China Sportswear Companies: Approaching end of de-stocking

Store visits in Xiamen. We visited retail outlets of Li Ning, Anta, Xtep, Kappa, China Hongxing and 361 at Zhongshan Road, the busiest shopping area in Xiamen, between 7pm and 9pm on 2 Sep09. We were surprised to see substantial product discounts across all brands at all outlets.

Industry-wide de-stocking is likely to end before Nov09. The big discounts are meant to clear summer inventories before the full-scale launch of winter products, in our view. Thus, price discounting should not extend into November.

Industry prospects are improving. Retail sales growth in China is on an uptrend on a y-o-y basis, and the Business Climate Index for clothing and footwear showed a strong rebound in 2Q09 after 6 quarters of decline from its peak in 3Q07.

Upgrade China Hongxing to BUY, TP raised to S$0.31, based on 12x FY10 P/E or 30% discount to Anta’s FY10 P/E, with no change in earnings estimates, for we expect the valuation discount to continue to narrow to its normalized level as we have correctly foreseen in May09.

Maintain BUY on China Sports, TP raised to S$0.33, based on 6x FY10 P/E or 40% discount to Xtep’s FY10 P/E, in anticipation of normalizing valuation discount along with economic recovery.

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Delong - New Deal For CB Holders

As the company will not be able to meet their convertible bondholders (CB) requests when the CB holders have the option to require the company to redeem their bonds (worth RMB1.532bln) on 8 June 2010 the company is proposing to amend the terms and conditions of the bonds.

The new bonds will be similar to the existing bonds except that the new bonds will repay 100% of the principal at maturity in June 2012 and will not allow bondholders to force the company to redeem by June 2010, but in return, the company will pay an annual interest of 5% (paid semi-annually). As well, the old conversion price of S$4.455 will be reset to the equivalent to the average price from 17 Aug ’09 to the trading day prior to the closing date and there is no restriction on the convertibility of the new bonds.

An EGM is expected to be held on 2 Oct ’09 for shareholders to vote and at least 75% of positive votes are required to put the deal through.

The new deal sounds like a good deal for existing CB holders as they would be able to gain 5% annual interest as well as lower conversion price. The only downside is that if business at Delong remains in the doldrums, the CB holders would only be able to get the 5% annual interest and not be able to participate in the rise in share price and remain stuck with their CB until June 2012. However, this sounds like a better deal than see the company go into receivership for not being able to meet their debt obligations.

While Delong has underperformed most other SChips by rising the least from its low (shown in our table yesterday) we maintain that at 1.8x price to book it remains overvalued compared to China’s largest steel producer (Baoshan) which trades at 1.4x and the industry remains in the bad books of the government given overcapacity & pollution problems, hence maintain SELL.

China XLX Fertiliser - 2Q09: The worst has passed

Worse-than-expected 2Q09 results due to lower product prices and one-off loss. We expect profit to recover in 2H09 given the production ramp-up at new plant. Maintain BUY with target price of S$0.57 based on 8x 2010F PE.
China XLX Fertiliser’s (XLX) turnover was up 7% yoy to Rmb545m, mainly due to the launch of the new urea plant in mid-Apr 09. Gross margin and EBIT margin slid 13ppt yoy to 10.8% and 6.7% respectively, due to declines in the prices of urea, methanol and compound fertilisers, as well as one-off start-up costs for the new plant. Net profit plummeted 75% and 60% yoy respectively to Rmb23m in 2Q09 and Rmb82m in 1H09 (vs our full-year forecast of Rmb226m).


We believe the worst to be over in 2Q09, and earnings could recover in 2H09, due to the smooth launch of the new plant, as well as the stabilisation of urea prices and methanol prices. In 2Q09, the company registered substantial one-off start-up costs for the launch of Phase III in mid-April. The start-up costs will not be repeated in 2H09. With the production ramp-up at the new plant, the company’s urea capacity has increased from 0.72m tonnes to 1.25m tonnes. The company expects the new plant’s utilisation rate to increase throughout the year and reach full capacity next year. Unit cost is lower than that of the two old plants, which helps to drag down overall cost. Urea prices in China have stabilised at Rmb1,600-1,700/tonne due to a rebound in international urea prices and the reduction of urea export tariff, which opens the profit window for Chinese urea exports.

The loss from the methanol segment will narrow as XLX is streamlining facilities to produce less methanol and more urea, as well as reduce the cost of production. Adding to the boost is the rebound in methanol prices. Though net profit for 1H09 reached only 36% of our full-year forecast of Rmb226m, we maintain our profit forecast for 2009, due to the aforementioned factors. Management is going to hold a conference call today so we will provide updates later.

XLX is trading at 6.9x 2010F PE, much lower than the over 10.0x for domestic and global peers. Despite the industry headwinds in the near term, we remain upbeat on XLX, given its strong position amid industry consolidation in the medium to long term. Maintain BUY with a target price of S$0.57 based on 8x 2010F PE.

China Zaino - 2Q09: Disappointing results but signs of recovery emerging

Signs of recovery are emerging despite the lower-than-expected results, suggesting the worst is over. Growth will be driven by its enhanced market leader position and continuing healthy financials. Maintain BUY.

2Q09 sales dropped 8.9% yoy with net profit contracting to a record -34% yoy on the back of lower consumer spending amid the economic downturn and a higher base last year. However, there are good signs emerging: a) under a tough environment, 1H09 sales increased 4.7%, suggesting the company has been able to maintain its market share, and b) then luggage segment reported good sales, indicating the company’s efforts to enter a new market so as to offer a better product mix has worked well.

We believe the stock might come under selling pressure today as the results came in lower than expected. But we recommend investors take advantage of price weakness before the market gradually realises that the worst is over,underpinned by a continuing recovery in the economy which will lead to an increase in consumer spending in 2H09. Also, management has guided that net margin has touched its base line and they are not going to compensate further for higher sales volume as its market leader position has been enhanced in the downturn and its product mix has been structurally adjusted.

Li & Fung - 1H09: cost cutting spurred profit, too much growth is priced in

1H09 results came in better than our estimates due to cost saving, but worse than market expectation as a result of drop in turnover, with net profit up 13% yoy to HK$1.4b. Valuation is too expensive. Maintain SELL with fair price of HK$18.8 based on 18x 2010F PE.
1H09 results came in better than our estimates due to cost saving, but worse than market expectation as a result of drop in turnover, with net profit up 13% yoy to HK$1.4b. The earnings growth was solely attributable to cost cutting. Due to dilution from the two share placements in Sep 08 and May 09 respectively, EPS only grew 6% yoy.

Despite its numerous M&As and outsourcing deals, turnover unexpectedly dipped 2% yoy to HK$46.3b in 1H09, mainly due to insolvency of its customers, order cuts and price deflation. Ytd, 10 customers of L&F have already filed for bankruptcy, compared to six for 2008. Besides, existing customers cut their orders for destocking purpose, as most of them saw a double-digit sales decline.

SG&A as a percentage of turnover dropped to 8% in 1H09 from 8.3% a year ago, due to the Group’s cost cutting measures. As such, EBIT margin rose 32bp yoy to 3.6% in 1H09. For 2009, the Group targets to reduce its operating expenses by US$100m or 10% of the 2008 cost base (excluding acquisitions).

Effective tax rate fell to 5.9% in 1H09 from 8.6% a year ago, due to tax management. Combined with an improvement in EBIT margin, it boosted net margin by 40bp yoy to 3.0% during the period.

Based on the larger than expected cost savings and lower effective tax rate, we raise our EPS forecasts for 2009, 2010 and 2011 to HK$0.88, HK$1.04 and HK$1.23 respectively. Our expected 27% EPS growth in 2009 is solely based on acquisitions (or outsourcing deals), operating cost savings, as well as tax expenses. The benefit will fade from 2010 onwards. We anticipate an 18% EPS growth for 2010-11 to factor in the new outsourcing deals, like Talbots.

Raffles Education - Victim Of Negative Media Report.

Raffles Education (RE) said that a website in China known as China’s 21 st Century Herald had on 25 Aug’09 published a speculative report indicating that a number of teachers in its 100%-owned China unit Oriental University City (OUC) have false accreditations.

RE said that while it is not the company’s policy to comment on speculative reports, management have decided to advise its shareholders and the investing public that the media report contains a number of inaccuracies and misleading facts and figures. Their 2 colleges at OUC are bona fide schools with all the requisite approvals and permits in place.

Management also cautioned against the wilful circulation of the media report and reproduction of the untruths and misleading facts and figures. And that it would not hesitate to seek legal redress against anyone found doing this.

The date of the negative media report was coincidentally released on the same day that RE released its full year ended June’09 resultswhere its performance came in below market expectations due to higher than expected costs, slower than expected student growth rate and start up costs of new colleges. This had resulted in a few downgrades and target price reductions by analysts.

At the same time, technically the stock breached its short term uptrend in place since Mar’09.

Since 3Q ended Mar’09, the company had stopped its usual quarterly dividend payment. At 50.5 cents this morning, market cap is S$1.324bln, trailing PE is 26x, price to sales is 6.5x and price to book is 2.5x.

China Precision - A Fair But Not Compelling Offer

China Precision’s Chairman and major shareholder Zhang Zhongliang who owns 66.24% of the company is proposing to take the company private at 28 cents a share, valuing the company at S$102.259mln.

This is at a 19% premium to its last traded price, 180% premium to its low reached in Jan’09, but at 2 cents discount to its IPO price of 30 cents (June’06) and 44% discount to its all time high of 50 cents hit shortly after the IPO.

This translates to a trailing PE of 8x, price to sales of 0.7x and price to book of 1x. Its 4-year historical average PE range from low of 4x to high of 10x, price to sales 0.4-1.1x and price to book 0.5-1.5x, hence the offer price values the stock roughly in-between the historical average valuation range.

An additional 9.7% of shareholders (Zhang Hongman, the treasury manager of the company, Lu Hong, the HR director, Zhang Qing Lin, director and GM of the company, Lou Yiliang is close business associate of the Chairman) have given irrevocable undetaking to vote in favour of the offer, giving the offeror a stake of 75.94%. There are no institutional shareholders with more than 5% of the company. (China Precision has not been a well-traded stock with average daily vol of about 150,000 share in the last 6 months).

An EGM will be held for shareholders to vote on the proposed privatisation offer and having already achieved the minimum 75% approval needed, the delisting proposal would be put through if not 10% or more shareholders vote against it.

We view the offer price as fair compared to Elec and Eltek’s which valued the stock at only 0.6x price to book (resulting in the independent advisers rendering the offer as too low), but not as compelling as Sihuan’s offer (the last privatisation offer) which valued the company close to its all time high share price and valuations (price to book of 3x, price to sales of 3.6x and PE of 9x).

This should be positive for other S-chips given that the offer price was done at 19% premium to its last traded price and 8x PE, 0.7x price to sales and 1x price to book is double that of the lows it hit and about in line with the average historical trading average.

A sell recommendation on Cosco

Cosco faces similar difficulties as shipping companies. Currently, there is excess capacity in the shipping industry and shipping companies are laying up vessels. As a result, the shipping companies are not placing orders for new vessels. In some instances, the shipping companies reschedule and/or cancel the orders for new vessels. Cosco has seen its share of reschedules and cancellations, and we believe that the trend will continue for the rest of this year and early next year.

