China Zaino - Better-than-expected 1Q09 results

China Zaino recorded a better-than-expected net profit of RMB 101.5m (-4% yoy, -5% qoq) in 1Q09. Earnings exceeded our expectations due to lower-than-expected selling and distribution costs. Falling ASPs and higher tax rate resulted in a decline in earnings from 4Q08. The seasonally weak 1Q09 earnings accounted for 28% of our full year forecasts.

1Q09 ASP of backpacks and luggage recorded a decrease of 11% and 8.2% respectively over 4Q08. The group reduced its ASP in order to maintain its market share amid slowdown in consumer discretionary spending. Further, the lack of TV advertisements in 1Q09 has reduced its product appeal. Falling ASPs has led to margin erosion to below 30%.

While the group is sitting in a net cash of RMB 997m, more than half would be deployed in FY09. The group plans to set aside RMB 150m on advertising and billboards and RMB 170m for the construction of its new plant. In addition, we estimate the group to pay RMB 80m for dividends given its commitment to a 20% dividend payout for FY09. We also estimate a RMB 160m to be set aside for working capital needs as the group may face longer trade receivable days amid the global slowdown.

To maintain its market dominance, the group plans to resume store expansion by 4Q09 when it targets to add 500 stores in Fujian, Jiangsu and Shandong progressively. However, the group will have to pay for the furniture and fittings of the new stores that could amount to RMB 400m. Assuming this expenditure will be amortised over the next 5 years, we estimate this new store expansions will erode its net margins by 3ppt.

We have reduced our earnings estimates for FY09 and FY10 by 7% and 14% respectively to reflect lower gross margins in line with the management’s target of 30-31%. Our target price is cut to 35 cents (pegged to 5x FY09 PER), a 50% discount to its HK peers. Despite the lack of catalysts in the near- term, the group looks undervalued at 3x PER considering its dominating market share (36%) in the PRC.

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Sino Techfibre - Profit warning for 1Q09

Sino Techfibre (Sinotech) has issued a profit warning of a potential loss in 1Q09.

For polyurethane (PU) and microfibre products, customers continued to request for lower grades in 1Q09 as lower-grade products generally have lower average selling prices (ASP). In addition, as the rate of decline in the cost of goods sold for PU and microfibre products was less than the rate of decline in ASPs, this resulted in a significant drop in gross margin in 1Q09, as compared with that in 4Q08.

The adverse current economic climate has also affected demand for pattern moulding paper (PMP) as the overall market demand for PU and microfibre products has fallen.

We believe the market expects Sinotech to report a loss for 1Q09 as the company has disclosed that it has been running at a low utilisation rate, and selling prices and margins have been falling amid deteriorating business conditions. However, the market has high expectations of the PMP unit, and if it turns out that the segment did badly in 1Q09 due to plunging demand, share price could come under pressure.

Yangzijiang - Margins holding up well

Yangzijiang reported a stronger than anticipated set of 1Q09 results. Net profits of Rmb483m were up 30% yoy and 47% of our full-year estimate thanks to stronger than expected margins. We are upgrading our FY09 net profit estimate by 39% to reflect the higher than anticipated results. Yangzijiang delivered 6 vessels in 1Q09 (8 so far this year) and is on schedule to deliver all 40 vessel scheduled for delivery in 2009. The new yard is running at 50% capacity and is on track to reach 90% by 2010.

Yangzijiang’s gross margins held up better than expected. The margins came in at 20% vs. our full year estimate of 13% thanks to the recognition of higher value vessels (company is making close to 40% margins on those) andthe lower than anticipated steel prices. To reflect this difference, we have upgraded our full-year 2009 gross margin estimate to 16%. We still expect the company to be impacted by the 8% provisions on potential cost variations, especially once it delivers these higher value vessels.

Yangzijiang has not seen a single of its 149 vessel order book (US$6.7 billion) cancelled. The company is working hard to avoid any cancellations by helping customers find funding, providing delivery delays or order modifications and even providing rebates. As a result our 35% order cancellation is too aggressive and we reduce it to 20%. At the same time we are increasing our working capital requirements to reflect the delays and rebates offered.

To reflect the better than anticipated margins and lower order cancellations, we increased our FY09 net profit estimate by 39% and our FY10 estimate by 106%. This leads us to upgrade our 6x PE target price from S$0.36/share to S$0.50/share. With 11% upside to our new TP, we are upgrading our rec from a SELL to an O-PF. We expect Yangzijiang to outperform the other shipbuilders although the news surrounding the sector will remain negative.

Raffles Education - The largest private education provider in Asia

Raffles education is a leading private education provider in Asia. It offers diploma and degree programs in design for fashion, graphics and other industries. Since establishing the first college in Singapore in 1990, the group has grown significantly. It now operates 26 colleges and 3 Universities across the Asia Pacific. Design education constitutes 65% of its operating profits and over 70% of its revenue comes from China.

Raffles is one of the cheapest education stocks among its listed peers, trading at more than 50% discount to its US-listed peers. Such steep discounts are unwarranted and points to deep undervaluation of the stock considering its superior earnings track record over the decade, outstanding margins and remarkable growth momentum. Its commitment to generous dividend payout (>85%) adds to its appeal.

Despite the dearth of acquisitions, the management expects enrolment to grow 20-30% per annum by focusing on its enlarged education network. We estimated rising student enrolment to sustain organic earnings CAGR of 24% for the next 3 years. This works out to a recurring annual earnings stream of at least S$100m. Moreover, its ability to go for proprietary degrees is a competitive edge to drive superior margins.

We see great potential in the recent acquisition of OUC given its strategic location at Langfang Development Zone and potential to boost student enrolment by over 70%. We estimate net profit contributions from OUC to amount to at least $30m, which could potentially boost the FY10 earnings by more than 20%. The OUC contributions that we have yet to factor in our earnings projections could offer positive catalysts.

The recent share price correction to trough levels of 7x forward PER presents an unprecedented opportunity to invest in the stock. Raffles education offers a good mix between growth and attractive dividends. We are initiating coverage on the stock with a BUY with a target price of $0.60 using 0.7x PEG (based on a forward 3-year earnings CAGR of 17%).

China XLX Fertiliser: 1Q09 net profit slumps 47.6% to RMB59.1m

Net profit for 1Q09 decreased by 47.6% YoY to RMB59.1m. This is inline with our expectations. Reasons for the decline: (1) first quarter is usually weaker taking into consideration the seasonality of its business; (2) 1Q08 base was high due to the sale recognition of about 14,000/tonnes consignment stock of urea which was sold at the end of Dec 07. Management believes that they could exceed our FY09 net profit forecast of RMB199.1m due to its third plant coming on stream earlier than expected. However, we maintain our conservative net profit forecast as we foresee an oversupply of urea in China.

