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Sino-Env officials back to office, stock up
Sino-Environment said the Company has on the date hereof received a notification dated 22 May 2009 from Mr Sun Jiangrong, Mr You Shengquan and Professor Li Shouxin that, in consultation with the Instructing Independent Directors and having taken into consideration the stability and continued development of the Company as well as the interests of Shareholders and employees of the Company and its group of companies, they had decided to withdraw their respective resignations. Pursuant to the Notification, the Company was alsonotified that due to health reasons, Mr Sun Jiangrong would be on medical leave for a period of three months before he resumes his responsibilities and duties as the Chief Executive Officer of the Company.
China Taisan - Poor 1Q FY09 results were a forgone conclusion
We maintain our 3 (Hold) rating and six-month target price of S$0.13 for China Taisan Technology Group (China Taisan), in view of its weak 1Q FY09 results and uncertain outlook. Our target price is based on an improved peer-average PER of about 3x (from 2.5x) on our revised-down earnings forecast for FY09.
China Taisan recorded a 1Q FY09 net profit of Rmb33.9m, down 47.5% YoY and 11.3% below our estimate. The company’s performance was affected by a decline in sales volume and product margins, as a result of slower demand for sports-apparel products in China, as well as an increase in domestic competition. The bottom-line was affected by a foreign-exchange loss and higher depreciation charges. Consequently, we have revised down our earnings forecasts for FY09 by 14.5% to factor in the prospects of further weakness over the near term.
However, China Taisan’s net-cash balance improved to S$0.10 per share at the end of March 2009, from S$0.06 per share at the end of December 2008, due to a decline in trade and other receivables. We expect the company’s strong cash position and a forward dividend yield of about 9.2% (based on a commitment to pay out at least 30% of its FY09 net profit) to provide support for the share price in the absence of a positive earnings-growth outlook.
China Taisan recorded a 1Q FY09 net profit of Rmb33.9m, down 47.5% YoY and 11.3% below our estimate. The company’s performance was affected by a decline in sales volume and product margins, as a result of slower demand for sports-apparel products in China, as well as an increase in domestic competition. The bottom-line was affected by a foreign-exchange loss and higher depreciation charges. Consequently, we have revised down our earnings forecasts for FY09 by 14.5% to factor in the prospects of further weakness over the near term.
However, China Taisan’s net-cash balance improved to S$0.10 per share at the end of March 2009, from S$0.06 per share at the end of December 2008, due to a decline in trade and other receivables. We expect the company’s strong cash position and a forward dividend yield of about 9.2% (based on a commitment to pay out at least 30% of its FY09 net profit) to provide support for the share price in the absence of a positive earnings-growth outlook.
Yang Zi Jiang Shipbuilding - Not yet dawn
We revise our earnings forecasts for Yangzijiang Shipbuilding (YZJ) on the back of improved margin due to larger vessels under construction in 2009. We maintain Underperform but increase our target price to S$0.38 from S$0.28.
Holding up better than peers: YZJ’s profitability is holding up relatively well compared with its Chinese peers, with 1Q09 EPS up 17% YoY. We think the key driver is larger vessels under construction. The average vessel size under construction rose from 14,360cgt/vessel in 2008 to 20,575cgt in 2009, up 43%. The expanded vessel size improves production scale and margin. We think the larger vessels will help YZJ to maintain a high margin this year; however, we expect the average vessel size under construction to pull back to 15,567cgt in 2010.
Revision of current contracts: YZJ has seen 6–12 month delays in delivery and revision of vessel prices for current contracts. The company denies cancellations so far. We estimate a six-month delivery delay would decrease the company’s margin by about 2% and a price renegotiation range of 15–20%. Our commodity team’s recent visits to steel plate companies indicated that some ship plate plants are seeing delays of up to two years.
Decreasing utilisation: Having expanded in 2007, YZJ’s new capacity is scheduled to be fully deployed by 2012. However, without new orders, the company’s capacity utilisation will shrink to below 50% after 2010, in our view. We believe the decreasing utilisation will put pressure on the yard’s margin.
We raise our EPS forecast for 2009 by 23%, leave our 2010 EPS forecast unchanged and cut our 2011 EPS forecast by 7%. We increase our target price to S$0.38 from S$0.28. 12-month price target: S$0.38 based on a Price to Book methodology. Catalyst: No new orders and more revision of the current backlog.
