revenue grew 19.6% YoY to S$22.7m, while net profit doubled to S$1.3m. Bottom-line growth outpaced top-line growth as the Group managed to keep its cost of sales and general & administrative expenses under control. Net profit margins across all segments continued to show YoY improvements, leading the overall net margin for the 9 months to Sep 2007 to come in at 6.6%, a 1.9ppt improvement from 4.7% a year ago. Revenue growth across the board. The revenue growth was attributed to growth in all three business segments. Among these three segments, the most outstanding growth was recorded by the accessories segment, which witnessed a 35.2% YoY increase in revenue to S$8.5m. This is in line with Qian Hu's strategy of growing its business via the accessories segment. The fish segment, which is currently contributes 50.6% of Qian Hu's revenue, grew 14.5% YoY to S$11.5m, while the plastics segment grew 2.3% YoY to S$2.7m. The strong growth in revenue was boosted by the Group's sales of ornamental fish and accessories to previously untapped markets such as the Middle East, Russia and Australia. Expect further growth from accessories segment. Qian Hu's accessories business looks set for further growth in FY08. Besides increasing its Guangzhou factory's output to meet the increasing orders from existing and OEM customers, the factory will also take over the production of Arcadia's orders in 2008. As utilization of the factory's capacity increases, we expect Qian Hu to reap economies of scale and improved margins. Keeping our forecasts and BUY call. Having displayed another quarter of organic growth, we are confident that Qian Hu is on track for growth in FY07 and FY08. We maintain our FY07 revenue and net profit forecasts of S$92.0m and S$4.3m respectively. The recent rights-cum-warrants issue has increased the liquidity of trading in Qian Hu's shares, and we have derived our fair value estimate based on the fully-diluted EPS (assuming full conversion of warrants). Based on a similar 17x FY08 PER, we derive a fair value estimate of S$0.21, representing a potential 26% upside from the last traded price. Maintain BUY.