Cut PO and earnings by 22%. New PO: S$0.36

YTD natural rubber (NR) price averages US$4.90/kg, 11% shy from our initial

forecast of US$5.50/kg. While we maintain our bullish stance on natural rubber,

we believe US$5/kg is a more achievable NR price for 2011. We thus cut our NR

price assumption by 9% for 2011. This led to a 22% reduction in GMG FY11 profit

as well as price objective. Maintain Buy.

What happened in 1H11?

Although GMG recorded 83% YoY improvement in 1H 11 profits to S$36mn, it

merely represents 23% and 40% of ours and market expectations. The

disappointment was due to GMG’s hedging policy. The old management forward

sold GMG’s entire production in 1Q11 instead of a gradual monthly hedge against

sales. This led to a total lost of S$14mn with S$4mn left unaccounted for.

New management, new style, new hope?

Coincidently, GMG’s parent company has replaced Xian Ming (former CEO) with

a new person – Yao Xing Liang prior to the 2Q11 results announcement. Based

on the information provided, Mr. Yao has extensive rubber related experience. His

last role was Head of Rubber division in Sinochem International. We understand

the first change made was to GMG’s hedging policy.

Profit catch up still possible

The resumption of Ivory Coast processing operation coupled by better weather

condition in Cameroon, in our view, are key catalysts to a better 2H11. Lastly,

stronger NR price is also vital. For the past 15 years, the rubber price (RG1

Comdty) had four flat years, four down years and seven up years. We expect the

NR price to end the year on a high note.