Earnings estimates. The reschedules and cancellations are expected to cause the profit to decline from S$302.6m in FY2008 to S$174.2m in FY2009F. We expect improvement to begin towards the second half of next year, which is likely to lift the profit to S$193.0m and S$230.9m in FY2010F and FY2011F respectively.

From the list, we note that the average P/E and P/B for the industry are 13.30 and 2.60 respectively. Cosco is currently valued at 9.10 times P/E and 2.41 times P/B.

Recommendation. We have a sell recommendation on Cosco with a fair value of S$1.14, which is 2.2 times book value for FY2009F. We feel that Cosco may face further downward adjustments in profit and cash flow due to more reschedules and cancellations of vessel deliveries. Moreover, we expect only a few, if any, contracts for the construction of new vessels given that shipping companies are still idling vessels.

Longcheer - Leveraging on the 3G theme

Results inline with forecasts; Maintain BUY. Mobile handset solutions provider Longcheer reported 4QFY09 results that were inline with our expectations. We continue to expect Longcheer to be able to leverage on the 3G theme – BUY recommendation is therefore maintained while target price is increased to S$0.865 (from S$0.56 previously) based on 7.6x FY10 P/E.

Net earnings were almost on the dot. With reference to Figure 1 & 2, Longcheer saw 4QFY09 revenue of RMB634.6m (+8.7% QoQ, -18% YoY) while net profit came in at RMB38.3m (+34% QoQ, -15.5% YoY) as lower demand for 2G handset solutions in China affected the company. Nevertheless, this was generally inline with our estimates as we were forecasting top and bottomline at RMB534.6m and RMB38.0m respectively.

Outlook remains bullish. We continue to like Longcheer due to the following:
(i) Strong net cash position of 28 S¢ per share as of FY09, representing slightly less than 50% of its current share price.
(ii) A growing 3G market in China where the three Chinese telcos are expected to spend RMB280b from 2009 till 2011 to upgrade their 3G networks – Longcheer’s 3G products jumped more than fivefold YoY to exceed 1.0m units in FY09 and we are forecasting no less than 2.3m units to be shipped in FY10.

(iii) Strong cash flow generating attributes – we expect Longcheer to generate full year operating cash flows of no less than its corresponding net profit in FY10F and FY11F respectively.

(iv) 1QFY10 results to at least match 1QFY09’s revenue and net profit of RMB905.3m and RMB48.9m which still translates to sequential growth of at least 42.6% and 27.7% in top and bottomline respectively.

Valuation. Our forecasts remain generally unchanged given that its results and outlook were inline. We maintain our BUY recommendation and continue to peg our target P/E to a 30% discount of the industry average – target price is therefore increased to S$0.865 (from S$0.56 previously) based on 7.6x FY10 P/E.

Epure - New projects in the pipeline

Epure’s 2Q09 results were in-line with our estimates, with earnings rising by 28%. With RMB900m worth of contracts currently under negotiation, our confidence in its ability to secure more future projects and grow its order books is reaffirmed. Maintain BUY, with revised fair value of S$0.75 (S$0.51 previously).

Stronger 2Q earnings from tax credit. Epure’s revenue was up 26.7% YoY to reach RMB303.4m, on the back of higher contribution from major turnkey projects and sale of customised environmental equipment from Hi-Standard. Gross profit margin was slightly weaker YoY, from 32.2% to 30.3% - this is due to the difference in the timing of recognition for the various projects. Consequently, earnings rose 27.9% YoY to RMB66.7m. We note that this was boosted by confirmation of tax incentive for Epure’s subsidiary, bringing income tax expenses down by 90.2% YoY to RMB1.1m in 2Q09.

Potential contracts ahead. We understand that there are ~RMB900m worth of contracts that Epure is currently negotiating for. In addition, there have been enquiries from other overseas countries such as Philippines, where there is apparently strong construction demand for water infrastructure. We believe that these potential order flows will help maintain, if not boost, order books, which currently stands at RMB1.2b.

Lower effective tax rates a booster to earnings. With the transfer of some existing EPC projects into Epure International Water, the company will enjoy lower tax rates of 0% tax for this year and 7.5% next year. This compares with the higher 15% tax rate without the transfer. Thus, we are lowering our effective tax rate forecast from 16% to 10% in FY09 and to 12% in FY10. This pushes our earnings estimates upwards by 7.2% to RMB270.2m in FY09 and 4.8% to RMB314.2m in FY10.

Maintain BUY, new fair value of S$0.75. With the positive industry outlook, we are expecting continued growth in revenue from Epure’s project wins. Applying a P/E of 14x (in line with its peers) to Epure’s FY10 earnings, we derive a new target price of S$0.75 (S$0.51 previously). We maintain our BUY rating.

China Automation is the largest provider of safety and critical control systems

China Automation expects its railway signalling and petrochemical system businesses to continue growing at 40-50% and 20-30% per annum, respectively, on rising demand in the next few years. It expects to win a few contracts, with confidence in the contract for Beijing metro, which will be announced in 2H09.

China Automation is the largest provider of safety and critical control systems in China, specialising in the petrochemical and railway signalling industries. The company’s business development hinges on the fast-growing Chinese railway industry. It foresees rising penetration given growing consciousness for railway safety. Management expects the railway signalling business to continue growing at 40-50% per annum in the next few years. Management expects city metro to offer exciting growth opportunities. Contract sizes for metro-line stations of Rmb200-350 mn are much larger than those for nationwide railway projects. Over 30 cities are planning to construct 85 city metro lines. Management expects the company to win a few contracts, with confidence in the contract for Beijing metro, which will be announced in 2H09. As the demand for safety and critical control system from the petrochemical industry is increasing rapidly, China Automation expects its petrochemical system business to continue growing at 20-30% per annum in the next few years.

Sinotel Technologies - ADR gains momentum

Since our previous report in August, a couple of developments have taken place. First and foremost there was a new contract win worth RMB15.3 million to provide 3G Distribution & Management System to China Unicom. At first glance, the figure seems small relative to its order book but it serves as a significant milestone in our opinion. The 3G Distribution & Management System basically keeps track and assist in managing China Unicom’s 3G sales and distribution channels between them, the distributors and exclusive third-party vendors across 31 provinces. This opens doors for Sinotel in terms of the opportunity to work with China Unicom’s 31 branches nationwide when deploying the system.

A second significant news update is the submission of American Depository Receipt (“ADR”) application to the US Securities Exchange Commission. ADRs represent ownership in the shares of a non-US company and trades in the US financial markets. It enables US investors to buy shares in foreign companies without undertaking cross-border transactions as ADRs carry prices in US dollars, pay dividends in US dollars and can be traded like the shares of US-based companies. Each ADR issued by the depository bank (The Bank of New York Mellon in this case) represents a fraction of a share, a single share or multiple shares of a foreign stock. For example, if the ratio is 1 ADR to 10 Sinotel shares in SGX, for each ADR a US investor purchases, 10 Sinotel shares will be delivered to the investor by buying from the open market of the Singapore Stock Exchange without a need to issue new shares.

We are very bullish on this event as ADRs provide increased liquidity to its shares, attract foreign investors and allow the company to carry out future fund raising activities when required. This greatly complements the Group’s participation in the prestigious Rodman & Renshaw Annual Global Investment Conference on 11 September 2009. This conference is expected to draw more than 2,500 investment professionals from around the world and Sinotel will have the opportunity to participate in the corporate presentation and daily networking sessions. We do not see any difficulty in the application of ADR to US SEC as, at this level, it is relatively straightforward and mainly requires that the company be listed in one or more stock exchanges in a foreign jurisdiction. We believe that with the approval of the ADR and the increased awareness derived from its roadshow in the US would give significant upside to Sinotel’s current share price.

Lastly, the Company has recently (4 September 2009) announced a placement of upto 28m new ordinary shares at a placement price of S$0.5052 per share. The placement will be placed to interested investors of which Providence SOGF Limited is one. The placement shares at full subscription represent 10% of Sinotel’s existing issued and paid up share capital of 280m ordinary shares. When completed, the placement will increase the issued and paid up capital to 308m. This has reduced our EPS forecast for FY09 from 10.72 SG cents to 9.27 SG cents.

Maintain BUY call at fair value estimate of S$0.93. Sinotel’s share price when we issued our report in August was only S$0.275, it has run up to S$0.585 since and we attribute the main reason to the announcement of the ADR. With the ADR just round the corner, we are pricing Sinotel closer to its US listed peers such as China Grentech Corp Limited and Telestone Technologies Corporation (Fig 2), which are currently trading at a PE of 13.53x and 6.66x respectively. With US investors likely to come in, the view that Sinotel is priced at a discount versus its peers is not unlikely. We thus move our PE to 10x FY09 forecasted earnings. This gives us a fair value of S$0.93, maintaining our BUY call. From the last traded price of $0.585, this represents an upside potential of 59%. As mentioned earlier, we view the ADR as a significant catalyst to the recent run up in share price, approval of which provides US investors a channel to purchase Sinotel shares that is still trading at a significant discount versus its peers.

China Banking - August new loan growth rebounded to Rmb410b, beating market expectations

New loans rebounded to Rmb410b in August, loan-structure continued to improve August's new loan-growth figure was well about market expectations, which was anticipating roughly Rmb300b of new loans for the month. In addition to strong headline numbers, the structure of loan growth continued to improve as well.

There was a total of Rmb159.1b of new corporate loans. Short-term loans increased by Rmb50.9b, medium- to long-term loans increased by Rmb367.5b, and discounted bills decreased by Rmb276.4b. Retail loans also saw strong growth in August, with a total of Rmb251.3b, which was largely driven by strong residential-mortgage loans. Medium- to long-term retail loans increased by Rmb180.6b for the month.

Strong August loan numbers will ease market concerns over liquidity The strong August new-loan figures will ease market concerns that there will be significant shortage of liquidity over 2H09. The continued improvement in loan structure shows that loans are being to finance economic development rather than speculative activities.

Given the CBRC's revised proposal to allow banks to deduct cross-held sub-debt over a series of years, joint-stock banks will be able to resume RWA expansion. The continued decline in discounted bills is also in-line with one of our major themes that will drive NIM expansion over 2H09.

China Hongxing is a leading domestic sports brand in China

China Hongxing expects a lacklustre 2009, due to weak demand and inventory issues. It plans to improve the situation by focusing on same-store sales. One of the strategies is to increase the store space (for fitting rooms) to cater for higher sales of sports apparel, which carry higher margins.

China Hongxing is a leading domestic sports brand in China, selling a wide range of sports footwear, apparel and accessories under its brand Erke. Management expects a lacklustre 2009, due to weak demand and inventory issues. The company plans to improve the situation by focusing on same-store sales. One of the strategies is to increase the store space (for fitting rooms) to cater for higher sales of sports apparel, which carry higher margins. Furthermore, Hongxing aims to expand its network and have 4,100 outlets by 2009 (+8%), 4,600 by 2010 (+12%) and 5,400 by 2011 (+17%). In the long term, management targets to have advertising and promotion-to-sales ratio reduced to within 20% while sports apparel to account for 60% of sales. Management remains optimistic that Hongxing will continue to gain market share.