1Q09 revenue remained flat decreasing by 0.4% to RMB480.3m which was inline with our expectations. Revenue decrease was due to these key reasons: (1) Average ASP for methanol and compound fertiliser (CF) decreased by about 35.4% and 10.8% respectively compared to 1Q08; (2) Sales quantity of methanol and compound fertiliser decreased by 21.9% and 8.5% respectively. The decline in methanol and compound fertiliser revenue was partially offset by a urea service income of RMB37.9m. If not for this service income, 1Q09 revenue would have been RMB442.4m.

High anthracite coal prices are a concern as it continues to squeeze net profit. 1Q09 average anthracite coal price increased 38% YoY to RMB1,150/tonne. This caused net profit margins to shrink 11.1ppt to 12.3% during the period under review. As of Apr 09, anthracite coal price is about RMB1,250/tonne. In our forecast, we assume that FY09 average anthracite coal prices will be about RMB1,140/tonne. However, we do not neglect the possibility of coal prices remaining higher than our forecast. In our sensitivity analysis, we believe that if coal prices remain at RMB1,250/tonne for the remainder of FY09 this will reduce our net profit assumption by 41.3% to RMB116.9m which will translate to a target price of S$0.22.

Maintain NEUTRAL. We maintain our NEUTRAL call for China XLX and raise our target price from S$0.29 to S$0.345 based on 4.8x FY10 P/E. We believe its stronger FY10 earnings (due to full utillisation of third plant and better ASP for urea) will limit share price downside, although FY09 will be a tough year.

China Zaino - No surprises

China Zaino's 1Q09 net profit accounts for 29% of our full-year estimate (-4% yoy to Rmb101.5m), in line with our expectations but significantly below consensus. Due to a slowdown in consumer spending, Zaino had cut its ASPs in order to maintain market share. As a result, while overall volume increased by 19.2% yoy, overall ASP was flat at Rmb98.90. Earnings remain at risk as demand for bags may fall as people cut down on their discretionary spending, including travel. Maintain Outperform, nevertheless, given the substantial upside to our target price. Our target price remains S$0.37, still based on 4x CY10 P/E, at a discount to retail peers.

Sino-Environment's status as going concern now uncertain

Sino-Environment Technology Group's ability to continue as a going concern is now uncertain, with its chairman-cum-CEO losing shareholding control over the company. The group said this yesterday when it announced that Stark Master Fund, Stark Asia Master Fund and Centar Investments (Asia) 'are deemed to have acquired an additional 25 per cent stake in the company'. The enforcement of some 84.73 million shares under a share charge slashed chairman and CEO Sun Jiangrong's shareholding further from 31.23 per cent to 6.23 per cent. Sino- Environment said there is now 'real uncertainty' on Mr Sun's continued service with the company.

The group said that if Mr Sun resigned, 'there is uncertainty that the company may be able to continue to retain the services of the current management team of the group that work under his direction and supervision'. The latest news came after Mr Sun, who owns his Sino-Environment stake through Thumb (China) Holdings Group, defaulted on certain financial obligations to hedge funds managed by Stark Investments (Hong Kong) Ltd. Before the enforcement action, Mr Sun owned a stake of 56.29 per cent.

He had pledged his shares and other personal assets to hedge funds for original notes worth $120 million. An outstanding $65 million became due on Feb 16. Earlier announcements said various attempts at refinancing and rescheduling of the loan obligations had not been successful and offers to bid for the shares had been solicited by the hedge funds. Yesterday, Sino-Environment also said that its current business contracts may be adversely affected by the change in shareholding as it could trigger 'the bondholders' rights to request for conversion and/or redemption of the outstanding $149 million worth bonds as well as crystalising defaults on the corresponding swaps arrangement with the bondholders'. In the meantime, the board advises the shareholders and the investing public to exercise extreme caution in the dealing of the shares of the company. Trading was halted yesterday pending the announcement of Mr Sun's loss of shareholding control.

Apart from Sino Environment, another S-chip company that has found itself facing woes over pledged shares is China Sky Chemical Fibre. The latter's CEO and controlling shareholder found his pledged shares the subject of claims by lenders. CEO Huang Zhong Xuan holds his stake in China Sky through Rock Mart Equities, which owns 37.72 per cent of China Sky. And to secure personal loans from two lenders, Mr Huang 'had procured Rock Mart to pledge Mr Huang's 50 per cent share of Rock Mart's entire portfolio of the shares' in China Sky.

China Merchant Hldgs (Pacific): Good Value with Attractive Yield

The company’s results were in line with expectations, with earnings decreasing 22% yoy to HK$63.0m, due to weak property market in New Zealand. The property development business continued to make an operating loss of HK$6.5m in 1Q09. However, toll roads, as the company’s key business, saw steady growth, with PBT from toll roads up 12% yoy to HK$58.2m in 1Q09, accounting for 87.5% of total Group PBT, backed by 7.6% increase in toll revenue. CMH’s balance sheet remained healthy as well, with net cash of HK$721m or S$0.24/share by end of 1Q09.

Looking ahead, the property market in New Zealand is expected to remain weak for the rest of the year, whereas the business outlook for toll roads in China remains relatively positive. In the meantime, CMH continues to be in the process of looking for acquisition opportunities, to improve its road portfolio.

Maintain BUY. Target Price S$0.64, unchanged based on 7% target yield, which we believe is achievable considering toll roads defensive earnings profile and the management’s commitment to >50% dividend payout. The counter is currently trading at c. 6x FY09 P/E, well below the peer average of around 12x FY09 P/E, and offers an attractive prospective yield of 9.3%. The stock has good value at the current price, but the management needs to deliver on acquisitions in order for the stock to re-rate.

China Aviation Oil: Associate contribution will be significantly lower

Associate mires in the red. CAO announced last week that its 33%-owned Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIAAFSC) had incurred yet another net loss for 1Q09 of ~US$8.8m. This was due largely to higher procurement costs of jet fuel inventory while revenues were adversely affected by falling crude oil prices in 4Q08 and early 2009.

Strikes agreement with oil major. In another announcement, CAO revealed that it had entered into a cooperation framework agreement with China National Offshore Oil Cooperation Marketing Company (CNOOC) that would last till 31 Dec 2012. The agreement states that CAO should eventually be able to expand its jet fuel supply and trading business beyond the PRC, mainly by selling oil and petrochemical products in the international market. We have not factored in any tangible gains for CAO in our revised forecasts as yet for this new development, as the initial agreement only entails CAO purchasing CNOOC's jet fuel at the Huizhou Refinery.

