Comment on Results Outlook Recommendation
2Q07 results were in line, with
bottomline up by 23% to y-o-y
HK$88.3m and revenue up by 27% yo-
y to HK$120m. The firm
performance was led by the Group’s
toll road business, which registered a
36% y-o-y increase in contribution to
overall PBT in 2Q07. This was
underpinned by increase in traffic
volume for both Guiliu Expressway
and Guihuang Highway as well as rate
hike increases for both these toll roads
during the quarter
An interim dividend of S 2.75cts was
declared, the same as last year.
We remain positive on the prospects
for CMH, whose earnings should be
driven in the long run by increasing
utilisation of its toll roads, as China’s
economy powers on and car
ownership in the PRC continues to rise.
Looking ahead, we are expecting a
stronger second half for the Group,
driven by a 30% rate hike increase for
Guihuang Highway w.e.f. 1 June as
well as an 8% rate hike for Guiliu
Expressway w.e.f. 10 May.
Offering a prospective net yield over
6.5%, we maintain our BUY call on CMH
(Pacific). Our target price of S$1.18 is
based on a target net yield of 5.5% for
FY08.
A potential catalyst for re-rating could
be in the form of toll road acquisitions,
following a recent corporate
restructuring exercise to bring majority
ownership of the Company directly
under the China Merchants Group from
China Merchants International
previously. We have not assumed any
acquisitions in our estimates.
Aqua-Terra Supply Co - Procuring a bright future
Story: Aqua-Terra (ATS) is an integrated service provider and
procurement specialist to the oil and gas industry, which has one
of the largest regional distributorships for 23 brands, and carries a
range of >160 consumable products. ATS’ consumable products
offering can easily meet more than 20% of its customers’ needs in
an otherwise fragmented industry.
Point: We believe ATS’ growth momentum will be augmented
by: 1) its success in securing projects as an integrated service
provider and procurement specialist, 2) more cross-selling
opportunities as it taps into the growing business network of KS
Energy, which is its parent company, and 3) its proven growth-byacquisition
strategy to expand product offerings and regional
customer network.
Relevance: We forecast ATS’ net profit to grow 84% y-o-y to a
record S$14.2m in FY07. Its net profit CAGR is expected to be 42%
in our FY07-09 forecast periods. We have a fair value of S$0.84 for
ATS, using 15x FY08 PER. The price upside potential to our fair
value estimate is 66%. As such, we are initiating coverage on ATS
with a BUY rating.
Moving up value chain. ATS’ success as a one-stop procurement specialist
for the oil and gas industry is expected to provide better earnings visibility
by entering into more long-term supply contracts. It has won a S$68m
order to provide integrated procurement and management services from
PRC-based China National Offshore Oil Corp (CNOOC) Oil Base Group Ltd
in early 2007, and a US$14m contract win to procure and supply of marine
equipment & systems in Indonesia in August 2006. These will be
recognised in our FY07-09 forecast periods.
Growth-by-acquisition strategy is workable. This strategy offers ATS the
fastest way to build up its product and networking capabilities to ride on
the booming oil and gas industry. We believe ATS’ growth-by-acquisition
strategy will work as: 1) ATS has successfully made earnings accretive
purchases at low-to-mid single digit forward PER valuation from the pool
of unlisted smaller distributors, and 2) ATS has enabled acquired entities
thrive under its enlarged business umbrella. We estimate the contributions
from entities acquired before 2006 to account for 70-75% of the group’s
PBT in the FY05-06 periods.
Groundworks for growth. We expect ATS’ distribution business to benefit
in the FY07-09 forecast periods through: 1) its initiatives to further
penetrate the Chinese offshore market, 2) the strong rig deliveries in
Singapore and 3) the cross-selling opportunities and business referrals as
part of Mr. Kris Wiluan’s group of companies, which include KS Energy
and Citra Tubindo.
Record earnings year in FY07. We forecast ATS to achieve S$14.2m in
net profit in FY07, representing 84% y-o-y growth. This can be
attributed to the operating leverage effect brought about by ATS’
steady gross profit margins and strong revenue growth. We project ATS’
net profit CAGR to be 42% in our FY07-09 forecast periods.
procurement specialist to the oil and gas industry, which has one
of the largest regional distributorships for 23 brands, and carries a
range of >160 consumable products. ATS’ consumable products
offering can easily meet more than 20% of its customers’ needs in
an otherwise fragmented industry.
Point: We believe ATS’ growth momentum will be augmented
by: 1) its success in securing projects as an integrated service
provider and procurement specialist, 2) more cross-selling
opportunities as it taps into the growing business network of KS
Energy, which is its parent company, and 3) its proven growth-byacquisition
strategy to expand product offerings and regional
customer network.
Relevance: We forecast ATS’ net profit to grow 84% y-o-y to a
record S$14.2m in FY07. Its net profit CAGR is expected to be 42%
in our FY07-09 forecast periods. We have a fair value of S$0.84 for
ATS, using 15x FY08 PER. The price upside potential to our fair
value estimate is 66%. As such, we are initiating coverage on ATS
with a BUY rating.
Moving up value chain. ATS’ success as a one-stop procurement specialist
for the oil and gas industry is expected to provide better earnings visibility
by entering into more long-term supply contracts. It has won a S$68m
order to provide integrated procurement and management services from
PRC-based China National Offshore Oil Corp (CNOOC) Oil Base Group Ltd
in early 2007, and a US$14m contract win to procure and supply of marine
equipment & systems in Indonesia in August 2006. These will be
recognised in our FY07-09 forecast periods.
Growth-by-acquisition strategy is workable. This strategy offers ATS the
fastest way to build up its product and networking capabilities to ride on
the booming oil and gas industry. We believe ATS’ growth-by-acquisition
strategy will work as: 1) ATS has successfully made earnings accretive
purchases at low-to-mid single digit forward PER valuation from the pool
of unlisted smaller distributors, and 2) ATS has enabled acquired entities
thrive under its enlarged business umbrella. We estimate the contributions
from entities acquired before 2006 to account for 70-75% of the group’s
PBT in the FY05-06 periods.
Groundworks for growth. We expect ATS’ distribution business to benefit
in the FY07-09 forecast periods through: 1) its initiatives to further
penetrate the Chinese offshore market, 2) the strong rig deliveries in
Singapore and 3) the cross-selling opportunities and business referrals as
part of Mr. Kris Wiluan’s group of companies, which include KS Energy
and Citra Tubindo.
Record earnings year in FY07. We forecast ATS to achieve S$14.2m in
net profit in FY07, representing 84% y-o-y growth. This can be
attributed to the operating leverage effect brought about by ATS’
steady gross profit margins and strong revenue growth. We project ATS’
net profit CAGR to be 42% in our FY07-09 forecast periods.
Starhub - Delivers on promise
Comment on Results Outlook Recommendation
Starhub reported a net profit of S$80.8m,
up 7% y-o-y and 15.4% q-o-q. Excluding
the impact of higher tax rate, the results
are broadly in line with our estimate of
S$83m. Starhub has proposed a 4 cents
interim dividend and raised its full year
dividend guidance to a minimum of 15.5
cents from 14 cents earlier.
Broadband segment was the top
performer in revenues. Revenue grew
10.8% y-o-y with broadband revenue
registering the fastest growth of 15.6%.
Overall service EBITDA margin of 35.3% is
better than 34.4% last year. While there
was an improvement in EBITDA margins in
all the three segments, margins for mobile
business improved significantly by 3 ppt to
43.2% because of (1) focus on higher
margin, pre-paid service that lowered
overall customer acquisition costs (2) efforts
on retention of high-value post-paid
customers with higher minutes of usage
(MoU), even at the cost of market share.
In our view, StarHub is well on track to
surpass its official guidance of “high single
digit revenue growth” and “service EBITDA
margin around 34%” for the full year. We
have slightly trimmed down our earnings
estimates for FY07 and FY08 by 3% each to
factor higher tax rate of 21% up from 18%
assumed earlier.
Expect a stable 3Q07 to be followed by a
strong 4Q07. Pay TV would be the weakest
link in 3Q07 as amortisation of EPL content
cost would kick-in, eroding the pay TV
margins. The projected increase of S$4 in
monthly fee of basic channels would not be
sufficient to cover the higher cost of
content. A hike of S$10 in monthly fee for
sports channels would come into effect in
4Q07, thus helping to sustain the margins.
We suspect, with more advertising revenue,
StarHub would be able to stem the decline
in pay TV margins in the next 6-9 months.
Maintain BUY at our DCF-based (WACC 7%,
terminal growth rate 1%) 12-month target
price of S$3.45.
Unclear picture on National Broadband
Network (NBN). The request for proposal
(RFP) for NBN should be out in 3Q07 and
IDA is expected to award the project
towards the end of 2007. StarHub is one of
the 12 bidders, who have been prequalified
by IDA. It will take another 3-5
years to build the high-speed network and
the operator would need to provide access
to the network at regulated prices to other
service providers. In our view, despite
government subsidy, the project cost would
be substantial with a long break-even
period. Moreover, a completely new
network could introduce excess broadband
capacity in the island, eroding profitability
of all the players. Alternatively existing
networks could be upgraded to provide
high-speed broadband service rather than
building a new network from scratch. IDA’s
decision would be important in this regard.
DBS Group Research . Equity
Starhub reported a net profit of S$80.8m,
up 7% y-o-y and 15.4% q-o-q. Excluding
the impact of higher tax rate, the results
are broadly in line with our estimate of
S$83m. Starhub has proposed a 4 cents
interim dividend and raised its full year
dividend guidance to a minimum of 15.5
cents from 14 cents earlier.
Broadband segment was the top
performer in revenues. Revenue grew
10.8% y-o-y with broadband revenue
registering the fastest growth of 15.6%.
Overall service EBITDA margin of 35.3% is
better than 34.4% last year. While there
was an improvement in EBITDA margins in
all the three segments, margins for mobile
business improved significantly by 3 ppt to
43.2% because of (1) focus on higher
margin, pre-paid service that lowered
overall customer acquisition costs (2) efforts
on retention of high-value post-paid
customers with higher minutes of usage
(MoU), even at the cost of market share.
In our view, StarHub is well on track to
surpass its official guidance of “high single
digit revenue growth” and “service EBITDA
margin around 34%” for the full year. We
have slightly trimmed down our earnings
estimates for FY07 and FY08 by 3% each to
factor higher tax rate of 21% up from 18%
assumed earlier.
Expect a stable 3Q07 to be followed by a
strong 4Q07. Pay TV would be the weakest
link in 3Q07 as amortisation of EPL content
cost would kick-in, eroding the pay TV
margins. The projected increase of S$4 in
monthly fee of basic channels would not be
sufficient to cover the higher cost of
content. A hike of S$10 in monthly fee for
sports channels would come into effect in
4Q07, thus helping to sustain the margins.
We suspect, with more advertising revenue,
StarHub would be able to stem the decline
in pay TV margins in the next 6-9 months.
Maintain BUY at our DCF-based (WACC 7%,
terminal growth rate 1%) 12-month target
price of S$3.45.
Unclear picture on National Broadband
Network (NBN). The request for proposal
(RFP) for NBN should be out in 3Q07 and
IDA is expected to award the project
towards the end of 2007. StarHub is one of
the 12 bidders, who have been prequalified
by IDA. It will take another 3-5
years to build the high-speed network and
the operator would need to provide access
to the network at regulated prices to other
service providers. In our view, despite
government subsidy, the project cost would
be substantial with a long break-even
period. Moreover, a completely new
network could introduce excess broadband
capacity in the island, eroding profitability
of all the players. Alternatively existing
networks could be upgraded to provide
high-speed broadband service rather than
building a new network from scratch. IDA’s
decision would be important in this regard.
DBS Group Research . Equity
Beauty China Holdings Ltd - Secrets of Beauty
Beauty China Holding Ltd (BCH) used to be a brand management company that
owns and manages two cosmetic brands Colour Zone and CharmingLady,
which targeted China’s mass market. Recently, BCH expanded its business to
produce cosmetic products in China, which makes it an integrated cosmetics
player. Colour Zone is targeting trendy women between 18-28 of age, and
CharmingLady is targeting office-going women above 25. Colour Zone
products are now distributed via more than 1275 outlets in all provinces
throughout China. CharmingLady products are available in around 150
department store counters in China.
Niche market player
BCH is well positioned in a niche market, especially for its Colour Zone brand. Colour
Zone targets young girls, who are 18-28, with product price ranging from RMB15 to
109. Usually, we don’t see established brands competing at this relatively low price.
Promising industry
China’s cosmetic industry is a booming industry. In our opinion, China’s cosmetic
industry will benefit from increasing consumer-spending power, booming service
sector, increasing interest in physical appearance, and modernizing retail and
distribution networks.
Strong and stable track record
In the past seven years, BCH has experienced strong and stable growth. The number
of its outlets grew from 450 in year 2003 to 1275 March 2007. It achieved CAGR of
revenue and net profits of 38.4% and 33.4% respectively since year 2000.
Resume coverage with a buy at fair value of S$1.65. We estimate the net earning
for FY07 and FY08 as HKD 168 mln and HKD 211 mln, which translates into a
growth of 24.4% and 26.1% in the next two years. Based on 21x, 18x and 14x PE for
FY06, FY07 and FY08, we arrive at a fully diluted fair value of S$1.65 per share,
which represents an upside of 41% from its previous close.
owns and manages two cosmetic brands Colour Zone and CharmingLady,
which targeted China’s mass market. Recently, BCH expanded its business to
produce cosmetic products in China, which makes it an integrated cosmetics
player. Colour Zone is targeting trendy women between 18-28 of age, and
CharmingLady is targeting office-going women above 25. Colour Zone
products are now distributed via more than 1275 outlets in all provinces
throughout China. CharmingLady products are available in around 150
department store counters in China.
Niche market player
BCH is well positioned in a niche market, especially for its Colour Zone brand. Colour
Zone targets young girls, who are 18-28, with product price ranging from RMB15 to
109. Usually, we don’t see established brands competing at this relatively low price.
Promising industry
China’s cosmetic industry is a booming industry. In our opinion, China’s cosmetic
industry will benefit from increasing consumer-spending power, booming service
sector, increasing interest in physical appearance, and modernizing retail and
distribution networks.
Strong and stable track record
In the past seven years, BCH has experienced strong and stable growth. The number
of its outlets grew from 450 in year 2003 to 1275 March 2007. It achieved CAGR of
revenue and net profits of 38.4% and 33.4% respectively since year 2000.
Resume coverage with a buy at fair value of S$1.65. We estimate the net earning
for FY07 and FY08 as HKD 168 mln and HKD 211 mln, which translates into a
growth of 24.4% and 26.1% in the next two years. Based on 21x, 18x and 14x PE for
FY06, FY07 and FY08, we arrive at a fully diluted fair value of S$1.65 per share,
which represents an upside of 41% from its previous close.
Delong Holdings Ltd: Resilient performance despite rough industry
Resilient performance. Despite government regulatory cooling measures
in the steel industry through sudden tax rebate cuts in May 07, hot-rolled
steel coil (HRC) producer Delong Holdings (DLNG) gave a credible showing
with 1H07 sales rising 37% YoY to S$646.2m. 1H07 net profit rose 26.1%
YoY to S$77m despite incurring its first year of tax expense of 15%. On a
quarterly basis, 2Q07's bottomline came in 8.1% YoY lower than 2Q06 due
to rising raw material costs and slightly lower ASPs as the supply of steel
increased locally.
Outlook for Chinese steel industry. China's macro control policies have
somewhat cooled the red hot construction and machine building industries,
slowing the demand for steel consumption. Despite these measures,
industry watchers anticipate a 4-5% YoY increase in steel consumption in
China for FY07 and even stronger consumption in FY08.
Optimistic of prospects in 2H07. DLNG has reported that its diverse pool
of customers from the booming Bohai Economic Circle continue to display
strong demand for its HRC products despite the rise in supply. Management
has indicated that its HRC ASPs have already stabilised in Jul 07 (just 1
month after government intervention) and is expected to maintain or even
rise incrementally in 2H07 as it focuses on selling better grade HRCs.
Rising raw material costs will also be mitigated when its Phase 3 technical
enhancements are completed.
Waiting for the big acquisition. Management has updated that it is in
deep discussion with 2 potential acquisition targets to incrementally achieve
10m ton/yr capacity by 2010. In our last report, we forecasted that DLNG
will need to acquire about 2m tons/yr to achieve this target. We anticipate
that DLNG will not acquire any plant with capacity larger than 3-4m tons/yr
in its maiden M&A to prevent overwhelming integration issues.
Strong outlook. As capacity reaches 3m tons/yr by year end with the
plant at full utilisation and M&A to increase output, we are confident that
FY07/08 will be strong years. DLNG's exposure to raw material price
increases will also be mitigated when its 2 new furnaces to process pig
and molten iron come online progressively by end FY07. We maintain our
BUY rating and fair value of S$4.56.(
in the steel industry through sudden tax rebate cuts in May 07, hot-rolled
steel coil (HRC) producer Delong Holdings (DLNG) gave a credible showing
with 1H07 sales rising 37% YoY to S$646.2m. 1H07 net profit rose 26.1%
YoY to S$77m despite incurring its first year of tax expense of 15%. On a
quarterly basis, 2Q07's bottomline came in 8.1% YoY lower than 2Q06 due
to rising raw material costs and slightly lower ASPs as the supply of steel
increased locally.
Outlook for Chinese steel industry. China's macro control policies have
somewhat cooled the red hot construction and machine building industries,
slowing the demand for steel consumption. Despite these measures,
industry watchers anticipate a 4-5% YoY increase in steel consumption in
China for FY07 and even stronger consumption in FY08.
Optimistic of prospects in 2H07. DLNG has reported that its diverse pool
of customers from the booming Bohai Economic Circle continue to display
strong demand for its HRC products despite the rise in supply. Management
has indicated that its HRC ASPs have already stabilised in Jul 07 (just 1
month after government intervention) and is expected to maintain or even
rise incrementally in 2H07 as it focuses on selling better grade HRCs.
Rising raw material costs will also be mitigated when its Phase 3 technical
enhancements are completed.
Waiting for the big acquisition. Management has updated that it is in
deep discussion with 2 potential acquisition targets to incrementally achieve
10m ton/yr capacity by 2010. In our last report, we forecasted that DLNG
will need to acquire about 2m tons/yr to achieve this target. We anticipate
that DLNG will not acquire any plant with capacity larger than 3-4m tons/yr
in its maiden M&A to prevent overwhelming integration issues.
Strong outlook. As capacity reaches 3m tons/yr by year end with the
plant at full utilisation and M&A to increase output, we are confident that
FY07/08 will be strong years. DLNG's exposure to raw material price
increases will also be mitigated when its 2 new furnaces to process pig
and molten iron come online progressively by end FY07. We maintain our
BUY rating and fair value of S$4.56.(
Elec & Eltek International - Yield issues may only be partially resolved
Utilisation should have improved, production yield problems may still be around. We expect capacity utilization at Elec and Eltek ("ELEC") to have improved sequentially from 84% in 1Q07 to about 90% in 2Q07. Revenue in the June quarter should therefore record sequential growth from US$123.2m in 1Q07. However, sub-optimal production yield at ELEC’s Kaiping plant that was highlighted in our previous report may still be an issue in 2Q07.