We maintain our Underperform recommendation, but increase our target price to S$0.38 from S$0.28. We think current cancellations or revision of the previous contracts will impact YZJ’s earnings starting in 2010. We maintain our negative view on the shipbuilding industry. We believe the recent rally of the shipbuilding company shares is not supported by a fundamental recovery of the industry.
Holding up better than peers: YZJ’s profitability is holding up relatively well compared with its Chinese peers, with 1Q09 EPS up 17% YoY. We think the key driver is larger vessels under construction. The average vessel size under construction rose from 14,360cgt/vessel in 2008 to 20,575cgt in 2009, up 43%. The expanded vessel size improves production scale and margin. We think the larger vessels will help YZJ to maintain a high margin this year; however, we expect the average vessel size under construction to pull back to 15,567cgt in 2010.
Revision of current contracts: YZJ has seen 6–12 month delays in delivery and revision of vessel prices for current contracts. The company denies cancellations so far. We estimate a six-month delivery delay would decrease the company’s margin by about 2% and a price renegotiation range of 15–20%. Our commodity team’s recent visits to steel plate companies indicated that some ship plate plants are seeing delays of up to two years.
Decreasing utilisation: Having expanded in 2007, YZJ’s new capacity is scheduled to be fully deployed by 2012. However, without new orders, the company’s capacity utilisation will shrink to below 50% after 2010, in our view. We believe the decreasing utilisation will put pressure on the yard’s margin.
We raise our EPS forecast for 2009 by 23%, leave our 2010 EPS forecast unchanged and cut our 2011 EPS forecast by 7%. We increase our target price to S$0.38 from S$0.28. 12-month price target: S$0.38 based on a Price to Book methodology. Catalyst: No new orders and more revision of the current backlog.
We maintain our Underperform recommendation, but increase our target price to S$0.38 from S$0.28. We think current cancellations or revision of the previous contracts will impact YZJ’s earnings starting in 2010. We maintain our negative view on the shipbuilding industry. We believe the recent rally of the shipbuilding company shares is not supported by a fundamental recovery of the industry.
Cosco - Cancellation and variation of shipbuilding order
1Q FY2009 results. For 1Q FY2009, Cosco reported revenue of S$714.4m (-0.5% yoy) and net profit of S$33.2m (-60.5% yoy). Although ship repair, shipbuilding and marine engineering operations posted an 1.8% increase in turnover, overall revenue declined because of the lower revenue from dry bulk shipping business. Net profit fell as a result of the lower charter rates of dry bulk shipping and higher operational costs of the ship repair, shipbuilding and marine engineering business.
Cancellation and variation of shipbuilding order. Cosco also announced that a European ship owner had cancelled the order for one of its bulk carrier vessels of 57,000 DWT each. The delivery dates for another two vessels had also been rescheduled. In 2009, due to the global economic downturn, we are expecting more rescheduling of ship deliveries and cancellations of orders.
From the list, we note that the average P/E and P/B for the industry are 9.34 and 2.47 respectively. Cosco is currently valued at 9.62 times P/E and 2.54 times P/B. Downgrade from HOLD to SELL with fair value raised from S$0.67 to S$0.92.
Cosco has been downgraded to Sell due to the challenging outlook of the shipbuilding industry. We have changed our valuation based on the price-earning (P/E) method to the price-to-book (P/B) method. This is because we expect volatility in its earnings that can be attributed to changes in costs of raw materials such as steel as well as cancellation or rescheduling of ship deliveries. We feel that the P/B method will reflect the value of its underlying assets. We are valuing Cosco at S$0.92, which works out to 1.5 times book value for FY2009. Since Cosco is a mid-sized shipbuilding company, it is valued below the average P/B for the industry.
Cancellation and variation of shipbuilding order. Cosco also announced that a European ship owner had cancelled the order for one of its bulk carrier vessels of 57,000 DWT each. The delivery dates for another two vessels had also been rescheduled. In 2009, due to the global economic downturn, we are expecting more rescheduling of ship deliveries and cancellations of orders.
From the list, we note that the average P/E and P/B for the industry are 9.34 and 2.47 respectively. Cosco is currently valued at 9.62 times P/E and 2.54 times P/B. Downgrade from HOLD to SELL with fair value raised from S$0.67 to S$0.92.