China - September/October Property Market Development Remains Key

A-share market saw the biggest single day decline in 15 months — On 31 August, the domestic A-share market took a 6.7% tumble, the biggest single day fall in 15 months and breaking the psychological support level of 2,800.

What's behind the decline? — Speculation on reasons behind the fall include: 1) August lending is rumored to be below the market expectation of RMB400-500bn; 2) State Asset Bureau ordered SOEs to look into their outstanding derivative contracts, which could potentially lead to renegotiations with counter party foreign investment banks; and 3) Large IPOs being announced.

What do we think? — We believe the fundamental reasons behind the fall are as highlighted in our 18 August report1 that: 1) incremental liquidity is seeing decelerating momentum as bank lending slows, 2) maturing discounted bills rolling into longer term loans, 3) IPOs resumption, and 4) pick up in restricted shares selling off.

High property prices triggered the policy adjustment — We believe the area that triggered the government’s adjustment in its loose monetary policy was the high property prices which in first tier cities have already surpassed their 2007 peak. In order to reign in the ‘run away’ market, banks have made second mortgages much more difficult to obtain. Also rising prices start to cut into people’s affordability. As a result, transaction volumes peaked out towards the end of July in some areas.

September/October will become key months to look out for property market development, which also has a significant implication on stock markets — As we believe property remains the leading sector for both the Chinese economy and stock markets, whether we will see recovery in the upcoming peak season of property launches in September/October will have a deciding impact on market direction. We believe volume recovery has to be driven by some pricing declines. Thus, a more realistic approach from developers would likely please the government and invite buyers back. Otherwise, it could lead to further constraints from policy, which could also hurt stock market liquidity flow and sentiment.

Beauty China - Winding-up order against the Company

The Board of Directors of Beauty China Holdings Limited (the "Company") refer to the Company’s announcements made on 12 March 2009, 22 June 2009, 26 August 2009 and 31 August 2009 in respect of the winding-up petition against the Company on 18 June 2009 by the High Court of the Hong Kong Special Administrative Region (the “High Court”) presented by Industrial and Commercial Bank of China (Asia) Limited together with Banco Weng Hang, S.A., CIMB Bank Berhad, Hong Kong Branch, MCL Global Portfolios SPC Ltd - MCL Focus Opportunities Segregated Portfolio Fund and Public Bank (Hong Kong) Limited.

The Company wishes to inform shareholders that a winding-up order against the Company was made by the High Court on 7 September 2009 appointing the Official Receiver in Hong Kong to act as the provisional liquidator to the Company.

The Company will continue to keep shareholders informed and updated on material developments in respect of the status of the Company. Further announcements will be made as and when appropriate on a timely manner.

China Hongxing - Trading Close To Net Cash

Management said that while JF Asset Management (JFAM ) claimed that they faxed the change in their shareholdings in Jan ’08 and Feb ’09, internal checks review that the company did not receive those notifications.

Given that these transactions were quite sometime back, verifications can no longer be made.

Management said that they only received the shareholding changes from JFAM at the end of July ’09 which they subsequently released on 6 Aug ’09.

Management said that they have now strengthened their internal procedures in this respect and will ensure that it will not occur again.

When the media first brought up the discrepancy regarding the change in JFAM ’s shareholding on 24 Aug ’09, instead of reacting negatively to the news, the stock had risen 1 cent to 21 cents and had continued to rise to hit an intra-day high of 26 cents on 30 Aug ’09 before consolidating around the 25 cents level.

This is likely due to the company reporting that they had received RMB888mln worth of new orders at the 2010 Spring/Summer collection trade fair held in Xiamen on 24 Aug ’09 as well. While this represents a 26% yoy decline, it is up from May ’09’s RMB440mln, Mar ’09’s RMB800mln and Oct ’08’s 650mln. Management said then that the orders would have been flattish yoy if not for held back orders and rebates provided to distributors to weather the downturn in 1H 2009.

Management also said then that they were heartened by the recent signs of stabilization and believe that they will start to see more signs of stable performance next year, a reversal from their more pessimistic view since 4Q 2008, after the collapse of Lehman Brothers.

With management’s latest clarifications and strengthened internal controls to ensure that such an event will not recur in future, coupled with almost 90% of its share price being backed by cash & management’s target of collecting the outstanding RMB604.6mln of prepayments by the end of this year, we maintain BUY.

China - Still a bright spot;

We believe China remains a bright spot globally on the back of its strong growth potential, reflected in our economists recently upgrading their GDP forecasts to 9.4% and 11.9% for 2009E and 2010E, respectively, from 8.3% and 10.9%. We think the market concerns about a near-term “exit strategy” appear premature as the government remains pro-growth and real interest rates are still near the historical highs despite a significant re-leverging in 1H09.

We expect HSCEI and CSI300 to reach 16,800 and 4,300, respectively, by end-2010E, implying 44% and 36% potential price returns. The incremental upside from the new targets is mainly driven by our EPS growth rollover, but we believe the monetary policy will be the swing factor to valuations and hence equity returns. We set out two scenarios to model the potential market returns in different liquidity conditions.

We see investment opportunities emerging from the private service sector, including healthcare and education providers, as the govt undertakes deregulation to catalyze sustainable growth. Sectorally, we like domestic demand and would overweight banks, insurers, property around our core holdings of internet and solid consumer names.

Raffles Education Corporation: Muddied waters; downgrade to HOLD

Difficult year. Raffles Education (RLS) posted FY09 revenue of S$202m (+6.3% YoY) and bottomline of S$51.1m (-48% YoY). The poor showing was primarily impacted by weak student growth numbers coupled with the full S$33m impairment of Oriental Century and higher bad debt provision. Higher taxes were recorded due to tax incurred from its disposal of land as well as withholding taxes as it mobilised cashflows from overseas subsidiaries. RLS did not declare any final dividends in a bid to conserve cash.

Addressing concerns. With the market concerned about its ability to pay its short term loans and meet its Oriental University City (OUC) deferred payment obligations, RLS recently embarked to raise capital of S$131.3m via two tranches of fresh equity offerings. RLS has also restructured its outstanding RMB1.2b debt with OUC with 75% repayable only after Dec 2012 with an intended public listing. Post listing, the provincial government will likely own a significant part of OUC. We think that it would still keep a stake seeing that it can be a cash producing asset that has been turned around by Raffles. As education is largely driven by regulators, the government's stake in the listed entity will be seen as an advantage for Raffles.

Muddied organic growth. Although it has addressed debt concerns, RLS will not experience the growth of prior years. Management has guided for revenue to grow 15-20% and hopes to achieve net profit margin of 40-45% by FY12F. Student enrolment growth will also be stifled by a weakening Chinese market for private education as students put off longer and more expensive courses for shorter ones. Uncertain and haphazard regulatory changes to the education system have also introduced a murky outlook for organic growth. RLS will be setting up eight new colleges this year with breakeven timelines of 2-3 years each, depending on its locality.

Wait for clearer earnings drivers. We have adjusted our estimates to cater for a smaller topline coupled with higher operating costs and taxes. This offsets the absence of negative exceptional items for FY10F. With its funding issues addressed, we have bumped up our peg to 18x FY10F (prev 12x). Our fair value is tweaked to S$0.60 (prev. S$0.57). With the limited upside, we downgrade the stock to a HOLD.

Sinomem: Sizeable BOT player in China

Plant visit to Xiamen, China. We recently visited Sinomem Technology Limited (STL) at its headquarters in Xiamen, China. STL is a leading wastemanagement solution provider - it develops advanced membrane materials and has recently branched into BOT (Build-Operate-Transfer) waste-water treatment plants in China. We were given a tour of its membrane production facility and visited three of its waste-water treatment projects - two industrial and one municipal.

Sizeable BOT player in China. STL made inroads into the BOT wastewater treatment segment in 2006 and is currently building/operating ~20 such municipal/industrial wastewater treatment/recycling plants across China. Based on the total combined capacity of over 560k m3/day, STL has become a sizeable player in the BOT segment in China. We understand that STL has invested (or will invest) more than RMB500m for these projects initially using internal resources; some of these projects come with expansion clauses and could see STL investing an additional RMB450m.

Focus on North China and India. We note that the bulk of its BOT projects are located in North China and according to management, it is a strategic move given the scarcity of water there. STL believes it will not only be able to treat waste water but can also recycle the water using RO (Reverse Osmosis), thus deriving four revenue streams from these projects - the first from EPC (construction of the plant); the second from waste-water tariffs (with guaranteed minimum uptake and inflation escalation clauses); the third from membrane sales; and finally from sale of recycled water. Meanwhile, STL is also venturing into India to expand its waste-water treatment business. STL is currently working with its Indian partners and will provide the membrane technology and EPC works.

Near-term convertible loan overhang. On the financial front, it faces a potential overhang from the redemption of its convertible loan notes. While STL is sitting on a sizeable cash hoard of S$71.2m (as of end Jun) and generated an impressive S$23.1m cashflow from its operations in 1H09, the redemption may curtail its financial ability and flexibility to go after more BOT projects. As for its 52%-owned listed unit Reyphon Agriceutical, STL has almost fully written down its investment (took a S$13.2m impairment charge in FY08), which dragged its net profit down to just S$3.3m from S$30.6m in FY07; for 1H09, STL posted a net profit of S$10.6m. We do not have a rating on the stock.

Hongxings Sport - Signs Of Stabilization

The company received RMB888mln worth of new orders at the 2010 Spring/Summer collection trade fair held in Xiamen on 7 Aug ’09.

While this represents a 26% yoy decline, it is up from May ’09’s RMB440mln, Mar ’09’s RMB800mln and Oct ’08’s 650mln.

Going forward, the lower base effect would make yoy comparisons more favourable.

And according to management, it would be comparable yoy instead of the 26% decline if they take into account the orders held back and rebates provided to distributors to weather the downturn in 1H 2009.

While the overall environment remains challenging, management is heartened by the recent signs of stabilization and believe that they will start to see more signs of stable performance next year. This is a change in management’s outlook since the collapse of Lehman Brothers in 4Q ‘08.

With management having delivered on their promises of prepayment & debts collections on time, signs of stabilization in their orders going forward and the stock still trading below its net cash of 19 cents per share (currently at 18.5 cents), we maintain BUY.

Li Heng - Prospects Are Looking Brighter

The key message during the plant visit last week was that 3Q ‘09 bottom-line is expected to continue to recover from 2Q ‘09 (RMB38mln), 1Q ‘09 (RMB10.2mln) as well as 4Q ‘08’s (loss of RMB8.7mln) depressed levels, but still not enough to reach 3Q ‘08’s high base of RMB 259mln.

We estimate 3Q ‘09 bottom-line to recover 32% qoq to RMB50mln (no forex gain included versus forex gain of RMB13mln in 2Q ‘09).

This in turn reflects sales volume remaining steady as new local customer additions (+17 yoy to 195) help to offset weakness from export customers, while average selling prices recover 27% sequentially on the back of stronger demand as well as higher raw material costs.

While raw material prices are also expected to increase, fortunately, the company buys 2 months worth of inventories, hence will benefit from the lag effect of lower cost inventories.

