Report from L&T.

Excluding the RMB14mln tax write-back (withholding tax for div paid last year), 1Q08 net profit would have declined 52% yoy to RMB93mln, in line with our expectation. This accounts for 29% of full year forecast of RMB320mln.

Gross margin fell from 34.3% to 26.8% due to the 35% yoy surge in pork, flour and packaging material prices. Selling and distribution expenses rose 50% yoy, faster than sales growth due to increased spending on TV and signages ahead of the 2008 Beijing Olympics.

The company’s strong net cash position of RMB2bln has already been pre-committed for capital expenditure plans already hence there would unlikely be any share buy back program.

Looking ahead, 2Q08 performance would likely be challenging due to the seasonally slower period which has been compounded by the earthquake in Sichuan where the company’s recently started Chengdu plant is located.

While management do not expect any material impact for now, there could be earnings risks going forward as expenses continue to increase while demand side may see downside risks with the China government’s price controls on staple food rendering premium priced frozen food products less attractive to consume.

In addition, Sichuan being an important pig rearing area in China may see further escalation in pork prices. The reduced bulk sales allowed by the government for hygene reasons would see continued increases in packaging costs for Synear as well.

With the problems mentioned above, it is highly likely for Synear to report another huge yoy bottom-line decline in 2Q08. Hence, despite its low 12x forward PE, the stock could remain depressed in the near term.