China Dairy Group Ltd: Caught between a rock and a hard place

Summary: We spoke to the management of China Dairy Group Ltd (CDG) recently, and the key takeaway was the rising heat from inflationary costs. Recent statistics from raw milk producer China Milk Products Group Ltd suggest that the cost of raw milk, a key component of CDG's cost of goods, could have risen by 27% in 2H07. Coupled with rising oil prices which will flow into higher operational costs, we expect a decline in the profitability of milk processors across the PRC, since they are generally unable to fully pass on costs to consumers. Furthermore, the PRC government has introduced curbs on price hikes for consumer products such as grain, milk and meat, adding to these food processors' woes of a margin squeeze. With various negative externalities inhibiting its growth, we have trimmed our estimates for CDG. We roll forward our valuation to FY08, but use a lower PER of 12x (previously 15x) to account for the lack of near term catalysts, translating to a fair value estimate of S$0.28. Downgrade to HOLD.

StarHub: Wins Uefa Broadcast Rights

Summary: StarHub has won the exclusive rights to broadcast the 2008 Uefa European Football Championship in Singapore, meaning that rival SingTel is still without a major sporting event to help draw more customers to its Mio pay-TV service. While StarHub did not disclose the price it paid for the broadcast rights, we do not expect it to come cheap. And as with the case of the 2006 World Cup broadcast, we expect StarHub to charge its sports viewers on a pay-per-view basis. We will have more updates when we see what sort of package StarHub intends to offer. Meanwhile, we are also leaving our numbers unchanged, pending the release of its FY07 results this evening. For now, we retain our BUY call and S$3.41 fair value.


NEWS HEADLINES

- Aztech Systems has secured a S$253m contract for the supply of construction material.

- China Essence Group posted an 85% YoY increase in 3Q08 net profit to RMB100.m as revenue almost doubled from RMB166m to RMB330.3m.

- Jade Tech is selling its wholly-owned, loss-making subsidiary Jade Precision Engineering to United Pacific Industries (UPI) for about S$6m in UPI shares and cash.

- Yoma Strategic Hldgs posted a S$21.06m net profit in 3Q08, a turnaround from a S$13.82m loss a year ago, thanks mainly to the completed acquisition of a 27% interest in Winner Sight Investments.

- Mercator Lines reported a 3Q08 net profit of US$14.4m, up sharply from US$2.4m a year ago. The company attributed the 106% YoY gain in revenue at US$43.1m to improved vessel day rates and an increase in the number of operating days.

- Vicom, the vehicle inspection unit of ComfortDelGro, posted a 31% YoY gain in FY07 net profit to S$13.5m.

- KTL Global has secured a 5-year contract to supply up to US$7m worth of wire ropes for crane equipment to the McDermott Group. It also announced a 24.6% YoY increase in 1H net profit to S$2.18m.

- Saizen REIT's 2Q08 net property income jumped 77.8% YoY to S$7.95m on the back of an 85% increase in gross revenue to S$11.23m.