China Automation warns of 2012 profit drop

OSK HK forecasts a 5% net profit decline.

OSK Securities Hong Kong Limited  China Automation (“CAG”) announced a profit warning regarding its 2012 annual results after market close today. According to the announcement, the company expects to record a decrease in 2012 net profit due to i) suspension or slow-down for a majority of rail-related signaling system projects, and ii) a significant provision for doubtful debts to be recognised in relation to aged account receivables (A/R).

Billy Leung, Vice President for Research Dept of OSK-DMG notes that while  they have accounted for a slow-down in rail-related projects and this has also been factored in by the market in their view; the recognition for provision of doubtful debts comes to surprise for them.

"After speaking with the financial controller of CAG, we understand that their auditors have suggested that A/R of over 2 years are required to be fully provided for due to: i) the large amount of A/R related to railway projects and ii) the lack of transparency in the domestic rail market currently. We estimate that the A/R in issue at roughly RMB60m, which means CAG will need to make a similar provision in 2012. This accounts for roughly 25% of our FY12F net profit forecast for CAG, translating to an estimated net profit decrease of about 5% y-o-y," he said.

"While we expect the share px to react negatively on this announcement, it will have limited impact on our TP of HKD2.13 which is based on 7x FY13F PE or one standard deviation below its 5-years historical forward average. We will be hosting a non-deal roadshow for CAG tomorrow and provide further feedback then," he added.