2Q07 net profit may fall short of our forecast. We expect 2Q07 revenue to be in-line with our forecast of US$132.2m. Net profit in the second quarter may fall short of our estimate of US$10.4m, as gross margins may be lower than our 18% assumption due to yield issues mentioned above. In fact, gross margin could still be in the 15% to 15.5% range (15.2% in 1Q07), in which case 2Q07 net profit would only be approximately US$7.3m compared to US$6.6m in 1Q07. The current production hiccup at Kaiping is temporary. We expect full resolution by end 3Q07, which is later than what we had anticipated earlier. Therefore, full-year gross margins may be lower than our earlier estimate of 17.9% (probably closer to 16.5%), and net profit should also decline more than our earlier forecast of -25% YoY to US$43.3m. We expect ELEC to pay out 60% of its FY07 net earnings, or 14.5 USD cents per share, for a dividend yield of 7%. Actual payout should be slightly lower as we are likely to revise downwards FY07 EPS estimates after 2Q07 results have been released sometime in mid-August.
Undervalued but still a Hold. We continue to believe that ELEC is well positioned to compete in the PCB industry given its size, experience and access to its parent’s (KingBoard) network of resources. As mentioned previously, we also think FY07 net profit will not be reflective of ELEC’s earnings potential. Given its double-digit ROE and nature of business, ELEC should be worth between 1.5-2.0x NTA, i.e. US$2.78-3.70, per share. We will keep our current fair value per share of US$3.32 as it falls within this range. Although ELEC has an upside potential of 59.6%, and is currently trading at undemanding 7.3x TTM EPS, 8.6x FY07E EPS, and P/NTA of 1.1x, we will maintain our HOLD recommendation as we are still unable to find any strong share price catalyst in the next six-to-nine months. Longer-term investors who are attracted by its yield and undervaluation may add or initiate a new position, as we doubt the stock price will go down much further from current levels. We guess downside is probably at the US$1.90 level, or -8.7%, giving the stock an attractive risk/reward for the longer-term investor.
2Q07 net profit may fall short of our forecast. We expect 2Q07 revenue to be in-line with our forecast of US$132.2m. Net profit in the second quarter may fall short of our estimate of US$10.4m, as gross margins may be lower than our 18% assumption due to yield issues mentioned above. In fact, gross margin could still be in the 15% to 15.5% range (15.2% in 1Q07), in which case 2Q07 net profit would only be approximately US$7.3m compared to US$6.6m in 1Q07. The current production hiccup at Kaiping is temporary. We expect full resolution by end 3Q07, which is later than what we had anticipated earlier. Therefore, full-year gross margins may be lower than our earlier estimate of 17.9% (probably closer to 16.5%), and net profit should also decline more than our earlier forecast of -25% YoY to US$43.3m. We expect ELEC to pay out 60% of its FY07 net earnings, or 14.5 USD cents per share, for a dividend yield of 7%. Actual payout should be slightly lower as we are likely to revise downwards FY07 EPS estimates after 2Q07 results have been released sometime in mid-August.
Undervalued but still a Hold. We continue to believe that ELEC is well positioned to compete in the PCB industry given its size, experience and access to its parent’s (KingBoard) network of resources. As mentioned previously, we also think FY07 net profit will not be reflective of ELEC’s earnings potential. Given its double-digit ROE and nature of business, ELEC should be worth between 1.5-2.0x NTA, i.e. US$2.78-3.70, per share. We will keep our current fair value per share of US$3.32 as it falls within this range. Although ELEC has an upside potential of 59.6%, and is currently trading at undemanding 7.3x TTM EPS, 8.6x FY07E EPS, and P/NTA of 1.1x, we will maintain our HOLD recommendation as we are still unable to find any strong share price catalyst in the next six-to-nine months. Longer-term investors who are attracted by its yield and undervaluation may add or initiate a new position, as we doubt the stock price will go down much further from current levels. We guess downside is probably at the US$1.90 level, or -8.7%, giving the stock an attractive risk/reward for the longer-term investor.
ECS Holdings - Drawing interests from strategic investors
Comment on Results Outlook Recommendation
Net profit of S$6.2m was up 18% y-o-y and
in line with our estimate of S$6.1m.
Revenue growth was very strong at 23%
due to more than 100% growth in
notebook sales mainly from Malaysia and
China.
Earnings growth of 18% was lower than
revenue growth of 23% due to (1) lower
margins in notebooks business (2) higher
minority interest (MI) of S$0.8m up 121% yo-
y from its 60%-owned subsidiary in
Malaysia. We are a bit concerned over
lower margins and don’t think that bigger
volume can be a substitute for better
margins.
As revenue ramp is quite strong, cash flow
from operations for the quarter was
negative at S$14m. Although, there is a
significant reduction in working capital days
to 42.4 days from 52.5 days in 2Q06, more
needs to be done in order to turn operating
cash flow positive.
We maintain our earnings estimates and
think that the company can meet our
numbers. The growth in the coming
quarters will be underpinned by:
1) Stronger demand for notebooks
compared to desktops with direct
selling model of companies like
HP and Apple performing better
than indirect selling model of
Dell, benefiting distributors like
ECS.
2) Malaysia continues to register
strong growth in distribution
business with China keeping the
pace in distribution and
enterprise business.
3) ECS is looking forward to enter
India and Vietnam in FY07.
Net profit of S$6.2m was up 18% y-o-y and
in line with our estimate of S$6.1m.
Revenue growth was very strong at 23%
due to more than 100% growth in
notebook sales mainly from Malaysia and
China.
Earnings growth of 18% was lower than
revenue growth of 23% due to (1) lower
margins in notebooks business (2) higher
minority interest (MI) of S$0.8m up 121% yo-
y from its 60%-owned subsidiary in
Malaysia. We are a bit concerned over
lower margins and don’t think that bigger
volume can be a substitute for better
margins.
As revenue ramp is quite strong, cash flow
from operations for the quarter was
negative at S$14m. Although, there is a
significant reduction in working capital days
to 42.4 days from 52.5 days in 2Q06, more
needs to be done in order to turn operating
cash flow positive.
We maintain our earnings estimates and
think that the company can meet our
numbers. The growth in the coming
quarters will be underpinned by:
1) Stronger demand for notebooks
compared to desktops with direct
selling model of companies like
HP and Apple performing better
than indirect selling model of
Dell, benefiting distributors like
ECS.
2) Malaysia continues to register
strong growth in distribution
business with China keeping the
pace in distribution and
enterprise business.
3) ECS is looking forward to enter
India and Vietnam in FY07.
SMRT - Applies to Public Transport Council for fare adjustment
SMRT submitted its application for fare adjustment to the Public Transport
Council (PTC) on 1 Aug 07.
SMRT continues to face cost pressures, with electricity cost increasing 26.3%
to S$39.8m, and a 3.8% rise in cost of diesel to S$35.5m, both for FY07. In
addition, SMRT annual earnings would be adversely affected by some S$11m
from the 2 ppt increase in GST and 1.5 ppt increase in employers’ CPF
contribution.
The PTC fare adjustment formula allows a maximum 1.8% fare hike this year.
We have assumed a fare hike of 1.5% for MRT and 2.0% for buses for FY08 in
our earnings model, which is consistent with the PTC formula. Our earnings
forecast remain unchanged.
Separately, SMRT announced that its wholly-owned subsidiary, SMRT
Engineering, will be appointed the operator of The Palm Monorail, the first
monorail to be constructed in the Middle East. This monorail is a Hitachi-based
system with a 5.45km fully elevated, double-tracked system with 4 stations.
Construction work is expected to be completed by Nov 08. Though this project
is expected to have only a small impact on SMRT financials, it will help SMRT
in its future bid to run other rail systems.
Our target price for SMRT is S$2.10. This comprises the following: a) S$1.55
for existing operations (which has factored in cannibalisation from the 2010
commencement of Circle Line operation), b) S$0.17 for the Circle Line, and c)
S$0.38 value enhancement assuming the land transport review will lead to one
operator running all rail and bus operations in Singapore. If the land transport
review leads to a model of one-rail operator and one-bus operator, then S$1.91
would be a fairer value. While the market continues to speculate on the
recommendations of the land transport review, we believe the bullish sentiment
could bring SMRT’s share price closer to our more optimistic valuation.
Council (PTC) on 1 Aug 07.
SMRT continues to face cost pressures, with electricity cost increasing 26.3%
to S$39.8m, and a 3.8% rise in cost of diesel to S$35.5m, both for FY07. In
addition, SMRT annual earnings would be adversely affected by some S$11m
from the 2 ppt increase in GST and 1.5 ppt increase in employers’ CPF
contribution.
The PTC fare adjustment formula allows a maximum 1.8% fare hike this year.
We have assumed a fare hike of 1.5% for MRT and 2.0% for buses for FY08 in
our earnings model, which is consistent with the PTC formula. Our earnings
forecast remain unchanged.
Separately, SMRT announced that its wholly-owned subsidiary, SMRT
Engineering, will be appointed the operator of The Palm Monorail, the first
monorail to be constructed in the Middle East. This monorail is a Hitachi-based
system with a 5.45km fully elevated, double-tracked system with 4 stations.
Construction work is expected to be completed by Nov 08. Though this project
is expected to have only a small impact on SMRT financials, it will help SMRT
in its future bid to run other rail systems.
Our target price for SMRT is S$2.10. This comprises the following: a) S$1.55
for existing operations (which has factored in cannibalisation from the 2010
commencement of Circle Line operation), b) S$0.17 for the Circle Line, and c)
S$0.38 value enhancement assuming the land transport review will lead to one
operator running all rail and bus operations in Singapore. If the land transport
review leads to a model of one-rail operator and one-bus operator, then S$1.91
would be a fairer value. While the market continues to speculate on the
recommendations of the land transport review, we believe the bullish sentiment
could bring SMRT’s share price closer to our more optimistic valuation.
Jun-07 stats: Loan growth back in action
System loan growth repeated the Mar-07 momentum at
10.3% y-o-y and 3.8% q-o-q in Jun-07 after a brief slowdown in
May-07 (8.7% y-o-y and 2.7% q-o-q).
Consumer loans, particularly housing loans, grew at its
strongest since Aug-05 at 6.9% y-o-y and 3.2% q-o-q in Jun-07.
Business loans grew at 14.5% y-o-y and 4.9% q-o-q after a
breather in May-07. Construction loans also improved y-o-y at
20.8%, but dipped on a q-o-q basis at 8.2% (May-07: 19.0% y-o-y
and 8.8% q-o-q).
Deposits continued the momentum at 26% y-o-y and 5.2% qo-
q with significantly higher growth from demand and savings
deposits (low cost deposit). This would keep cost of funds for
banks low resulting in healthy NIMs. Meanwhile LD ratio was
higher at 68.3% in Jun-07.
Loans take off. The system’s domestic loans repeated its momentum at
10.3% y-o-y and 3.8% q-o-q in Jun-07 after a brief pause in May-07
(8.7% y-o-y and 2.7% q-o-q). Consumer loans grew their strongest since
mid-05, particularly housing loans, which is at its peak. Business loans
continued to dominate the system’s growth at 14.5% y-o-y and 4.9% qo-
q in Jun-07 after a breather in May-07.
Housing loans a winner. Housing loans grew their strongest since Aug-
05 at 6.9% y-o-y and 3.2% q-o-q in Jun-07. It appears quite evident the
influx of private residential activities is thriving - from bullish home sales
and expectations of en-bloc sales. We expect the momentum to
continue into 2H07. We believe all three domestic banks would benefit
but we expect UOB to show stronger housing loans growth.
Construction loans build up. Construction loans growth revived in Jun-
07 at 20.8% y-o-y, but dipped to 8.2% on a q-o-q basis (May-07: 19.0%
y-o-y and 8.8% q-o-q). We still think they will accelerate in view of
increased construction demand and hence flow through to the volume
of construction loans. Based on the latest financials available,
construction loan exposure (bank level to reflect domestic loans) ranks
DBS, OCBC and UOB in descending order (in terms of absolute value).
Higher low cost deposit growth. We note demand and savings deposits
outshined fixed deposit growth and we believe this could be a
deliberate strategy carried out by banks to offset the effects of lower
SIBOR to maintain NIMs. Despite flattish interest spreads, we believe
lower funding costs coupled with volume of loan growth would seal
healthy NIMs for banks.
Maintain Overweight. We believe there’s potential for Singapore banks
to outperform the market, with stronger-than-expected loan growth in
2H07. While ROEs may remain flat, we expect overall earnings growth of
18% y-o-y. Our top sector pick is UOB (Buy, TP $27.50) for better growth
and ROE prospects. We also have a Buy rating for OCBC with target
price of $10.20. The sector has been a laggard and we would
recommend it as a late cycle proxy and alternative exposure to the
property boom. Maintain Overweight.
10.3% y-o-y and 3.8% q-o-q in Jun-07 after a brief slowdown in
May-07 (8.7% y-o-y and 2.7% q-o-q).
Consumer loans, particularly housing loans, grew at its
strongest since Aug-05 at 6.9% y-o-y and 3.2% q-o-q in Jun-07.
Business loans grew at 14.5% y-o-y and 4.9% q-o-q after a
breather in May-07. Construction loans also improved y-o-y at
20.8%, but dipped on a q-o-q basis at 8.2% (May-07: 19.0% y-o-y
and 8.8% q-o-q).
Deposits continued the momentum at 26% y-o-y and 5.2% qo-
q with significantly higher growth from demand and savings
deposits (low cost deposit). This would keep cost of funds for
banks low resulting in healthy NIMs. Meanwhile LD ratio was
higher at 68.3% in Jun-07.
Loans take off. The system’s domestic loans repeated its momentum at
10.3% y-o-y and 3.8% q-o-q in Jun-07 after a brief pause in May-07
(8.7% y-o-y and 2.7% q-o-q). Consumer loans grew their strongest since
mid-05, particularly housing loans, which is at its peak. Business loans
continued to dominate the system’s growth at 14.5% y-o-y and 4.9% qo-
q in Jun-07 after a breather in May-07.
Housing loans a winner. Housing loans grew their strongest since Aug-
05 at 6.9% y-o-y and 3.2% q-o-q in Jun-07. It appears quite evident the
influx of private residential activities is thriving - from bullish home sales
and expectations of en-bloc sales. We expect the momentum to
continue into 2H07. We believe all three domestic banks would benefit
but we expect UOB to show stronger housing loans growth.
Construction loans build up. Construction loans growth revived in Jun-
07 at 20.8% y-o-y, but dipped to 8.2% on a q-o-q basis (May-07: 19.0%
y-o-y and 8.8% q-o-q). We still think they will accelerate in view of
increased construction demand and hence flow through to the volume
of construction loans. Based on the latest financials available,
construction loan exposure (bank level to reflect domestic loans) ranks
DBS, OCBC and UOB in descending order (in terms of absolute value).
Higher low cost deposit growth. We note demand and savings deposits
outshined fixed deposit growth and we believe this could be a
deliberate strategy carried out by banks to offset the effects of lower
SIBOR to maintain NIMs. Despite flattish interest spreads, we believe
lower funding costs coupled with volume of loan growth would seal
healthy NIMs for banks.
Maintain Overweight. We believe there’s potential for Singapore banks
to outperform the market, with stronger-than-expected loan growth in
2H07. While ROEs may remain flat, we expect overall earnings growth of
18% y-o-y. Our top sector pick is UOB (Buy, TP $27.50) for better growth
and ROE prospects. We also have a Buy rating for OCBC with target
price of $10.20. The sector has been a laggard and we would
recommend it as a late cycle proxy and alternative exposure to the
property boom. Maintain Overweight.
UOL Group Limited: Strong growth but mainly due to revaluation gains
Strong earnings, but due to revaluation gains. UOL Group Limited
(UOL) reported a good set of 2Q07 results with revenue improving 24% YoY
to S$201.6. However, net profit growth for the quarter was much stronger,
rising over 421% YoY to S$286.3m. The much stronger bottom-line
performance was mainly due to revaluation surplus from the revaluation of
its investment properties. The total revaluation gain recognized was
S$274.4m. However, UOL did not provide the attributable value of this surplus
to the group, although we know that about S$5.5m came from Hotel Plaza
and assuming that 80% of the gain was attributed to UOL, the net bottomline
gain from revaluation surplus would be about S$215m. Excluding the
revaluation gains, UOL's PATMI would be about S$71.3m or growth of about
30% YoY. This is broadly in line with top-line growth. The key drivers of the
earnings improvement came from residential projects, dividend income and
to a lesser from its Hotel operation.
Development projects did well. In 2Q07, UOL recognized pre-sold
projects from Southbank, Newton Suite, Pavilion 11, The Regency and
Regency Suites. The good performance in this segment was reflected in
this division's revenue growth of 27% YoY to S$61.0m.
Hotel doing fine. UOL's hotel subsidiary, Hotel Plaza, had a more moderate
quarter, with revenue falling 1% YoY, but with PATMI rising over 100% YoY.
Revenue suffered mainly due to the sale of its Singapore Hotel Grand Plaza
while PATMI benefited from lower interest expenses as well as revaluation
surplus of about S$5.5m.
Hotel Negara redevelopment is now possible. Over the last 6 months,
UOL has bought two en-bloc redevelopment projects, i.e. Spottiswoode
Park (off Keppel Road) and a site at Tagore Avenue. The two freehold sites
cost UOL about S$335m collectively, and we estimate the breakeven at
S$980 psf and S$643 psf, respectively. Furthermore, with the recent high
transaction costs at Orchard Turn, we see the redevelopment of Hotel Negara
as back on track.
Maintain HOLD. Since our downgrade report dated 15 June, UOL peaked
at S$6.00 but has since corrected to the last traded price of S$5.25. Our
fair value stands at S$5.48, and as the upside is marginal, we see no
reason to upgrade our rating presently. We maintain our HOLD rating on
UOL.
(UOL) reported a good set of 2Q07 results with revenue improving 24% YoY
to S$201.6. However, net profit growth for the quarter was much stronger,
rising over 421% YoY to S$286.3m. The much stronger bottom-line
performance was mainly due to revaluation surplus from the revaluation of
its investment properties. The total revaluation gain recognized was
S$274.4m. However, UOL did not provide the attributable value of this surplus
to the group, although we know that about S$5.5m came from Hotel Plaza
and assuming that 80% of the gain was attributed to UOL, the net bottomline
gain from revaluation surplus would be about S$215m. Excluding the
revaluation gains, UOL's PATMI would be about S$71.3m or growth of about
30% YoY. This is broadly in line with top-line growth. The key drivers of the
earnings improvement came from residential projects, dividend income and
to a lesser from its Hotel operation.
Development projects did well. In 2Q07, UOL recognized pre-sold
projects from Southbank, Newton Suite, Pavilion 11, The Regency and
Regency Suites. The good performance in this segment was reflected in
this division's revenue growth of 27% YoY to S$61.0m.
