A 60% stake in Shanghai Rigang Non-crystal Metal Co., Ltd. has been transferred between four companies since 2005, implying a tough time for non-crystal iron core manufacturers. In 2005, the sales volume of non-crystal metal of Shanghai Zhixin Electric Co., Ltd. (600517) increased significantly, marking a turning point in the industry.

Shanghai Zhixin Industry Co., Ltd., the controlling shareholder of Shanghai Zhixin Electric, has held a 40% stake in Shanghai Rigang since 1999. In recent days, Shanghai Zhixin Electric planned to acquire the remaining 60% stake in Shanghai Rigang, following which Shanghai Zhixin Electric will be able to improve its research capabilities via exchange of core technology with Shanghai Rigang, obtain self-made materials for production rather than outsourcing and realize an increase in gross profit margin. In addition, according to the needs of its non-crystal metal transformer business, Shanghai Zhixin Electric plans to gradually expand Shanghai Rigang's iron core production to over 30,000 tons annually by 2010.

Shanghai Rigang produced approximately 13,000 tons of iron core in 2007, and plans to produce between 15,000 and 18,500 tons in 2008. Furthermore, subsidiaries of Shanghai Zhixin Electric have signed contracts with Shanghai Rigang to supply non-crystal iron ores at RMB 37.8 per kg (taxes included) for 2008.

Analysts predict a 4.2% increase in gross profit margin and a 130% increase YOY in net profit for Shanghai Zhixin Electric. As the proposal related to the acquisition of Shanghai Rizhao must be submitted to relevant government authorities for examination, analysts have maintained their previous profit expectations for Shanghai Zhixin Electric: RMB 0.83 in EPS for 2008, RMB 1.17 for 2009 and RMB 1.50 for 2010. Given a valuation of 30 times and 35 times P/E based on estimated 2008 and 2009 EPS, the reasonable valuation range should be between RMB 29.00 and RMB 35.00, thus analysts have maintained a 'Strong Buy' rating on the stock.

Source: www.sina.com.cn

Date: 30 Jul 2008

CN01/FL/LZ/BT/KM