As a result, gross profit margin is expected to recover from 2Q ‘09’s 10.6% to about 15% in 3Q ‘09, but still down from 3Q ‘08’s 31%. (Gross margin was 9.2% in 4Q ‘08 and 12.9% in 1Q ‘09).

The new polyamide chip plant which is used to produce part of their raw materials is expected to help them improve overall margins by 2-3% points when it ramps to full utilization in 1H 2010. The cost of the plant is about RMB571mln with depreciation per year estimated to be between RMB55-60mln (to start accounting for depreciation in 4Q ‘09).

Due to improved prospects, management has restarted their previously stalled expansion plans, targeting to add 70,000 mt of new production capacity by 1H 2010, increasing total production capacity from 167,000 mt to 237,000 mt.

The capex cost of RMB200mln is not a problem with the company’s net cash holdings of close to RMB1bln. Management said that they will maintain their at least 20% payout ratio at the end of the financial year.

The number of analysts visiting the company’s plant is down significantly from the one organized in early 2008, likely reflecting the company’s dismay operating performance and problems associated with S-Chips in general. However, we believe that as the company continues to deliver on their improving bottom-line performance, successfully executes its expansion plans and delivers on their dividend promises, investor interest will return.

While the stock has risen 19% since our upgrade last week, we still see upside potential given its improving prospects (especially with easier yoy comparisons due to low base effect from 4Q ‘08 onwards) and 0.7x price to book despite improving bottom-line and ROE performance, hence maintain BUY. (Founder and Chairman Chen Jianlong owns 42.7% of the company, CEO Chen Feng owns 10.32% while David Loh of UOB owns 10.47%).

China Fishery: Conservation of quota to 4Q

2Q09 net profit up 6.6% YoY to US$25.1m despite fall in revenue. This is in line with our expectations. However, growth in net profit was due to cost savings. Revenue on the other hand fell 21.7% YoY to US$107.4m due to a 30.6% (US$32.5m) YoY fall in 2Q09 trawling operations revenue. We raise FY09 net profit by 11.1% to US$117.4m. Target price is raised from S$1.20 to S$1.38. BUY maintained.

2Q09 trawling revenue fell as a result of conserving fishing quota to 4Q09. Reason for this allocation includes higher operational efficiency as they even out their vessel utilisation. They also hope to benefit from higher fish and fish roe prices towards the end of the year as the economy picks up.
Operating cost decreased 30.9% YoY to US$66.1m in 2Q09, due to the introduction of the ITQ system in Peru since Apr 09, allowing them to operate more efficiently. Lower fuel costs also contributed to the decline. Selling expenses declined 29.0% YoY in line with lower sales volume, hence net margins increased to 23.4% in 2Q09 compared to 17.1% in 2Q08.

FY09 net profit forecast raised. We have increased FY09 North Pacific trawling ASP from US$1,750/MT previously to US$1,850/MT due to better than expected ASP in 1H09 (US$1,884/MT). This is partially off-set by a US$9m increase in selling expenses forecast for FY09, as 1H09 selling expenses of US$14.7m turned out higher than expected. Our FY10 net profit has been lowered to US$162.4m from US$169.2m, due to increased FY10 selling expenses.

Target price is raised from S$1.20 to S$1.38. We raise our target price to S$1.38 from a previous S$1.20 based on 5.1x FY10 P/E, which is derived from peer Pacific Andes’ FY11 P/E of 5.1x. We note that since 2007, China Fishery has been consistently trading at a premium to Pacific Andes, with a P/E average of 11.7x versus Pacific Andes’ P/E average of 7.1x. However, our valuation is more conservative as we consider the Group’s inexperience in South Pacific fishing, as well as possible disruptions to their fishmeal operations due to a severe El Nino.

Raffles Education: The worst is over

Weak 4Q09 results, below expectations. mainly due to S$6.7m tax expenses relating to the disposal gain of OUC’s land and S$8.4m of withholding tax. Both are one-off items, including disposal gain of $19m from OUC’s land sale. Excluding these, operating profit for 4Q fell 73% to $6.3m, on account of a 28% yoy drop in sales and 31% rise in personnel expenses. Operating margin more than halved to 14%.

Expect margin recovery in FY10. FY09 revenue increased by 6% to S$202m, driven by 10% y-o-y increase in student population to 32,828. However, operating profit for FY09 fell 10% to $68m, operating margin declined from 40% in FY08 to 34% in FY09. We expect a rebound in operating margin, as top line is expected to resume its growth momentum from FY10 onwards, as management focus on organic growth of its existing schools, amid more favorable economic conditions.

Management targets to list OUC before FY1Q11 OUC contributed 15.6% and 21.2% to the Group’s revenue and net profit, respectively for FY09. The IPO proceeds of OUC will be used to address the Group’s RMB895m of deferred payment obligations in 2012 and 2013.

Cut earnings and TP to S$0.68. We trimmed its FY10 top line by 12%, and net earnings by 4%, on account of the disappointing 4Q core results. TP cut to 68cts, still based on 18x FY10F earnings, pegged to regional peers’ average. Maintain Buy, the worst is over for the Group, amidst tough operating conditions last year, and it is now poised for an upturn, with incremental contribution from OUC. The company did not declare any dividends for FY09, despite its net cash position of S$115m as at June 09, post recent placements.

China Hongxing Sports - order book off to a weak start

Aug09 order book had declined by 26% YoY to RMB887.5m. This came in slightly below our expectations. Compared to its last two trade fairs (Feb09: -20% and May09: -15%), the decline was more pronounced due to the high base effect from the Beijing Olympics last year. We are beginning to see signs of stabilization and order book is improving. Compared to the autumn/winter trade fair held in Feb09, orders would have increased by 11.0%. We also saw an improvement in sales mix towards higher margin apparel and accessories, making up 48.8% of the order book with footwear accounting for rest.

Outlook mixed. The company continues to lag behind its peers in terms of operating performance and profitability. This could be attributed to the higher inventory levels at its distributors, slower store expansion and products discounts/ rebates provided to distributors to help weather the downturn in the 1H09. We expect short-term weakness in the share price due to the disappointing Aug09 order book.

Key catalysts to rerate the stock. We would watch for key catalysts to turn more positive on the stock such as: 1) improvement in operating environment such as higher SSS and lower inventory levels at its distributors, 2) carrying out share buybacks in the 3Q, and 3) potential M&A opportunities to expand its product range. Maintain Hold.

China Fishery: Wider margins due to lower fuel costs

Rise in net profit due to better margins. Net profit for 2Q09 was up 6.6% YoY to US$25.1m. This is in-line with our expectations. However, the reason for this increase was mainly due to cost savings resulting in better margins rather than growth in revenue. Revenue fell 21.7% YoY to US$107.4m, due to a 30.6% (US$32.5m) YoY drop in 2Q09 trawling operations revenue.

We are likely to revise earnings as we expect more cost savings in 2H09 as well as updates on the progress of their South Pacific operations. Our target price will be revised after discussion with management.

Conservation of North Pacific fishing quota to 4Q09 for better efficiency. China Fishery’s 2Q09 trawling operations revenue fell 30.6% YoY as a result of conserving their fishing quota to 4Q09. Reasons for this include higher operational efficiency as they even out their vessel utilisation throughout the year.

Operating cost decreased 30.9% YoY to US$66.1m in 2Q09. This was due to the introduction of the Individual Transferable Quota (ITQ) system in Peru since Apr 09, which would allow them to operate more efficiently. Lower fuel costs also contributed to the decline. Selling expenses declined 29.0% YoY to US$4.9m in line with lower sales volume, hence net margins increased from 17.1% in 2Q08 to 23.4% in 2Q09.

Pacific Andes Holdings: Optimising vessel deployment

1Q earnings of HK$161m. Pacific Andes Holdings' (PAH) posted 1QFY10 net earnings of HK$160.9m, up 32% YoY but down 32% QoQ. Revenue fell 14% YoY and 16% QoQ to HK$2023m. The group attributed this to its strategy to delay the use of catch quota so that it can achieve better pricing later. As such, it posted lower revenue and also lowered its utilisation and other costs as the group deployed fewer vessels. Overall, gross margin improved from 15.8% in the previous 1Q to 19.6% in the current 1Q.

Change in product mix. In terms of revenue breakdown, Frozen Fish SCM (Supply Chain Management) accounted for 60% of revenue versus 55% in the previous 1Q. There was a deliberate effort to move its product mix to lower priced fish offering higher margin. The PRC market remained its key market, and accounted for 74% of revenue or HK$1501m. This was followed by East Asia at 20% and Europe at 3%. Total debt increased marginally QoQ from HK$5273m to HK$5652m, giving net debt to equity of 0.9x.

Delaying use of quota in anticipation of better prices. Management mentioned that the push of its quota to the last quarter will be beneficial as prices should improve later on, which should be better for both its fish and fish roe prices. As such, management expects catch volume to be better towards the later part of the year. Capex is likely to remain manageable at US$20m for China Fishery Group for the rest of the year and at a modest US$1-2m for PAH. While oil prices have recovered from the year's low, management said that if oil stays at around US$70 per barrel, it will account for about 13-14% of its costs.

Maintain BUY. As the results were fairly in line with our expectations, we are maintaining our forecasts for FY10 and FY11 for now. We expect the vessel optimisation exercise to continue and yield better results later in the year. Current risks to our earnings include the possible impact from the El Nino effect, which could impact its fishmeal operation in Peru. At the same undemanding valuation peg of 6x blended earnings, our fair value estimate remains at 31 S cents. The stock has done well since our last report in Jul 2009, up 29%, but we are retaining our BUY rating as its valuations are not expensive and there is potential for future price upgrades.

China Hongxing : 2Q09: Worse-than-expected Results; Slash Earnings Forecasts : SELL

China Hongxing Sports’ (Hongxing) 2Q09 results came in worse than expected as net profit plunged 60% yoy due to turnover contraction and margin erosion. The outlook remains challenging for 2H09 given slow sales and inventory glut. Maintain SELL.

Sales contraction and margin erosion. The 60% yoy earnings plunge was due to a significant decline in turnover and margin erosion as a result of the slowdown in retail sales and destocking by distributors. In order to help distributors to clear their inventories and compensate them for heavy retail discounting, Hongxing offered bigger wholesale discount to distributors by slashing the average selling prices (ASPs) of its products. In addition, sales volume plummeted as distributors cut orders to destock their inventories.

Retail inventory still high. Distributors, by cutting orders in 1H09, saw their unsold inventory level fell slightly from the peak of over five months at the start of 2009 to four-and-a-half months at end-Jun 09 (vs two-and-a-half months last year). However, Hongxing’s inventory days surged from 23 days at end-08 to 40 days at end-Jun 09, due to order cancellations by distributors.

Slash 2009-11 earnings forecasts by 27-28%. Based on the worse-thanexpected 1H09 results for Hongxing, we slash our 2009-11 earnings forecasts by 27-28%. The Group is subject to huge earnings risk due to: a) inventory level is still high and b) intensifying competition in the low-end sportswear segment.

