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.
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
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Price Chart – C&O
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Price Chart – AsiaPharm
52-week price chart
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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.
China raised rates and cut interest income tax
China raised rates by 27 bps and cut interest income tax to 5%
As we have expected, China's Ministry of Finance announced on Friday, 20 July,
that the interest income tax will be cut from 20% to 5%, effective 15 August, shortly
after the People's Bank of China (PBoC) announced the benchmark one-year
lending and deposit rates would be raised by 27 basis points (bps), effective 21 July.
The demand deposit rate, unchanged at 0.72% throughout the current tightening
cycle, was raised 9 bps to 0.81%. After the latest hike, one-year lending rate will
rise to 6.84% from 6.57% while one-year deposit rate will rise to 3.33% from
3.06%. The two-pronged tightening action reflected the serious effort of the central
bank to rectify the negative real interest rate environment after the sharp spike of
June CPI inflation to 4.4% YoY. At the new one-year deposit rate of 3.33%, the
interest income tax cut is equivalent to a 50 bps hike in the deposit rate. Combining
the effects of the rate hike and tax cut, the government has raised effective oneyear
deposit rate by 77 bps in an attempt to curb the diversion of bank deposits to
stock market investments.
We believe the latest monetary actions should not bring major surprise to investors,
as the market has largely anticipated an imminent tightening after China announced
the much stronger-than-expected Q2 2007 real GDP growth at 11.9% YoY. The
PBoC's statement emphasizes that the interest rates hike is aimed to keep credit
expansion and investment growth in check, to stabilize inflation expectations and to
maintain stability in general price levels. Driven by continued rapid credit expansion,
fixed asset investment growth accelerated to 28.4% YoY in June from 26.9% YoY
in May. Industrial production growth also strengthened to 19.4% YoY in June, upfrom 18.1% YoY in May. Private consumption remained buoyant, with retail sales growth sustaining at the high level of 16% YoY
in June.
After the strong rebound of the HSCEI (+2.1%) and the Shanghai Composite Index (+3.7%) on Friday, the China equity markets
are expected to see near-term correction pressure next week as the simultaneous announcements of the rates hike and interest
income tax cut will be perceived by investors as negative news for China shares. However, we expect the austerity measures will
remain moderate and gradual, as the downtrend of the Purchasing Manager Index (PMI) in May and June suggested that the
Chinese economy would likely see a moderation going into Q3 2007. This should reduce the urgency for the government to
introduce aggressive tightening measures and therefore we see limited risk of a policy-induced major economic downturn. The
next major policy move to watch out is the upcoming CNY 1.55 trn special bond issue to establish the China Investment
Company (CIC). We advise investors to take any tightening-induced correction in the Hong Kong-listed H shares and red chips
as good buying opportunities ahead of the upcoming interim reporting season
As we have expected, China's Ministry of Finance announced on Friday, 20 July,
that the interest income tax will be cut from 20% to 5%, effective 15 August, shortly
after the People's Bank of China (PBoC) announced the benchmark one-year
lending and deposit rates would be raised by 27 basis points (bps), effective 21 July.
The demand deposit rate, unchanged at 0.72% throughout the current tightening
cycle, was raised 9 bps to 0.81%. After the latest hike, one-year lending rate will
rise to 6.84% from 6.57% while one-year deposit rate will rise to 3.33% from
3.06%. The two-pronged tightening action reflected the serious effort of the central
bank to rectify the negative real interest rate environment after the sharp spike of
June CPI inflation to 4.4% YoY. At the new one-year deposit rate of 3.33%, the
interest income tax cut is equivalent to a 50 bps hike in the deposit rate. Combining
the effects of the rate hike and tax cut, the government has raised effective oneyear
deposit rate by 77 bps in an attempt to curb the diversion of bank deposits to
stock market investments.
We believe the latest monetary actions should not bring major surprise to investors,
as the market has largely anticipated an imminent tightening after China announced
the much stronger-than-expected Q2 2007 real GDP growth at 11.9% YoY. The
PBoC's statement emphasizes that the interest rates hike is aimed to keep credit
expansion and investment growth in check, to stabilize inflation expectations and to
maintain stability in general price levels. Driven by continued rapid credit expansion,
fixed asset investment growth accelerated to 28.4% YoY in June from 26.9% YoY
in May. Industrial production growth also strengthened to 19.4% YoY in June, upfrom 18.1% YoY in May. Private consumption remained buoyant, with retail sales growth sustaining at the high level of 16% YoY
in June.