Lowering forecast. We have lowered CAO's forecasted associate contribution for FY09 by 22.5% from US$13.3m to US$10.3m. This is mainly due to our lower crude oil assumption of US$51/bbl, as well as 1Q09 being loss-making. However, we have increased our FY10 associate contribution estimate by 44.3%, from US$14.2m to US$20.5m. This is on the back of a higher crude price target of US$58/bbl for FY10 assuming it does not get caught out again by higher procurement costs of inventory amid falling oil prices.

Valuation and recommendation. Our EPS estimate has been reduced by 27.1% from 5.9S¢ to 4.3S¢ in FY09, but been raised by 11.9% from 5.9S¢ to 6.6S¢ in FY10 after our adjustments. At CAO's closing price yesterday, the stock is trading at 21.2x FY09 and 14.0x FY10 P/E, which appears to be quite rich. We have updated our DCF parameters and set a required return from the market of 15.0%, in line with other S-shares we cover. Our target price has been raised from S$0.665 to S$0.72, but we downgrade the stock to a SELL given the stock's strong run-up over the past month.

Sihuan Pharmaceutical - Eventful week ahead

Sihuan Pharmaceutical (Sihuan) is due to hold its AGM on 27 April and announce its 1Q FY09 results on 28 April, while the stock will go ex-dividend on 30 April.

We forecast Sihuan to record a 1Q FY09 net profit of Rmb70.7m, up 33.2% YoY, backed by continued sales growth for its key products. The main item to watch, in our view, should be the company’s sales-growth momentum.

Our six-month target price of S$0.93 is based on a peer-average PER of about 7.5x on our 12-month earnings forecast (excluding one-off items) to 2Q FY09. We will publish an update after the results have been announced.Catalysts and action

We maintain our Buy rating for Sihuan, as we expect the AGM and 1Q FY09 results, as well as the coming dividend of Rmb0.153 per share (which gives a yield of about 4.5% at the current share price), to provide a positive boost to the share price over the near term.

China Cosco Seeks to Delay, Cancel Ships After Half-Year Loss

The company had a 3.97 billion yuan loss in its full-year accounts from forward freight agreements that fell in value because of the plunge in rates. FFAs are contracts used to bet on changes in shipping or chartering costs. Annual profit fell 40 percent to 11.6 billion yuan, missing the 16.2 billion yuan median of 10 analyst estimates compiled by Bloomberg.

This year, the China Cosco's dry-bulk traffic, or the total distance it carries paid-for cargo, will likely tumble to 846 billion ton-miles from 1.5 trillion ton-miles last year, according to the statement.

As of Dec. 31, the shipping line had secured 18 percent of 2009 dry-bulk operational days at rates a third lower than last year's average. The Baltic Dry Index, a measure of commodity- freight rates, fell 92 percent last year, the biggest drop in at least two decades. The company, controlled by China Ocean Shipping (Group) Co., had 443 dry-bulk vessels at the end of last year.

The shipping line slipped 7.6 percent to HK$6.34 in Hong Kong trading yesterday before the earnings announcement. The stock has climbed 18 percent this year, compared with a 3.4 percent gain for the city's benchmark Hang Seng index.

The company said its container-shipping arm may carry 5.2 million boxes this year, compared with 5.8 million last year. The shipping line will reduce capacity on major transpacific and Asia-Europe routes during slow seasons because of waning demand. As of Dec. 31, the company had a fleet of 141 container ships, with another 59 on order.

Raffles Education to invest 5m yuan in China school

A day after announcing a new investment in India, Raffles Education said it will pump in five million yuan (S$1.1 million) into a new school in China. Yesterday, the education group said it has forged a partnership with Langfang Development Zone Oriental University City Zhongxin Education Investment to establish the Oriental Vocational College.

The school will offer diplomas in fashion design, multimedia design, IT and eco-tourism, and expects to accept its first intake of students in September. With the addition of the Oriental Vocational College, the group will now operate three universities and 26 colleges across 10 countries in Asia-Pacific.

Additionally, the investment dollars will be injected into the school over five years. On Monday, Raffles said in a press release that it will invest US$500,000 into a new college in Bangalore, offering advanced diplomas in fashion design, graphic design, and fashion marketing. Educomp Solutions, its partner in that joint venture, will similarly contribute US$500,000 and the Bangalore school is scheduled to accept its first intake in July.

Last month, Raffles was hit by troubles at its associate company Oriental Century, which reportedly inflated sales and cash figures for years. Raffles has a 29.9 per cent stake in Oriental Century and does not rule out taking over the management of the troubled company.

China Sky: Profit warning

China Sky cautions investors that the Group has swung into losses in 1Q09, as operating environment deteriorated. The demand from customers has weakened further as end consumption for textile products from both domestic and export markets shrank. This has led to softening prices despite firm raw material cost. We have slashed our earnings forecasts for FY09 and FY10 by 69% and 55% respectively on lower sales volumes, ASPs and margins. Maintain FULLY VALUED with a reduced TP of S$0.14.

Worse than expected. The utilisation for China Sky has drifted below 50% level in 1Q09. We believe the ASP has plunged by 20%-30% qoq as demand for nylon yarn continued to slacken. We now expect volume to remain sluggish in 2Q and gradually improve towards the end of 3Q. Overall gross margins in 2009-2010 are expected to normalize to around 15% level vs 20% previously. Based on the lower volume and margin assumptions, our FY09 and FY10 earnings are slashed by 69% and 55% to RMB67m and RMB141m respectively.

Jittery over CEO's pledging of shares. China Sky has recently announced the pledging of the CEO, Mr Huang Zhong Xuan's 19% stake in the group for personal loan and his failing to pay instalments. This has brought about an overhang of China Sky's shares. In addition, business continuity of China Sky could be at stake in the event that Mr Huang, the founder of the group, steps down as the CEO. This is expected to suppress the share price performance in the near term despite any market re-rating.

Maintain FULLY VALUED; TP reduced to S$0.14. Hence, we retain FULLY VALUED on China Sky. Our TP has been revised down to S$0.14, following the earnings revision, still pegged to 0.2x FY09 P/NTA.

Beauty China receives non-binding conditional offer

Beauty China Holdings Limited has received a non-binding conditional offer from Dunross Asia Pte Ltd, on behalf of Dunross Group, Zesiger Capital Group LLC, Blue Pool Capital, Krohne Capital, Sean Wright and certain other investors (collectively, the "Investors"). The Investors hold in aggregate 27.45% of the issued share capital of the Company.

Subject to the negotiations between the Investors and the Company and the conditions precedent, the Investors propose that:

(a) the Company undertakes a rights issue of ordinary shares in the capital of the Company to the existing shareholders to raise gross proceeds of S$32.07 million (the "Rights Issue"); and

(b) the ratio for the Rights Issue (the "Rights Ratio") be 2 Rights Shares for every 1 existing share in the capital of the Company, and the issue price (the "Rights Issue Price") be S$0.045 per Right Share.