Hotel doing fine. UOL's hotel subsidiary, Hotel Plaza, had a more moderate
quarter, with revenue falling 1% YoY, but with PATMI rising over 100% YoY.
Revenue suffered mainly due to the sale of its Singapore Hotel Grand Plaza
while PATMI benefited from lower interest expenses as well as revaluation
surplus of about S$5.5m.
Hotel Negara redevelopment is now possible. Over the last 6 months,
UOL has bought two en-bloc redevelopment projects, i.e. Spottiswoode
Park (off Keppel Road) and a site at Tagore Avenue. The two freehold sites
cost UOL about S$335m collectively, and we estimate the breakeven at
S$980 psf and S$643 psf, respectively. Furthermore, with the recent high
transaction costs at Orchard Turn, we see the redevelopment of Hotel Negara
as back on track.
Maintain HOLD. Since our downgrade report dated 15 June, UOL peaked
at S$6.00 but has since corrected to the last traded price of S$5.25. Our
fair value stands at S$5.48, and as the upside is marginal, we see no
reason to upgrade our rating presently. We maintain our HOLD rating on
UOL.
AsiaPharm Group Ltd: Healthy outlook for drug makers
Deeper integration to yield better results. Specialty pharmaceutical
manufacturer Asiapharm (APHM) is likely to release its 2Q07 results
between 13-14 Aug. Last quarter, APHM performed well despite going full
throttle to integrate its recent acquisitions. Revenue and net profit grew
39% YoY and 31% YoY, respectively. For 2Q07, we are expecting better
performance and forecast topline to surge 57% YoY to RMB122m and
bottomline to rise in tandem by 49% YoY to RMB32m due to better integration
with its 2006 acquisitions and improving market conditions in the pharma
industry.
2-year price cut reprieve. China's drug price regulator, the National
Development and Reform Commission (NDRC), has indicated that major
drug price cuts will be targeted to be implemented every 2 years from now
on unlike the last 4 years which saw 12 strong price cuts. All drug companies
including APHM were adversely affected in 2006. We see this 2-year reprieve
as a positive move by the NDRC to let the industry adapt and consolidate
after the flurry of harsh cuts (averaging 15-20%) implemented in the last
year.
Increased barriers to entry. On 10 Jul 07, the drug regulatory body (SFDA)
released more stringent drug registration rules to prevent low quality drugs
from coming into the market. APHM's Solid Success acquisition on 4 Jan
07 was timely as it obtained 3 key oncology products that are already
approved for sale. This gives APHM market exposure advantage against
other competitors seeking new drug approvals.
Seeing hidden value. Despite the difficult environment in 2006, China's
pharma industry profit rose 35% YoY to RMB18.4b. The long-term potential
of the Chinese pharma market is huge, given the large aging population,
ongoing healthcare system modernization and economic development. We
see FY07/08 as pivotal years for R&D focused pharmaceutical companies
like APHM where growth will be even more accentuated with the PRC
government pushing for greater healthcare coverage in China. The recent
market consolidation presents APHM with an attractive 38% potential upside
to our fair value estimate of S$0.92. Maintain BUY.
manufacturer Asiapharm (APHM) is likely to release its 2Q07 results
between 13-14 Aug. Last quarter, APHM performed well despite going full
throttle to integrate its recent acquisitions. Revenue and net profit grew
39% YoY and 31% YoY, respectively. For 2Q07, we are expecting better
performance and forecast topline to surge 57% YoY to RMB122m and
bottomline to rise in tandem by 49% YoY to RMB32m due to better integration
with its 2006 acquisitions and improving market conditions in the pharma
industry.
2-year price cut reprieve. China's drug price regulator, the National
Development and Reform Commission (NDRC), has indicated that major
drug price cuts will be targeted to be implemented every 2 years from now
on unlike the last 4 years which saw 12 strong price cuts. All drug companies
including APHM were adversely affected in 2006. We see this 2-year reprieve
as a positive move by the NDRC to let the industry adapt and consolidate
after the flurry of harsh cuts (averaging 15-20%) implemented in the last
year.
Increased barriers to entry. On 10 Jul 07, the drug regulatory body (SFDA)
released more stringent drug registration rules to prevent low quality drugs
from coming into the market. APHM's Solid Success acquisition on 4 Jan
07 was timely as it obtained 3 key oncology products that are already
approved for sale. This gives APHM market exposure advantage against
other competitors seeking new drug approvals.
Seeing hidden value. Despite the difficult environment in 2006, China's
pharma industry profit rose 35% YoY to RMB18.4b. The long-term potential
of the Chinese pharma market is huge, given the large aging population,
ongoing healthcare system modernization and economic development. We
see FY07/08 as pivotal years for R&D focused pharmaceutical companies
like APHM where growth will be even more accentuated with the PRC
government pushing for greater healthcare coverage in China. The recent
market consolidation presents APHM with an attractive 38% potential upside
to our fair value estimate of S$0.92. Maintain BUY.
AsiaPharm Group Ltd: Healthy outlook for drug makers
Deeper integration to yield better results. Specialty pharmaceutical
manufacturer Asiapharm (APHM) is likely to release its 2Q07 results
between 13-14 Aug. Last quarter, APHM performed well despite going full
throttle to integrate its recent acquisitions. Revenue and net profit grew
39% YoY and 31% YoY, respectively. For 2Q07, we are expecting better
performance and forecast topline to surge 57% YoY to RMB122m and
bottomline to rise in tandem by 49% YoY to RMB32m due to better integration
with its 2006 acquisitions and improving market conditions in the pharma
industry.
2-year price cut reprieve. China's drug price regulator, the National
Development and Reform Commission (NDRC), has indicated that major
drug price cuts will be targeted to be implemented every 2 years from now
on unlike the last 4 years which saw 12 strong price cuts. All drug companies
including APHM were adversely affected in 2006. We see this 2-year reprieve
as a positive move by the NDRC to let the industry adapt and consolidate
after the flurry of harsh cuts (averaging 15-20%) implemented in the last
year.
Increased barriers to entry. On 10 Jul 07, the drug regulatory body (SFDA)
released more stringent drug registration rules to prevent low quality drugs
from coming into the market. APHM's Solid Success acquisition on 4 Jan
07 was timely as it obtained 3 key oncology products that are already
approved for sale. This gives APHM market exposure advantage against
other competitors seeking new drug approvals.
Seeing hidden value. Despite the difficult environment in 2006, China's
pharma industry profit rose 35% YoY to RMB18.4b. The long-term potential
of the Chinese pharma market is huge, given the large aging population,
ongoing healthcare system modernization and economic development. We
see FY07/08 as pivotal years for R&D focused pharmaceutical companies
like APHM where growth will be even more accentuated with the PRC
government pushing for greater healthcare coverage in China. The recent
market consolidation presents APHM with an attractive 38% potential upside
to our fair value estimate of S$0.92. Maintain BUY.
manufacturer Asiapharm (APHM) is likely to release its 2Q07 results
between 13-14 Aug. Last quarter, APHM performed well despite going full
throttle to integrate its recent acquisitions. Revenue and net profit grew
39% YoY and 31% YoY, respectively. For 2Q07, we are expecting better
performance and forecast topline to surge 57% YoY to RMB122m and
bottomline to rise in tandem by 49% YoY to RMB32m due to better integration
with its 2006 acquisitions and improving market conditions in the pharma
industry.
2-year price cut reprieve. China's drug price regulator, the National
Development and Reform Commission (NDRC), has indicated that major
drug price cuts will be targeted to be implemented every 2 years from now
on unlike the last 4 years which saw 12 strong price cuts. All drug companies
including APHM were adversely affected in 2006. We see this 2-year reprieve
as a positive move by the NDRC to let the industry adapt and consolidate
after the flurry of harsh cuts (averaging 15-20%) implemented in the last
year.
Increased barriers to entry. On 10 Jul 07, the drug regulatory body (SFDA)
released more stringent drug registration rules to prevent low quality drugs
from coming into the market. APHM's Solid Success acquisition on 4 Jan
07 was timely as it obtained 3 key oncology products that are already
approved for sale. This gives APHM market exposure advantage against
other competitors seeking new drug approvals.
Seeing hidden value. Despite the difficult environment in 2006, China's
pharma industry profit rose 35% YoY to RMB18.4b. The long-term potential
of the Chinese pharma market is huge, given the large aging population,
ongoing healthcare system modernization and economic development. We
see FY07/08 as pivotal years for R&D focused pharmaceutical companies
like APHM where growth will be even more accentuated with the PRC
government pushing for greater healthcare coverage in China. The recent
market consolidation presents APHM with an attractive 38% potential upside
to our fair value estimate of S$0.92. Maintain BUY.
Singapore Post - Robust 1QFY08 earnings for an attractive dividend play
SingPost reported 1QFY08 net profit of S$38.4m, up 24% yoy. This represents
26% of our FY08 forecast. Excluding one-time items, underlying net profit was
up 14.9% yoy. Revenue rose 10% yoy.
Robust growth for mail. Mail revenue rose 10.9% (or S$9m) yoy, and
accounted for 75% revenue share, due to mail volume increasing 9.6%. This
came on the back of a strong 11.4% rise in bulk mail (compared with a weak
1.6% for public mail), due to a) Direct Mail’s increase of 10.9%, partly due to
one-off contributions from mailing of GST Offset packages, service and
conservancy charges notices and Dengue Fever letters (8% growth excluding
these one-offs); and b) business and others increasing 11.7%. Correspondingly,
mail operating profit rose 14.3% yoy.
Financial services drove retail segment. Retail revenue rose 10.6% (or
S$1.4m) yoy, and accounted for 12% revenue share. Financial services
revenue surged 51.8%, and accounted for 3.5% of overall revenue –
remittances, EzyCash were star performers, and insurance sales are also
picking up.
Underlying operating margin improved from 1QFY07’s 37% to 37.7%, due
to mail, logistics and retail operating margins widening from 1QFY07’s 39.5%,
12.5% and 14.1% respectively to 40.7%, 13.0% and 14.4% respectively.
Robust cashflow generation. Net cash inflow from operating activities was
S$49.4m, up from 1QFY07’s S$36.5m. Capex was a low S$2.5m, or 2% of
revenue. Management expects the low capex to be maintained for subsequent
quarters.
Dividend yield stays high. SingPost declared an interim dividend of 1.25¢ ps.
SingPost aims to pay out 80-90% of net profit or a minimum of 5¢ ps per annum.
We are forecasting 6.5¢ ps total dividends for FY08 (based on 83% payout
ratio), giving a yield of 5.2%, which is higher than 3-mth SIBOR of 2.6%.
SingPost remains a BUY. Our FY08 net profit forecast has factored in the
increase in postage rates effective 18 Dec 06 and 1 Jul 07, as well as the onetime
gain from sale of Clementi Central HDB shop unit. Management indicated
that SingPost owns 15 post office premises (others are leased), and these could
potentially be sold if SingPost decides to relocate its branches (due to
operational reasons). SingPost is attractive based on our DCF valuation of
S$1.43 per share – we have assumed a terminal growth rate of 0.7%, a WACC
of 5.7% (which factors in cost of debt of 4.6% and cost of equity of 7.7%).
26% of our FY08 forecast. Excluding one-time items, underlying net profit was
up 14.9% yoy. Revenue rose 10% yoy.
Robust growth for mail. Mail revenue rose 10.9% (or S$9m) yoy, and
accounted for 75% revenue share, due to mail volume increasing 9.6%. This
came on the back of a strong 11.4% rise in bulk mail (compared with a weak
1.6% for public mail), due to a) Direct Mail’s increase of 10.9%, partly due to
one-off contributions from mailing of GST Offset packages, service and
conservancy charges notices and Dengue Fever letters (8% growth excluding
these one-offs); and b) business and others increasing 11.7%. Correspondingly,
mail operating profit rose 14.3% yoy.
Financial services drove retail segment. Retail revenue rose 10.6% (or
S$1.4m) yoy, and accounted for 12% revenue share. Financial services
revenue surged 51.8%, and accounted for 3.5% of overall revenue –
remittances, EzyCash were star performers, and insurance sales are also
picking up.
Underlying operating margin improved from 1QFY07’s 37% to 37.7%, due
to mail, logistics and retail operating margins widening from 1QFY07’s 39.5%,
12.5% and 14.1% respectively to 40.7%, 13.0% and 14.4% respectively.
Robust cashflow generation. Net cash inflow from operating activities was
S$49.4m, up from 1QFY07’s S$36.5m. Capex was a low S$2.5m, or 2% of
revenue. Management expects the low capex to be maintained for subsequent
quarters.
Dividend yield stays high. SingPost declared an interim dividend of 1.25¢ ps.
SingPost aims to pay out 80-90% of net profit or a minimum of 5¢ ps per annum.
We are forecasting 6.5¢ ps total dividends for FY08 (based on 83% payout
ratio), giving a yield of 5.2%, which is higher than 3-mth SIBOR of 2.6%.
SingPost remains a BUY. Our FY08 net profit forecast has factored in the
increase in postage rates effective 18 Dec 06 and 1 Jul 07, as well as the onetime
gain from sale of Clementi Central HDB shop unit. Management indicated
that SingPost owns 15 post office premises (others are leased), and these could
potentially be sold if SingPost decides to relocate its branches (due to
operational reasons). SingPost is attractive based on our DCF valuation of
S$1.43 per share – we have assumed a terminal growth rate of 0.7%, a WACC
of 5.7% (which factors in cost of debt of 4.6% and cost of equity of 7.7%).
Raffles Medical - Just what the doctor ordered
Story: Raffles Medical Group 2Q07 results were slightly above
our expectation.
Point: Net profit increased from S$3.8m to S$15.8m mainly due
to fair value gain of Raffles Hospital. Stripping off the EI, net profit
rose 44% y-o-y to S$5.5m due to higher patient load and a wider
range of medical specialties.
Relevance: With the increased emphasis on healthcare due to
an aging population, increase in wealth accumulation and
Singapore’s drive to be a leading medical hub, we see Raffles
Medical benefitting from both local and international patients. We
maintain Buy with an increased target price of S$1.80.
2Q07 result slightly above our expectation. Revenue grew 26.3% yoy to
S$41.4m. Revenue from Healthcare (clinic and insurance segments) and
Hospital Services grew 17.6% and 33.2% respectively. Net profit rose
315% mainly due to the share of profits in Raffles Hospital’s fair value
gain. After striping out the exceptional gain, net profit at S$5.5m was
44.5% higher than the same period last year. An interim ordinary
dividend of 1.0cents per share for 2Q07 was declared, which will be paid
on 7th September. They are targeting 2.5cents of ordinary dividend
payout for FY07, the same as last year.
New airport medical centre to serve as regional hub for Eastern
Singapore. The group has been operating three medical clinics in
Singapore’s Changi Airport since 1990. It is now starting a medical
centre at the new Terminal 3. The 24-hour centre will provide general
practice, health screening, Obstetrics and Gynaecology, and Aesthetics
services. It will also serve as a regional medical centre for those living in
the East who need late night emergency treatments.
Two strategic investors propel overseas expansion. RMG had
undertaken a placement of 50m new shares in the capital of RMG to VScience
Investments, a wholly-owned subsidiary of Temasek Holdings
and Qatar Investment Authority. Each subscribed 25m new shares at
S$1.30 each, giving each a 4.87% sake in RMG based on the enlarged
share capital of $513.5m. Total proceeds raised approximate S$63m. The
tie-up with Qatar Investment Authority will enable RMG to leverage on
the former’s connection in the fast growing Middle East region.
Maintain Buy, TP S$1.80. We have factored in the full ownership of the
hospital and adjusted our assumptions in our forecast to take into
account the increase in efficiency and EBIT margin (from 12% to 14%)
for the hospital operation. This translates to the new target price to
S$1.80, backed by DCF calculations. Maintain Buy.
our expectation.
Point: Net profit increased from S$3.8m to S$15.8m mainly due
to fair value gain of Raffles Hospital. Stripping off the EI, net profit
rose 44% y-o-y to S$5.5m due to higher patient load and a wider
range of medical specialties.
Relevance: With the increased emphasis on healthcare due to
an aging population, increase in wealth accumulation and
Singapore’s drive to be a leading medical hub, we see Raffles
Medical benefitting from both local and international patients. We
maintain Buy with an increased target price of S$1.80.
2Q07 result slightly above our expectation. Revenue grew 26.3% yoy to
S$41.4m. Revenue from Healthcare (clinic and insurance segments) and
Hospital Services grew 17.6% and 33.2% respectively. Net profit rose
315% mainly due to the share of profits in Raffles Hospital’s fair value
gain. After striping out the exceptional gain, net profit at S$5.5m was
44.5% higher than the same period last year. An interim ordinary
dividend of 1.0cents per share for 2Q07 was declared, which will be paid
on 7th September. They are targeting 2.5cents of ordinary dividend
payout for FY07, the same as last year.
New airport medical centre to serve as regional hub for Eastern
Singapore. The group has been operating three medical clinics in
Singapore’s Changi Airport since 1990. It is now starting a medical
centre at the new Terminal 3. The 24-hour centre will provide general
practice, health screening, Obstetrics and Gynaecology, and Aesthetics
services. It will also serve as a regional medical centre for those living in
the East who need late night emergency treatments.
Two strategic investors propel overseas expansion. RMG had
undertaken a placement of 50m new shares in the capital of RMG to VScience
Investments, a wholly-owned subsidiary of Temasek Holdings
and Qatar Investment Authority. Each subscribed 25m new shares at
S$1.30 each, giving each a 4.87% sake in RMG based on the enlarged
share capital of $513.5m. Total proceeds raised approximate S$63m. The
tie-up with Qatar Investment Authority will enable RMG to leverage on
the former’s connection in the fast growing Middle East region.
Maintain Buy, TP S$1.80. We have factored in the full ownership of the
hospital and adjusted our assumptions in our forecast to take into
account the increase in efficiency and EBIT margin (from 12% to 14%)
for the hospital operation. This translates to the new target price to
S$1.80, backed by DCF calculations. Maintain Buy.
LottVision Limited - China Lottery Market
Acquisition of Wu Sheng Technology Co., Ltd. On 4 July 07, LottVision entered into a non-binding sheet with Firich Enterprises Co., Ltd for the acquisition of Wu Sheng Technology Co., Ltd. The consideration will be between S$66.3 million and S$93.9 million. This amount would be funded by the issue of shares at S$0.609 per new share. There was also a guarantee of the audited net profit after tax of Wu Sheng for the financial period 1 July 2007 to 30 June 2008 of not less than HK$30 million (approximately S$5.8 million). In the event that the net profit is less than the guaranteed amount, Firich shall pay a cash amount to Lottvision of the difference between net profit after tax and the guaranteed amount.
New fair value of S$0.76. We use a 5-yr DCF valuation method to drive a fair value of S$0.76 per share on LottVision and we upgrade to a Buy recommendation after the acquisition of Wu Sheng Technology Co., Ltd. Our 5-yr forecast of revenue is based on two potential earnings streams: (1) sales of POS terminals to authorised betting outlets (trading revenue), (2) a percent of lottery sales for each POS terminal (outsourcing revenue).