After the strong rebound of the HSCEI (+2.1%) and the Shanghai Composite Index (+3.7%) on Friday, the China equity markets
are expected to see near-term correction pressure next week as the simultaneous announcements of the rates hike and interest
income tax cut will be perceived by investors as negative news for China shares. However, we expect the austerity measures will
remain moderate and gradual, as the downtrend of the Purchasing Manager Index (PMI) in May and June suggested that the
Chinese economy would likely see a moderation going into Q3 2007. This should reduce the urgency for the government to
introduce aggressive tightening measures and therefore we see limited risk of a policy-induced major economic downturn. The
next major policy move to watch out is the upcoming CNY 1.55 trn special bond issue to establish the China Investment
Company (CIC). We advise investors to take any tightening-induced correction in the Hong Kong-listed H shares and red chips
as good buying opportunities ahead of the upcoming interim reporting season
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.
CapitaCommercial Trust: Buys Wilkie Edge
Flat sequentially. CapitaCommercial Trust (CCT) released its 2Q07 on
Friday. Revenue came in at S$S$59.4m (+91.1% YoY and +2.5% QoQ)
with distributable income at S$29.28m (+84.7% YoY and +0.1% QoQ).
Distributable income per unit (DPU) came in at 2.12 cents (+19.8% YoY
and 0.5% QoQ), slightly below OIR's estimate of 2.17 cents. The strong
annual numbers were attributed to the inclusion of Raffles City (RC), higher
rental and car-park rates as well as investment income.
Buys Wilkie Edge from CapitaLand. CCT also announced the proposed
acquisition of Wilkie Edge, a 12-storey mixed development from CapitaLand
(CapLand) for S$262.0m. Completion is expected by end 2008. With this,
CCT appears to be changing its strategy by going for pre-completed and
untenanted assets. This raises the risk profile and reflects the difficulty in
acquiring accretively. As part of the agreement, CCT has granted CapLand
a 99-year lease for the service apartments for S$79.3m. We estimate the
GFA of the apartments at about 160,350 sq ft, which means selling price of
about S$495psf. This appears a little low considering that residential units
are going for substantially higher in the area.
Expect divestment gains. Separately, Quill Capita Trust, the Malaysian
associate of CCT, will be buying CCT's interest in Wisma Technip. The
acquisition price of RM125m will result in CCT recognizing a divestment
gain of RM4.4m (about S$2.0m), but the transaction is not expected to
complete until 4Q07.
Raffles City asset enhancement. CCT is presently enhancing Raffles
City. It is decanting space used for mechanical and engineering equipment
and this in turn will release about 41,000 sq ft of space for retail use. The
new space will be spread over 3 levels and will encompass building a 3-
storey island podium. The estimated capex is about S$56m and funding
will be via debt. We see no issues with respect to debt funding. Construction
has started and completion is expected by end 2007.
Maintain HOLD. The outlook for the office sector remains good for the
next two years due to limited supply. CCT is the key beneficiary of this
macro trend. Hence we anticipate strong organic earnings growth. However,
at present trading level, we see limited upside potential. We thus maintain
our HOLD rating with a fair value estimate of S$2.62, based on a target
asset size of S$5.5bn.
Friday. Revenue came in at S$S$59.4m (+91.1% YoY and +2.5% QoQ)
with distributable income at S$29.28m (+84.7% YoY and +0.1% QoQ).
Distributable income per unit (DPU) came in at 2.12 cents (+19.8% YoY
and 0.5% QoQ), slightly below OIR's estimate of 2.17 cents. The strong
annual numbers were attributed to the inclusion of Raffles City (RC), higher
rental and car-park rates as well as investment income.
Buys Wilkie Edge from CapitaLand. CCT also announced the proposed
acquisition of Wilkie Edge, a 12-storey mixed development from CapitaLand
(CapLand) for S$262.0m. Completion is expected by end 2008. With this,
CCT appears to be changing its strategy by going for pre-completed and
untenanted assets. This raises the risk profile and reflects the difficulty in
acquiring accretively. As part of the agreement, CCT has granted CapLand
a 99-year lease for the service apartments for S$79.3m. We estimate the
GFA of the apartments at about 160,350 sq ft, which means selling price of
about S$495psf. This appears a little low considering that residential units
are going for substantially higher in the area.
