Synear - profit guidance

Synear released a profit guidance for its upcoming 1QFY08 results. It's good that they update investors of any news that crop up, so that expectations can be managed. Here are the key points:

1. Sales is for 1Q08 is expected to be 10% lower than 1Q07, though higher than sales in 4Q07. This is due to the snowstorm in Jan 08 which had affected the transportation and sales of the Group's products to southern China.

4Q07 revenue is 595,609,000 RMB
1Q07 revenue is 719,923,000 RMB

Management is expecting 1Q08 sales to be between 595,609,000 RMB to 647,930,700 RMB.

2. Cost of sales continued upward trend in 1Q08. The group intends to focus on their premium brand products with higher prices to mitigate the drop in margins. Looks like synear is being squeezed on top and bottom.

3. Expenses due to advertising will be increased to create brand awareness. Short term, this will depress net margins further. But I think management did a good move - with proper branding, they will create a moat that will ensure long term success. It'll be truly disappointing to see them cut expenses due to the difficult circumstances they are in just to see a good quarterly report card.

4. New plants at chendu is back on track with a utilization rate of 30% in 2008. Trial operations begins by end of march 2008. With higher utilization of their assets, we could potentially see a higher ROE since they would have higher asset turnover. But dropping net margins might neutralize this partially or fully.

Lastly, management concluded by saying fundamentals remain intact. Demands for their products are still strong. Well, that remains to be seen. Let's see how the 1Q08 results work out.