Valuation/Recommendation. Based on our new earnings forecasts, the stock is trading at 10.5x 2009F PE vs 5-6x for S-share consumer stocks. Given the high earnings risk, we maintain SELL rating with a fair price of S$0.10, based on 5.5x 2010F PE.

Li Heng: Cautiously more upbeat for 2H09

2Q09 results suggest fragility still. Li Heng Chemical Fibre (LHCF) reported its 2Q09 results , where 2Q09 revenue fell 61.2% YoY to RMB453.3m, while net profit tumbled 88.8% to RMB38.0m. But on a sequential basis, we note that revenue was just down 4.1%, and was also 0.4% above our estimate; net profit was also up 272.8%, just 2.6% shy of our forecast. While there were some signs of stability, the situation remains quite fragile as we had highlighted in our earlier report. LHCF still has to absorb most of the higher raw material costs to help its customers, hence overall ASPs only rose 0.2% QoQ. For the half year, revenue fell 53.1% to RMB925.8m and net profit slid 91.5% to RMB48.2m, meeting 45.3% and 23.7% of our FY09 revenue and earnings estimates, respectively.

Cautiously improving outlook. As the macro economic picture continues to improve in recent months, management said it noticed a gradual stabilization in order volume and ASPs of its nylon yarn products and also raw material prices. While this may signal that the worst is probably over, the persistent margin pressure may be the biggest challenge facing not only LHCF but also other industry players. Nevertheless, it believes the gradual ASP increase will help gross margin recover to around 15% in 2H09.

PA chip plant almost done. While it is progressing cautiously with its planned expansion, its PA (polyamide) chip plant is almost completed. LHCF expects to start full trial production of the PA plant soon and begin full production by Sep. LHCF has also started the preliminary installation work for its additional yarn capacity but expects it to come on-stream in 1H10. Last but not least, we understand that the planned major overhaul of its old Li Yuan Phase 1 and 2 will be pushed back to 2Q10 as opposed to 2H09; this will also be done over a period of 4-5 years. As such, it expects to spend no more than RMB200m in capex in 2H09.

Maintain HOLD. In view of the margin squeeze in 1H09 and the still cautious recovery in 2H09, we have cut our FY09 earnings forecast by 23.7%; our FY10 estimate by 8.8%. However, in view of the recent market re-rating, we have eased our discount rate from 22.0% to 16.8%, which bumps up our DCF-based fair value from S$0.25 to S$0.26 (translates to just 5x FY10 EPS).. Maintain HOLD.

Sihuan Pharmacuetical - Strong operating performance

We have raised our six-month target price to S$0.94, from S$0.70, to factor in an improved operating outlook for Sihuan Pharmaceutical (Sihuan), following the announcement of its 2Q FY09 results. Our target price is based on a PER of 5.5x (a 35% discount to the forward peer-median PER) on our FY10 earnings forecast (from FY09 previously).

Sihuan recorded a 2Q FY09 net profit of Rmb64.7m, up 6.6% YoY, which included a divestment gain of Rmb38.2m, and a Rmb73.3m write-down of intangible assets. As a result of the “house-cleaning” exercise, we no longer expect asset write- down to be a drag on future earnings.

Sihuan’s pretax profit, excluding the divestment gain and asset write-off, was 17.4% above our forecasts. Sales revenue rose 38.4% YoY, and contributions from its key products – Kelinao, Anjieli, Chuanqing, Quao and Ninxinao – also exceeded our expectations. We have lowered our FY09 net profit forecasts by 8.6% to factor in the asset write-down, and raised our net profit forecasts for FY10 and FY11 by 7-8% to factor in a stronger outlook.

We maintain our 2 rating for Sihuan in view of its strong operating performance for 2Q FY09. We have raised our six-month target price to S$0.94, from S$0.70, to factor in an improved operating outlook.

Abterra - Right place, Right time

Abterra is currently involved in the trading of coking coal, coke and iron ore. The group imports iron ore and coking coal into China from Australia, India, Canada and Indonesia, and exports coke out of China to different regions globally.

In Aug 2007 and May 2009, Abterra successfully completed upstream acquisition of two coal mines, Zuoquan Yongxing Coal Mine and Shanxi Taixing Jiaozhong Coal Mine - 15% and 49% stake respectively. This is part of the group’s vertical integration strategy.

We recently visited Abterra’s coal mines and processing plant in Shanxi, China to understand its business operation and gather insights on future development.

Restructuring of coal mines in China. The site visit to China’s coal mining province, Shanxi, allows us to verify the reality of the much discussed restructuring of coal mines in China. From our conversation with local mine managers, we understand that the Chinese government is indeed hammering hard on illegal mining and proceeding in strictness to consolidate the mining industry.

Officials plan to reduce the number of Shanxi’s coal mines from 2,598 to 1,000 by 2010, shutting down unsafe and lowproducing mines. Small mines will be taken over by large mines and authorities are targeting an annual capacity of at least 3 million tons for the remaining coal mines.

During our visit, we understand from management that Taixin Jiaozhong Coal Mine, with annual production capacity of 150,000 metric tons (MT), is in the process of obtaining final approval from the authorities on the rezoning and upgrading of their production facilities to 900,000 MT. Similarly for Zuoquan Yongxing Coal Mine, it will be upgraded from the current 900,000 MT to 1.5 million MT. Both expansions are to be completed by end 2010, in line with official’s timeline.

We believe that more is to come. Given authorities’ determination to restructure and Abterra’s internal target to grow, we could potentially be seeing more mine acquisitions from Abterra within the next one to two years.

Midas – 4th and 5th production line now a reality

Midas posted revenue of $37.8m and net profit attributable of $9.4m for 2Q09. Net profit attributable grew by 10% on a yoy basis and 11% on a qoq basis. This strong quarter means that 1H09 net profit of $17.9m already forms 48% of our FY09 forecasts. The Group also maintained its quarterly cash dividend of 0.25cents per share.

The net profit in 1H09 was achieved without any contribution from its 31.5%-owned metro manufacturing associate Nanjing Puzhen Rail Transport (NPRT). This is due to the delivery schedule of its S$1b orderbook where FY09 delivery will come in the 2nd half of the year. We estimate Midas’s profit share to be approximately $6.4m in FY09.

Downstream fabrication will begin operations as scheduled in the 2H09. However we do not expect this to be meaningful to overall profit for FY09. Management has already scheduled an orderbook of about $20m for this new business and we expect contracts momentum to increase when Midas starts to show results for its clients.

The share placement proceeds of $90.6m in July will be mainly used to fund these. With an estimated installation time of 6 months each, we expect the 4th and 5th line to start operations in 4Q10 and 1Q11 respectively. With its capacity constraint alleviated, we expect Midas to compete strongly for the next round of orders which could come in 4Q09.

We have upgraded our FY09 earnings estimate by 6%. We are unconcerned about the decrease in revenue as that only reflects the lower aluminum prices and is inconsequential to Midas’s profitability. Our target price of $0.985 which is pegged to 18X FY10 earnings remains unchanged.

Zaino - Luggage products still the key growth driver

China Zaino’s 2Q09 net profit of RMB 69.6m (-35% yoy, -32% qoq) was within our expectations. The group’s strategy to maintain market share in current challenging market conditions, and higher tax rates led to weaker profitability. No interim dividends were declared.

Revenue from luggage products grew at a slower pace in 2Q, due to the switch towards low-pricing product mix to secure its market share. Backpacks, on the other hand, saw declining sales volumes but ASP rose due to high-quality new models. Looking forward, the group reckons that its luggage products will remain the key growth driver, targeting a sales volume of 4.5m units, an increase of near 30% from a year ago.

The group believes that the ASPs for its luggage products and margins could have bottomed in 2Q09. While hefty A&P expenses and lack of store expansions will limit earnings growth for the 2H09, the group is upbeat on a recovery in 2010. They are in the midst of planning the next phase of expansion by year-end, targeting to add 500 POS a year over the next 2 years.

Inventory days stood at a healthy level of 10 days, while net cash grew to RMB 878.7m or 19.3 cts/per share. The group plans to set aside RMB 170m for advertising and billboards in FY09 and RMB255m for its new production facility that will be ready by 1Q10. They will also be setting aside capital for network expansion. Interim dividends were held back to buffer against the uncertainties.

We kept our earnings estimates unchanged. Our target price is increased to 50 cents, rolled forward to 6x FY10 PER, based on the average PER of S-chips. At a mere 3x forward PER (82% discount to HK branded sports maker), China Zaino is clearly undervalued given its extensive store network of 3250 POS and market dominance on backpacks in the PRC.

Yanlord Land - Buy: Strong Sales and Rising Margins

Reiterate Buy (1M) — Yanlord’s strong 1H09 results and contracted sales performance YTD show that it is benefiting from the strong recovery in transaction volume and prices in the China property market. With its high-grade investment property portfolio now taking shape, Yanlord is growing into a major city-center integrated property player in China. We increase 2009E-2011E EPS by 3-10%, factoring in latest achieved ASPs for recent new launches. We raise our NAV-based target price to S$3.26 and reiterate our Buy (1M) rating.

Strong 1H09 results — Net profit was S$176.7mn, up 58.3% YoY, better thanour expectations. More importantly, gross profit margin improved 11.5ppt YoY to 62.6% in 1H09, while net profit margin was up 0.2ppt to 22% – reaffirmingour view that developers focusing on high-end, city-center properties should fare better on profitability given the more favorable demand-supply situation.

Strong financial position — Alongside an improvement in earnings, Yanlord’s financial position also improved significantly, with net gearing lowered to 12.8% at end-1H09 (from 64% at end-2008). This should allow it to adopt a more proactive property pricing strategy to maximize profit and margin, and to take advantage of potential NAV-accretive landbank opportunities.

Strong contracted sales — In 1H09, Yanlord has already achieved RMB6.2bn of contracted sales, up 107% YoY. Added to the sales performance at Yanlord’s latest new launches in Nanjing, Shanghai, and Tianjin, it has already achieved over 98% of its full-year contracted sales target for 2009 and locked in 100% of our estimated property sales revenue to be recognized in 2009. Echoing the strong sales environment, Yanlord is starting construction on eight new p rojects, which should help ensure a continued sales pipeline going into 2010.

China Taisan Technology Group - More water in the ship

China Taisan Technology Group (China Taisan) has warned that its 2Q FY09 net profit may be significantly lower than that of the previous year, due to deteriorating demand for its products and services. While this is no surprise given the 47.5% YoY fall in net profit for 1Q FY09, we think the gap may have widened further to warrant the issuance of a profit warning.

The continued deterioration in the results of China Taisan and its peers suggests that the synthetic-fabric manufacturing sector is still struggling from intense competition due to weak export sales and over-expansion. We have cut our earnings forecasts for FY09 by 52.8% to Rmb83.4m, to factor in further pressure on the company’s sales volume and profit margins, instead of the bottoming-out in 2Q FY09 that we had envisaged previously.

We have lowered our rating for China Taisan to 4 (Underperform) from 3 (Hold), as we recommend that investors stay cautious ahead of the coming 2Q FY09 results. We have also cut our six-month target price from S$0.13 to our estimated net cash per share of S$0.08 for June 2009. In our view, weak results would limit the company’s ability to pay out a dividend for FY09, and this would point to a lower payoff despite the increased uncertainty.

