Fu Yu Corporation - 2Q07 should still be a lossFu Yu Corporation

2Q07 revenue may beat our forecast. We have forecasted 2Q07 revenue of S$95.5m and operating loss of S$2.6m for Fu Yu Corporation (FUYU). However, based on checks with other suppliers to a key common customer for printers, the delayed program that we had highlighted in our earlier report has maintained strong unit shipment for the months of April and May, following an unseasonably strong 1Q07. Therefore, we believe FUYU’s 2Q07 revenue may instead grow QoQ in the single digit percentage range compared to 1Q07’s sales of S$104.4m. FUYU could therefore record a small operating profit for 2Q07, but only if there are no further significant provisions at its China operations.
Recent share price appreciation perhaps ahead of fundamentals. FUYU has appreciated 20.3% since our last report, and was as high as S$0.375 on 29th June 2007. We are not as optimistic about FUYU compared to the market, as indicated by the recent price appreciation. We believe FUYU’s China operations is still in recovery mode and will probably have better results only in FY08. We are also uncertain if further provisions will be required for China.
Retained fair value and recommendation. We have left our revenue estimate alone as we feel that the potential marginal difference between actual 2Q07 results and our forecast will not be material. FUYU will report 2Q07 results within the first two weeks of August 07. We have retained our fair value peg for FUYU to 1x FY07E NTA, i.e. S$0.46 per share. We repeated our view in the last report that we believe FUYU’s stock price has bottomed but advised investors to avoid the stock for the time being as we were unable to identify a catalyst. Also while operations are certainly improving, we still see more work ahead for FUYU before sustainable growth can re-establish. Contrary to our view, FUYU’s share price seems to have found a life of its own in the past two months. In spite of that, we are still unable to identify any fundamental catalyst that could sustain the stock’s momentum. In fact, we believe risk is on the downside at this price level. Therefore, although FUYU is still 22.8% below our fair value, we feel that there are better investment alternatives with more attractive risk/reward. We advise investors to sell into the current strength of its share price.