Attractive valuation, but stock remains speculative. Based on our fair value of S$0.76, the stock offers upside for investors. However, there is a substantial amount of risk as the company reports a loss for FY07 and our valuations are based on expected net profit after tax from FY08 onwards. We will monitor the financial results for FY 08 and provide an update for investors.
Risk factors in our estimates. The risk factors in our estimates are (1) loss of key management and execution risks may delay the Group’s operations, (2) deregulation of the sports lottery market has opened up the competitive landscape to foreign companies, which may reduce the Group’s market share, (3) changes in China’s regulation may affect the Group’s operations and earnings.
New fair value of S$0.76. We use a 5-yr DCF valuation method to drive a fair value of S$0.76 per share on LottVision and we upgrade to a Buy recommendation after the acquisition of Wu Sheng Technology Co., Ltd. Our 5-yr forecast of revenue is based on two potential earnings streams: (1) sales of POS terminals to authorised betting outlets (trading revenue), (2) a percent of lottery sales for each POS terminal (outsourcing revenue).
Attractive valuation, but stock remains speculative. Based on our fair value of S$0.76, the stock offers upside for investors. However, there is a substantial amount of risk as the company reports a loss for FY07 and our valuations are based on expected net profit after tax from FY08 onwards. We will monitor the financial results for FY 08 and provide an update for investors.
Risk factors in our estimates. The risk factors in our estimates are (1) loss of key management and execution risks may delay the Group’s operations, (2) deregulation of the sports lottery market has opened up the competitive landscape to foreign companies, which may reduce the Group’s market share, (3) changes in China’s regulation may affect the Group’s operations and earnings.
Boustead Singapore Limited - Largest contract to date
The S$74m contract to build a high-tech development at Ubi. Boustead
Singapore Limited (“Boustead” or the “Company”) announced on 30 July 2007
that its 91.7%-owned subsidiary, Boustead Projects Pte Ltd (“Boustead Projects”)
had been awarded an S$74m contract to design and build a high-tech
development to be located at the Ubi District, Singapore. The development will
have a gross floor area of over 42,200 square metres and will comprise two
connecting seven storeys glass buildings. Furthermore, the high-tech
development will feature enhanced power supply, a fibre optic network, wireless
connectivity, an integrated building management system and provisions for dual
feed power supply and backup power generators. The high specifications are
catered to the back-office functions of trans-national companies, as well as firms
in the precision engineering and information technology sectors. Completion of
the development is scheduled for December 2008.
Clinched five substantial projects since February this year. With this
announcement, Boustead Projects has in total announced five substantial
contracts since February this year. The contracts, awarded by reputable
multinational clients such as Agility International Logistics, Berg Propulsion, and
Qioptiq Singapore, speak volumes on Boustead Projects’ expertise and their
ability to timely deliver.
Going forward. While we are positive over the prospects of Boustead Projects
for the next 2 to 3 years, we are equally optimistic over the long term prospects
of Boustead’s Energy-Related Engineering division. The buoyant environment of
the oil and gas industry should benefit Boustead’s energy-related subsidiaries
(Boustead International Heaters Ltd and Controls & Electrics Pte Ltd).
• Assumption. Assuming completion of the high tech development by end of
December 2008, the entire project (to be completed approximately 14 months
from now) will span 8 months of FY08 and 6 months of FY09. As such, we
assume that 57% of the S$74m contract will be recognised in FY08 and 43% in
FY09.
• Valuation and Recommendaton. Our valuation of Boustead is based on the
sum-of-parts (SOP) approach. We continue to apply a 14x P/E multiple on FY08
EPS for the Geo-Spatial business division due to its strong niche presence in
providing geographic information systems to clients in South East Asia and
Australia. For Boustead’s Water and Wastewater division, we use an
undemanding 13x P/E multiple1. For the rest of Boustead’s engineering business
activities, we apply a P/E multiple of 15x2 on the estimated FY08 earnings in view
of Boustead’s engineering expertise (especially Boustead Projects’ strong design
and build capabilities). Our fair value is S$2.47, which translates to a FY08 P/E of
14.5x and FY08 P/B of 4.1x. Although our fair value represents only a 13%
upside, we upgrade our recommendation to BUY in view of our optimism that
there will be more contract announcements in the near term.
Singapore Limited (“Boustead” or the “Company”) announced on 30 July 2007
that its 91.7%-owned subsidiary, Boustead Projects Pte Ltd (“Boustead Projects”)
had been awarded an S$74m contract to design and build a high-tech
development to be located at the Ubi District, Singapore. The development will
have a gross floor area of over 42,200 square metres and will comprise two
connecting seven storeys glass buildings. Furthermore, the high-tech
development will feature enhanced power supply, a fibre optic network, wireless
connectivity, an integrated building management system and provisions for dual
feed power supply and backup power generators. The high specifications are
catered to the back-office functions of trans-national companies, as well as firms
in the precision engineering and information technology sectors. Completion of
the development is scheduled for December 2008.
Clinched five substantial projects since February this year. With this
announcement, Boustead Projects has in total announced five substantial
contracts since February this year. The contracts, awarded by reputable
multinational clients such as Agility International Logistics, Berg Propulsion, and
Qioptiq Singapore, speak volumes on Boustead Projects’ expertise and their
ability to timely deliver.
Going forward. While we are positive over the prospects of Boustead Projects
for the next 2 to 3 years, we are equally optimistic over the long term prospects
of Boustead’s Energy-Related Engineering division. The buoyant environment of
the oil and gas industry should benefit Boustead’s energy-related subsidiaries
(Boustead International Heaters Ltd and Controls & Electrics Pte Ltd).
• Assumption. Assuming completion of the high tech development by end of
December 2008, the entire project (to be completed approximately 14 months
from now) will span 8 months of FY08 and 6 months of FY09. As such, we
assume that 57% of the S$74m contract will be recognised in FY08 and 43% in
FY09.
• Valuation and Recommendaton. Our valuation of Boustead is based on the
sum-of-parts (SOP) approach. We continue to apply a 14x P/E multiple on FY08
EPS for the Geo-Spatial business division due to its strong niche presence in
providing geographic information systems to clients in South East Asia and
Australia. For Boustead’s Water and Wastewater division, we use an
undemanding 13x P/E multiple1. For the rest of Boustead’s engineering business
activities, we apply a P/E multiple of 15x2 on the estimated FY08 earnings in view
of Boustead’s engineering expertise (especially Boustead Projects’ strong design
and build capabilities). Our fair value is S$2.47, which translates to a FY08 P/E of
14.5x and FY08 P/B of 4.1x. Although our fair value represents only a 13%
upside, we upgrade our recommendation to BUY in view of our optimism that
there will be more contract announcements in the near term.
Suntec REIT: Upgrade on One Raffles Quay acquisition
Results are in line. Suntec REIT reported 3Q07 revenue of S$46.7m;
+6% YoY but flat QoQ. Distributable income was equally strong at S$30.m;
+23% YoY and +7% QoQ. At the DPU level, growth was more moderate at
+12% YoY and +7% QoQ to 2.1 cents. Growth was mainly due to the
increase in office revenue at Suntec City and Park Mall as well as the
newly acquired strata space from Suntec City. However, higher property
expenses eroded much of the better revenue. This led to cost to income
ratio rising from 24.4% (2Q07) to 26.9% (3Q07). The results are broadly in
line with our estimates.
Buys One Raffles Quay. Separately, Suntec's manager ARA Trust
Management (ARA) announced that it has acquired a one-third stake in
One Raffles Quay (ORQ) for S$941.5m from Cheung Kong. The acquisition
includes a rental top up of S$103.48m. In our opinion, the best way to view
this rental top up is in the form of a discount. ORQ's actual value net of the
income support is thus S$838m or a reasonable S$1,877 psf. No rental
details were provided; however, assuming an average rental of say S$10
psf/mth, this translates to an NPI of S$40.2m or a capitalized rate of 4.8%.
Presently Suntec is trading at a yield of 4.4%, so ORQ should be marginally
accretive. However, allowing for the rental top-up, an extra S$17.0m NPI
could be recognized. This in turn will boost ORQ's yield to 6.1% making
the acquisition very accretive. Even though this scheme is innovative to the
office sector, it has been used previously in the industrial REIT sector. In
light of this acquisition, we have adjusted our FY08F from 8.70 cents to
8.84 cents.
Upgrade to BUY with revised fair value of S$2.18. Over the last quarter,
Suntec has corrected from a peak of about S$2.10 to the current level of
S$1.86 or by about 11%, which is close to our fair value of S$1.82 (based
on asset size of S$4.5bn). However, in light of the ORQ acquisition, Suntec
has reached our target asset size. We thus revised up our target size to
S$5.5bn and hence our fair value to S$2.18. With over 17% potential upside
to our fair value and a FY08F trading yield of 4.75%, the investment case
for Suntec is looking compelling. We thus upgrade our rating from HOLD
to BUY.
+6% YoY but flat QoQ. Distributable income was equally strong at S$30.m;
+23% YoY and +7% QoQ. At the DPU level, growth was more moderate at
+12% YoY and +7% QoQ to 2.1 cents. Growth was mainly due to the
increase in office revenue at Suntec City and Park Mall as well as the
newly acquired strata space from Suntec City. However, higher property
expenses eroded much of the better revenue. This led to cost to income
ratio rising from 24.4% (2Q07) to 26.9% (3Q07). The results are broadly in
line with our estimates.
Buys One Raffles Quay. Separately, Suntec's manager ARA Trust
Management (ARA) announced that it has acquired a one-third stake in
One Raffles Quay (ORQ) for S$941.5m from Cheung Kong. The acquisition
includes a rental top up of S$103.48m. In our opinion, the best way to view
this rental top up is in the form of a discount. ORQ's actual value net of the
income support is thus S$838m or a reasonable S$1,877 psf. No rental
details were provided; however, assuming an average rental of say S$10
psf/mth, this translates to an NPI of S$40.2m or a capitalized rate of 4.8%.
Presently Suntec is trading at a yield of 4.4%, so ORQ should be marginally
accretive. However, allowing for the rental top-up, an extra S$17.0m NPI
could be recognized. This in turn will boost ORQ's yield to 6.1% making
the acquisition very accretive. Even though this scheme is innovative to the
office sector, it has been used previously in the industrial REIT sector. In
light of this acquisition, we have adjusted our FY08F from 8.70 cents to
8.84 cents.
Upgrade to BUY with revised fair value of S$2.18. Over the last quarter,
Suntec has corrected from a peak of about S$2.10 to the current level of
S$1.86 or by about 11%, which is close to our fair value of S$1.82 (based
on asset size of S$4.5bn). However, in light of the ORQ acquisition, Suntec
has reached our target asset size. We thus revised up our target size to
S$5.5bn and hence our fair value to S$2.18. With over 17% potential upside
to our fair value and a FY08F trading yield of 4.75%, the investment case
for Suntec is looking compelling. We thus upgrade our rating from HOLD
to BUY.
This morning’s rebound after 6.6% pullback could signal initial attempt to decouple from Wall Street with China pointing the way
China’s non-reaction to Wall Street’s plunge should cushion Asian market falls and signal that regional markets including Singapore may not suffer a steeper fall of up to 8-10% for the time being.
China’s stock market has largely ignored the Dow’s plunge last week, with major indices gaining while the rest of the world were mostly down.
This sign of decoupling unlike at end-Feb/March when Wall Street reacted adversely, plunging over 450 points on the day Shanghai plunged 9% could see a repeat of market behaviour then when the STI rebounded quickly from its 11.6% in a week with a new high seen in a month.
In coming days the local market my remain touchy to Wall Street even as it made a spirited rebound this morning. The index has rebounded above the 3500 psychological level as we had talked about in latest market view but it is too early to call for a bottom at Friday’s 3444 low.
If Wall Street continues to fall this week, breaking 13000 and next support around 12800, the STI is likely to fall back to 3400, which means an 8% pullback from 3688. But if the Dow rebounds to 13600-700, then the STI should rally to 3550-80, covering more of last Friday’s breakdown gap between 3576 to 3504.
We had warned of a pending pullback in the latest two market views with the first report on July 18 calling for a fall to 3580 from the then 3688 record high on July 16 but felt it was still possible for the STI to test 3700 in August. The STI fell to 3578 on July 18 but rebounded to 3669 on July 24.
The next report on July 25 after Wall Street’s overnight plunge exceeding 200 points warned of a significant market pullback in the months ahead and that the STI could see a 8-12% fall instead of the usual 3-5% pullbacks seen in recent months. A 10% fall could see the STI back to around its first major high of 3316 early this year.
So far the index has dropped 244 points or 6.6% from 3688 to 3444 last Friday. The end Feb/early March correction was more severe, down 385 point or 11.6% as the sub-prime woes had just started. It is well known now and its bearish impact on Singapore should be less.
The factors causing the worldwide market correction then are about the same that caused Wall Street’s latest scare mainly the sub-prime mortgage woes. There is certainly a worsening of this issue with the US housing market in depression and fears that it can only get worse with repercussions on companies’ earnings and GDP growth.
Thus Wall Street is expected to remain unsettled as the ramifications of the housing crisis can drag for a long time. This is proven by the resurfacing of the sub-prime issue after a few months. A choppy Wall Street remains a drag on Singapore as the US remains our biggest export market.
But strong regional fundamentals will re-assert themselves and bring back investors to regional markets. Already we have seen some choice sectors led by O&M, construction/building materials, commodities and tourism sectors remaining resilient.
Property counters have already plunged with Capitaland and CityDev down about 20% from their recent all-time peaks and are taking the rebound lead. They should help in cushioning the STI’s fall together with the other bullish sectors.
The reporting season is going full swing now and while overall sentiment is still sensitive to Wall Street, strong earnings reports from such blue chips as the banks, SIA, SingTel, ST Eng, SembCorp and Venture should also support the market as earnings upgrades may continue to be justified despite the market fall.
A minor rally cannot be ruled out next month with the STI testing 3550-3600 but we are unlikely to see the 3688 high being tested until year-end. Prospects for the following months from September to November remain uncertain at this stage. But we expect 3300-50 to be a strong support during those months.
This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. You should independently evaluate particular investments and consult an independent financial adviser before dealing in any securities mentioned in this report.
This report may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report is not intended for distribution, publication to or use by any person in any jurisdiction outside (i) Singapore or (ii) such other jurisdiction as FSPL may determine in its absolute discretion, where its distribution, publication or use would be contrary to applicable law or would subject FSPL and its related corporations, connected persons, associated persons and/or affiliates (collectively “Fraser”) to any registration, licensing or other requirements within such jurisdiction.
The information or views in the report (“Information”) has been obtained or derived from sources believed by FSPL to be reliable. However, FSPL makes no representation as to the accuracy or completeness of such sources or the Information and FSPL accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Information. Fraser may have issued other reports expressing views different from the Information and all views expressed in all reports of Fraser are subject to change without notice. Fraser reserves the right to act upon or use the Information at any time, including before its publication herein.
Fraser and its directors, officers, employees and representatives may, to the extent permitted by law, transact with, perform broking, underwriting or other services for or solicit business from, the issuer(s) or other persons in respect of, and/or have a position or holding, or other material interest, or effect transactions in, the securities referred to in this report or other investments related thereto.
China’s stock market has largely ignored the Dow’s plunge last week, with major indices gaining while the rest of the world were mostly down.
This sign of decoupling unlike at end-Feb/March when Wall Street reacted adversely, plunging over 450 points on the day Shanghai plunged 9% could see a repeat of market behaviour then when the STI rebounded quickly from its 11.6% in a week with a new high seen in a month.
In coming days the local market my remain touchy to Wall Street even as it made a spirited rebound this morning. The index has rebounded above the 3500 psychological level as we had talked about in latest market view but it is too early to call for a bottom at Friday’s 3444 low.
If Wall Street continues to fall this week, breaking 13000 and next support around 12800, the STI is likely to fall back to 3400, which means an 8% pullback from 3688. But if the Dow rebounds to 13600-700, then the STI should rally to 3550-80, covering more of last Friday’s breakdown gap between 3576 to 3504.
We had warned of a pending pullback in the latest two market views with the first report on July 18 calling for a fall to 3580 from the then 3688 record high on July 16 but felt it was still possible for the STI to test 3700 in August. The STI fell to 3578 on July 18 but rebounded to 3669 on July 24.
The next report on July 25 after Wall Street’s overnight plunge exceeding 200 points warned of a significant market pullback in the months ahead and that the STI could see a 8-12% fall instead of the usual 3-5% pullbacks seen in recent months. A 10% fall could see the STI back to around its first major high of 3316 early this year.
So far the index has dropped 244 points or 6.6% from 3688 to 3444 last Friday. The end Feb/early March correction was more severe, down 385 point or 11.6% as the sub-prime woes had just started. It is well known now and its bearish impact on Singapore should be less.
The factors causing the worldwide market correction then are about the same that caused Wall Street’s latest scare mainly the sub-prime mortgage woes. There is certainly a worsening of this issue with the US housing market in depression and fears that it can only get worse with repercussions on companies’ earnings and GDP growth.
Thus Wall Street is expected to remain unsettled as the ramifications of the housing crisis can drag for a long time. This is proven by the resurfacing of the sub-prime issue after a few months. A choppy Wall Street remains a drag on Singapore as the US remains our biggest export market.
But strong regional fundamentals will re-assert themselves and bring back investors to regional markets. Already we have seen some choice sectors led by O&M, construction/building materials, commodities and tourism sectors remaining resilient.
Property counters have already plunged with Capitaland and CityDev down about 20% from their recent all-time peaks and are taking the rebound lead. They should help in cushioning the STI’s fall together with the other bullish sectors.
The reporting season is going full swing now and while overall sentiment is still sensitive to Wall Street, strong earnings reports from such blue chips as the banks, SIA, SingTel, ST Eng, SembCorp and Venture should also support the market as earnings upgrades may continue to be justified despite the market fall.
A minor rally cannot be ruled out next month with the STI testing 3550-3600 but we are unlikely to see the 3688 high being tested until year-end. Prospects for the following months from September to November remain uncertain at this stage. But we expect 3300-50 to be a strong support during those months.
This report is provided for information only and is not an offer or a solicitation to deal in securities or to enter into any legal relations, nor an advice or a recommendation with respect to such securities. This report is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient hereof. You should independently evaluate particular investments and consult an independent financial adviser before dealing in any securities mentioned in this report.
This report may not be published, circulated, reproduced or distributed in whole or in part to any other person without our written consent. This report is not intended for distribution, publication to or use by any person in any jurisdiction outside (i) Singapore or (ii) such other jurisdiction as FSPL may determine in its absolute discretion, where its distribution, publication or use would be contrary to applicable law or would subject FSPL and its related corporations, connected persons, associated persons and/or affiliates (collectively “Fraser”) to any registration, licensing or other requirements within such jurisdiction.
The information or views in the report (“Information”) has been obtained or derived from sources believed by FSPL to be reliable. However, FSPL makes no representation as to the accuracy or completeness of such sources or the Information and FSPL accepts no liability whatsoever for any loss or damage arising from the use of or reliance on the Information. Fraser may have issued other reports expressing views different from the Information and all views expressed in all reports of Fraser are subject to change without notice. Fraser reserves the right to act upon or use the Information at any time, including before its publication herein.