Expect divestment gains. Separately, Quill Capita Trust, the Malaysian
associate of CCT, will be buying CCT's interest in Wisma Technip. The
acquisition price of RM125m will result in CCT recognizing a divestment
gain of RM4.4m (about S$2.0m), but the transaction is not expected to
complete until 4Q07.
Raffles City asset enhancement. CCT is presently enhancing Raffles
City. It is decanting space used for mechanical and engineering equipment
and this in turn will release about 41,000 sq ft of space for retail use. The
new space will be spread over 3 levels and will encompass building a 3-
storey island podium. The estimated capex is about S$56m and funding
will be via debt. We see no issues with respect to debt funding. Construction
has started and completion is expected by end 2007.
Maintain HOLD. The outlook for the office sector remains good for the
next two years due to limited supply. CCT is the key beneficiary of this
macro trend. Hence we anticipate strong organic earnings growth. However,
at present trading level, we see limited upside potential. We thus maintain
our HOLD rating with a fair value estimate of S$2.62, based on a target
asset size of S$5.5bn.
Resorts World-Reduces stake in SCL to investment holding
Story: The Group has accepted an offer to dispose part of its 33.91%
interest in Star Cruises (SCL) to CMY Capital, a wholly-owned investment arm
of Dato' Chua Ma Yu. Resorts will sell 1.01b SCL shares (representing 14.02%
interest) to CMY Capital at HK$2.62 per share (totaling HK$2.6b or RM1.2b).
Point: This effectively reduces Resorts' interest in SCL to 19.89%, and
going forward, will not be equity accounting SCL. Instead, Resorts will
recognise SCL as an investment, thereby removing the cyclical earning
patterns of SCL. Resorts will also recognise a gain of c. RM309.7m upon
completion of the transaction (in three weeks).
Relevance: We tweaked our FY07-08F earnings upward by 6-12%, erasing SCL's
potential losses from Resorts' income statement. We also upgrade our call to
a Buy (from a Hold) with a RNAV-based price target of RM4.60. The latest
development coupled with strong hilltop operations (judging by 1Q07's strong
report card) should see the stock re-rating closer to the higher end of its
five-year (excluding SCL) PE range of 20-22x. At our price target of RM4.60
per share, the stock will be trading at 21.4x FD FY08 EPS.
Monopoly player in the sector
| China Communications Construction ("CCC") is a leading transportation infrastructure company in China, primarily engaged in the infrastructure construction, infrastructure design, dredging and port machinery manufacturing business. In terms of its infrastructure construction business, which contributed 60.4% of total revenue last year, CCC is the largest port construction company, seizing almost 90% of domestic market share. Due to fierce competition, its road, bridge and railway construction business accounts for 10% of domestic market share, since this part of market was opened earlier to all competitors. As to infrastructure design business, CCC is the leading port, road and bridge design company in China in terms of design revenue, running 10 top-tier design institutes. Few competitors of the comparable scale and strengths exist in China. This part of business accounted for approximately 5% of its turnover. CCC is the largest dredging company in China and was ranked the third largest globally in terms of dredging capacity. It has been involved itself in up to 80% of the dredging projects domestically, and also contributed 9% of its turnover last year. CCC is the largest manufacturer of container cranes in the world. It operates its port machinery manufacturing business mainly through its two subsidiaries: wholly-owned SPMP, and ZPMC with controlling equity interest of 43.3%. The latter is an internationally well-known port machinery manufacturer that accounted for 74% and 50% of global market share of quayside container cranes and Gantry container cranes, respectively. This part of business is the second largest contributor of total turnover.
|
Oriental Century Ltd - Opportunity for enrollment
Story: Oriental Century (ORIC) is expected to announce their
1H results in mid-Aug.
Point: We are not expecting any surprises in its 1H07 results as
operations have been stable. The positive factor pertaining to
education business is that revenue stream and costs are rather
stable and predictable once student enrollment is secured. We
understand that operations are very healthy.
Relevance: This counter dipped by about 6.5% yesterday,
which we believe was possibly a spill over from some unrelated
market news/sentiments. We believe this presents a good
opportunity to accumulate the stock. Fundamentally, ORIC’s
business is still strong and management has indicated that there
was nothing contrary to this belief. Maintain BUY, TP: S$1.52 based
on 25x FY08F earnings with cash of S$0.18/share.
