Qian Hu 2Q profit down 4.1% to $0.95mln

Negative global events pulled down revenue for the second quarter by 4.1% to $22.7 million.

2Q10 was a deviation from the normal business trend of Qianhu. In the past year, Qianhu business remained resilient in the face of recession. Management cited the quadruple whammies of the European airports shutdown, World Cup drawing people’s attention away from ornamental fish purchase, riots in Bangkok affected accessories sale, and the drought experienced in Malaysia that affected production of the dragon fish, according to a Philips Securities Research paper.

Product segments analysis. Revenue from ornamental fish was $11.3 million (-5.6% y-y, -8.2% q-q) and contributed 50% to total revenue. Accessories sales was $8.6 million (-6.3% y-y, +6.3% q-q) and contribution increased to 38%. The plastic business was stable with revenue of $2.8 million (+10.4% y-y, 0.0% q-q) and accounted for 12% of total revenue. Long term plan is still to have equal contributions from both the fish and accessories segments.

Profit margins. Profit margins continue to slide in 2Q10. Gross profit margin was 30.6% while net profit margin was 4.0%. Profitability margin of the fish segment fell from a high of 20% in 4Q09 to 7% IN 2Q10. As cautioned by management during the 1Q10 results release, a severe drought had caused lower production of the dragon fish which will affect sales into the second quarter. Profit margins for the accessories and plastic segments remained stable. As the fish segment contributes 50% of total revenue, the lower profitability has affected the overall gross and net profit margins.

Geographical analysis. Other Asian countries made good growth in 2Q10, however the opposite is true for the Europe region. Europe sales dropped 63% from a year ago to just $1.9 million. As cited above, the European airports shutdown had affected exports to the Europe region.

2Q10 was an exceptional quarter that had caused a dent to this year’s earnings trend. However Philips Securities Research sees things normalizing in 3Q10 and 4Q10, given that such events are one-off and not expected to recur. The self-bred dragon fish should lift margins from 3Q10. The research firm is now more wary of external shocks that could throw things haphazard. It lowered its FY10E revenue slightly by 1.3% to $96.4 million and earnings per share by 18.4% to 1.34 cents. It also continues to peg its fair value to FY10E book value, however it has lowered the fair value slightly from $0.18 to $0.17.

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