Fraser and its directors, officers, employees and representatives may, to the extent permitted by law, transact with, perform broking, underwriting or other services for or solicit business from, the issuer(s) or other persons in respect of, and/or have a position or holding, or other material interest, or effect transactions in, the securities referred to in this report or other investments related thereto.
Don't panic! It's not the beginning of a bear market -Asia Equity Focus
Asia to face temporary pullback rather than entering a bear market
Hit by a sharp resurgence of risk aversion across the globe, the Asian equity
markets tumbled in the last three trading days, with the MSCI Asia ex-Japan and
MSCI Asia Pacific indices falling 5.3% and 4.3% from their record highs on 24 July.
We expect the Asian equity markets will see further headwinds in the coming week
after the continued sell-off in the US equity market last Friday, driven by lingering
concerns about the spillover effects of the subprime mortgage fallout and a widening
credit crunch which will curb global M&A activities. The market has totally ignored
the stronger-than-expected US Q2 GDP estimate at 3.4%, above consensus of
3.2%. The Dow Jones and S&P 500 plunged 4.2% and 4.9%, respectively, over
the past week.
In view of the current hostile trading environment, we advise investors not to panic as
we see limited signs of the beginning of a bear market. In his just released global
equity strategy report, Credit Suisse Investment Banking (CSIB) Global Equity
Strategist, Andrew Garthwaite, argued that we do not have the preconditions for a
general credit crisis or the end of the equity bull market. According to Garthwaite, six
pre-conditions need to be in place for the equity bull market to end: (1) equities
become expensive against bonds; (2) corporates turn into net sellers; (3) a major
macro problem occurs; (4) excessive optimism; (5) credit spreads need to be in a
bear market; and (6) credit breadth narrows. At this stage, we only see two negative
signs emerging, which are the widening of credit spreads and narrowing of breadth.
Based on the experience of the narrowing of breadth in April 1998, the equitymarkets peaked nearly two years later. As a result, CSIB reiterated its bullish view on global equities though it saw risks for the
equity markets rising.
We share the views of CSIB that the latest market downturn is another bull market correction, though the magnitude of the
correction will likely be greater than the two earlier pullbacks that we saw in late February-early March and in early June. There
are three positive fundamental factors in support of continuation of the bull market to the year-end. First, equities are still not
expensive against bonds as equities FCF yield is still abnormally high against corporate bonds yield. Second, funds flow remains
attractive, as overall corporate buying and insider buying have risen strongly. Note that private equity inflows soared 67% to USD
260 bn in H1 2007 and CSIB estimated that there is still around USD 200 bn of un-invested private equity in the market. Lastly,
inflation remains benign, as wage inflation in the US, Japan and Europe is falling and non-food inflation in China continues to stay
low at 1%. We maintain our positive fundamental views on the Asian equity markets for H2 2007 and believe the near-term
correction will bring more attractive re-entry levels for long-term investors.
Hit by a sharp resurgence of risk aversion across the globe, the Asian equity
markets tumbled in the last three trading days, with the MSCI Asia ex-Japan and
MSCI Asia Pacific indices falling 5.3% and 4.3% from their record highs on 24 July.
We expect the Asian equity markets will see further headwinds in the coming week
after the continued sell-off in the US equity market last Friday, driven by lingering
concerns about the spillover effects of the subprime mortgage fallout and a widening
credit crunch which will curb global M&A activities. The market has totally ignored
the stronger-than-expected US Q2 GDP estimate at 3.4%, above consensus of
3.2%. The Dow Jones and S&P 500 plunged 4.2% and 4.9%, respectively, over
the past week.
In view of the current hostile trading environment, we advise investors not to panic as
we see limited signs of the beginning of a bear market. In his just released global
equity strategy report, Credit Suisse Investment Banking (CSIB) Global Equity
Strategist, Andrew Garthwaite, argued that we do not have the preconditions for a
general credit crisis or the end of the equity bull market. According to Garthwaite, six
pre-conditions need to be in place for the equity bull market to end: (1) equities
become expensive against bonds; (2) corporates turn into net sellers; (3) a major
macro problem occurs; (4) excessive optimism; (5) credit spreads need to be in a
bear market; and (6) credit breadth narrows. At this stage, we only see two negative
signs emerging, which are the widening of credit spreads and narrowing of breadth.
Based on the experience of the narrowing of breadth in April 1998, the equitymarkets peaked nearly two years later. As a result, CSIB reiterated its bullish view on global equities though it saw risks for the
equity markets rising.
We share the views of CSIB that the latest market downturn is another bull market correction, though the magnitude of the
correction will likely be greater than the two earlier pullbacks that we saw in late February-early March and in early June. There
are three positive fundamental factors in support of continuation of the bull market to the year-end. First, equities are still not
expensive against bonds as equities FCF yield is still abnormally high against corporate bonds yield. Second, funds flow remains
attractive, as overall corporate buying and insider buying have risen strongly. Note that private equity inflows soared 67% to USD
260 bn in H1 2007 and CSIB estimated that there is still around USD 200 bn of un-invested private equity in the market. Lastly,
inflation remains benign, as wage inflation in the US, Japan and Europe is falling and non-food inflation in China continues to stay
low at 1%. We maintain our positive fundamental views on the Asian equity markets for H2 2007 and believe the near-term
correction will bring more attractive re-entry levels for long-term investors.
SMRT - 1QFY08 : Earnings expansion driven by ridership growth
SMRT reported 1QFY08 net profit of S$37.9m, up 38.5% yoy. Revenue was up
7.8% yoy.
Revenue was up 7.8% yoy to S$194.2m. The S$14m yoy rise in revenue was
primarily driven by MRT operations, which recorded a S$8.9m or 9.1% revenue
rise to S$106.8m - MRT average daily ridership was up 6.9% yoy to 1.23m.
Rental revenue from commercial spaces rose a sharp 18.4% yoy as a result of
better yield following the redevelopment of retail space at various MRT stations.
Advertising revenue surged 43.8% yoy due to increased advertising on trains,
stations and buses. Taxi operations also recorded a respectable 11.4% yoy
revenue increase.
Operating profit rose 27.6% or S$9.7m yoy to S$44.6m. This was due to a)
MRT operations operating profit rising S$3.7m (or 13%) yoy; b) taxi operating
losses falling from S$3.2m in 1QFY07 to S$0.3m; and c) improvements in rental
and advertising operating profit.
Positive outlook for revenue going ahead. SMRT expects a yoy ridership
increase going forward. The consequent higher fare revenue will be partly
negated by the 2 ppt increase in GST effective 1 Jul 07. Revenue from taxi is
also expected to rise due to a larger average hired-out fleet. SMRT management
expects to record S$8m retail space rental revenue increase for FY08.
However, expenses are expected to be higher due to more scheduled repairs
and maintenance and increase in employers’ CPF contribution by 1.5 ppt
effective 1 Jul 07.
Earnings forecasts raised marginally. We have raised our FY08 net profit
forecast by 11% to S$131.1m, to reflect the anticipated stronger FY08 ridership
figures for MRT, LRT and buses.
Our target price for SMRT is S$2.10. This comprises the following: a) S$1.55
for existing operations (which has factored in cannibalisation from the 2010
commencement of Circle Line operation), b) S$0.17 for the Circle Line, and c)
S$0.38 value enhancement assuming the land transport review will lead to one
operator running all rail and bus operations in Singapore. If the land transport
review leads to a model of one-rail operator and one-bus operator, then S$1.91
would be a fairer value. While the market continues to speculate on the
recommendations of the land transport review, we believe the bullish sentiment
could bring SMRT’s share price closer to our more optimistic valuation.
7.8% yoy.
Revenue was up 7.8% yoy to S$194.2m. The S$14m yoy rise in revenue was
primarily driven by MRT operations, which recorded a S$8.9m or 9.1% revenue
rise to S$106.8m - MRT average daily ridership was up 6.9% yoy to 1.23m.
Rental revenue from commercial spaces rose a sharp 18.4% yoy as a result of
better yield following the redevelopment of retail space at various MRT stations.
Advertising revenue surged 43.8% yoy due to increased advertising on trains,
stations and buses. Taxi operations also recorded a respectable 11.4% yoy
revenue increase.
Operating profit rose 27.6% or S$9.7m yoy to S$44.6m. This was due to a)
MRT operations operating profit rising S$3.7m (or 13%) yoy; b) taxi operating
losses falling from S$3.2m in 1QFY07 to S$0.3m; and c) improvements in rental
and advertising operating profit.
Positive outlook for revenue going ahead. SMRT expects a yoy ridership
increase going forward. The consequent higher fare revenue will be partly
negated by the 2 ppt increase in GST effective 1 Jul 07. Revenue from taxi is
also expected to rise due to a larger average hired-out fleet. SMRT management
expects to record S$8m retail space rental revenue increase for FY08.
However, expenses are expected to be higher due to more scheduled repairs
and maintenance and increase in employers’ CPF contribution by 1.5 ppt
effective 1 Jul 07.
Earnings forecasts raised marginally. We have raised our FY08 net profit
forecast by 11% to S$131.1m, to reflect the anticipated stronger FY08 ridership
figures for MRT, LRT and buses.
Our target price for SMRT is S$2.10. This comprises the following: a) S$1.55
for existing operations (which has factored in cannibalisation from the 2010
commencement of Circle Line operation), b) S$0.17 for the Circle Line, and c)
S$0.38 value enhancement assuming the land transport review will lead to one
operator running all rail and bus operations in Singapore. If the land transport
review leads to a model of one-rail operator and one-bus operator, then S$1.91
would be a fairer value. While the market continues to speculate on the
recommendations of the land transport review, we believe the bullish sentiment
could bring SMRT’s share price closer to our more optimistic valuation.
SGX: Record FY07 performance
Record FY07 earnings. Singapore Exchange (SGX) posted record FY07
earnings of S$421.8m, more than doubling that of FY06. Excluding the
one-time gains from the disposal of the SGX Centre and the write-back of
the impairment allowance on the same building, net profit would have been
S$311.3m, still a record high, and fairly in line with market estimates.
Improvements came from all fronts. Revenue rose 41% to S$576.2m in
FY07. Securities topped with revenue of S$326m, up 56%, or 57% of total
revenue, buoyed by the surge in securities trading volumes and values
since the start of 2007. Derivatives revenue grew 22% to S$117m. Other
positives included more new and bigger listings (46 new IPOs, 70% foreign),
Exchange Traded Funds (ETF) and Global Depository Receipts (GDR).
Raised base annual dividend to 12 cents. Management has raised the
annual base dividend from 8 cents to 12 cents with effect from FY08. The
final dividend for FY07 is a total of 30 cents (2 cents for 4Q + a variable
dividend of 28 cents). This means a total payout of 36 cents in FY07 (FY06:
16.2 cents), once again exceeding its base dividend.
Positive newsflow. In the last few months, SGX has seen several positive
developments, with two key deals being a 5% stake in the Bombay Stock
Exchange (BSE) as well as the Tokyo Stock Exchange's 4.99% stake in
SGX. In addition, it has signed several partnerships including two MOUs
with the Hanoi Securities Trading Center and Ho Chih Minh City Securities
Trading Center. All these have been captured in its share price in the last 1-
2 months, which has moved to a recent high of S$10.90, up 91% for the
year, making it the best-performing exchange stock in this region. Trading
momentum looks good so far this quarter, with average daily volume of 4.5b
units in Jul - another all-time high. Based on the still strong market activities,
we have raised FY08 earnings estimates from S$238.7m to S$286.8m,
largely on account of optimistic estimates for both securities and derivatives
in FY08. As valuations for its peers have also moved up, we are upping our
valuation parameter from 25x to 30x (peer range: 25-37) FY08/09 blended
earnings. Based on this, we are raising the fair value estimate for the stock
from S$6.20 to S$8.80. We maintain our HOLD rating on SGX as its net
yield remains good at around 3%.
earnings of S$421.8m, more than doubling that of FY06. Excluding the
one-time gains from the disposal of the SGX Centre and the write-back of
the impairment allowance on the same building, net profit would have been
S$311.3m, still a record high, and fairly in line with market estimates.
Improvements came from all fronts. Revenue rose 41% to S$576.2m in
FY07. Securities topped with revenue of S$326m, up 56%, or 57% of total
revenue, buoyed by the surge in securities trading volumes and values
since the start of 2007. Derivatives revenue grew 22% to S$117m. Other
positives included more new and bigger listings (46 new IPOs, 70% foreign),
Exchange Traded Funds (ETF) and Global Depository Receipts (GDR).
Raised base annual dividend to 12 cents. Management has raised the
annual base dividend from 8 cents to 12 cents with effect from FY08. The
final dividend for FY07 is a total of 30 cents (2 cents for 4Q + a variable
dividend of 28 cents). This means a total payout of 36 cents in FY07 (FY06:
16.2 cents), once again exceeding its base dividend.
Positive newsflow. In the last few months, SGX has seen several positive
developments, with two key deals being a 5% stake in the Bombay Stock
Exchange (BSE) as well as the Tokyo Stock Exchange's 4.99% stake in
SGX. In addition, it has signed several partnerships including two MOUs
with the Hanoi Securities Trading Center and Ho Chih Minh City Securities
Trading Center. All these have been captured in its share price in the last 1-
2 months, which has moved to a recent high of S$10.90, up 91% for the
year, making it the best-performing exchange stock in this region. Trading
momentum looks good so far this quarter, with average daily volume of 4.5b
units in Jul - another all-time high. Based on the still strong market activities,
we have raised FY08 earnings estimates from S$238.7m to S$286.8m,
largely on account of optimistic estimates for both securities and derivatives
in FY08. As valuations for its peers have also moved up, we are upping our
valuation parameter from 25x to 30x (peer range: 25-37) FY08/09 blended
earnings. Based on this, we are raising the fair value estimate for the stock
from S$6.20 to S$8.80. We maintain our HOLD rating on SGX as its net
yield remains good at around 3%.
Pharmaceutical Industry - Chinese healthcare industry rebounds!
Chinese healthcare industry rebounds!
In the first half of year 2007, Chinese healthcare industry performance
bounced back. In the first five months, industry revenue reached 214.6 billion
RMB, with a YoY increase of 21.05%. 5-month net profit was 18.4 billion RMB,
with a YoY increase of 35.54%. Profit before tax margin also increased 0.84%
to 8.58%. This increase is mainly due to lower sales and profit in year 2006.
Drug companies’ outlook got a bit brighter as large scale price capping would
not take place within the next two years by National Development and Reform
Commission (NDRC). More resources and market share are accruing to bigger
and higher quality companies; smaller players are getting out of the market.
This restructuring will continue in the future and will benefit bigger players like
C&O.
Chinese healthcare industry includes chemical pharmaceuticals, traditional
Chinese medicine, drug related raw chemicals, biological and biochemical
pharmaceuticals and other sub industries (medical devices, hygiene related
materials and products, herbal medicine etc). Since chemical drug sector and
TCM sector were hit most by Chinese government regulations, the rebounding
of these two sectors is most obvious. According to growth data, we can see
that the TCM sector has recovered to its year 2005 performance while the
chemical drug sector still hasn’t fully recovered to its 2005 level. We also
observe that the biological and biochemical pharmaceuticals sector continue to
maintain high growth.
Recent policy effect on S share pharmas.
New drug registration method in effect from Oct 1, 2007. This new method will
generally slow down the process of new drug application and increase the
entry barrier for new drugs entering the market. The new registration method
also encourages the introduction of completely new drugs (e.g. new neverbefore
used drug formulations) into the market. This new method has much
more stringent requirements for the safety of new drugs, and discourages
those companies that simply change the drug delivery system or formulation.
Some drugs in Sihuan, C&O, and AsiaPharm pipeline are completely new
drugs. This new regulation can partially protect these companies’ current
business by preventing new comers and favoring existing companies’ new
products.
NDRC does not plan to do large-scale price capping within the next two years.
It appears that the government is trying to build an inspection framework and
prefers to give some time for the market to adjust itself. This is generally good
for drug companies.
The adjustment for export tax refund will affect certain companies, which
manufacture drug related raw materials (but not for antibiotics and vitamins).
This policy does not affect S share pharmas as none of these companies’ main
revenue sources derive from raw material export.
Singapore/Pharmaceutical/Sector
PHILLIP SECURITIES
RESEARCH
Equities
(MICA (P) 186/06/2007)
Zuo Li
65-6531 1249
FAX 65-6536 4435
zuoli@phillip.com.sg
Price Chart – Sihuan
52-w eek price chart
0.4
0.5
0.6
0.7
0.8
0.9
1
3/22/2007
4/5/2007
4/19/2007
5/3/2007
5/17/2007
5/31/2007
6/14/2007
6/28/2007
7/12/2007
Price Chart – C&O
52-week price chart
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
7/25/2006
9/5/2006
10/17/2006
11/28/2006
1/9/2007
2/20/2007
4/3/2007
5/15/2007
6/26/2007
Price Chart – AsiaPharm
52-week price chart
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
7/25/2006
9/5/2006
10/17/2006
11/28/2006
1/9/2007
2/20/2007
4/3/2007
5/15/2007
6/26/2007
Pharmaceutical Industry 26 July 2007
Phillip Securities Research
2
Prospects for the Chinese healthcare industry.
We expect the healthcare industry to continue its growth momentum,
especially international trade. Huge rural market, aging population,
urbanization, and raising awareness of healthcare will help the growth of
Chinese healthcare industry. We expect an industry production/sales growth of
18%.
The healthcare system reform is on going. It will change the current drug
consumption status, which is excessively concentrated in urban hospitals.
Currently, Chinese national healthcare insurance scheme only covers 30% of
urban and 25% of rural areas. Since the goal of Chinese healthcare reform is
to build a universally available primary healthcare system, the demand for
healthcare will keep growing but profit margins of the healthcare industry are
likely to get thinner.
We expect to see more resources and market share accruing to bigger and
higher quality players; industry structure will get optimized as smaller players
are getting out of the market.
Valuation.
Traditionally, healthcare has been one of the most attractive sectors for
Chinese investors, for its high margins and growth story, even though this
sector faces heavy government regulations. In the A share secondary market,
before the recent market correction, the healthcare industry PE was 55x, and
after the correction, the PE is still close to 49x, the highest among all sectors.
As for H shares, the median heath-care sector historical PE is above 25x, and
the forward PE around 20x. For S share drug companies, the historical twelvemonth
PE range is from 12-22x, and the forward twelve-month PE for those
companies under our coverage are 13-14x.
After acquisition, the size of C&O and AsiaPharm are comparable with H
shares healthcare companies (in term of net profit). Even if we give S share
companies a discount for their relatively smaller sizes and short operation
history, they should be trading at a higher PE, which we think should be around
forward 18x. Given Sihuan’s high growth, it also deserves a higher PE, which
we would expect 20-25x forward PE (those H and A share healthcare
companies which have above 50% growth trade at around 50x PE). We have a
neutral view about Reyoung, since we expect it to have a flat growth (currently
trading around 13.7x historical PE). We are also neutral about Star Pharm
even though it is trading under a lower historical PE 11.7x primarily due to its
small size, its growth quality and its acquired R&D quality.
