Hitting the sweet spot

�� Story: Luzhou Bio-Chem (LUBC) placed out 36m new shares,

diluting its share capital by 10%. The net proceeds of S$25.7m

will be used mainly for capacity expansion.Story: Luzhou Bio-Chem (LUBC) placed out 36m new shares,

diluting its share capital by 10%. The net proceeds of S$25.7m

will be used mainly for capacity expansion.

�� Point: We look forward to the completion of the HFCS

production lines in 2Q07, which will allow LUBC to ramp up

production of the high-margin sweetener used in carbonated

drinks.Point: We look forward to the completion of the HFCS

production lines in 2Q07, which will allow LUBC to ramp up

production of the high-margin sweetener used in carbonated

drinks.

�� Relevance: Having taken into account the dilution impact,

interest cost savings and increase in ASPs, we are raising our

FY07 and FY08 net earnings by 3-6%. We maintain our BUY call

on LUBC with a target price of S$1.05 based on DCF valuation.Relevance: Having taken into account the dilution impact,

interest cost savings and increase in ASPs, we are raising our

FY07 and FY08 net earnings by 3-6%. We maintain our BUY call

on LUBC with a target price of S$1.05 based on DCF valuation.

New share placement dilutes share capital by 10%. Luzhou Bio-Chem

(LUBC) issued 36m new shares, diluting the share capital by 10%. The

estimated net proceeds of S$25.7 million will be used to: 1) partially

finance the construction of the JV plant in Sichuan, including purchase

and installation of production line, machinery and equipment, 2)

construct new production lines for special feed products in Shandong

and 3) build production lines for high fructose corn syrup in Liaoning.

The capital expenditure is expected to cost S$20.9m and the remaining

net proceeds of S$4.8m will be used as working capital.Luzhou Bio-Chem

(LUBC) issued 36m new shares, diluting the share capital by 10%. The

estimated net proceeds of S$25.7 million will be used to: 1) partially

finance the construction of the JV plant in Sichuan, including purchase

and installation of production line, machinery and equipment, 2)

construct new production lines for special feed products in Shandong

and 3) build production lines for high fructose corn syrup in Liaoning.

The capital expenditure is expected to cost S$20.9m and the remaining

net proceeds of S$4.8m will be used as working capital.

Government measures expected to stabilise corn prices. During 2H06,

we saw corn prices increase to a high of RMB1,200/ tonne. As corn

prices were still relatively high in 4Q06, we believe that margins will be

slightly compressed. Going forward, margins could potentially rise with

the shift in product mix towards the higher-margin HFCS, assuming corn

prices remain fairly stable. We are reassured by the Chinese

government?s recent efforts to control corn prices from soaring. It was

recently announced that regulations would be imposed to control

companies using grain as raw material in biofuel production. From 2007

onwards, companies which plan to produce biofuels are required to

seek regulatory approval. Since Nov 06, the Chinese government has

allowed increases in the supply of grain by releasing some of its

national stockpile to offset price jumps. We believe that such measures

will keep corn prices from increasing substantially in the short term.During 2H06,

we saw corn prices increase to a high of RMB1,200/ tonne. As corn

prices were still relatively high in 4Q06, we believe that margins will be

slightly compressed. Going forward, margins could potentially rise with

the shift in product mix towards the higher-margin HFCS, assuming corn

prices remain fairly stable. We are reassured by the Chinese

government?s recent efforts to control corn prices from soaring. It was

recently announced that regulations would be imposed to control

companies using grain as raw material in biofuel production. From 2007

onwards, companies which plan to produce biofuels are required to

seek regulatory approval. Since Nov 06, the Chinese government has

allowed increases in the supply of grain by releasing some of its

national stockpile to offset price jumps. We believe that such measures

will keep corn prices from increasing substantially in the short term.

Maintain BUY, target price: S$1.05. The new special feed plant in

Shandong will have a capacity of 20k per annum. LUBC hopes to sell it

for RMB2,500/tonne, twice the price it is currently commanding for byproducts.

As we have limited information on special feed products, we

are raising the ASP of by-products by 21% to RMB1, 500/tonne. As a

yardstick, China Sun Bio-Chem is selling its by-products for approx.

RMB1,500/ tonne. As LUBC is ramping up HFCS production, we have

also raised the sweeteners ASP by 5% per annum to RMB2,100/ tonne in

FY07. Having taken into account the dilution impact, interest cost

savings and increase in ASPs, we are raising our FY07 and FY08 net

earnings 3-6%. We maintain our BUY call on LUBC with a target price

of S$1.05 based on DCF valuation.The new special feed plant in

Shandong will have a capacity of 20k per annum. LUBC hopes to sell it

for RMB2,500/tonne, twice the price it is currently commanding for byproducts.

As we have limited information on special feed products, we

are raising the ASP of by-products by 21% to RMB1, 500/tonne. As a

yardstick, China Sun Bio-Chem is selling its by-products for approx.

RMB1,500/ tonne. As LUBC is ramping up HFCS production, we have

also raised the sweeteners ASP by 5% per annum to RMB2,100/ tonne in

FY07. Having taken into account the dilution impact, interest cost

savings and increase in ASPs, we are raising our FY07 and FY08 net

earnings 3-6%. We maintain our BUY call on LUBC with a target price

of S$1.05 based on DCF valuation.