An interesting candidate which has fallen out of favour with the brokers - a qucik check on Bloomberg shows that most analysts there covering the stock have a HOLD and a fair value price of $0.16 to S$0.35.   The share price below shows that it is a potential candidate for the Big One with its share price from a high of $2.50 to the current price of S$0.19.  The price decline started in late 2007 when crude oil prices started to rise sharply as crude oil prices have a major impact on their raw material costs. (see chart on crude oil prices below).  Therefore with crude oil price now sharply lower.....the earnings of China Sky Chemical should improve......lets check its balance sheet and its earnings outlook before concluding that its a good candidate.

China Sky Chemical share price chart

Crude oil price chart

The nine month 2008 results probably tell us why the stock continues to languish and why brokers have downgraded it to a HOLD.   Q3-2008 net profit declined by 43% on a 10% decline in turnover and a 25% decline in pretax profit.   The surge in the tax rate was due to the expiration of its tax holiday.  So investors should be using a much higher tax rate going forward.  Raw material prices have declined by 30% but demand for their product remains weak as the business of its major customers has been affected by the global economic slump.    The outlook going forward is uncertain and set to deteriorate further according to their forward looking statement:

"As a consequence of all these factors, the Group expects its profitability to be affected. Sales and gross margins for 4Q2008 are expected to be lower than the first three quarters of FY2008 and the directors do not expect any significant improvements in the first half of FY2009. Against this background, the Group will focus on streamlining its operations with a view to contain overheads and other operating costs to preserve its profitability."

The balance sheet looks reasonable - cash of RMB 1.15bn, debt of RMB 66mn.  So net cash of RMB1.34 per share or about S$0.27 per share.  Definitely worth keeping on our list for the Big One.....to be followed up by a visit with management.  I understand that their Q4-2008 and FY2008 results will be released on Feb 25-26, 2009.  MIght as well wait for this to see if there is more bad news on the cards and if the cash is still there or massively depleted into receivables or inventory.....