In the first half of year 2007, Chinese healthcare industry performance
bounced back. In the first five months, industry revenue reached 214.6 billion
RMB, with a YoY increase of 21.05%. 5-month net profit was 18.4 billion RMB,
with a YoY increase of 35.54%. Profit before tax margin also increased 0.84%
to 8.58%. This increase is mainly due to lower sales and profit in year 2006.
Drug companies’ outlook got a bit brighter as large scale price capping would
not take place within the next two years by National Development and Reform
Commission (NDRC). More resources and market share are accruing to bigger
and higher quality companies; smaller players are getting out of the market.
This restructuring will continue in the future and will benefit bigger players like
C&O.
Chinese healthcare industry includes chemical pharmaceuticals, traditional
Chinese medicine, drug related raw chemicals, biological and biochemical
pharmaceuticals and other sub industries (medical devices, hygiene related
materials and products, herbal medicine etc). Since chemical drug sector and
TCM sector were hit most by Chinese government regulations, the rebounding
of these two sectors is most obvious. According to growth data, we can see
that the TCM sector has recovered to its year 2005 performance while the
chemical drug sector still hasn’t fully recovered to its 2005 level. We also
observe that the biological and biochemical pharmaceuticals sector continue to
maintain high growth.
Recent policy effect on S share pharmas.
New drug registration method in effect from Oct 1, 2007. This new method will
generally slow down the process of new drug application and increase the
entry barrier for new drugs entering the market. The new registration method
also encourages the introduction of completely new drugs (e.g. new neverbefore
used drug formulations) into the market. This new method has much
more stringent requirements for the safety of new drugs, and discourages
those companies that simply change the drug delivery system or formulation.
Some drugs in Sihuan, C&O, and AsiaPharm pipeline are completely new
drugs. This new regulation can partially protect these companies’ current
business by preventing new comers and favoring existing companies’ new
products.
NDRC does not plan to do large-scale price capping within the next two years.
It appears that the government is trying to build an inspection framework and
prefers to give some time for the market to adjust itself. This is generally good
for drug companies.
The adjustment for export tax refund will affect certain companies, which
manufacture drug related raw materials (but not for antibiotics and vitamins).
This policy does not affect S share pharmas as none of these companies’ main
revenue sources derive from raw material export.
Singapore/Pharmaceutical/Sector
PHILLIP SECURITIES
RESEARCH
Equities
(MICA (P) 186/06/2007)
Zuo Li
65-6531 1249
FAX 65-6536 4435
zuoli@phillip.com.sg
Price Chart – Sihuan
52-w eek price chart
0.4
0.5
0.6
0.7
0.8
0.9
1
3/22/2007
4/5/2007
4/19/2007
5/3/2007
5/17/2007
5/31/2007
6/14/2007
6/28/2007
7/12/2007
Price Chart – C&O
52-week price chart
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
7/25/2006
9/5/2006
10/17/2006
11/28/2006
1/9/2007
2/20/2007
4/3/2007
5/15/2007
6/26/2007
Price Chart – AsiaPharm
52-week price chart
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
7/25/2006
9/5/2006
10/17/2006
11/28/2006
1/9/2007
2/20/2007
4/3/2007
5/15/2007
6/26/2007
Pharmaceutical Industry 26 July 2007
Phillip Securities Research
2
Prospects for the Chinese healthcare industry.
We expect the healthcare industry to continue its growth momentum,
especially international trade. Huge rural market, aging population,
urbanization, and raising awareness of healthcare will help the growth of
Chinese healthcare industry. We expect an industry production/sales growth of
18%.
The healthcare system reform is on going. It will change the current drug
consumption status, which is excessively concentrated in urban hospitals.
Currently, Chinese national healthcare insurance scheme only covers 30% of
urban and 25% of rural areas. Since the goal of Chinese healthcare reform is
to build a universally available primary healthcare system, the demand for
healthcare will keep growing but profit margins of the healthcare industry are
likely to get thinner.
We expect to see more resources and market share accruing to bigger and
higher quality players; industry structure will get optimized as smaller players
are getting out of the market.
Valuation.
Traditionally, healthcare has been one of the most attractive sectors for
Chinese investors, for its high margins and growth story, even though this
sector faces heavy government regulations. In the A share secondary market,
before the recent market correction, the healthcare industry PE was 55x, and
after the correction, the PE is still close to 49x, the highest among all sectors.
As for H shares, the median heath-care sector historical PE is above 25x, and
the forward PE around 20x. For S share drug companies, the historical twelvemonth
PE range is from 12-22x, and the forward twelve-month PE for those
companies under our coverage are 13-14x.
After acquisition, the size of C&O and AsiaPharm are comparable with H
shares healthcare companies (in term of net profit). Even if we give S share
companies a discount for their relatively smaller sizes and short operation
history, they should be trading at a higher PE, which we think should be around
forward 18x. Given Sihuan’s high growth, it also deserves a higher PE, which
we would expect 20-25x forward PE (those H and A share healthcare
companies which have above 50% growth trade at around 50x PE). We have a
neutral view about Reyoung, since we expect it to have a flat growth (currently
trading around 13.7x historical PE). We are also neutral about Star Pharm
even though it is trading under a lower historical PE 11.7x primarily due to its
small size, its growth quality and its acquired R&D quality.
Buyers lining up
The sharp pullback on Wall Street overnight pressured local stocks on Wednesday, but active bargain hunting was witnessed throughout the trading hours. In fact, despite hovering in negative territory for the entire session, both the HSI and the HSCEI finished the day well above their respective day low established in early trading. Reflecting renewed subprime worries and easing crude oil prices, HSBC Holdings (0005.HK, $143.80, HOLD) and CNOOC (0883.HK, $9.39, HOLD) suffered from heavy selling on Wednesday, dragging the blue-chip index down by 111 points ( 0.5%) to a close of 23,362. The H-share index, meanwhile, fell 81 points (0.6%) to end just below the 13,400-point level on the back of setbacks in PetroChina ( 0857.HK, $12.10, HOLD) and mainland banks. Nonetheless, the local market did demonstrate strong bouncing power that saw both benchmark indexes crawl back markedly from a loss of over 240 points intraday. On the corporate front, China airlines buckled against the market pullback as investors bet on their turnaround in operations, which sent share prices of Air China (0753.HK, $7.27, HOLD) and China Southern Airlines ( 1055.HK, $6.38, SELL) up sharply by 17.6% and 10.8%, respectively. Following the announcement of China Eastern Airlines (0670.HK, $3.73) last week that it may report a profit for 1H07 after incurring a substantial net loss in 1H06, Air China announced that it expects its 1H07 net profit to jump more than 20 times yoy on traffic growth, increased investment gains and renminbi appreciation. China Southern Airlines also announced a positive profit alert after market closed on Wednesday.
Our View
Wednesday's market setback ended the four-day rising streaks in the HSI and the HSCEI that had put on solid gains of 631 points ( 2.8%) and 682 points (5.3%), respectively. We nonetheless expect the market uptrend to resume near term on the back of strong liquidity. After all, market turnover surpassing $100b on Wednesday indicated that there is plenty of buying power lining up, which should support the local market to regain its upward momentum. In addition, the mainland markets appear to be heading for a breakout on the upside, which should bode well for investment sentiment in the local bourse. The bulls seem to have the upper hand at the moment.
Our View
Wednesday's market setback ended the four-day rising streaks in the HSI and the HSCEI that had put on solid gains of 631 points ( 2.8%) and 682 points (5.3%), respectively. We nonetheless expect the market uptrend to resume near term on the back of strong liquidity. After all, market turnover surpassing $100b on Wednesday indicated that there is plenty of buying power lining up, which should support the local market to regain its upward momentum. In addition, the mainland markets appear to be heading for a breakout on the upside, which should bode well for investment sentiment in the local bourse. The bulls seem to have the upper hand at the moment.
Vietnam Real Estate Primer - Unleashing the tiger
• All trends point to property: Vietnam has one of the youngest
demographics in Asia, with 70% of its population less than 35
years of age. Together with increasing incomes and rapid
urbanization, the appetite for residential space of the emerging
middle class is growing quickly. The influx of foreign investment
and high and stable GDP growth that averaged 7.1% CAGR last
decade are spurring demand for commercial and industrial real
estate. We believe that as the economy begins to pick up, the first
wave of growth will be largely focused on the natural need for
infrastructure and property development.
• Rising across the board: Real estate in Vietnam is experiencing
significant appreciations in capital values and rents throughout its
spectrum, from residential to commercial space. We expect this
trend to carry on as regulations overseeing the market continue to
develop and as MNCs enter the country as a result of the WTO
accession and China Plus One policy. In the short to medium
term, we expect demand to continue overwhelming supply.
• Investment opportunities: We discuss key stocks that give
investors an exposure to Vietnam’s property market. As more and
more firms have begun to invest in the country, several investment
plays, not limited to Vietnamese stocks, have risen. Our
compilation includes companies listed in Vietnam, Singapore,
Hong Kong, Korea, Malaysia and Thailand.
• Key risks: Overcrowding and quality control are ongoing issues in
Vietnam’s property market. Other risk factors include the lack of
transparency and stagnation in real estate regulatory reform.
demographics in Asia, with 70% of its population less than 35
years of age. Together with increasing incomes and rapid
urbanization, the appetite for residential space of the emerging
middle class is growing quickly. The influx of foreign investment
and high and stable GDP growth that averaged 7.1% CAGR last
decade are spurring demand for commercial and industrial real
estate. We believe that as the economy begins to pick up, the first
wave of growth will be largely focused on the natural need for
infrastructure and property development.
• Rising across the board: Real estate in Vietnam is experiencing
significant appreciations in capital values and rents throughout its
spectrum, from residential to commercial space. We expect this
trend to carry on as regulations overseeing the market continue to
develop and as MNCs enter the country as a result of the WTO
accession and China Plus One policy. In the short to medium
term, we expect demand to continue overwhelming supply.
• Investment opportunities: We discuss key stocks that give
investors an exposure to Vietnam’s property market. As more and
more firms have begun to invest in the country, several investment
plays, not limited to Vietnamese stocks, have risen. Our
compilation includes companies listed in Vietnam, Singapore,
Hong Kong, Korea, Malaysia and Thailand.
• Key risks: Overcrowding and quality control are ongoing issues in
Vietnam’s property market. Other risk factors include the lack of
transparency and stagnation in real estate regulatory reform.
Keppel Corp - Another Strong Quarter
2Q07 net earnings rises 32%
Keppel Corp recorded another creditable quarter, with a 2Q07 net profit of
S$258.4m, up 32% versus 1Q06, and up 2.7% from 1Q07. Turnover grew by 49.1%
y/y, and up 21% sequentially. This is broadly within our expectation;
however, a better than expected showing at Singapore Petroleum Company
(SPC) was offset by lower than expected contributions from Infrastructure.
Keppel has declared a 9cts per share interim dividend (1.5cts tax franked
and 7.5cts single tier) and has now used up its Section 44 tax credits in
the process.
¨ No major worries at O&M, still the powerhouse
Offshore and marine continues to be the revenue driver, recording a 12%
sequential increase in turnover, and accounting for 70% of total turnover
for the quarter. However, EBITDA declined sequentially by 3%, due to profit
recognition cycles. Consequently, EBITDA margins for the division dipped to
9.9% from 11.4% in the first quarter. As for SPC, profit was higher due to
improved refining margins at around US$9 per barrel, versus the US$7 seen
in 2Q07, mainly on higher product prices. This rise was despite a reduction
in capacity of about 9.2% due to maintenance at one of the refineries.
¨ Infrastructure takes a step back
Infrastructure, however, took a breather from its re-emergence trend ? the
division's EBITDA fell to S$7.1m for the quarter, down from S$9.4m from 1Q.
Keppel said that costs associated to 'legacy projects' continued to hold
back earnings. While we are confident of the division's long term
prospects, it looks unlikely for Keppel to achieve its target of 10%
earnings contribution from infrastructure this year, compounded by the
relative strength in the other divisions. We expect growing contributions
from the 500MW Cogen Plant that was operational since 2Q07 to make a
significant contribution to the division over the rest of the year.
¨ Target price revised to S$15.00; maintain BUY.
Keppel's O&M division will be the mainstay of the company for the
foreseeable future, with its net orderbook at some S$11.3b. While the pace
of new orders has slowed somewhat over the past few months, Keppel has
indicated that the outlook for overall demand remains healthy. For
property, Keppel Land's prospects will be driven by local and regional
projects, especially Vietnam. Local property prices will also drive
earnings for Keppel's own landbank such as Reflections at Keppel Bay and
environs. We are adjusting our FY07 forecast to S$1102.5m from S$958.5m or
an EPS of $0.697, mainly on the back of a better outlook for SPC, offset by
a lower contribution from infrastructure. Similarly, FY08 earnings are
revised to S$1,177.5m from S$1,064.8m. We are also adjusting our
sum-of-parts fair value for Keppel to S$15.00, to reflect the earnings
revision and adjustment for market prices of listed subsidiaries and
associates. We reiterate our BUY recommendation.
DBS Group: Strong 2Q, but hit came from impairment charges
Impairment charge hit 2Q results. DBS Group posted 2Q earnings of
S$560m this morning, below market expectations of S$627m (based on a
Dow Jones poll), down 7% YoY or 9% QoQ. However, the decline was
largely due to an impairment charge S$159m to reflect the lower valuation
of its 16% investment in TMB Bank. Excluding this and an allowance writeback
of S$55m, net earnings would have been S$664m, meaning yet another
record set of quarterly earnings for the group. With 1Q net earnings of
S$617m, 1H07 earnings came in at S$1177m (+5% YoY).
Broad-based growth from key units. Similar to 1Q, DBS enjoyed broadbased
growth. Interest Income grew 14.5% YoY to S$1027m, while Not-
Interest Income rose 2.5% to S$524m, giving total income of S$1551m or
up 10.2%. Net Interest Margin (NIM) stood at 2.21% in 2Q, same as in
1Q07. Customer loans rose 5% QoQ or 19% YoY to S$99b. Once again,
this was led by corporate and SME loans in Singapore and in the region.
Fee income posted double-digit growth. Fee & Commission surged a
strong 25.3% to S$371m. Buoyed by the last quarter's strong rally in the
equity market, several units benefited from brisk trading activities. The key
units with strong double-digit growth were Stockbroking (+76% YoY to
S$58m), Wealth Management (+79% YoY to S$68m) and Credit Card (+26%
to S$35m). For 1H07, fee income expanded 22% to S$680m.
Most key indicators showed improvements. Expenses were flat QoQ
but up 11% YoY to S$660m, giving cost-to-income ratio of 43%, same as
1Q, but below 2Q06. Non-Performing Loan rate improved from 1.5% in 1Q
to 1.4% in 2Q07. Non-Performing Assets rose 2% to S$1.49b. Excluding
one-time items, ROE improved to 13.6%. For 1H, ROE was 13.4%. Capital
Adequacy Ratio stood at 14.7%, with tier-1 at 9.4%, compared with 13.6%
and 9.6% in the previous quarter.
Maintain BUY. DBS has declared 2Q dividend of 20 cents per share, same
as 1Q07. This means total dividend of 40 cents per share for 1H07 (versus
17 cents for 1Q06 and 34 cents for 1H06). There is an analysts' briefing
later and we will provide further updates later on. Meantime, our rating for
the stock is a BUY.
S$560m this morning, below market expectations of S$627m (based on a
Dow Jones poll), down 7% YoY or 9% QoQ. However, the decline was
largely due to an impairment charge S$159m to reflect the lower valuation
of its 16% investment in TMB Bank. Excluding this and an allowance writeback
of S$55m, net earnings would have been S$664m, meaning yet another
record set of quarterly earnings for the group. With 1Q net earnings of
S$617m, 1H07 earnings came in at S$1177m (+5% YoY).
Broad-based growth from key units. Similar to 1Q, DBS enjoyed broadbased
growth. Interest Income grew 14.5% YoY to S$1027m, while Not-
Interest Income rose 2.5% to S$524m, giving total income of S$1551m or
up 10.2%. Net Interest Margin (NIM) stood at 2.21% in 2Q, same as in
1Q07. Customer loans rose 5% QoQ or 19% YoY to S$99b. Once again,
this was led by corporate and SME loans in Singapore and in the region.
Fee income posted double-digit growth. Fee & Commission surged a
strong 25.3% to S$371m. Buoyed by the last quarter's strong rally in the
equity market, several units benefited from brisk trading activities. The key
units with strong double-digit growth were Stockbroking (+76% YoY to
S$58m), Wealth Management (+79% YoY to S$68m) and Credit Card (+26%
to S$35m). For 1H07, fee income expanded 22% to S$680m.
Most key indicators showed improvements. Expenses were flat QoQ
but up 11% YoY to S$660m, giving cost-to-income ratio of 43%, same as
1Q, but below 2Q06. Non-Performing Loan rate improved from 1.5% in 1Q
to 1.4% in 2Q07. Non-Performing Assets rose 2% to S$1.49b. Excluding
one-time items, ROE improved to 13.6%. For 1H, ROE was 13.4%. Capital
Adequacy Ratio stood at 14.7%, with tier-1 at 9.4%, compared with 13.6%
and 9.6% in the previous quarter.
Maintain BUY. DBS has declared 2Q dividend of 20 cents per share, same
as 1Q07. This means total dividend of 40 cents per share for 1H07 (versus
17 cents for 1Q06 and 34 cents for 1H06). There is an analysts' briefing
later and we will provide further updates later on. Meantime, our rating for
the stock is a BUY.
BH Global Marine Ltd - Full Steam Ahead
Better than anticipated H1 results. BH Global delivered a sterling set of results for 1H07, which came in stronger than expected. The Company posted net earnings of S$8.3 mil (+59.1% yoy) on revenue of S$39.4 mil (+73.9% yoy). Gross profit margin improved marginally from 40.9% in the previous corresponding period to 41.0%, while net profit margin declined from 23.1% to 21.1%.
Stronger contributions from all segments. Better-than-expected results were attributed to stronger contributions from both the marine electrical equipment and marine consumables sectors. It was further boosted by several large offshore projects undertaken by the Company during the period. The Company continued to benefit from the buoyancy of the sector, and the amount of rig- and ship-building work being carried out in Singapore, as revenue contributions from Singapore improved 82.9% yoy.
New distributorship to lend boost to H2. We expect 2H07 to come in stronger than 1H07, as the Company finalizes its new distributorship for Prysmian-branded cables. The new distributorship for Prysmian (formerly known as Pirelli), the no. 2 brand of marine cables worldwide, was acquired through the Company’s new subsidiary. BH Global will serve as Prysmian’s first portal in the region.
Upgrade of fair value estimate to S$0.85. On the back of a strong H1, we have adjusted our topline estimates for FY07 and FY08 by 13.2% and 16.3%, respectively. Accordingly, we have also adjusted net earnings projections upwards for FY07 (+20.1%) and FY08 (+20.0%). Pegged to 12x FY08 earnings, our fair value estimate has been adjusted to S$0.85.