Cosco has been downgraded to Sell due to the challenging outlook of the shipbuilding industry. We have changed our valuation based on the price-earning (P/E) method to the price-to-book (P/B) method. This is because we expect volatility in its earnings that can be attributed to changes in costs of raw materials such as steel as well as cancellation or rescheduling of ship deliveries. We feel that the P/B method will reflect the value of its underlying assets. We are valuing Cosco at S$0.92, which works out to 1.5 times book value for FY2009. Since Cosco is a mid-sized shipbuilding company, it is valued below the average P/B for the industry.
Midas Holdings Ltd: Better margins but currently fairly valued
Better bottomline. Midas Holdings (Midas) posted 13% YoY decline in 1Q09 topline to S$31.4m but bottomline delivered a 11% YoY uptick to S$8.5m. The bottomline improvement was on the back of better margins from the all its divisions. In particular, aluminium prices continued to stay low while the ASP of its products have still not tailed off in the same magnitude. Midas' associate, Nanjing Puzhen (NPRT), did not have any accretive contribution due to the timing of delivery of train car bodies. However, with its backlog order of 768 train cars, management is confident of meeting expectations for FY09 contributions.
Cost-plus vs. back-to-back. Midas signs two types of contracts with its customers. For back-to-back contracts, Midas locks the prices of raw materials in after securing the contract thus profit margins are protected. However, these contracts come with a premium which is required by the aluminium suppliers. Cost-plus approaches profitability in absolute terms where Midas marks up its profits with an absolute amount instead of a margin. As aluminium prices remain low, either contract types could lead to lower absolute dollars for Midas, translating to a lower topline but possibly better margins.
Competition? Recently, China Zhongwang Holdings (Zhongwang) was listed in the Hong Kong and have garnered a significant amount of interest, raising US$1.26b (world's largest IPO YTD). Although the Zhongwang had indicated that it has been engaged in the rail industry, we understand that it currently has a lower grading certification from only one of the three major train manufacturers which it obtained in end 2008. Midas has indicated that it has not encountered Zhongwang in their past bids for projects in a significant way. As such, we think that Zhongwang is positioning to enter the rail industry but currently does not pose a significant challenge to Midas at this juncture. However, we acknowledge Zhongwang's significantly stronger balance sheet and do not discount a faster-than-anticipated penetration into the market.
Downgrade to HOLD on valuation. Despite higher margins, the net effect of low ASPs edges our estimates downwards. However, we are rolling our valuation forward to FY09/10F (prev: FY09F) with a similar peg of 12x and our fair value is now S$0.64 (prev. S$0.63). With its aggressive share price run up, we are downgrading Midas to a HOLD. 2010 will see earnings kicker from its 3rd line, bigger and better margined NPRT contributions and margin enhancers from its complementary downstream activities.
Cost-plus vs. back-to-back. Midas signs two types of contracts with its customers. For back-to-back contracts, Midas locks the prices of raw materials in after securing the contract thus profit margins are protected. However, these contracts come with a premium which is required by the aluminium suppliers. Cost-plus approaches profitability in absolute terms where Midas marks up its profits with an absolute amount instead of a margin. As aluminium prices remain low, either contract types could lead to lower absolute dollars for Midas, translating to a lower topline but possibly better margins.
Competition? Recently, China Zhongwang Holdings (Zhongwang) was listed in the Hong Kong and have garnered a significant amount of interest, raising US$1.26b (world's largest IPO YTD). Although the Zhongwang had indicated that it has been engaged in the rail industry, we understand that it currently has a lower grading certification from only one of the three major train manufacturers which it obtained in end 2008. Midas has indicated that it has not encountered Zhongwang in their past bids for projects in a significant way. As such, we think that Zhongwang is positioning to enter the rail industry but currently does not pose a significant challenge to Midas at this juncture. However, we acknowledge Zhongwang's significantly stronger balance sheet and do not discount a faster-than-anticipated penetration into the market.
Downgrade to HOLD on valuation. Despite higher margins, the net effect of low ASPs edges our estimates downwards. However, we are rolling our valuation forward to FY09/10F (prev: FY09F) with a similar peg of 12x and our fair value is now S$0.64 (prev. S$0.63). With its aggressive share price run up, we are downgrading Midas to a HOLD. 2010 will see earnings kicker from its 3rd line, bigger and better margined NPRT contributions and margin enhancers from its complementary downstream activities.
PetroChina - Acquires a 45.5% interest in SPC; minimal earnings and reserve accretion
PetroChina has acquired Keppel Corp’s (KEP SP, S$6.96, 4) 45.5% interest in Singapore Petroleum Company (SPC) (SPC SP, S$6.09, Not rated) for around US$1bn. We think PetroChina is likely to privatise the remaining 54.5% interest.