China Hongxing - Costs hit bottom line

Below. 2Q09 net profit was 50% below our expectation and consensus (-60% yoy to Rmb47.2m) on lower-than-expected GP margins and higher-than-expected costs. As expected, revenue fell 27.2% yoy to Rmb499.0m. GP margins were 35.6% (- 6.3% pts) vs. our forecast of 38.7%. The cost surprise came from advertising and promotion (A&P) expenses related to the ATP Shanghai Masters partnership. A&P rose to 21% of sales from 18.2% yoy. 1H09 net profit was Rmb103.2m (-55.5% yoy) on a revenue decline of 20% to Rmb1,066.7m, accounting for only 27% of our fullyear estimate. Hongxing declared an interim dividend of Rmb1ct. As at end-1H09, Hongxing had a cash hoard of Rmb2.7m.

Expect better 2H. Our FY09 earnings estimate has been cut by 24% to reflect higher advertising and promotion expenses. We expect 2H to be stronger than 1H as we believe the worst is over for the sportswear sector. Based on improving retail sales, we expect Hongxing to be able to cease product discounts to distributors by 3Q09. While demand is recovering gradually, order value could continue to decline yoy at the 1Q10 trade fair which will be held in August, given a record performance a year ago. We expect Hongxing to perform below the industry average due to its weaker brand name and conservatism.

Maintain Neutral. Hongxing’s closest competitor, Anta, is trading at 18.0x CY10 P/E. We believe Hongxing should trade at a discount to Anta, given its smaller size and weaker earnings visibility. Our target price remains S$0.18, still pegged at 6x CY10 P/E, at a discount to its larger peers. Maintain Neutral given the limited upside to our share price.

Midas Holdings: Set to enlarge its production capacity

Purchasing 4th and 5th production lines. Midas Holdings announced that it has purchased two additional aluminium alloy (AA) extrusion lines with an annual production capacity of 20,000 tonnes. Coupled with the current two existing AA lines and taking into account the 3rd AA line that is expected to commence production in 2Q10, this move would see Midas command an annual production capacity of 50,000 tonnes by end-2010.

We view this as a positive move. With the expected strong pipeline of new projects in the PRC, Midas’ higher production capabilities would enable it to leverage on the transportation boom in China. Also, the funds required for the purchase of these two AA lines would be financed by Midas’ recent S$89.4m share placement and not through bank borrowings, thereby avoiding the need for the company to gear up.

Recommendation. The fourth and fifth lines would be commissioned in Feb-10 and Aug-10 respectively. We will be reviewing our target price and BUY recommendation pending discussions with management.

Li Heng - Expanding customer base against all odds

LHCF posted a 2Q09 revenue decline of 61.2% yoy to RMB453.3m and net profit decline of 88.8% yoy to RMB38.0m. Sequentially, 2Q09 revenue and core earnings were also lower as a result of pricing pressures. Adjusting for the forex gains and its effects on income tax, 2Q09 net profit was RMB23m compared to RMB34m in 1Q09.

LHCF has coped well in this slowdown as the sales volume in 1H09 was just 3% lower than in 1H08. The overall ASP stabilized at RMB16,440/ton during 1H09, and has since rebounded to RMB21,000/ton due to higher raw material prices. The improving profitability of its customers has allowed the increased raw material costs to be passed on.

LHCF added five new Fujian-based customers in 2Q09, increasing its customer base to 195 and re-affirming its position as the market leader. The business outlook is likely to strengthen in the next six months based on stronger ASP and stable sales volume. The management expects gross margins to improve 5-ppt to around 15%.

As a sustainable recovery is still uncertain, the management remains cautious about inventory-stocking as raw material prices could be volatile. Working capital was well-managed. Long-term customers who have been given an extension in credit terms have so far been able to pay up. Net cash by end-FY09 is expected at RMB1.0b, with no major capex in FY10F.

We have raised our FY09 and FY10 revenue forecasts by 4% and 14% given the improved earnings visibility. The additional 90,000mt of yarn production lines are expected to be installed by 1H10. We are upgrading LHCF to a Hold with a target price of $0.24, pegged at 8x PER, a 50% discount to the regional sector average PER. LHCF has committed to paying out 20% of net profit as dividends for FY09F.

China Essence - Extension of loan

Loan obligations updates ? According to China Essence's announcement, the Group will be required to repay 16.7% of the loan, i.e. RMB70 million (equivalent to US$10 million), on 31 August 2009. The repayment of the remaining full sum of the loan amounting to US$50 million will be extended by one year to 30 June 2010, with an interest rate of LIBOR plus 3.25% per annum.

Downgrade to HOLD; Target price maintained at S$0.25 We reduced our FY10F earnings estimates by 1.9% after adjusting for refinancing cost. We maintain our target price of S$0.25, equivalent 0.5x FY09 P/B. With an upside potential of 16%, we downgrade China Essence to HOLD.

China Hongxing – Same-store-sales remains weak

CHHS’s 2Q09 net profit of RMB 47m (-60% yoy, -16% qoq) was below expectations. 1H09 net profit only accounted for 29% of our forecast. Earnings disappointment was due to broad-based decline in ASPs and gross margins as a result of product discounts amid weak demand. The group proposed an interim dividend of 1 fen/share.

At group level, same-store-sales continued to slide in 2Q09. Although the management indicated slight recovery from July, there are no signs of stability as yet. Gross margin hit record low of 35.4% led by falling ASPs and gross profits across all product segments. Its high-margin apparel products were the weakest segment in 2Q due to lower ASPs.

While earnings suffered, the group’s efforts in managing its inventories and cash flows led to strengthening financial position and improvement in cash conversion days. Net cash rose to RMB 2.7bn or 19.8 cts/share. The group plans to utilise its cash for share buybacks in 3Q09, while keeping to an annual dividend payout of 20-30%. It will also invest in their store network to foster expansion and keep an eye on M&A opportunities.

The management reckons its gross margins have bottomed along with easing inventory levels from the peak of 5 months in Feb to 3.5 months at the distributors end. Product discounts are expected to stop by Oct if demand continues to improve. Over the long term, gross margins could revert back to 43%. Further, concerns on the advances to its distributors are alleviating with the bulk of outstanding (~60%) collected.

We have cut our FY09 and FY10 earnings estimates by 24% and 19% respectively on the weak results. We now pegged the stock to 8x FY10 PER at 50% discount to its HK peers (pegged at cash previously). The group’s aggressive store expansion (3845 POS), and active A&P bodes well for its earnings momentum as the economy recovers. Key risks are competition and inefficient utilisation of its cash pile. Upgrade to BUY.

China Hongxing Sports - Performance worsen further; Cut 2009 profit estimates

Sales contraction and margin erosion slashed profit by 60% yoy, a result of a slowdown in retail sales and de-stocking by distributors. Turnover plunged 27% yoy. To help distributors clear inventories and to compensate for the heavy retail discounting (25% vs 15-20% last year), the Group offered a bigger wholesale discount to distributors (65% off retail price vs 60% last year), which slashed its product ASPs. In addition, sales volume for footwear and accessories plunged as distributors cut orders to destock inventories.

Retail sales of distributors dived. Same-store sales (SSS) growth dived from over 20% last year to 3-4% in 1H09 due to the economic slowdown. Store additions also slowed with points-of-sales (POS) increasing only 21 to 3,845 in 1H09.

Severe margin erosion. Gross margin was only 35.6% for 2Q09 vs 41.9% a year ago and 40.2% in 1Q09 due to lower product ASPs. Coupled with higher SG&A expenses as a percentage of turnover, EBIT margin plunged 9.3ppt yoy to 11.4% in 2Q09.

Retail inventory still high. By cutting orders in 1H09, distributors’ inventory dippedfrom a peak of over five months at the beginning of the year to fourand- a-half months as at end-Jun 09 (vs two-and-a-half months last year).

However, inventory at the Group surged from 23 days at end-08 to 34 days at end-Mar 09 and 40 days at end-Jun 09 due to order cancellations by distributors.

Collection of lease prepayment from distributors. The Group got back over Rmb550m of lease prepayment from distributors in 1H09. The balance of prepaid lease for distributors declined to Rmb605m at end-Jun 09 from Rmb1.1b at end-08.

Cut 2009-11 net profit forecasts by 27-28%. With much worse-thanexpected 1H09 results, we slash our 2009-11 net profit estimates by 27-28%.

This implies a 53% yoy earnings decline for 2009 and 6-7% yoy growth in 2010-11. While we anticipate Hongxing to resume profit growth since 2010, the Group is subject to huge earnings risk due to the still high inventory level and intensifying competition in the low-end sportswear segment.

Uncertain top-line growth. The Group has just completed the trade fair for 1Q10. Management guided a negative growth in orderbook and did not give guidance for 2010 turnover growth.

Sustained margin pressure. With more low-end sportswear companies getting listed recently, store openings are accelerating and competition intensifying. Together with the still high industry-wide inventory level, the Group may need to provide large wholesale discounts to distributors or raise advertising and promotional expenses.

Further investment in distribution network is probable. Instead of raising dividend payout, the Group intends to invest more on distribution network, such as paying the lease prepayment for distributors, buy stakes in distributors and launch M&As.

Based on our new earnings forecasts, the stock is trading at 10.5x 2009F PE vs 5-6x for S-shares consumer stocks. Given the high earnings risk, we maintain SELL with a fair price of S$0.10 based on 5.5x 2010F PE.

Yanlord Land Group: Cashed Up

Strong 2Q09. Yanlord's 2Q09 revenue was up 56% yoy to S$616m as its PATMI rose 36% to S$92m. This brought 1H09 PATMI to S$116m, or c.40% of our and consensus FY09 forecasts. The higher revenue was attributed to higher ASPs achieved, +54% yoy to RMB23,500/sm, as 80% of 1H09 revenue was from its high-profit margin Riverside City project in Shanghai.

S$800m of pre-sales yet to be recognised. The company still has S$800m of pre-sales that have yet to be recognised, and this will underpin earnings over the next few quarters going into FY10. Further success at its new Nanjing and Tianjin projects in 3Q09 continues to underpin its strong earnings visibility into FY10.

Cashed up, Ready to gear up. Following its share placement in 2Q09, coupled with a strong operating cashflow of S$528m in 2Q09, its cash position is up to c.S$1.3bn, bringing gearing ratio down to 0.1x. Further proceeds of c.S$369m from its convertible bond issue were received in Jul 09, and places Yanlord in a good position to be opportunistic with land acquisitions.

Building for the future. Yanlord plans to commence construction for up to 8 projects across 5 cities in 2H09, allowing it to diversify its revenue base whilst launching new projects in the future.

Maintain BUY, TP S$2.80. We believe RNAV-accretive acquisitions will be catalyst for Yanlord going forward. Maintain BUY, TP of S$2.80 (from S$2.81) based on 10% discount to RNAV of S$3.11.

Midas: raise target to $1.10

Accelerating expansion to meet demand. Midas plans to expand its aluminium extrusion production capacity to 50,000 tonnes per annum, along with three fabrication lines by end 2010 to grow its business. We project Midas’ revenue to double by 2011 to S$283m, with earnings increasing from less than S$33m in FY08 to S$75m by 2011. Revenue and earnings in 2012 is projected to reach S$350m and S$92.6m respectively.