Re-rating to HOLD following strong run-up in share price. Despite our fair value estimate revision, we are downgrading our call on BH Global to HOLD. Following the strong run-up in share price since our initiation on 04 July 07, we are of the view that the Company’s earnings potential has been appropriately priced in. Downgrade to HOLD with fair value estimate of S$0.85
Stronger contributions from all segments. Better-than-expected results were attributed to stronger contributions from both the marine electrical equipment and marine consumables sectors. It was further boosted by several large offshore projects undertaken by the Company during the period. The Company continued to benefit from the buoyancy of the sector, and the amount of rig- and ship-building work being carried out in Singapore, as revenue contributions from Singapore improved 82.9% yoy.
New distributorship to lend boost to H2. We expect 2H07 to come in stronger than 1H07, as the Company finalizes its new distributorship for Prysmian-branded cables. The new distributorship for Prysmian (formerly known as Pirelli), the no. 2 brand of marine cables worldwide, was acquired through the Company’s new subsidiary. BH Global will serve as Prysmian’s first portal in the region.
Upgrade of fair value estimate to S$0.85. On the back of a strong H1, we have adjusted our topline estimates for FY07 and FY08 by 13.2% and 16.3%, respectively. Accordingly, we have also adjusted net earnings projections upwards for FY07 (+20.1%) and FY08 (+20.0%). Pegged to 12x FY08 earnings, our fair value estimate has been adjusted to S$0.85.
Re-rating to HOLD following strong run-up in share price. Despite our fair value estimate revision, we are downgrading our call on BH Global to HOLD. Following the strong run-up in share price since our initiation on 04 July 07, we are of the view that the Company’s earnings potential has been appropriately priced in. Downgrade to HOLD with fair value estimate of S$0.85
Cosco Corporation - Big plans ahead
Story: We are impressed with the rapid development of its
various yards, specifically at Cosco Zhoushan. The group now
operates 12 docks, total group docking capacity has increased by
28% to hit 1.7mdwt, following the commencement of its VLCC dry
dock at Zhoushan.
Point: In addition to new sites, workshops, berths and docks
added over the year, the group is negotiating for additional sites
at Dalian, Zhoushan and a new offshore base near Nantong. This
implies upside to our order book assumptions, once its expansion
plans are firmed up. In addition, the group has available slots for
delivery of offshore projects in 2009, and we would expect more
offshore contracts to be awarded in 2H07.
Relevance: The stock is trading at P/E of 24.5x and 18.2x vs its 3
year eps cagr of 43.5%. Maintain Buy, based on SOP value of
S$6.10.
Beefing up engineering capability. To ensure smooth execution of the
offshore projects, the group has set up technical centres at each of the
major shipyards, headquartered in Dalian. The unit, headed by Mr Xu
XiuLong, who is the Vice General Manager, Technical Centre, joined the
group last year, after 11 years in ABS Singapore (a unit of American
Shipping Bureau). Cosco Shipyard Group now boasts of a team of 676
engineers spread over all its major yards, of which 16 engineers and 11
project managers are from Singapore (Keppel FELS, SembCorp Marine and
Labroy). Backed by a strong engineering team, we believe the group has
demonstrated its commitment to ensure smooth execution for on time
delivery of its offshore projects.
Appreciation of Rmb: As contracts for shipbuilding and offshore
projects are in US$ vs cost in Rmb, the appreciation of Rmb will be
negative for project margins. To mitigate the risks, the group has added
a protective clause in its contracts. In the event the Rmb appreciated by
2% over the fixed rate in its contract, Cosco will adjust its contract price,
allowing it to pass on the additional cost to its clients.
Steel price fluctuations : The impact on offshore projects is small, at <10%
of overall project cost, as the bulk of cost is in equipment. However, steel
cost is higher for shipbuilding projects, at about 20%. To mitigate this
risk, the group will tender for projects based on forecast steel price trends
over the next three years. Group procurement is enhanced due to bulk
requirements, strengthening the group’s bargaining power for discounts
as well as securing its sources of supplies. The group aims to secure
materials at the lowest price, while fixing the cost of steel over an
extended period of time. While steel price has risen in 1H07, the group
expects prices to stabilise or decline marginally from here, due to the
removal of 17% tax rebate to discourage steel exports.
various yards, specifically at Cosco Zhoushan. The group now
operates 12 docks, total group docking capacity has increased by
28% to hit 1.7mdwt, following the commencement of its VLCC dry
dock at Zhoushan.
Point: In addition to new sites, workshops, berths and docks
added over the year, the group is negotiating for additional sites
at Dalian, Zhoushan and a new offshore base near Nantong. This
implies upside to our order book assumptions, once its expansion
plans are firmed up. In addition, the group has available slots for
delivery of offshore projects in 2009, and we would expect more
offshore contracts to be awarded in 2H07.
Relevance: The stock is trading at P/E of 24.5x and 18.2x vs its 3
year eps cagr of 43.5%. Maintain Buy, based on SOP value of
S$6.10.
Beefing up engineering capability. To ensure smooth execution of the
offshore projects, the group has set up technical centres at each of the
major shipyards, headquartered in Dalian. The unit, headed by Mr Xu
XiuLong, who is the Vice General Manager, Technical Centre, joined the
group last year, after 11 years in ABS Singapore (a unit of American
Shipping Bureau). Cosco Shipyard Group now boasts of a team of 676
engineers spread over all its major yards, of which 16 engineers and 11
project managers are from Singapore (Keppel FELS, SembCorp Marine and
Labroy). Backed by a strong engineering team, we believe the group has
demonstrated its commitment to ensure smooth execution for on time
delivery of its offshore projects.
Appreciation of Rmb: As contracts for shipbuilding and offshore
projects are in US$ vs cost in Rmb, the appreciation of Rmb will be
negative for project margins. To mitigate the risks, the group has added
a protective clause in its contracts. In the event the Rmb appreciated by
2% over the fixed rate in its contract, Cosco will adjust its contract price,
allowing it to pass on the additional cost to its clients.
Steel price fluctuations : The impact on offshore projects is small, at <10%
of overall project cost, as the bulk of cost is in equipment. However, steel
cost is higher for shipbuilding projects, at about 20%. To mitigate this
risk, the group will tender for projects based on forecast steel price trends
over the next three years. Group procurement is enhanced due to bulk
requirements, strengthening the group’s bargaining power for discounts
as well as securing its sources of supplies. The group aims to secure
materials at the lowest price, while fixing the cost of steel over an
extended period of time. While steel price has risen in 1H07, the group
expects prices to stabilise or decline marginally from here, due to the
removal of 17% tax rebate to discourage steel exports.
Singapore Post - Disposes HDB shop unit at Clementi Central
SingPost announced that it has completed the sale by tender of its HDB shop
unit at Clementi Central for a total cash consideration of S$7.9 million.
The net book value of the Property as at 30 June 2007 was S$2.6m, which gives
SingPost a gain on disposal (after deducting agent commission and legal fees)
of S$5.2m. Our earnings forecast has not factored in this gain as yet. We will
revise our earnings forecast after SingPost releases its 1QFY08 results on 30
Jul 07.
The sale is part of SingPost’s constant review of the optimization of its retail
network. The Clementi Central Post Office currently located there will be
relocated.
Based on our assumptions of 0.7% terminal growth rate, 5.7% WACC (derived
from risk-free rate of 2.8%, market risk premium of 7.9% and cost of debt after
tax of 4.6%), our DCF valuation gives a fair value of S$1.43 per share, which we
adopt as the price target.
SingPost aims for a dividend payout ratio of 80-90% of net profit, or a minimum
of 5¢/share per year. We are forecasting FY08 dividend of 6.5¢, or a payout
ratio of 85%. The resultant 5.2% dividend yield is attractive. Maintain BUY on
SingPost.
unit at Clementi Central for a total cash consideration of S$7.9 million.
The net book value of the Property as at 30 June 2007 was S$2.6m, which gives
SingPost a gain on disposal (after deducting agent commission and legal fees)
of S$5.2m. Our earnings forecast has not factored in this gain as yet. We will
revise our earnings forecast after SingPost releases its 1QFY08 results on 30
Jul 07.
The sale is part of SingPost’s constant review of the optimization of its retail
network. The Clementi Central Post Office currently located there will be
relocated.
Based on our assumptions of 0.7% terminal growth rate, 5.7% WACC (derived
from risk-free rate of 2.8%, market risk premium of 7.9% and cost of debt after
tax of 4.6%), our DCF valuation gives a fair value of S$1.43 per share, which we
adopt as the price target.
SingPost aims for a dividend payout ratio of 80-90% of net profit, or a minimum
of 5¢/share per year. We are forecasting FY08 dividend of 6.5¢, or a payout
ratio of 85%. The resultant 5.2% dividend yield is attractive. Maintain BUY on
SingPost.
SC Global Developments Limited - First landing on Sentosa Cove
Top bid for The Beachfront Collection. SC Global Developments Ltd emerges as the top bidder for the second last condominium site available for sale at Sentosa Cove – The Beachfront Collection (Figure 1). A total of five bids were submitted by developers, and SC Global had the highest bid of S$1,799 psf ppr. It is understood that the top three bids were within 3-5% of each other. With a permissible gross floor area of 149,074 sq ft, the land price works out to S$268.3 million. The site, which was launched for sale on 12 June 2007, will be the first and only beachfront condominium site at Sentosa Cove. This is in line with SC Global’s concepts of ‘Owns the original’ and ‘The Ultimate Living’. It is envisaged that a 4-storey condominium offering up to a maximum of 88 luxury apartments will be built.
Surge in land price. Land price at Sentosa Cove has surged tremendously in the past three and a half years since its first launch in December 2003 (Figure 2). From a price of S$351 psf ppr paid by Ho Bee Investment Ltd for The Berth by the Cove site in 2003, the condominium land price has jumped 413% to the current The Beachfront Collection for S$1,799 psf ppr.
Surge in land price. Land price at Sentosa Cove has surged tremendously in the past three and a half years since its first launch in December 2003 (Figure 2). From a price of S$351 psf ppr paid by Ho Bee Investment Ltd for The Berth by the Cove site in 2003, the condominium land price has jumped 413% to the current The Beachfront Collection for S$1,799 psf ppr.
Surge in land price. Land price at Sentosa Cove has surged tremendously in the past three and a half years since its first launch in December 2003 (Figure 2). From a price of S$351 psf ppr paid by Ho Bee Investment Ltd for The Berth by the Cove site in 2003, the condominium land price has jumped 413% to the current The Beachfront Collection for S$1,799 psf ppr.
Surge in land price. Land price at Sentosa Cove has surged tremendously in the past three and a half years since its first launch in December 2003 (Figure 2). From a price of S$351 psf ppr paid by Ho Bee Investment Ltd for The Berth by the Cove site in 2003, the condominium land price has jumped 413% to the current The Beachfront Collection for S$1,799 psf ppr.
China Wheel Holdings Ltd - Proposed issue of convertible bonds
Proposed issue of US$25 million 5-year convertible bonds. China Wheel Holdings (“CWH”) announced that it has entered into a subscription agreement with Lehman Brothers Commercial Corporation Asia Limited (“Lehman”) for the issue of US$25 million 5-year convertible bonds, which bear interest at 3% per annum and can be converted into shares at a conversion price of S$1.045 per share. Under the terms of the agreement, Lehman has agreed to subscribe and pay for, or procure subscription and payment for the bonds.
Net proceeds will be used to finance the construction of the new Tianjin plant. As mentioned in our initiation report of 2 April 2007, CWH expects to invest a total of about RMB780 million in the new Tianjin plant (RMB500 million for the construction of the plant and purchase of machinery and RMB280 million for working capital) through a combination of equity financing, bank borrowings and internal resources. CWH will use the net proceeds from the bonds issue to finance the construction of the Tianjin plant. Following the issue of convertible bonds, we expect CWH to finance its remaining investment in the Tianjin plant through bank borrowings and internal resources.
Maintain BUY and raise Fair Value Estimate to S$1.36. In our previous forecasts, we have assumed that CWH will tap the equity market for RMB150 million of funding by placing out new shares at S$0.90 per share in FY08. We have revised our share base dilution assumptions by factoring in a full conversion of the convertible bonds into shares during FY09, leading to increases in our EPS estimates for FY08 and FY09 by 11% and 2% respectively. Based on our revised forecasts, we now expect CWH to grow its EPS at a 3-year CAGR of 26%. CWH remains an appealing proxy to China’s booming auto sector. We maintain our BUY recommendation and raise our Fair Value Estimate from S$1.23 to S$1.36, based on the same relative valuation of 12x FY08 PER.
Net proceeds will be used to finance the construction of the new Tianjin plant. As mentioned in our initiation report of 2 April 2007, CWH expects to invest a total of about RMB780 million in the new Tianjin plant (RMB500 million for the construction of the plant and purchase of machinery and RMB280 million for working capital) through a combination of equity financing, bank borrowings and internal resources. CWH will use the net proceeds from the bonds issue to finance the construction of the Tianjin plant. Following the issue of convertible bonds, we expect CWH to finance its remaining investment in the Tianjin plant through bank borrowings and internal resources.
Maintain BUY and raise Fair Value Estimate to S$1.36. In our previous forecasts, we have assumed that CWH will tap the equity market for RMB150 million of funding by placing out new shares at S$0.90 per share in FY08. We have revised our share base dilution assumptions by factoring in a full conversion of the convertible bonds into shares during FY09, leading to increases in our EPS estimates for FY08 and FY09 by 11% and 2% respectively. Based on our revised forecasts, we now expect CWH to grow its EPS at a 3-year CAGR of 26%. CWH remains an appealing proxy to China’s booming auto sector. We maintain our BUY recommendation and raise our Fair Value Estimate from S$1.23 to S$1.36, based on the same relative valuation of 12x FY08 PER.
China XLX Fertiliser Ltd - Riding on China’s Agriculture and Alternative Energy Drive
One of China’s largest and lowest-cost coal-based urea producers. Based
in Henan, the most populous and largest fertiliser consuming province in China,
and located near coal-rich Shanxi (150km), XLX is the largest coal-based urea
producer in Henan and the sixth-largest one in China, with two plants and a
combined capacity of 680k tpa (315k tpa + 365k tpa). Due to its larger scale,
proximity to coal mines, advanced technologies and self-generation of electricity
(self-sufficiency at 35%), XLX, as a coal-based urea producer, has the lowest
cost in Henan and the fourth-lowest cost in China (Rmb1,136/tonne, at least
20% lower than industry average).
Resources advantage and low processing cost are the keys. Given that urea
prices are on an uptrend in tandem with rising raw material prices (natural gas
and coal) worldwide. Producers like XLX with resource advantage and lower
processing costs, would benefit the most from the trend. It is because the
company could ride on rising product prices and simultaneously see more
modest increase in raw material cost, implying margin improvement. With
additional Rmb735m of cash raised from the IPO, XLX could grab the
opportunities to acquire small players and revamp them into more efficient
producers through restructuring.
Riding on strong product prices. We expect urea and methanol prices in
China to rise 1-3% p.a. in 2007-09, based on the robust supply-demand
dynamics and hike in natural gas and coal prices. China’s urea demand could
grow 5% p.a. in 2007-09, given its drive to raise grain output. Urea capacity in
China could grow slower than consensus of 5% p.a., as rising natural gas prices
and power tariffs will likely force small players to shut down. Lending support to
domestic urea prices is strong overseas prices, partly due to the US’ push for
bio-fuel. Methanol prices will be underpinned by the development of methanol
fuel and DME as substitute to diesel and LPG.
Less vulnerable to fluctuations in coal prices. With its two plants located only
150km from coal mines in Jincheng and transportation cost accounting for only
one-fourth of total coal purchase cost, XLX is less vulnerable to the coal
transportation bottleneck and hence should see more modest hike in coal costs
in the coming years. Due to the closure of small coal mines in Shanxi, XLX’s
average coal purchase cost rose 18% in 2005 and 9% in 2006, lagging far
behind national average. We expect it to remain flat in 2007 (vs 10-15% for
national average), given the abundant coal supply from Jincheng.
A further 5-6% cost reduction by 2009. XLX plans to add two power
generators to raise its self-sufficiency in electricity to 70% by 1Q08. The project
could contribute a cost saving of Rmb11m (8.5% of FY06 net profit) p.a. to XLX.
The company also intends to construct a railway extension from Xinxiang
Railway Station into its new plant by end-08, which will enable it to load and
unload raw materials and products directly at the plants. We estimate it to
contribute an additional cost saving of Rmb9m (Rmb16-20/tonne). With the
above two projects and improvement in efficiency, we expect XLX’s total unit
cost to fall 5% by 2009.
in Henan, the most populous and largest fertiliser consuming province in China,
and located near coal-rich Shanxi (150km), XLX is the largest coal-based urea
producer in Henan and the sixth-largest one in China, with two plants and a
combined capacity of 680k tpa (315k tpa + 365k tpa). Due to its larger scale,
proximity to coal mines, advanced technologies and self-generation of electricity
(self-sufficiency at 35%), XLX, as a coal-based urea producer, has the lowest
cost in Henan and the fourth-lowest cost in China (Rmb1,136/tonne, at least
20% lower than industry average).
Resources advantage and low processing cost are the keys. Given that urea
prices are on an uptrend in tandem with rising raw material prices (natural gas
and coal) worldwide. Producers like XLX with resource advantage and lower
processing costs, would benefit the most from the trend. It is because the
company could ride on rising product prices and simultaneously see more
modest increase in raw material cost, implying margin improvement. With
additional Rmb735m of cash raised from the IPO, XLX could grab the
opportunities to acquire small players and revamp them into more efficient
producers through restructuring.
Riding on strong product prices. We expect urea and methanol prices in
China to rise 1-3% p.a. in 2007-09, based on the robust supply-demand
dynamics and hike in natural gas and coal prices. China’s urea demand could
grow 5% p.a. in 2007-09, given its drive to raise grain output. Urea capacity in
China could grow slower than consensus of 5% p.a., as rising natural gas prices
and power tariffs will likely force small players to shut down. Lending support to
domestic urea prices is strong overseas prices, partly due to the US’ push for
bio-fuel. Methanol prices will be underpinned by the development of methanol
fuel and DME as substitute to diesel and LPG.
Less vulnerable to fluctuations in coal prices. With its two plants located only
150km from coal mines in Jincheng and transportation cost accounting for only
one-fourth of total coal purchase cost, XLX is less vulnerable to the coal
transportation bottleneck and hence should see more modest hike in coal costs
in the coming years. Due to the closure of small coal mines in Shanxi, XLX’s
average coal purchase cost rose 18% in 2005 and 9% in 2006, lagging far
behind national average. We expect it to remain flat in 2007 (vs 10-15% for
national average), given the abundant coal supply from Jincheng.
A further 5-6% cost reduction by 2009. XLX plans to add two power
generators to raise its self-sufficiency in electricity to 70% by 1Q08. The project
could contribute a cost saving of Rmb11m (8.5% of FY06 net profit) p.a. to XLX.