Sino-Env - Default?

Following the company Chairman’s transfer of 67,786,436 shares (20% of the company) to Stark Master Fund on 16 Apr ’09, one of the company’s substantial bondholder is seeking confirmation as to whether a change of control has occurred and whether an event of default or potential event of default has occurred as it was reported previously that in the event of a change in control of the company, it would trigger an immediate repayment of their outstanding S$149mln of convertible bonds as well as crystallize S$45.3mln worth of potential losses on their swap agreements (if this happens, the company is in no position to repay as it only has cash holdings of S$138mln).

The board of directors are seeking clarifications on this front from its Chairman.

Regardless of the outcome, we maintain that the stock will remain under pressure as Stark Master Fund attempts to dispose off their 20% stake in the open market or seek to place out their stake as they had previously disposed off their 5.0565% stake a depressed price of between 7 to 10 cents a share and the stock is last traded at 17.5 cents.

China Property - Improving Outlook With The Strong Liquidity Environment

1Q09 saw a sharp decline in commencement of construction GFA and land transaction volume — The recent 1Q09 real estate figures confirmed our view that the China real estate sector should see a year of destocking in 2009. In 1Q09 commencement of construction GFA and land transaction volumes declined significantly, by 16.2% yoy and 40% yoy respectively, although real estate investment recorded slight growth of 4.1% yoy. Commodity housing volume increased by 8.2% yoy to 11.3mn sqm, reversing the negative 0.1% growth in January-February 2009.

Improving market outlook with the strong liquidity environment — In 1Q09 the strong liquidity environment has acted as a critical factor for property market volume recovery. Total new net RMB lending in 1Q09 reached as high as RMB4.58 trillion, up 244% yoy, with the net increase in the household medium/long-term consumption loan (a good indicator for the incremental residential mortgage loan) reaching RMB195.4bn in 1Q09. This represented the strong increase in residential mortgage loans in the period, one of the key reasons for the strong rally in the property transaction market.

Key is future loan growth, favorable credit environment likely in remainder of 2009 — The Citi China Banking Research Team views that while severe tightening is unlikely (the PBoC has reaffirmed its loose stance following release of these figures), loan growth in April 2009/2Q09 should inevitably slowdown. If new lending falls from the RMB4.58 trillion level in 1Q09 to RMB1.0 trillion per quarter for the rest of the year (run-rate in 2Q/3Q08), system loan growth would be RMB7.6 trillion in 2009, implying 25% growth in loans outstanding. We believe the favorable credit environment could underpin growth in residential transactions, although volume growth is expected to slow down from the 1Q09 peak.

Focus on quality names such as COLI, Sino Ocean and CRL — In our view, the outlook for the China property market has turned bright. With recovery in transaction volumes expected to continue in 2Q09, volumes in 2009 will likely be better than in 2008. The China property sector has accumulated around 50% average share price growth in the past month. After the recent re-rating in the stock market, we believe investors should focus on stocks that present growth opportunities in the next 6-12 months. Based on this our preferred plays in the sector are COLI, Sino Ocean and CR Land.

Midas - Capacity and expansion at Jilin

Balance sheet. Midas had net cash of S$11.3m as at 31 Dec 08. It holds its cash mainly in deposits placed with Chinese mainland banks, ICBC, BoC and CCB for its China operations. It deals with OCBC for Singapore operations. It does not have any long-term loans, while short-term loans with the same banks above are essentially revolving credit lines, renewable annually. It has no convertible instruments. Operating cash flow is about S$30m and accounts receivables are within management’s acceptable levels. The only related party transaction is the supply of large section aluminium extrusion profiles to its 32.5%-owned associate, NPRT. NPRT uses these profiles to make rolling stock traincars for metropolitan rail operators.

Capacity and expansion at Jilin. Capacity for two lines is 20,000 mt, running at about 80% utilisation, which is near peak levels. The breakeven is about 30-40%. A third line will add 10,000 mt in 1QFY10 and cost S$35m. There will be further capex of S$40m-45m in 2009-10 for expansion as well as fabrication facilities. Although management says a full ramp-up could take up to three years, the process could be shortened if order flows are strong. Jilin’s order book is S$100m, and it is actively pursuing S$200m-300m worth of contracts. Should it clinch a large order, management may have to consider a fourth or even fifth line. For now, it will defer that decision until there is clarity on order flows and delivery schedules as it will still have sufficient lead time to set up additional lines. Jilin Midas has a dominant 80% share of this industry and does not see competition rising.

Impact from Chinese stimulus package. Midas’s order flows originate from the Ministry of Railways to rolling stock manufacturers which are mainly related companies of the China North Railway and China South Railway groups. About Rmb1.75tr of the Rmb4tr stimulus package announced in Nov 08 is for rail infrastructure development, and will only translate into orders for component manufacturers some 9-12 months on, and orders clinched would be for delivery over the next 24 months. Based on the Rmb1.75tr package, the value of the rolling stock is about 20-25%, and the aluminium extrusion value is only 3-5% of the rolling stock value. This translates to Rmb10.5bn-21.9bn of potential business for Jilin Midas.

NPRT. Capacity is currently being increased from 100 to 500 traincars. The bulk of its Rmb4.5bn order book of 768 traincars will be delivered in FY10. NPRT is also pursuing a number of projects – Hangzhou and Suzhou metro projects – which may involve another 400 traincars worth Rmb3bn-4bn. Management believes that it is a matter of time before NPRT needs to increase its capacity to 1,000 traincars as a number of cities are embarking on metro rail projects. As for possible expansion into high-speed trains, that will be highly unlikely due to the nature of its licence.
Raw material hedging. With volatile aluminium prices in the last 18 months, questions were raised on how Midas hedges itself. Midas’s contracts are firstly signed with established large players in the rail industry, and pricing is typically negotiated. There are two main contracts used by Midas: 1) cost-plus, in which case aluminium prices are not hedged and Midas adds absolute dollar processing costs or value-added fees. Gross margins for this type of contract rise when aluminium prices fall and vice versa; and 2) fixed-price, in which aluminium prices are fixed. Midas adds a premium to the aluminium price for its risk, and adds on its absolute dollar processing costs or value-added fees. With rising aluminium prices, the customer benefits and the risk is mitigated for Midas, and vice versa. However, management highlights that the practice of offering a cost-plus or fixed-price contract is a normal part of business and the group does not take any positions or deploy derivative instruments.