Strong order book and bidding for more contracts. With an order book of RMB1.5bn to fulfill from 2Q09 onwards, Midas’ aluminium extrusion lines (including the 3rd line) are already fully booked until the end of 2010. The Group is also bidding for more contracts as China continues to spend on developing its railway system. At the same time, Midas’ associate Nanjing Puzhen also has a strong order book of RMB4.5bn and is gunning for more projects in various cities.

Target price raised to S$1.10, maintain BUY. We raise our target price for Midas to S$1.10, based on 20x FY10 earnings, at a 20% discount to its HK-listed train and parts manufacturering peers. 20x PE is also undemanding against Midas’ 25% EPS CAGR over FY08-FY12, which translates to 0.8x PEG.

Li Heng Chemical Fibre Technologies - 2Q09: In line; 3Q09 to improve further with ongoing recovery

Li Heng reported 2Q09 net profit of Rmb38.0m, down 88.9% yoy. On a qoq basis, however, 2Q09 net profit almost quadrupled from 1Q09’s Rmb10.2m, which was in line with our expectation. A forex gain of Rmb13m in 2Q09 as opposed to the Rmb21m forex loss in 1Q09 was the main reason for the prominent qoq improvement. Otherwise, the company actually saw a slight qoq decline at the gross profit level in 2Q09 because the poor performance in April, which was the weakest month in terms of selling prices and margins, had dragged down the overall outcome in 2Q09.

Revenue declined 61.2% yoy to Rmb453.3m due to a 50.9% yoy decline in average selling prices (ASP) and a 21.0% yoy decline in sales volume. Li Heng ran at full capacity in 1H09, but since it produced different types of yarn, the maximum amount it could produce was less than its originally designed capacity.

Gross margin for 2Q09 deteriorated further to 10.6% from 12.9% for 1Q09. This was also due to the negative effect of a weak April. Gross margin was below 8% in April, gradually expanding as the market recovered since May, and approached 15% in June.
The chemical fibre industry continued to see a recovery in 3Q09. According to Li Heng, there has been quite a significant improvement in July and August, with selling prices rising about 10% based on ASPs in 1H09. Thus, we expect gross margin for 3Q09 to climb to over 15% given such a huge increase in selling prices.
The fluctuation in the exchange rate of S$/Rmb appeared to have largely stabilised in the last two months as compared to that in the previous quarters. As such, we expect the impact of the forex gain/loss on Li Heng’s bottom line to decrease, making its future performance more predictable. And as the company continued to witness improvements in its operations, operating factors such as margin expansion and selling price hikes would dominate the changes in the results.

Looking ahead, with the ongoing favourable trend in the market, we expect Li Heng to record an over 10% qoq increase in 3Q09 revenue, a 40-50% qoq jump in gross profit, and over 30% qoq increase in net profit.

Li Heng remains our top pick in the chemical fibre sector as we like its ability to maintain production at full capacity and to generate profits when others are incurring losses, which generally validate the company’s leadership position. As the industry recovers, we expect Li Heng to benefit more as a market leader in terms of charging more decent prices and reporting better margins. Maintain BUY on Li Heng with a target price of S$0.29, based on 5x 2010 PE.

Sinotel Technologies - BUY at a fair value of S$0.33

Relatively strong earnings growth. The Group announced growth in revenue of 36.1%, from RMB 104.4 million in 2QFY2008 to RMB 142.1 million in 2QFY2009. Its half-year revenue has increased by 30.9% from RMB 182.3 million in 1HFY2008 to RMB 238.7 million in 1HFY2009. The Group attributes the growth in revenue to the increase in contribution from their “Wireless Network Solutions” and the revival of their “Distribution Solutions” from the commencement of sales of 3G network cards in July 2008. The increase in the Group’s wireless network solutions were due mainly to the securing of more contracts in Shanxi province as well as the increase in the contribution from its Emergency Mobile Communication System, introduced last year.

Growth in profits albeit a decline in margins. Gross profits were reported to increase from RMB 47.0 million in 2QFY2008 to RMB 56.6 million in 2QFY2009 depicting a 20.5% growth. Despite earnings growth, the Group’s gross profit margin fell by –5.2ppts from 45.0% in 2QFY2008 to 39.8% in 2QFY2009. The decline in profit margins was brought about by sales of equipment to the telecommunications operators. The telecommunication operators have, in 2008, changed their procurement policy to one that encourages central bulk purchasing for certain contracts based on their overall or provincial requirement. Contracts of such nature command lower margins, as there are no other services such as design and installation services required. The Group’s net profits for 2QFY2009 and 1HFY2009 increased by RMB 5.4 million or 15.0% and RMB 9.8 million or 16.1% compared to the corresponding periods in 2008. Net profit margins fell from 34.6% in 2QFY2008 to 29.25% in 2QFY2009. Net profit margins for 1HFY2008 was 33.3%, falling to 29.5% in 1HFY2009. The fall in net margins were due mainly to significantly higher general and administrative expenses as well as a moderate increase in finance costs due to increased borrowings.

The road ahead. We still believe that Sinotel, amidst this frenzy of telecommunication operators’ capital expenditure spending, is well positioned to benefit considerably. Despite the economic slowdown, China’s telecommunication industry has proven its resilience through progressive growth due mainly to the introduction of 3G this year. We believe that a few factors will seek to ensure the industry will continue to perform well: The number of cities targeted to have 3G networks for this year alone (more than 200 key cities) and massive upgrading projects running concurrently across the country to handle increased subscriber base. These all require significant capital expenditures by the (3) three telecommunication operators, benefiting equipment/solutions providers like Sinotel.

The Ministry of Industry and Information Technology (“MIIT”) in the PRC has expressed the Chinese Government’s intention to spend close to RMB 280 billion on 3G upgrading networks in the next three (3) years, inclusive of the RMB 150 billion to be spent in 2009. To date, the three (3) telecommunication operators have spent more than RMB 80 billion collectively, which is in-line with MIIT’s estimation done at the beginning of the year.

Reiterate BUY rating at a revised fair value estimate of S$0.33. We maintain our BUY rating with a revised fair value estimate of $0.33, from a peg of 3.5x to FY2009’s earnings. We have also increased our revenue forecasts for FY2009 and FY2010 slightly, taking into consideration the recent contract wins. Our previous price target of S$0.27, pegged to a 3.0x FY2009 PE, has been achieved and we believe, with the bullish sentiments for China’s telecommunication industry for the next few years, Sinotel, as one of the major beneficiaries, should see further contributions to its revenues as seen in the number of projects clinched in the last few months. A quick look at its immediate peers (Exhibit 2), we can see that Sinotel is already trading at a significantly lower PE value as compared to the rest with the average trailing PE for its peers at 16.61x and forward PE of 11.39x. Average peer price to book value is at 1.39x whilst Sinotel sits at 0.93x.

CHINA SPORTS - "Cum-Rights" Impt Date

1. "Cum-Rights" period in the Ready and Unit Share Markets : 6 August 2009 to 14 August 2009
2. "Ex-Rights" period in the Ready and Unit Share Markets : 17 August 2009 to 19 August 2009
3. Record Date : 19 August 2009 (5.00 p.m.)
4. Last day for Buying-In on a Cum basis unless extended by the Exchange : 20 August 2009
5. Shares are good for delivery for sales on a Cum basis in the Buying-In Market if the shares are purchased on or before : 14 August 2009

China Hongxing Sports: Disappointing Earnings

1H09 earnings down 56% y-o-y, with revenue falling 20% y-o-y. The decrease in the top line was attributed to weak consumer demand and the de-stocking process in the distribution channels. Although the Group continued to expand its distribution network to 3,845 POS, sales per store dropped 28%. We believe increased competition and heavier discounting also contributed to this.

Margins compressed mainly by advertising expenses. Gross margin decreased slightly from 41% in 1H08 to 38% in 1H09, whilst operating margin dropped significantly from 20% in 1H08 to 11% in 1H09, mainly due to the scaled up advertising and promotional activities.

B/S remained strong, supported by robust cash flow. Net cash per share further increased to S$0.20, fueled by robust operating cash inflow of RMB707m in 1H09.

Downgrade to HOLD, TP S$0.21, based on 8x FY10 P/E. We slashed our earnings estimates by 30% for FY09 and FY10 on lower revenue and margin assumptions. We believe the market will continue to rate CHHS below its HK-listed peers, as the company seems to be lagging behind its peers in terms of its operating performance and profitability. This set of disappointing results also raises questions about CHHS’ competitiveness in an increasingly crowded market.

China Merchant Hldgs (Pacific): Toll Road Business in Steady Growth

CMH’s 1H09 results are largely in line with our expectations, with earnings down 9.5% y-o-y to HK$162.2m, mainly due to the losses in its New Zealand property business.

1H09 revenue decreased by 36.6% y-o-y due mainly to much lower sales of the NZ properties in 1Q09. The property development segment incurred a loss of HK$12.1m in 1H09 vs HK$23.9m PBT in 1H08. The prospects of NZ property market remain challenging in 2H09.

Toll road business, as the Group’s main profit contributor, realized strong growth in 1H09, with PBT from toll roads rising 9.9% y-o-y to HK$134.6m, accounting for 79.5% of the Group’s total. The outlook for the toll road business in China remains positive.

B/S remained strong. Net cash/share reached S33.0cts by end 1H09. C/F was still robust, with HK$59.3m operating cash flow from the property segment and HK$216.7m dividends from toll road business.

Re-iterate BUY, TP revised to S$0.60, based on 5% target yield for FY10. The counter is offering an attractive current yield of 8%. Potential catalyst would be earnings-accretive acquisitions of road assets.

Li Heng – Earnings Strengthened By Forex Gains

Li Heng targets to announce its 2Q09 results on 11 August. Production remained at full capacity in 2Q09; monthly output could reach 10,000 tonnes, similar to that in 1Q09. ASP for 2Q09 is likely to have been in the range of Rmb16,000- 17,000/tonne, similar to that in 1Q09.

As such, we expect 2Q09 sales to remain flat qoq, totalling Rmb480m. Gross margin was about 8% in April, 12% in May and nearly 15% in Jun. Overall we believe gross margin for 2Q09 could remain at 12%, similar to that in 1Q09.

Li Heng recorded a forex loss of Rmb21m in 1Q09 due to the depreciation of the Singapore dollar against the renminbi. In 2Q09, the trend reversed and the Singapore dollar appreciated from below 4.5Rmb/S$ on 31 March to over 4.7 Rmb/S$ on 30 June. The company has a cash balance of over S$50m for the moment, and could have recorded forex gains of up to Rmb13m in 2Q09. Hence, we expect Li Heng’s 2Q09 net profit to come in at around Rmb30- 40m.

China Sky – Likely To Turn Profitable In 2Q09

Thanks to stronger order flows in 2Q09, a production line that was shut down in 4Q08 and 1Q09 has been put into operation since mid-May. The utilisation rate of CSky’s continuing operations has recovered to over 80% currently compared with 61% in 1Q09, while we estimate the average utilisation rate at over 70% for 2Q09.

