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Sino Hua-An's 2Q10 renevue registered a growth of more than 13% to RM 342.5 million y-o-y because of improved selling price of coke The higher revenue was mainly attributable to higher selling price boosted by small recovery in the steel consumption in China domestic market. ASP of coke in 2Q09 was only RMB 1,460 per ton as compared to RMB 1,872 per ton in 2Q10. The price performance of oil-based by-products (from coking process) like tar oil and crude benzene were commendable and on the high side in 2Q10, i.e. in line international crude oil price exceeding USD 70 per barrel.

Cost of goods sale:
As for COGS for the quarter ended 30 June 2010 under reviewed, our main raw material (i.e. coking coal) price was not favourable to us. Average coking coal price in 2Q09 was RMB 1,036 per ton but in 2Q10 the price was higher at RMB 1,308 per ton, which means an increase of 26.2%. Again, the coking coal price hike was mainly due to temporarly shortage because of few cases of reported coal mines explosion in 1H10 prompting the Chinese government to implement stricter inspections on existing ones causing the extraction of coal slower than expected. However, lately the coking coal price has been ‘normalized' i.e. dropped after many traders imported large number of coking coal from overseas (like Russian and Mongolian) into China. In end-July 2010, it was reported that the coking coal dip to less than RMB 1,200 per ton.

Sino Hua-An reported a ‘return to the black' results with a decent profit after tax of RM4.8 million in 2Q10 after 2 consecutive quarters of loss making since 3Q09.

As at 30 June 2010 net cash position at RM 24.7 million (no external borrowing) and net asset per share at RM 0.63. Also, stock turnover, debtors' day & creditors' day were below 30 days.

Industry updates (steel and coke):
Overall, China is still facing with oversupply of steel in China. Inventory destocking currently on-going for long and flat products. More than 40% of steel mills in China are cutting back production to restore steel prices due to negative cash margins in 2Q10. To counter the over-capacity problems, the Chinese government through Ministry of Industry & Information Technology on 12 July 2010 announced its plan to step up consolidate the steel industry this year by closing down small mills (especially those obsolete facilities) and improving production standards. Its new policy stated the pledge to eliminate those mills produced < 1 mil tons of crude steel in 2009. Also, those steel mills that produced high-end steel products need to at least produce > 300,000 tons or will face close down risk as well. China plans to reduce the number of steel mills from 800 to 200 through M&A and also to eliminate those outdated production capacity. Besides the move is also aim to curb the overheat investment in steel industry, enable the government to monitor the proper allocation and utilisation of iron ore rationally. However, the aforesaid move is likely to take a few years to play out fully.
Coke manufacturers which are categorized as outdated and highly polluted are also required to close down. A total of 192 smaller and inefficient coke factories will be forced to close down before 30 September 2010 which included 8 coke factories in Shandong Province with total production capacity of 1.4 million tons. Sino Hua-An being a coke manufacturer with modern production facilities in Shandong Province, the move is seen as favourable to us in the long term as the saying goes ‘less people more share'. Therefore, in a situation of lesser coke suppliers, the market forces will gradually push up the coke price there.

Economy update:
China 1Q10 GDP of 11.9% and 2Q10 of 10.3% is commendable. China's Apr, May and June 2010 PMI index reading were 55.7, 53.9 and 52.1 respectively. Obviously, the economy is expanding (PMI: a figure above 50 indicates expansion and a figure below 50 shows contraction). According to National Bureau of Statistic of China, for the 1st 7 months of 2010, fixed asset investment reached RMB 11.9 trillion or up 24.9% y-o-y. As for retail sales for consumer goods for the 1st 7 month in 2010 were RMB 8.4 trillion or growth 18.2% y-o-y. CPI for June and July were 2.9% and 3.3% respectively.

Steel price in China has hit rock bottom in end-July 2010 (after witnessing active destocking activities in the past months usually happen in summer) and its price has started to ‘U-turn' since then. Rebar price hit a low of RMB 3850 per ton in end-July 2010 and in mid-Aug 2010 the price has reached more than RMB 4,200 per ton. With steel mills cutting down production capacity, coupled with government's consolidation actions, steel price is expected to gradually climb up from now till year end. We are cautiously optimistic that the steel demand would probably slowly return to ‘normal' by year end but at the same time we also reckon that 2H10 period would still be subject to some challenges and external volatility.