Chinalco. The proposed joint venture remains at the letter-of-intent stage. Given current market conditions and weak demand in the aerospace and shipbuilding industries, management is quite willing to defer it. There is not been any definite financial commitment but initial estimates put the investment figure at S$60m-80m for a 35% stake. Should the other parties push ahead with the joint venture in the near term, management may choose not to proceed as near term-risks are high.

Financing for the business. Backed by healthy operating cash flow of S$30m, management is confident that its financial needs can be funded internally. For its capex of S$40m-45m, it may take on some debt with the Chinese banks, which should carry favourable terms as these banks are very keen to lend out money. Management has ruled out equity fund-raising or financial instruments, other than straightforward loans with banks. That has been its policy all along. Business financing for NPRT will come from internal sources, aided by 10-30% downpayments for traincar orders. NPRT is self-sufficient and its shareholders have not been approached for any fund-raising.

Dividend policy. Midas has no fixed dividend policy. Dividends are contingent on the level of capex. However, it has been giving shareholders good dividends since IPO. It recently reduced its quarterly dividend to conserve cash for capex and operations. We expect payouts in 2009 to be about 10-15%. Management may consider consolidating quarterly dividends into half-yearly payments as this may be more efficient.

Maintain Outperform. Midas’s peers should not be the S-chips. Its closest peers are in fact H-shares listed in Hong Kong. Valuations remain attractive against these railrelated peers. We maintain our forecasts and DCF-based target price of S$0.70 (WACC 11.2%).

COSCO (S) addressed issues highlighted in today's Business Times article

The management of COSCO Corp (Singapore) (COSCO (S)) addressed the issues highlighted in today's Business Times article.

Question 1: What is the likelihood of further order cancellations and reschedulings?

Answer 1: The Company is unable to say for certain if there will or will not be further order cancellations and reschedulings, or the extent thereof if any, given the conditions facing the shipping industry at present.

Question 2: Whether the usual seeking of a mandate to issue shares at the annual general meeting of the Company to be held on 20 April 2009 is a precursor to a rights issue?

Answer 2: The Company has no plan at present to undertake a rights issue. The mandate has been a usual item for consideration at the Company’s past annual general meetings and the Company again seeks shareholders’ approval for the mandate at this year’s annual general meeting.

Question 3: How accurate is the policy, in relation to assessing revenue flows, adopted by the Company to only announce newbuilding contracts after the first instalment has been received?

Answer 3: The Company used to announce newbuilding contracts upon the signing of each contract. However, due to the cancellation of some of those contracts, the Company, as a matter of prudence, decided to announce the newbuilding contracts only after the first installment had been received as such payment would better reflect the commitment of the shipowners to the contracts in the current environment.

Question 4: Whether the Company has plan to divest its dry bulk shipping business?

Answer 4: The Company has no plan at present to divest its dry bulk shipping business.

We are valuing COSCO (S)'s shipyard business at a reasonable long-term sustainable annual contract wins of S$2.0b (2007: S$9.0b; 2008: S$1.6b) and a sustainable net profit of S$230m p.a. at a PE of 8.0x, which is in line with small-cap shipyards' valuations prior to the offshore & marine boom in 2003-08. Our contract wins assumption effectively implies COSCO's orderbook will be halved. COSCO (S)'s dry bulk shipping business is valued at 0.40x P/B, which is the typical cyclical trough valuation for the shipping sector. Should dry bulk shipping freight rates rebound, shipyard contract wins in 2009 surpass our assumption, or the global credit crunch eases, COSCO (S)'s share price could see a lift. When China's shipbuilding stimulus package kicks in, sentiments on Chinese shipyards may improve, which in turn may boost COSCO (S)'s share price. Maintain HOLD with a fair price of S$0.89.

SINO-ENVIRONMENT - How Much More To Go?

As Mr Sun Jiangrong, Chairman and CEO of Sino Environment is in default of debts owing to Stark Investments (a Hedge Fund based in Hong Kong), another 67,786,436 or 20% of Mr Sun’s shareholding in the company has been transferred to Stark Investments in accordance to their “enforcement agreement”. As a result, Mr Sun’s stake has been reduced from 51.23% to 31.23% (at current price this would be worth S$19.05mln).

On 5 March ’09, it was revealed that Mr Sun was not able to meet the requirements of Stark Investments for S$65mln of his debts outstanding to them and that they would seize his real estate worth about RMB10bln (S$2bln) and his shareholding in Sino Environment.

On 10 March ’09, 17,138,000 or 5.0565% of Mr Sun’s shareholding in the company were transfered to Stark Investments which they disposed off in the open market on 16 and 17 March ’09 between 7 to 10 cents a share. If they were willing to dispose then at such depressed prices, with the current price at 18.5 cents, we believe Stark Investments would be looking to dispose off their newly received 67,786,436 shares.

Only problem is that with average trading volume in the last 2 weeks ranging about 14-15mln shares, it would likely take them a while to dispose of the entire holding, unless done via an off market deal. Assuming it is done in the open market, it would likely depress the share price in the near term.

Besides, we do not know how much more does Mr Sun owe Stark Investments, as the 2 tranches so far amounts to an estimate of $14-15mln (versus his indebtedness of S$65mln) and while the pledged real estate amounts to about S$2bln, it was valued by Jones Lang LaSalle as at 30 Apr ’08 and one would have to estimate the residual value assuming Stark investment sells them in the open market currently.

CHINA SKY - CEO & Major Shareholder In Financial Difficulties

The company revealed that Huang Zhong Xuan (HZX) CEO, Executive Director and 37.72% shareholder of China Sky had received a letter of demand on 6 Apr ’09 from a creditor demanding him to settle outstanding debts. In addition, HZX also owes another creditor debts due to credit facilities having been granted to him.

To secure these 2 facilities, HZX had pledged 18.86% of his shareholding in the company. The 1st lender had required HZX to settle his debts in installments, failing which it has the right to dispose off his pledged shares in the open market. This happened on 2 Apr ’09 where the creditor sold 500,000 shares at 17 cents each.

Since early 2009, HZX had been in discussions with both creditors to settle his outstanding debts without them resorting to force selling his pledged shares, however, as at 12 Apr ’09, HZX had not been able to obtain any written confirmation from them.

As a result, further force-sale of shares could potentially result in a change of substantial shareholder and possible change of CEO as well. In the meantime, HZX remains in negotiations with his creditors for an amicable settlement.

The above suggests more force selling of shares can be expected in the near term. The first creditor have only raised S$85,000 when they sold 500,000 at 17 cents each on 2 Apr ’09. The second creditor has yet to announce any force sale.

This fiasco in itself raises more concerns about the company’s real financial position as it has a strong cash position of RMB880mln versus debts of only RMB64.151mln but chose to omit its final dividend payment (last year they paid 2 cents a share, amounting to S$16mln or RMB79.34mln).

