Press Releases

Hong Kong, May 13, 2010 (ABN Newswire) - Fufeng Group (HKG:0546) (PINK:FFNGY) has announced it will issue Rmb-dominated convertible bonds (CBs) to raise Rmb 820mil-1bil. As the initial conversion price (HK$7.03) is below both of the current share price and our current PT of HK$6.7, there is no dilution impact on our modeled numbers at present. Our initial take on the CB issue is that it is slightly positive to the company's financials as it can lock the company's interest costs in face of a potential interest rate hike. We leave our model, rating and PT unchanged.

Share capital enlarged by 10% if fully issued and converted: Details of the CB are shown in the exhibit below. We would like to highlight: (1) the conversion price of HK$7.03 is ~20% above the current share price and 5% above our PT of HK$6.7. (2) Fufeng will pay Rmb37mil-46mil of CB interest expense (settled in US$ in cash semi-annually), but we believe that this will largely be offset by an interest saving from a lower bank borrowing. The CB coupon rate is 4.5%, lower than the company's current borrowing rate (~6%, according to management). We believe the CB can help fix the company's interest costs in face of a potential interest rate hike.

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Gross Proceeds                     Rmb 820mil - Rmb 1025mil
                                 (~US$ 120mil - US$ 150mil)
No. of new shares to be issued              132.6-165.7 mil                      
% Increase                                         8% - 10%
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Annual Coupon rate (%)            4.5% (paid semi-annually)
Conversion Price (HK$)                                 7.03
Maturity                          Five years (Due Apr 2015)
CB Holder's Put Option           At year 3 (1st April 2013)
CB Listing                        Singaopore Stock Exchange
Use of Proceeds              Expansion capex, M&As, General
                                            working capital
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Source: Company

For a better understanding, we have also calculated below the potential dilution impact on the company's EPS if the CB is fully converted now. However, as both the share price and PT is below the conversion price, there should not be any dilution due to the new shares to be issued from the CB conversion.
Potential Impact

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Our current estimates                       FY10      FY11
Net Profit (Rmb mil)                        1049      1531
EPS (Rmb)                                   0.63      0.82
Impact (if Optional bonds issued in full)
Net Profit (Rmb mil)                        1,033     1,341
EPS                                         0.57      0.73
EPS dilution effect                        -10.2      -10.5
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Source: Piper Jaffray Asia Securities

PRICE TARGET AND JUSTIFICATION:

We rate Fufeng Overweight with a PT of HK$6.7 (9.4x FY10E EPS of HK$0.72).

For the complete Fufeng Group Research Report, please refer to the following link:

http://www.abnnewswire.net/media/en/docs/62855-PJ-Mar-10-(100329).pdf

Contact

Fufeng Group Limited Carine Wong Tel: +852-3185-0300 carinewong@fufeng-group.com.hk