The company also intends to construct a railway extension from Xinxiang
Railway Station into its new plant by end-08, which will enable it to load and
unload raw materials and products directly at the plants. We estimate it to
contribute an additional cost saving of Rmb9m (Rmb16-20/tonne). With the
above two projects and improvement in efficiency, we expect XLX’s total unit
cost to fall 5% by 2009.
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.
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.
MobileOne Ltd - Good 2Q performance
Good results due to lower costs and better ARPU. MobileOne (M1)
delivered a good set of 2Q07 results. Revenue came in at S$199.8m (+1.7%
QoQ, 4.0% YoY) with net profit for the quarter at S$40.6m (-19.0% QoQ,
+10.0% YoY). The reason for the sequentially decline is due to a positive
tax adjustment in 1Q07 from the change in corporate tax rate to 18%.
Excluding the one-off tax adjustments (i.e. at pre-tax level), M1's 2Q07
pretax profit came in at a strong S$50.4m, +10.0% QoQ and 7.2% YoY.
The stronger profitability is also reflected by the EBITDA improvement to
S$81.9m, +7.5% QoQ and 6.0% YoY. The better operating performance
appears to be driven by revenue growth and lower operating expenses.
Post-paid segment star. Over the last quarter, M1 saw 31k increase in
the number of subscribers - 14k new prepaid and 17k new postpaid
customers. However, even though prepaid had more customers and MOU
increased, its revenue continue to fall a further 3.3% QoQ. This in turn led
to ARPU for prepaid falling 5.3% QoQ to S$16. The poor performance for
prepaid was probably due to aggressive promotions by M1's competitors
and the situation is not expected to lessen anytime soon. But on a positive
note, M1's postpaid segment saw revenue growth of 3.6% QoQ with ARPU
improvement of 2.6% QoQ to S$62.2, neutralizing the revenue decline
from prepaid, giving an overall mobile revenue improvement of 2.9% QoQ.
Number portability delayed. In the results, M1 also revealed that the
mobile number portability initiative by the regulators has been delayed by
about 6 months. This in turn is likely to delay any competitive action by
players to a later date. This could possibly explain the lower acquisition
cost (down 5.7% QoQ) and retention cost (down 12.3% QoQ) incurred by
M1 over the last quarter.
7.1 cents payout; maintain HOLD. In the 1H07, M1 has declared an
interim dividend of 2.5 cents plus 4.6 cents coming from a capital reduction.
The total payout of 7.1 cents translates to a payout ratio of 70% and
investors will thus enjoy an interim yield of 3.3%. Finally in light of the
better operating performance, M1 is also guiding a single-digit PATMI
improvement versus previous guidance of a stable operation. We maintain
our S$2.33 fair value and our HOLD rating.
delivered a good set of 2Q07 results. Revenue came in at S$199.8m (+1.7%
QoQ, 4.0% YoY) with net profit for the quarter at S$40.6m (-19.0% QoQ,
+10.0% YoY). The reason for the sequentially decline is due to a positive
tax adjustment in 1Q07 from the change in corporate tax rate to 18%.
Excluding the one-off tax adjustments (i.e. at pre-tax level), M1's 2Q07
pretax profit came in at a strong S$50.4m, +10.0% QoQ and 7.2% YoY.
The stronger profitability is also reflected by the EBITDA improvement to
S$81.9m, +7.5% QoQ and 6.0% YoY. The better operating performance
appears to be driven by revenue growth and lower operating expenses.
Post-paid segment star. Over the last quarter, M1 saw 31k increase in
the number of subscribers - 14k new prepaid and 17k new postpaid
customers. However, even though prepaid had more customers and MOU
increased, its revenue continue to fall a further 3.3% QoQ. This in turn led
to ARPU for prepaid falling 5.3% QoQ to S$16. The poor performance for
prepaid was probably due to aggressive promotions by M1's competitors
and the situation is not expected to lessen anytime soon. But on a positive
note, M1's postpaid segment saw revenue growth of 3.6% QoQ with ARPU
improvement of 2.6% QoQ to S$62.2, neutralizing the revenue decline
from prepaid, giving an overall mobile revenue improvement of 2.9% QoQ.
Number portability delayed. In the results, M1 also revealed that the
mobile number portability initiative by the regulators has been delayed by
about 6 months. This in turn is likely to delay any competitive action by
players to a later date. This could possibly explain the lower acquisition
cost (down 5.7% QoQ) and retention cost (down 12.3% QoQ) incurred by
M1 over the last quarter.
7.1 cents payout; maintain HOLD. In the 1H07, M1 has declared an
interim dividend of 2.5 cents plus 4.6 cents coming from a capital reduction.
The total payout of 7.1 cents translates to a payout ratio of 70% and
investors will thus enjoy an interim yield of 3.3%. Finally in light of the
better operating performance, M1 is also guiding a single-digit PATMI
improvement versus previous guidance of a stable operation. We maintain
our S$2.33 fair value and our HOLD rating.
Singapore Property - Supply shortage may get pronounced
According to Business Times, Citigroup, the supply shortage situation may
worsen due to the actual number of units completed likely to fall short of
the Urban Development Authority’s (URA) projection of 42,200 units from
2007 to 2010. The claim is made on the basis that the units under
construction lag completion estimates with only 25,100 to be built from
2007 to 2010 and shortage of construction materials and workers may
add to the delay. We believe that it is unlikely to be the case because the
URA planned estimates does not fully include the supply from the en bloc
transactions in the past twelve months.
Although the en bloc supply can be controlled by the developers by
holding back the launches, we expect more developers to take advantage
of the current bull market and launch the projects soonest possible due
to the rising uncertainties about future price levels and possible
government intervention. Also, historical data from URA on the Expected
and actual units completed indicates that actual units completed since
2004 has exceeded the expected units completed. We are reviewing the
demand supply dynamics in the different segments and the overall
strategy for the residential property sector and will update later.
worsen due to the actual number of units completed likely to fall short of
the Urban Development Authority’s (URA) projection of 42,200 units from
2007 to 2010. The claim is made on the basis that the units under
construction lag completion estimates with only 25,100 to be built from
2007 to 2010 and shortage of construction materials and workers may
add to the delay. We believe that it is unlikely to be the case because the
URA planned estimates does not fully include the supply from the en bloc
transactions in the past twelve months.
Although the en bloc supply can be controlled by the developers by
holding back the launches, we expect more developers to take advantage
of the current bull market and launch the projects soonest possible due
to the rising uncertainties about future price levels and possible
government intervention. Also, historical data from URA on the Expected
and actual units completed indicates that actual units completed since
2004 has exceeded the expected units completed. We are reviewing the
demand supply dynamics in the different segments and the overall
strategy for the residential property sector and will update later.
King’s Safetywear Ltd: Return of the King
Undiscovered stock; pick-up in FY06 earnings. King's Safetywear Ltd
(KSW) reported a strong set of FY06 results with topline growth of 11.4%
to S$91.4m. Cost controls in admin and marketing enabled net profit to
surge 89.6% to S$5.1m. This was a vast improvement from FY05 when
topline grew a meagre 5.7% to S$82m while net profit dove 25.5% to
S$2.7m. The biggest topline contribution came from Asia, which grew 16%
to S$62.2m. The loss-making EU operation is likely to turn in a small profit
this year. The market appears to have missed the pickup in FY06 earnings
as the stock is not yet on analysts' radar screen.
Better operational efficiencies. KSW closed down its Malaysian and
Jakarta facilities to consolidate operations into the new Batam plant. This
will yield savings with better inventory and operation management. With
the new facility paid for and the present capacity at only 60% utilisation,
we expect capex for the next 1-3 years to be minimal.
Booming sectors to support revenue. BCA estimates that Singapore
construction contracts to be awarded in 2007 at S$17-19b and another
US$624b in construction contracts over the next 15 years in Saudi Arabia.
Personal safety equipment is a non-negotiable expenditure and is mandatory
and this will provide a constant stream of revenue stability for safety
equipment manufacturers like KSW.
Expansion through M&A. Management has indicated that there could be
acquisition opportunities in this fragmented industry. For FY07, we forecast
a cash balance of about S$10m. To launch into its next phase of growth in
FY08/09, we think that KSW could acquire a brand in US or Japan to gain
a quick entry into these lucrative markets and the future possibility of
venturing into the high-margin retail market with its upmarket Otter brand.
Strong FY07, kickers in FY08/09. We forecast KSW FY07 topline growth
of 12.9% to S$103.2m and operating profits growth of 23.2% to S$9.8m,
but expect bottomline to inch ahead by 3.2% to S$5.3m due to the S$1.5m
Jakarta plant closure compensation to be paid out in 1H07. Excluding this,
FY07 net profit would have surged 25% to S$6.4m. We derive a fair value of
S$$0.46 (27% upside) using blended 16x FY07/08 EPS (30% discount to
its consumer peers). At current levels, KSW still offers a good opportunity
to get into a recovering company with added earnings kickers in FY08/09.
We initiate coverage on KSW with a BUY rating.
(KSW) reported a strong set of FY06 results with topline growth of 11.4%
to S$91.4m. Cost controls in admin and marketing enabled net profit to
surge 89.6% to S$5.1m. This was a vast improvement from FY05 when
topline grew a meagre 5.7% to S$82m while net profit dove 25.5% to
S$2.7m. The biggest topline contribution came from Asia, which grew 16%
to S$62.2m. The loss-making EU operation is likely to turn in a small profit
this year. The market appears to have missed the pickup in FY06 earnings
as the stock is not yet on analysts' radar screen.
Better operational efficiencies. KSW closed down its Malaysian and
Jakarta facilities to consolidate operations into the new Batam plant. This
will yield savings with better inventory and operation management. With
the new facility paid for and the present capacity at only 60% utilisation,
we expect capex for the next 1-3 years to be minimal.
Booming sectors to support revenue. BCA estimates that Singapore
construction contracts to be awarded in 2007 at S$17-19b and another
US$624b in construction contracts over the next 15 years in Saudi Arabia.
Personal safety equipment is a non-negotiable expenditure and is mandatory
and this will provide a constant stream of revenue stability for safety
equipment manufacturers like KSW.
Expansion through M&A. Management has indicated that there could be
acquisition opportunities in this fragmented industry. For FY07, we forecast
a cash balance of about S$10m. To launch into its next phase of growth in
FY08/09, we think that KSW could acquire a brand in US or Japan to gain
a quick entry into these lucrative markets and the future possibility of
venturing into the high-margin retail market with its upmarket Otter brand.
Strong FY07, kickers in FY08/09. We forecast KSW FY07 topline growth
of 12.9% to S$103.2m and operating profits growth of 23.2% to S$9.8m,
but expect bottomline to inch ahead by 3.2% to S$5.3m due to the S$1.5m
Jakarta plant closure compensation to be paid out in 1H07. Excluding this,
FY07 net profit would have surged 25% to S$6.4m. We derive a fair value of
S$$0.46 (27% upside) using blended 16x FY07/08 EPS (30% discount to
its consumer peers). At current levels, KSW still offers a good opportunity
to get into a recovering company with added earnings kickers in FY08/09.
We initiate coverage on KSW with a BUY rating.
SMB United - Bumper dividend
SMB United was established as a sheet metal fabricator in 1973 and has grown
into a regional player in electrical switchgears and electronic meters. It has a
dominant share of more than 40% for the switchgear market in Singapore.
Switchgear plays an important role in the distribution and protection of electrical
supplies in commercial, industrial and residential buildings and industrial process
plants. SMB United has a 57.3% stake in EDMI. EDMI manufactures electronic
meters for the electricity generating and distribution industries.
Well positioned in mission critical switchgears. SMB United benefits from
increased demand for high-end switchgears used in data centres and industrial
process plants such as semiconductor wafer fabs. Many financial institutions
have centralised administrative and backroom functions in Singapore. This has
led to contracts from Barclays Bank, Citibank, Deutsche Bank, DBS (Tower 2)
and UOB (396 Alexandra Road). It also supplies switchgears to data centre
providers such as Equinix.
SMB United also benefits from the resurgence in foreign investment for hightech
manufacturing in Singapore. It has secured contracts from Seagate
(recording media plant at Woodlands), Siltronic Samsung Wafer (12-inch wafer
plant at Tampines) and Soitec (12-inch wafer plant at Pasir Ris) in FY07.
Contracts from IRs provide catalyst. SMB United is a strong contender for
contracts from the two integrated resorts (IRs) at Marina Bay and Sentosa.
Management expects tender for the IRs to be called in 2H07. SMB United will
also be bidding for contracts from IM Flash Technologies (JV between Intel and
Micron) and Qimonda as both companies will commence construction of 12-inch
wafer fabs in Woodlands and Pasir Ris in 2H07.
Benefitting from industry-wide shortage in capacity. SMB United’s order
book for switchgear is strong and growing due to the booming construction and
property industries. The amount of construction contracts awarded in Singapore
was S$16.1b in 2006, an increase of more than 40%. It is well positioned to
select projects offering better margins due to industry-wide shortage in capacity.
Many switchgear makers downsized during 2001 to 2004 when the construction
industry recorded negative growth for four consecutive years.
Bumper dividend. SMB United has net cash of S$20.1m at Dec 06. It disposed
22.5m Oculus shares in the open market at an average price of $0.37. The sale
proceed from the divestment of S$8.4m will further boost its cash coffer. The
profits from divestment of S$6.4m will be distributed to shareholders in the form
of a special dividend estimated at 1.3 cents/share. We expect final dividend of
1.9 cents/share for FY07 assuming dividend payout of 70%. SMB United will
thus pay total dividend of 3.2 cents/share, which translate to yield of 7.4%.
SMB United is a proxy to the recovery in the construction industry. We forecast
earnings growth of 64.9% in FY07 driven by volume and margin expansion for
switchgear business. We expect earnings growth of 34.6% in FY08 driven by
contribution from contracts related to the IRs. Our target price is S$0.54 based
on FY08 PE of 15x (Tai Sin Electric Cables: 15.8x and ITE Electric: 23.8x).
into a regional player in electrical switchgears and electronic meters. It has a
dominant share of more than 40% for the switchgear market in Singapore.
Switchgear plays an important role in the distribution and protection of electrical
supplies in commercial, industrial and residential buildings and industrial process
plants. SMB United has a 57.3% stake in EDMI. EDMI manufactures electronic
meters for the electricity generating and distribution industries.
Well positioned in mission critical switchgears. SMB United benefits from
increased demand for high-end switchgears used in data centres and industrial
process plants such as semiconductor wafer fabs. Many financial institutions
have centralised administrative and backroom functions in Singapore. This has
led to contracts from Barclays Bank, Citibank, Deutsche Bank, DBS (Tower 2)
and UOB (396 Alexandra Road). It also supplies switchgears to data centre
providers such as Equinix.
SMB United also benefits from the resurgence in foreign investment for hightech
manufacturing in Singapore. It has secured contracts from Seagate
(recording media plant at Woodlands), Siltronic Samsung Wafer (12-inch wafer
plant at Tampines) and Soitec (12-inch wafer plant at Pasir Ris) in FY07.
Contracts from IRs provide catalyst. SMB United is a strong contender for
contracts from the two integrated resorts (IRs) at Marina Bay and Sentosa.
Management expects tender for the IRs to be called in 2H07. SMB United will
also be bidding for contracts from IM Flash Technologies (JV between Intel and
Micron) and Qimonda as both companies will commence construction of 12-inch
wafer fabs in Woodlands and Pasir Ris in 2H07.
Benefitting from industry-wide shortage in capacity. SMB United’s order
book for switchgear is strong and growing due to the booming construction and
property industries. The amount of construction contracts awarded in Singapore
was S$16.1b in 2006, an increase of more than 40%. It is well positioned to
select projects offering better margins due to industry-wide shortage in capacity.
Many switchgear makers downsized during 2001 to 2004 when the construction
industry recorded negative growth for four consecutive years.
Bumper dividend. SMB United has net cash of S$20.1m at Dec 06. It disposed
22.5m Oculus shares in the open market at an average price of $0.37. The sale
proceed from the divestment of S$8.4m will further boost its cash coffer. The
profits from divestment of S$6.4m will be distributed to shareholders in the form
of a special dividend estimated at 1.3 cents/share. We expect final dividend of
1.9 cents/share for FY07 assuming dividend payout of 70%. SMB United will
thus pay total dividend of 3.2 cents/share, which translate to yield of 7.4%.
SMB United is a proxy to the recovery in the construction industry. We forecast
earnings growth of 64.9% in FY07 driven by volume and margin expansion for
switchgear business. We expect earnings growth of 34.6% in FY08 driven by
contribution from contracts related to the IRs. Our target price is S$0.54 based
on FY08 PE of 15x (Tai Sin Electric Cables: 15.8x and ITE Electric: 23.8x).
Collective sales could yield 40% of new homes. DC hike not a cooling
According to Business Times, CBRE, the 154 collective sales since the
start of 2006 will translate into a demand of 10,249 displaced units
and be replaced by a supply of 21,719 new units. Assuming that 80%
of the owners of the displaced units look for a replacement in private
homes and the remaining 20% seek public housing, the net new supply
would be around 13,520 units. The 21,719 new units from the en bloc
are expected to account for nearly 40% of the 54,746 new
uncompleted units projected by the Urban Development Authority
(URA). Based on the 10 year average demand of around 7,600 units,
the 32,700 unsold units out of the total projected unsold units, we
estimate that it would take around 4.3 years to absorb the unsold
supply. However, according to Business Times, CBRE, the recent surge
in demand could see the absorption within three years. We are
reviewing the demand supply dynamics in the different segments and
the overall strategy for the residential property sector and will update
later.
In another update, Ministry of National Development clarified that the
Development Charge hike announced last week was not to cool the
property market or curb the en blocs. It was restored to the 1985 level
on wake of the buoyant property market for more equitable sharing of
the gains to be deployed into state functions. We continue to believe
that the revision may lower the enbloc frenzy as the developers will
have a lesser incentive due to the higher development cost and
differential premium involved and will be able to offer lesser amounts
to the en bloc sellers.
start of 2006 will translate into a demand of 10,249 displaced units
and be replaced by a supply of 21,719 new units. Assuming that 80%
of the owners of the displaced units look for a replacement in private
homes and the remaining 20% seek public housing, the net new supply
would be around 13,520 units. The 21,719 new units from the en bloc
are expected to account for nearly 40% of the 54,746 new
uncompleted units projected by the Urban Development Authority
(URA). Based on the 10 year average demand of around 7,600 units,
the 32,700 unsold units out of the total projected unsold units, we
estimate that it would take around 4.3 years to absorb the unsold
supply. However, according to Business Times, CBRE, the recent surge
in demand could see the absorption within three years. We are
reviewing the demand supply dynamics in the different segments and
the overall strategy for the residential property sector and will update
later.
In another update, Ministry of National Development clarified that the
Development Charge hike announced last week was not to cool the
property market or curb the en blocs. It was restored to the 1985 level
on wake of the buoyant property market for more equitable sharing of
the gains to be deployed into state functions. We continue to believe
that the revision may lower the enbloc frenzy as the developers will
have a lesser incentive due to the higher development cost and
differential premium involved and will be able to offer lesser amounts
to the en bloc sellers.
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