If HZX (being CEO, ED and largest shareholder controlling the company) is in financial difficulty, he could logically have voted to force the company to pay dividends as they were still profitable last year (RMB393mln, albeit down from RMB651mln the previous year). And the company’s current market cap of about S$150mln is even below its last reported net cash position of S$163mln.

Although we do not have an official rating on the stock, the numerous abrupt suspensions of problematic S-Chips suggest that investors should remain extremely cautious on China Sky .

China Sky resume trading - great selling pressure

China Sky has requested for lifting of the trading halt, and has made a clarification on the trading halt.

In the announcement, the company clarified that the lenders who have granted credit facilities to Mr. Huang Zhong Xuan, one of the major shareholders and CEO of the company through share pledge arrangement, may seek to sell off the shares pledged to them to reduce debt incurred by Mr. Huang Zhong Xuan.

The stock will resume trading today and we expect great selling pressure on it.

Chinese Banks - Record Lending in March With Better Mix

Record lending in March, improved mix – The PBOC announced on 11 April that new Rmb lending in March reached a record Rmb1.89trn, in line with recent media reports, and trumping January's Rmb1.62trn. Lending mix improved in March, with discounted bills falling to 20% of new loans (vs. 40% Jan/Feb), and medium/long-term loans rising to 42% of new loans (vs. 33% Jan/Feb). YTD growth in loan outstanding was a rapid 15.2%. Excluding discounted bills, YTD growth in regular loans was 10.9%. The lending surge in late March partly reflects banks' locking-in loan volumes for fear of potential credit tightening measures.
State banks grew faster in March – State-owned banks outgrew the system in March, with mom loan growth of 6.8%, vs. 6.0% mom growth for the joint-stock banks. We believe this reflects the stronger loan demand for infrastructure/ government projects, which the state banks are in a stronger position to capture.

Negative deposit mix shift – Time deposits in 1Q09 grew 15.8% qoq, faster than the growth in demand deposits +10.2% qoq. This was driven primarily by corporate time deposits, which increased 22.7% qoq.

Key is future loan growth – Whilst severe tightening is unlikely (PBOC has reaffirmed its loose stance following release of these figures), loan growth in April / 2Q09 should inevitably slowdown. If new lending falls from the Rmb4.58trn level in 1Q09 to Rmb1trn per quarter for the rest of the year (run-rate in 2Q/3Q08), system loan growth would end up at Rmb7.6trn in 2009, or 25% growth in loans outstanding.

Credit multiplier soaring to ~3.5x – With loan growth potentially in the 25% range this year, and nominal GDP growth slowing to ~7%, China's credit multiplier (loan growth/nom GDP growth) will surge to ~3.5x from sub-1x level in the last 3-4 years. Whilst NPL formation is unlikely to be significant near term given the ease of credit availability, medium-term NPL risks are building, in our view.  Sector stance – After the recent rally, potential price upside looks increasingly limited. Strong loan growth in 1Q09 is mainly being used to offset NIM pressure. We maintain our Buy rating on BOC and our Hold (2M) rating on ICBC. CMB remains our top Sell.

Yanlord - Major contributions from Shanghai, as expected

FY09 sales on target. Based on our recent discussions with management, Yanlord appears to have bagged about Rmb2bn (S$400m) of contract sales in 1Q09, representing 40% of our full-year forecast of Rmb5bn (S$1bn). Presales in 1Q09 rebounded from a trough of Rmb630m (S$126m) in 4Q08, as market sentiment improved after the Chinese New Year holidays, on the back of the government’s relaxation policies such as lower mortgage rates and a reduction in transaction taxes.

Major contributions from Shanghai, as expected. Yanlord sold about 347 units of Shanghai Riverside City in 1Q09, out of the 1,100 units unsold as at end-2008 plus a newly launched 130 units in Mar 09. ASP remained stable at Rmb32,000/sq m for the small units and Rmb39,000/sq m for the large units launched in March. Proceeds from Shanghai were around Rmb1.6bn in 1Q09, or about 80% of Yanlord’s total presales.

Cash flow improving. We expect Yanlord’s cash flow to improve in 2009 on the back of stronger presales. In addition, Yanlord will be receiving cash inflow of Rmb1.25bn (S$250m) after the completion of the sale of its 40% stakes in the Suzhou Lakeview Bay and Shanghai Waigaoqiao projects to GIC Real Estate. Cash inflow should cover estimated construction costs of Rmb3bn-4bn (S$600m-800m), a land premium of Rmb5m (S$100m) and short-term debt repayment of Rmb1.75bn (S$350m).

Fine-tuning earnings and NAV estimates. We have revised our completion expectations based on the latest development schedule. We adjusted our earnings forecasts by +3.1% to -3.0% for FY09-11 as we now assume 301k sq m, 387k sq m and 572k sq m of GFA for booking in FY09-11 (previously 239k, 433k and 541k sq m). Our RNAV per share has been lowered from S$2.24 to S$2.20, to reflect changes in the completion schedule and the sale of the 40% stakes in the Suzhou and Shanghai projects to GIC Real Estate.

Maintain NEUTRAL despite higher target price. We maintain our neutral position on the Chinese property sector on the back of pricing pressure and increasing supply. Yanlord’s share price has rebounded 77% since March, which should have captured most of the positives, in our view. In light of its improved presales in 1Q09 and the alleviated pressure on its cash flow, we have narrowed our discount to NAV from 70% to 40%, in line with the current average discount for the property sector. Accordingly, our target price rises to S$1.32 from S$0.67. Maintain NEUTRAL.

China Sky Chemical Fibre - Reasons for trading

China Sky requested for a trading halt this morning. It is believe that the trading halt was requested for the following reasons:

a) Major shareholder Mr Cheung Wing Lin was forced to sell his pledged shares to meet obligations; and

b) A profit warning stating that the company has incurred a loss for 1Q09 is to be released.

The major shareholder is in talks with the share pledge counterpart to decide on the amount to sell; thus it may take a few more days for trading to resume. We believe there would be strong selling pressure on the stock once trading resumes

Sell Synear, China Sky, Buy Jiutian

Synear Food Holdings (SYNF SP; S$0.245) – SELL

• Synear is now sitting exactly on its resistance trend line at S$0.245. However, a doji candle formed yesterday, suggesting the bulls and the bears are still in battle. If the price closes above S$0.245, the stock could continue to edge higher to test S$0.28-0.30 next.

• Technical indicators are still positive but appear to be losing momentum.

• It may take a short-term breather for now if it fails to overcome the immediate resistance. Investors who bought earlier may want to take some profits here and let the rest ride if prices edges above S$0.245. Investors looking to buy may want to accumulate near the support levels of S$0.21 and its 30-day SMA at S$0.19.