1H07 results preview – no surprises. We do not expect any surprises for its
1H07 results announcement next month. We believe the Group should be
delivering some growth, probably in the mid-single digit as there should
be some expenses incurred in relation to the establishment of Humen
Kindergarten prior to enrollment. In any case, as we have highlighted in
our initiation note on 19 Apr, ORIC’s 2H results tends to be stronger than
1H as the academic year starts in September.
Humen Kindergarten enrollment in progress. We understand from
management that enrollment for its new kindergarten in Humen,
Dongguan city, Guangdong Province, has begun and is progressing well.
The school semester is expected to start in September.
Revenue stream in secured and predictable. One factor we like about the
education business is its predictable nature, i.e. there is continuity in its
revenue stream for the year once student enrollment is secured. We
understand from management that operations are progressing on track.
Impact of unrelated market news present good entry opportunity.
Fundamentally, business is still strong and management has indicated that
there is nothing contrary to this belief. There was an article in a Chinese
financial magazine that the Chairman of Midas, Chen Weiping, had been
detained by authorities for alleged corruption charges which Midas
categorically denied. We believe this news caused some concern with
regards to Raffles Education whose share price also dropped by about 5%.
Chen Weiping was an ex-Executive Director of Raffles Ed whom had
resigned from Raffles Ed’s Board of Directors sometime in 2003/04. Raffles
Ed holds 21.4% of ORIC. We believed the market could have over-reacted
to this news, which is unrelated to ORIC. We think this episode, while
unfortunate and uncalled for, presents a good opportunity to accumulate.
Maintain BUY.
1H results in mid-Aug.
Point: We are not expecting any surprises in its 1H07 results as
operations have been stable. The positive factor pertaining to
education business is that revenue stream and costs are rather
stable and predictable once student enrollment is secured. We
understand that operations are very healthy.
Relevance: This counter dipped by about 6.5% yesterday,
which we believe was possibly a spill over from some unrelated
market news/sentiments. We believe this presents a good
opportunity to accumulate the stock. Fundamentally, ORIC’s
business is still strong and management has indicated that there
was nothing contrary to this belief. Maintain BUY, TP: S$1.52 based
on 25x FY08F earnings with cash of S$0.18/share.
1H07 results preview – no surprises. We do not expect any surprises for its
1H07 results announcement next month. We believe the Group should be
delivering some growth, probably in the mid-single digit as there should
be some expenses incurred in relation to the establishment of Humen
Kindergarten prior to enrollment. In any case, as we have highlighted in
our initiation note on 19 Apr, ORIC’s 2H results tends to be stronger than
1H as the academic year starts in September.
Humen Kindergarten enrollment in progress. We understand from
management that enrollment for its new kindergarten in Humen,
Dongguan city, Guangdong Province, has begun and is progressing well.
The school semester is expected to start in September.
Revenue stream in secured and predictable. One factor we like about the
education business is its predictable nature, i.e. there is continuity in its
revenue stream for the year once student enrollment is secured. We
understand from management that operations are progressing on track.
Impact of unrelated market news present good entry opportunity.
Fundamentally, business is still strong and management has indicated that
there is nothing contrary to this belief. There was an article in a Chinese
financial magazine that the Chairman of Midas, Chen Weiping, had been
detained by authorities for alleged corruption charges which Midas
categorically denied. We believe this news caused some concern with
regards to Raffles Education whose share price also dropped by about 5%.
Chen Weiping was an ex-Executive Director of Raffles Ed whom had
resigned from Raffles Ed’s Board of Directors sometime in 2003/04. Raffles
Ed holds 21.4% of ORIC. We believed the market could have over-reacted
to this news, which is unrelated to ORIC. We think this episode, while
unfortunate and uncalled for, presents a good opportunity to accumulate.
Maintain BUY.
Ascendas REIT - Riding on industrial growth
Story: Ascendas REIT’s (A-REIT) results were in line with
expectations. Gross revenue and net income available for
distribution grew 14% and 13% y-o-y to S$77.3m and S$44.7m
respectively. This improvement was mainly due to additional
rental income from completed acquisitions. Distribution per unit
(DPU) grew 9% y-o-y to 3.37 cents.
