Sino Grandness

Sino Grandness: 1Q12 net profit of Rmb57m (+81% yoy, +162% qoq) came in better-than-expected. Revenue grew 61% to Rmb285m and GP Margins added 3ppt to 38%. Nonetheless, receivables were higher at Rmb332m (4Q11: Rmb298m), resulting in negative free cash flow of Rmb33m and lower ending cash balance of Rmb45m (4Q11: Rmb82m). DMG revise FY12-FY13 earnings estimates up by 21%-25% to RMB148m-RMB184m respectively following a strong set of 1Q12 results. However, adjust target multiple down to 3.5x (old: 4.0x) to reflect volatile margins observed since 1Q10 and surprise audit adjustments for higher expenses in 4Q11. With current share price offering less than 10% downside potential, house upgrade the counter to NEUTRAL at a slightly higher TP of $0.39