Synear Food Holdings is engaged in the development, production and sale of quick freeze food products under its "Synear” brand name. It produces a variety of quick freeze food products including savoury dumpling products, glutinous sweet dumpling products, and other products including glutinous rice dumpling products and specialty desserts and snacks.

China Sky Chemical Fibre Co. (CSCF SP; S$0.145) – SELL

• The stock tested the S$0.185 resistance and failed to close above it. This failure suggests that there is likely more downside ahead. The close below its 30-day SMA is another negative for the stock.

• Indicators are weakening with the MACD confirming its dead cross.

• With its RSI pointing lower, we expect the stock to continue to edge lower to test the S$0.12 support once more. The next support is at S$0.105.

China Sky’s principal product lines is nylon Full Drawn Yarn (FDY), nylon (lustrous) FDY and nylon High Oriented Yarn (HOY). China Sky's products are currently sold under its trademark and brand name "Tianyu".

Jiutian Chemical Group (JIUC SP; S$0.06) – BUY

• The stock broke out of its bullish wedge pattern a few days back. Yesterday strong run confirmed the positive breakout.

• However, yesterday’s run took the RSI into overbought levels. Hence, we could see a minor pullback for the stock. However, with MACD still positive, any weakness should be seen as an opportunity to buy.

• Traders should buy near the S$0.045-0.05 support with a stop placed at S$0.04 or below. The breakout targets S$0.08 next if the S$0.06 resistance is breached.

Jiutian Chemical Group is principally engaged in the manufacture and production of methanol, dimethylformamide ("DMF") and methylamine. The Group is also engaged in the processing and sale of consumable carbon dioxide and oxygen.

Cosco Corp: insufficient offshore track record

Cosco has seen a raft of bad news in the past year, with the cancellation of 4 bulk carrier orders and rescheduling of another 21. This has led to its share price falling to just 15% of its all time high. Furthermore, it had to make provisions for trade receivables and delays of S$89.1m in FY08. We believe Cosco could announce more order cancellations and/or delays as the business climate remains dismal, with the Sevan 650 project possibly being a high-profile candidate – we estimate that around US$70m of the outstanding contract value could be at risk.

We maintain fair price at 1.1x book value, or S$0.57 per share, in line with trough valuations for the marine sector. We still expect Cosco to be profitable on its US$7.3bn orderbook, but forecasts are at risk from more cancellations and provisions. Management will also need time to get its house in order, having expanded too quickly and with insufficient risk controls, which have exacerbated the current situation, in our opinion.

Despite having strong offshore ambitions, highlighted by its establishment of a dedicated offshore yard in Qidong, Cosco is still way behind on the learning curve for complex newbuildings such as jack-ups and semisubmersibles. Cosco therefore will not be the first yard of choice for international customers, especially if there is available capacity at more established offshore players such as SMM and Keppel.

However, we note that Cosco could be a beneficiary of the Chinese government’s efforts to bolster the economy, where it is mulling providing enhanced credit support to shipbuilders and promoting self-innovation in ship building.

China Essence - Auditors have turned cautious

• Last Saturday, the Straits Times reported that the SGX is urging investors to be vigilant. At the same time, more auditors have been raising red flags about listed companies in the midst of this crisis.

• Due to high gearing levels and concerns about Companies ability to refinance or repay their debts, auditors have raised going concern worries over companies such as Frasers Commercial Trust and China Fashion, to name a few.

• With auditors turning more cautious, there is a risk that China Essence’s full year accounts may be qualified by its auditors.

• As at end December 08 (3Q), China Essence had short-term debts of RMB 460.9m and a long term debt (convertible bond) of RMB222.7m. Net gearing remained reasonable at 0.41x. Interest repayment ability was healthy with interest cover at 6.6x but operating cash flow for the 9 months was negative.

• Long-term debt – the long term debt which is a convertible bond is less of a concern at this point in time as bond holders are not able to demand redemption from the Company before maturity of the bond on 20th December 2011. While China Essence has the option of redeeming the bonds earlier, its current cashflow does not allow the Company to do so.

• Short-term debt – the greater concern is on the Company’s ability to repay/refinance its short-term debts of RMB460.9m. In July 2008, China Essence obtained a US$60m (RMB 409.6m or roughly 89% of its short-term borrowing) loan from DBS with a maturity date not exceeding 30th June 09.

• Given that China Essence market cap (approximately US$35.1m) is less than the amount loaned by DBS, we understand that there is a possibility that DBS will either demand full repayment of the loan or reduce the amount it is willing to lend to China Essence when the loan expires.
• Given that China Essence still has RMB262.6m in cash and receivables of RMB170.2m, the Company has leeway to manage the situation appropriately.

• Possible options include paying down some of the DBS loan with its cash balance and we understand that the Company has already started talks with domestic Chinese banks for banking lines.

• The Company is still profitable but the obvious risk is that a demand for full repayment of the short-term loan could cause auditors to highlight going concern risk since current cashflow are not sufficientfor full repayment of the loan. However, the Company could get financing from domestic banks and it would be foolhardy for its current major banker to jeopardize its borrower’s finances at this stage when cash flow generation capability still exists.

• At the same time, the share price was under pressure from sales by major shareholder, Dunross Investment Ltd which reduced its stake from 7.40% to 4.95% (9.6m shares) on 18th March 2009.

• Major shareholders have however been buying shares from the open market. CEO Zhao Libin bought shares on 26th March and 31st March at average prices of S$0.11373 and S$0.10958, bring his stake in the Company from 43.36% to 43.92%. Another major shareholder, Lee Kah Bao raised his stake from 4.984% to 5.099% on 3rd April with his purchase of 452,000 shares at an average price of S$0.135.

• On 27th march, the Company issued a statement to inform investors that they were considering various options in regard to the repayment of the DBS loan of US$60m.

• Maintain BUY with S$0.34 target price. This recommendation would be subject to the Company being able to resolve its debt issue. The dividend yield is only a ball park figure as we have assumed a 10% payout ratio which may not materialise since the Company is likely to seek cash preservation.

• China Essence has formed a bullish wedge pattern, and it is about to breakout of the said pattern. Trading volume has been increasing, suggesting that there is accumulation by strong hands.

• Technical indicators are also positive with the MACD and RSI hooking upwards. RSI has breached its resistance earlier. The bullish divergence on its MACD is supportive of our bullish call. Resistance is seen at S$0.15 and S$0.175.

• It appears that the bulls are about to shift into overdrive soon. Traders should buy half now and the rest near the S$0.11-0.12 levels before the impending breakout. Place a stop at S$0.105.