Average selling price (ASP) for 2Q09 went up by 10-15% relative to the low level in March, but ASP was generally flat in 1H09.

We expect CSky’s sales for 2Q09 to record a 20% qoq increase to Rmb220m mainly on the back of higher sales volume.

We expect gross margin to expand to 15% in 2Q09 due to the higher utilisation rate.

The operations at Qingdao Zhongda (QZ) did not see any material improvement in 2Q09 as the utilisation rate was similar to that in 1Q09 (28%). Major reasons behind QZ’s unfavourable performance: a) production equipment is old and thus less efficient, and, b) direct exports originally constituted 20% of QZ’s revenue but their contribution is currently almost zero.

CSky recorded Rmb72m in maintenance and recalibration expenses in 1Q09. Excluding these expenses, CSky would have made a net profit for the quarter. In 2Q09, CSky is likely to have recorded another Rmb20m- 30m in these expenses in its P&L account, but we expect the company to have made a thin profit owing to the improvements in its sales and gross margin. Starting from 3Q09, CSky will not incur such expenses any more.

Cosco - still some distance from operational turnaround

Another weak quarter for COSCO, well below our and consensus average, with revenue down 31% YoY (flat QoQ) and PATMI down 71% YoY (+12% QoQ).

Stability in sequential PATMI trend was largely on improved bulk shipping economics, as BDI improved from 1,349 in 1Q09 to 2,528 in 2Q09, on average. In 1H09, shipping contributed less than 6% of revenue but 42% of net income (c.US$20 mn).

The shipbuilding business continues to drag with just one delivery to date, out of a 111 vessel order book net of cancellations. COSCO expects deliveries to pick up in 2H09 with 11 vessels undergoing sea trials. But management expects shipbuilding gross margins, 1% in 1H09, to remain subdued for the time being.

The ship repair business remains a relative bright spot with flat revenue QoQ (down 54% YoY) and 36% reported gross margins.

2009-11E earnings are cut by 21-25% (Fig. 2); target price ($0.51), pegged at 1x 08A BVPS, is unchanged. A lack of earnings visibility and relative valuation are reasons for our UNDERPERFORM rating.

Raffles Education – Humble valuations despite superior track record

Following our recent non-deal roadshow for Raffles Education in Tokyo, our comfort level has improved. While acquisitions have slowed, RLS will steer its focus towards organic growth, targeting an annual growth rate of 10-15% in student enrolment.

There is plenty of room to maximise the value of OUC by acquiring some of its existing 14 colleges, adding colleges and increasing fee income. Apart from receiving service fees, the group has added 2 schools that will commence their first student intake in 1H10. OUC has contributed returns of $62m since acquired in 2007. In 5 years, RLS targets a student enrolment of 100 000 in OUC. Earnings potential from OUC alone could go up to $200m per year, double the group’s existing core earnings.

The group has made its foray into India 3 years ago with Mumbai and now have a JV with India’s largest education provider – Educomp. India, with the largest population of young people in the world, will be an important growth engine for RLS. The group plans to set up two colleges in India every six months. At the fast expansion pace, the group expects India’s contribution to match its China operations in 5 years’ time.

RLS has been delivering value for its shareholders with a total share price return of ~75x since IPO. While there are sceptics about its regular equity financing, we note that RLS has been enhancing its firm value, evident in its 7-year core earnings CAGR of 63.5% and superior ROE. Aside from the placement proceeds, the bulk of the funding for its acquisitions and dividends came from strong cash flow generated internally.

RLS stands out as one the cheapest listed education stocks with an established brand name and superior margins. As most of its schools are below five years in operation, margins could improve to above 70% when the schools operate with sizable student population beyond 8 years. Along with its strong cash-generative business and easing debt burden, we expect the group to resume its dividends payout by end-2010. Maintain BUY.

China Sunsine Chemical - Positive sign in volume growth

2Q09 revenue saw significant improvement over 1Q09, rising 32.5% QoQ to RMB 177.7m. This was mainly on historical high sales volume of 11,130 tons, with over 90% coming from rubber accelerators. Although contributions from Insoluble Sulphur (IS) and Anti-Oxidant (AO) are minimal, 2Q09’s stable volume growth form these new products seems promising to us. Overall ASP in 2Q09 also contributed partly to the improved revenue, recovering some 6.6% QoQ to RMB 16,000/ton.

Net profit in 2Q09 increased 133.9% QoQ to RMB 25.5m. Consequently, Sunsine’s net profit for the first half of 2009 amounted to RMB 36.4m, about 47% of our FY09E forecast of RMB 77m.

Sunsine has completed the construction of 7,000 ton MBTS plant as at June 2009, rightly on schedule. The plant is currently under trial production and will commence commercial production in August 2009. Management noted that the plant is also capable of producing medical grade MBTS and Sunsine has already received 20 tons of trial order from a key customer.

That aside, expansion of IS and AO plant to 10,000 tons each are still expected to be completed by end FY09. However, the Group has decided to reschedule the expansion of DCBS workshop from 500 tons to 3,000 tons to end of FY09. According to management, current DCBS capacity is still sufficient to meet demand.

We have increased our sales volume forecast for FY09E and FY10E on the back of gradual return of demand, especially from the Chinese market. Our gross margin assumption remains at 22-23% given 2Q09’s promising margin.

Since our previous call in May 2009 with target price of S$0.24 when the share price was S$0.195, the stock has rallied and hit a 52 weeks high of S$0.27. Looking past FY09E into a new FY10E earnings forecast, we derived a new target price of S$0.37. Maintain BUY.

China Kunda Technology - has been easing in a long term downtrend

Customers remain cautious although there has been a marked improvement in sentiment since the low of 4Q08. We previously highlighted M&A ambitions, especially into plastic injection for automobile related parts. Such discussions are still ongoing.

Kunda is also working hard to acquire new customers for its IMD business and automotive mould business. Efforts to diversify into moulds for aircraft-related interior components are also ongoing.

Still cautious customers and the holiday season in Europe could see Kunda’s delivery schedule being pushed back and a significant portion of their mould orders are slated for delivery in August/September period. This could cause 1HFY3/10 net profit to come in at a lower percentage versus our full year forecast of HK$60.1m. As management is not seeing any order cancellation, we suspect Kunda could see its full year net profit being second-half loaded.

No changes to our forecast and recommendation. Maintain BUY with S$0.23 target price. Meiban’s average CY09-10 P/E has risen to 6.9x versus 5.6x when we initiated coverage on Kunda.

China Animal Healthcare: The Privileged Animal Drug Manufacturer

Leading animal drug manufacturer. China Animal Healthcare (CAL) manufactures and distributes: (i) powdered animal drugs; (ii) injection animal drugs; and, (iii) biological animal drugs, ie vaccines in China.

1st non-SOE licensed to manufacture animal Hand-Foot-Mouth (HFM) disease vaccine. We expect CAL to grab 20% of China’s HFM vaccine market when its 60%-owned Bewei Antai commences production end 2009, which will boost Group’s earnings by c. 45% from FY10 onwards. The market size of animal HFM vaccine in China is expected to reach RMB1.8-2.0b in FY09.

China was the largest consumer of pork in 2008, consuming over half of global total or > 33kg per capita a year, according to USDA. As one of the biggest manufacturers of powdered animal drugs, CAL is well positioned to ride on the booming demand for meat products, buoyed by rising Chinese residents’ affluence.

Initiating coverage with BUY, Price Target S$0.27, based on 10x FY10 P/E, which is pegged to its closest peer and backed by 45% earnings growth expected in FY10. The counter is now trading at 5.1x FY10 P/E, which is >70% discount to peers’ average.

Risks. The Group’s earnings growth in FY10 is highly dependent on the successful launch of HFM vaccine. Hence, downside risk mainly lies in the ramp-up of the new plant.

S-Chips - Who could be next?

Who could be next, after China XLX? Speculation is widespread post China XLX’s proposed dual listing in HK, possibly in search of better valuation. We attempt to uncover possible names.

Better valuation is key motivator. FTSE China Index has historically traded at an average of 47% discount to Hang Seng CEI (pg 2 chart). But, with valuation gap running as high as 40% and 70%, companies with equally bright prospects and good earnings visibility will find it attractive to list in HK, if depressed valuations do not fairly reflect the underlying assets or potential. Hence, good quality companies would gravitate towards exchanges that offer them the best valuations and investor reception.

Most S-shares would pass financial criteria of HK listing. Most S-shares under our coverage, by virtue of their listing status in Singapore, will probably meet the criteria by HKSE. (see appendix for financial criteria). Other key criteria to clear are accounting standards, jurisdictions, minimum market cap (>HK$200m) and public float (>25%). Epure and China Hongxing likely candidates to venture out.

Epure has a proven track record of earnings delivery to attract interests in HK/ China, where environmental themes are well received by investors. Besides, Epure’s management is familiar with China’s listing. China Hongxing’s huge discount of 70% vis-à-vis HK peers, coupled with its low ex-cash PE of c.1.5x and a net cash of 17.6cents/share looks compelling, in our view.

But not without risks/hurdles. While the benefits of dual listing/ privatization and relisting look appealing, hurdles to consider include the ability to secure funding for privatization, and the ability to relist at a premium thereafter. Companies with dual listing may also need to contend with managing different set of shareholders and the added cost of duplicate listing.

Cosco - still struggling ahead

Another quarter of disappointment: Net profit of S$37 (-71% Y/Y) for 2Q09 was 26% below our and consensus estimates, with no clear sign of earnings recovery ahead due to on-going weak execution, in our view. Reversal of a previous bad debt provision at Cosco Shipyard Group amounting to S$25.9MM provided a ~S$13.2MM boost to group net income. Interest income rose 6 times on higher borrowings. Total borrowings of S$1.2B were almost double the S$657MM at end-2008 as the company geared up to fund yard expansion and make up for the mismatch in liabilities duration when it previously funded yard capex with customer advances. Net cash now stands at S$672MM, and customer advance payment is at ~S$2.4B.

Newbuilding effectively unprofitable for now: Management guided that gross margin for newbuilding for 1H09 was at 1% as a result of still less than optimal execution. 11 vessels will go on sea trial soon and are expected to be delivered this year, comprising 3 for third parties owners and 8 for China Cosco. Management highlighted that it does not expect further cancellation from China Cosco post the recent cancellation of 8 vessels and the amendment of delivery schedule for 3. 39 vessels are underconstruction.

Shipping contributed major part of earnings: Earnings from the 12 dry bulk vessels contributed about 42-43% of the company’s net income with 8vessels on short-term charter, 3 on spot charter and 1 expected to come off its previously locked-in high charter rates in August.

Do not expect major offshore surprises: As Cosco is still unable to perform turnkey rig-building, participation in potential Petrobras pipeline will be indirect via contracts like hull construction similar to the Sevan 650.

Reduce Jun-2010 SOTP PT to S$0.66 as we trim our 2010 and beyond gross margin assumption for conversion to 18%, offshore to 15% and newbuilding to 8%, cutting earnings estimate by 35%/28%/17% for FY09E/FY10E/FY11E. The current order backlog of 100 dry bulk vessels may continue to pose a drag to its operational efficiency and earnings as it continues to struggle to move up the learning curve. Maintain UW.