Point: With the positive outlook for the High-Tech industrial
space and Business and Science Parks, A-REIT is expected to
benefit from its exposure in these two sectors. Moving forward,
A-REIT would continue to seek potential asset enhancement for
its existing properties, pursue yield accretive acquisitions and
broaden its investment focus on build-to-suit development
projects.
Relevance: In view of higher rental reversions, we have
increased our DPU forecasts. Hence, this has raised our target
price to S$3.16 based on DCF valuation. Maintain Buy. With a
total return, including yield, of 11%, we are maintaining our Buy
recommendation.
1QFY08 results. Gross revenue and net income available for distribution
grew 14% and 13% y-o-y to S$77.3m and S$44.7m respectively. This
improvement was mainly due to additional rental income from
completed acquisitions. Distribution per unit grew 9% y-o-y to 3.37
cents.
Continued growth in industrial rent. According to CBRE, the average
rent for all industrial space increased in the second quarter of 2007. Hi-
Tech industrial properties led the growth, recognising an increase of
11.9% q-o-q. With rising office rents and supply of office space
remaining tight, the demand for high-end quality business space is
expected to be strong. Therefore, we remain optimistic on the outlook
for High-Tech industrial space and Business and Science Parks, of which
A-REIT has a total exposure of 45% (by portfolio value).
JTC’s plan revealed. JTC announced its plan to divest property worth
between S$1.4bn and S$1.6bn. At least half of the industrial assets
would be placed in a trust (expected to be set up in 2Q2008) that will
be listed on the SGX. However, we note that the potential acquisition
pipeline coming from its sponsor, Ascendas Land (Singapore) Pte Ltd
(Ascendas), is still strong.
Maintain Buy with raised target price of S$3.16. Moving forward, in
view of higher rental reversions, we have increased our DPU forecasts.
DPU forecast for FY08 and FY09 increased by 4% and 9% respectively.
Hence, this has raised our target price to S$3.16 based on DCF
valuation, which incorporates an acquisition pipeline of S$400m p.a. till
2010. With a total return, including yield, of 11%, we are maintaining
our Buy recommendation.
expectations. Gross revenue and net income available for
distribution grew 14% and 13% y-o-y to S$77.3m and S$44.7m
respectively. This improvement was mainly due to additional
rental income from completed acquisitions. Distribution per unit
(DPU) grew 9% y-o-y to 3.37 cents.
Point: With the positive outlook for the High-Tech industrial
space and Business and Science Parks, A-REIT is expected to
benefit from its exposure in these two sectors. Moving forward,
A-REIT would continue to seek potential asset enhancement for
its existing properties, pursue yield accretive acquisitions and
broaden its investment focus on build-to-suit development
projects.
Relevance: In view of higher rental reversions, we have
increased our DPU forecasts. Hence, this has raised our target
price to S$3.16 based on DCF valuation. Maintain Buy. With a
total return, including yield, of 11%, we are maintaining our Buy
recommendation.
1QFY08 results. Gross revenue and net income available for distribution
grew 14% and 13% y-o-y to S$77.3m and S$44.7m respectively. This
improvement was mainly due to additional rental income from
completed acquisitions. Distribution per unit grew 9% y-o-y to 3.37
cents.
Continued growth in industrial rent. According to CBRE, the average
rent for all industrial space increased in the second quarter of 2007. Hi-
Tech industrial properties led the growth, recognising an increase of
11.9% q-o-q. With rising office rents and supply of office space
remaining tight, the demand for high-end quality business space is
expected to be strong. Therefore, we remain optimistic on the outlook
for High-Tech industrial space and Business and Science Parks, of which
A-REIT has a total exposure of 45% (by portfolio value).
JTC’s plan revealed. JTC announced its plan to divest property worth
between S$1.4bn and S$1.6bn. At least half of the industrial assets
would be placed in a trust (expected to be set up in 2Q2008) that will
be listed on the SGX. However, we note that the potential acquisition
pipeline coming from its sponsor, Ascendas Land (Singapore) Pte Ltd
(Ascendas), is still strong.
Maintain Buy with raised target price of S$3.16. Moving forward, in
view of higher rental reversions, we have increased our DPU forecasts.
DPU forecast for FY08 and FY09 increased by 4% and 9% respectively.
Hence, this has raised our target price to S$3.16 based on DCF
valuation, which incorporates an acquisition pipeline of S$400m p.a. till
2010. With a total return, including yield, of 11%, we are maintaining
our Buy recommendation.
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