China Milk - US$3m principal amount to be repurchased

The tender for the bond repurchase has closed. The final aggregate principal repurchase amount is US$3m, so that the remaining principal of the bond will become US$147m. The clearing price expressed as a percentage of the denomination of the tendered bonds is 95%. Based on that price, the aggregate repurchase amount in cash payable is US$2.85m.

The repurchase amount would translate into about Rmb20m, which is quite insignificant relative to CMILK's Rmb1.9b cash position or its Rmb1b convertible bonds (CB) balance as of 31 Dec 08.

The company is willing to pay up to US$40m for the repurchase, but has received far from enough applications. The CB could be converted into new shares at a conversion price of S$2.00, or be redeemed by the company at 129.58% of the principal at maturity date. The bondholders seem to be at least quite confident about CMILK's repayment ability and are reluctant to sell the bonds at a discount now.

Raffles Education Corporation: Seeding the clouds. Initiate with BUY

30% growth in FY09F. We are forecasting Raffles Education Corporation (Raffles) to grow its bottomline at a clip of 28% in FY09F. While long-time investors have been used to higher growth trajectories, we think that Raffles will be using this year to refine its operations in its schools. The difficult credit and equity situation will not present them cheap financing opportunities as it had in the past. As such, we think Raffles is unlikely to undergo another bout of major acquisitions that will boost its financials. On a quarterly basis for FY09F, Raffles could face resistance to growth due to slower student recruitment and very minor fee hikes (in the light of the difficult economic situation).

Prime asset overlooked. While the market looks at Oriental University City (OUC) as an outsized investment, we are of the view that it is Raffles' prime asset that will drive growth in the next few years, if run properly. The land bank and its possible plot sales, set up of more private colleges on campus and ready pool of current students to recruit into its own programs hold tremendous potential.

Reduce dividends? We think more investors may opt out of the scrip dividend scheme. Although Raffles has not indicated so, we anticipate that Raffles could reduce its dividends to 0.75 S cents/quarter (vs current 1 S cent/quarter) to preserve more cash. We are assuming that the scrip program will continue indefinitely with a 50% subscription rate. This will translate to about 4-5% dilution every year.

Attractive valuation, initiate with BUY. We are using a PER-type valuation for Raffles as we think that earnings growth will drive its share price. Raffles has traded in a wide spectrum, ranging from ~34-78x in 2007 to its recent 52-week low of ~8x PER during the Oriental Century scandal. Concomitant with the volatile equity market conditions, we think recent lows have primarily factored in the funding needs for its expansion (especially OUC's RMB2b price tag), cloudy sentiments of S-chips, its slowing growth in student numbers and ability to operationally execute well with an enlarged geographical footprint. As such, we peg our valuation to a blended 12x FY09/10F PER, closer to its lower trading band. Our fair value is S$0.60 (46% upside). Initiate with BUY. Dividend yield for FY09F is attractive at ~8% despite our 0.75 S cent/quarter assumptions. Sustained margins that trump our estimates and continued ability to grow student population beyond our forecasts will incentivise us to edge our valuation upwards.

Technically buy China Sport, Oceanus, Hongxing Sports

China Sports International (CSPORT SP; S$0.10) – BUY

• The stock appears to have built a base above its 30-day SMA and look poised for a move upwards. It could climb to test its last support-turned-resistance at S$0.12-0.13.

• Daily MACD continued to edge higher and so is its RSI. A rise in volume is likely to lend the bulls a hand in lifting the stock.

• Aggressive investors may want to buy now with a stop placed below its 30-day SMA at S$0.085.

China-Sports International Limited is principally engaged in the design, manufacture and sale of sports fashion footwear and the design and sale of sports fashion apparel under their YELl brand.

Oceanus (OCNUS SP; S$0.145) – BUY

• The stock broke out above its resistance trend line on strong volume. More upside is likely to follow in the coming days as buyers pour in.

• Both indicators continue to edge higher. Any weakness towards the support at S$0.12-0.13 is a good level to get in.

• As the momentum is still on the rise, the stock is likely to test the upper resistance at S$0.16-0.165 next. The breakout above this resistance could see the stock climb to try to take out the strong resistance at S$0.195.

Oceanus is a marine aquaculture specialist focusing on large scale; land based industrialised production and sale of premium quality Japanese Abalones. Its principal activities are the research and development, breeding, intensive production and sale of this luxury product.

China Hongxing Sports (CHHS SP; S$0.125) – BUY

• The stock has broken out of its downtrend channel and also its 30-day SMA. There is a good chance that the stock could see a strong run to close the gap at S$0.135-0.14. S$0.155 is the next target if this gap is filled.

• Both indicators are positive at the moment, supporting the view for higher prices ahead. The bullish divergence on its MACD is also a positive sign.

• Buy now with a stop loss place below the trend line at S$0.095.

China Hongxing manufactures its sports footwear at its production facilities in Quanzhou City, China and has a current annual production capacity of approximately 17.9m pairs of sports footwear. The manufacture of sports apparel, sports accessories and a portion of its sports footwear are subcontracted to selected contract manufacturers who meet the quality and design requirements of the Group.

Yanlord Land - Strong contract sales, but stock has outperformed

Outperformed on strong contract sales. Yanlord has outperformed the China developers and FTSE STI Index by 13% and 40% YTD, on the back of a much stronger contract sales YTD. Our latest conversation with management indicated that the group has achieved almost RMB2bn contract sales so far, up 62% YoY and represents 48% of our old estimates. We have therefore increased our FY09 contract sales and earnings estimates up by 40% and 61% respectively.

Leverage and financial flexibility less of a concern. Given the latest project stake sales to GIC and the much improved cash inflow from contract sales, Yanlord's financial flexibility, especially its ability to repay the CB in Feb 2010 should no longer be a concern in our view. Assuming a contract sales of RMB5.9bn this year, we estimate a rather flat gearing of 63% by end 2009.

Momentum is still up, but valuation is a bit stretched. With new upcoming launches in Tianjin and Nanjing in May and July, and continuous encouraging sales in Shanghai, contract sales momentum would still be on the uptrend in our view. However, at S$1.30/share, the stock is trading at 43% discount to our RNAV estimates and 12x FY09 P/E, a slight premium to the S-MID cap China developers in Hong Kong. We re-set our broad trading range to S$1.00 - 1.50 based on our revised estimates, and will start to trim our exposure with another 10% gain from currently level.

We remain Neutral on Yanlord, with Dec-09 price target of S$1.40/share (S$1.10/share previously), based on 40% discount to our RNAV estimates. Our PT translates into 13x/12x FY09E/10E, and 1.1x end-FY09E P/B. Key risk to our rating and price target would include 1) the company's inability to sustain the current run rate of monthly contract sales and as a result miss our RMB 6 billion contract sales forecast; and 2) possible fund-raisings to strengthen its balance sheet further.