Summary: Luzhou Bio-chem Technology (LUBC) reported a 37% YoY growth in FY06 revenue to RMB1.47b with net profit increasing 74.1% YoY to RMB126.4m. Apart from top-line growth, net profit was also boosted by other income which surged 226% to RMB25.1m. Excluding this non-operational income, bottom-line would still have grown a healthy 57% YoY. This growth was despite the fact that LUBC was subjected to taxation in 4Q06 compared to their tax exemption status previously. Revenue growth was mainly attributable to a 45.1% YoY growth in revenue from corn sweeteners. Gross profit margin (GPM) for FY06 was at 18.5%, marginally higher than 18.4% in FY05. However, sweeteners and corn starch division saw decreases in GPM while the by-products division started being profitable in FY06 thus pulling the overall gross profit margin up slightly. GPM for sweeteners and corn starch was adversely affected by the ever increasing corn prices and we do not see the situation easing up in the near future, although a significant downward correction is not expected either since corn prices have pretty much reached its peak. LUBC is currently constructing new production lines to produce high fructose syrup at the production facility in Liaoning Province. Furthermore, the production facility for sweeteners in Yishui, Shandong Province has commenced production in January 2007. Finally in terms of valuation, we have revised down our fair value from S$1.00 to S$0.88 mainly to account for the EPS dilution of the recent placement of 36m shares, maintaining our price earning multiple ratio of 13x. We keep our BUY rating.

Good growth in FY06. Luzhou Bio-chem Technology (LUBC) reported a 37.0% YoY growth in FY06 revenue to RMB1.47b with net profit increasing 74.1% YoY to RMB126.4m. Apart from top-line growth, net profit was also boosted by other operating income which surged 226% to RMB25.1m. Excluding other non-operational income, bottom-line would still have grown a healthy 57% YoY. This growth was despite the fact that LUBC was subjected to taxation in 4Q06 compared to their tax exemption status previously. Revenue growth was mainly attributable to a 45.1% YoY growth in revenue from corn sweeteners. In FY06, LUBC sold less corn starch, as it used more internally as raw material for production of corn sweeteners.

Margins under pressure and expected to continue. Gross profit margin (GPM) for FY06 was at 18.5%, marginally higher than 18.4% in FY05. However, sweeteners and corn starch division saw decreases in GPM while the by-products division started being profitable in FY06 thus pulling the overall gross profit margin up slightly. GPM for sweeteners and corn starch was adversely affected by the ever increasing corn prices and we do not see the situation easing up in the near future as demand for corn remains strong. However, further significant erosion of the GPM is also not expected to occur as corn prices have pretty much peaked at RMB1,300 per tonne.

Still on track for growth. LUBC is currently constructing new production lines to produce high fructose syrup at the production facility in Liaoning Province. Furthermore, the production facility for sweeteners in Yishui, Shandong Province has commenced production much earlier than the previously expected 2Q07. By the end of FY07, the total annual production capacity is expected to increase 44.6% to 940,000 tonnes. We anticipate utilization rate to be approximately 78%, which will increase production volume by approximately 35.7% and revenue will subsequently be boosted 30.8% YoY to RMB1.92b.

Maintain BUY rating, lower fair value. FY07 will be the first full year LUBC will be paying taxes. Hence YoY growth in FY07 net profit growth is expected to be muted at 7.8% (before dilution). However at the profit before tax level, growth is expected to be approximately 26.0%. Finally in terms of valuation, we have revised down our fair value from S$1.00 to S$0.88 mainly to account for the EPS dilution of the recent placement of 36m shares, but keeping our price earning multiple ratio of 13x. We maintain our BUY rating.