Minimal earnings and reserves accretion. Assuming that PetroChina buys out the remaining 54.5% interest, the total transaction value would be around US$2.4bn (including net debt). PetroChina should have no problem funding this transaction because recall that it aims to raise US$22bn in debt this year. Based on the Bloomberg-consensus forecasts, we see minimal earnings accretion for FY09 and less than 1% earnings accretion for FY10 and FY11. SPC has 21.8mmboe of proven oil and gas reserves currently, which is around 0.1% of PetroChina’s existing total oil and gas proven reserve base. Currently, PetroChina’s refining capacity is around 2,600,000bbl/d and this acquisition will boost it by about 5.6%.
Expensive price tag (earnings-wise) and regional refining outlook not too promising. Based on the Bloomberg forecasts, PetroChina is paying PERs of 18.4x and 14.6x (based on the acquisition price) for FY09 and FY10, respectively, which is at the high end of its PER band chart. Furthermore, we are negative on the Asia refining sector due to the prospect of a strong ramp-up in global refining capacity over the next few years, which would be likely to depress regional refining margins. Based on replacement cost, we believe the acquisition price is fair, as it factors in around US$13,000 per bbl/d of refining capacity and around US$10/boe for proven oil and gas reserves.
Expanding its international business. SPC owns a 50% interest in a nameplate 290,000bbl/d refinery in Singapore (95% utilisation rate and achieved gross refining margin of US$5.50/bbl in FY08). SPC has interests in oil and gas E&P properties in China, Indonesia, Vietnam, Cambodia and Australia, with total oil and gas production in FY08 of 3.1mmboe. SPC also conducts storage and distribution and trading of crude and refined petroleum products.Valuation
PetroChina is now trading at a PER of 11.6x (based on an average WTI oil price of US$68/bbl) with a dividend yield of 3.5% on our FY10 forecasts.
SPC is more of a downstream company, and the rationale for such an acquisition is questionable, in our view. We would have preferred PetroChina to have acquired pure upstream assets instead with US$2.4bn. Nevertheless, despite the slightly high price tag and minimal earnings accretion for the next few years, we believe the market will view this acquisition positively as PetroChina starts its international expansion. We reiterate our 3 (Hold) rating on the stock on valuation grounds, and our six-month target price of HK$6.10, which is based on an average of: 1) a target PER of 8x on our FY09 EPS forecast, and 2) a DCF valuation that uses a long-term normalised WTI oil-price assumption of US$85/bbl.
Minimal earnings and reserves accretion. Assuming that PetroChina buys out the remaining 54.5% interest, the total transaction value would be around US$2.4bn (including net debt). PetroChina should have no problem funding this transaction because recall that it aims to raise US$22bn in debt this year. Based on the Bloomberg-consensus forecasts, we see minimal earnings accretion for FY09 and less than 1% earnings accretion for FY10 and FY11. SPC has 21.8mmboe of proven oil and gas reserves currently, which is around 0.1% of PetroChina’s existing total oil and gas proven reserve base. Currently, PetroChina’s refining capacity is around 2,600,000bbl/d and this acquisition will boost it by about 5.6%.
Expensive price tag (earnings-wise) and regional refining outlook not too promising. Based on the Bloomberg forecasts, PetroChina is paying PERs of 18.4x and 14.6x (based on the acquisition price) for FY09 and FY10, respectively, which is at the high end of its PER band chart. Furthermore, we are negative on the Asia refining sector due to the prospect of a strong ramp-up in global refining capacity over the next few years, which would be likely to depress regional refining margins. Based on replacement cost, we believe the acquisition price is fair, as it factors in around US$13,000 per bbl/d of refining capacity and around US$10/boe for proven oil and gas reserves.
Expanding its international business. SPC owns a 50% interest in a nameplate 290,000bbl/d refinery in Singapore (95% utilisation rate and achieved gross refining margin of US$5.50/bbl in FY08). SPC has interests in oil and gas E&P properties in China, Indonesia, Vietnam, Cambodia and Australia, with total oil and gas production in FY08 of 3.1mmboe. SPC also conducts storage and distribution and trading of crude and refined petroleum products.Valuation
PetroChina is now trading at a PER of 11.6x (based on an average WTI oil price of US$68/bbl) with a dividend yield of 3.5% on our FY10 forecasts.
SPC is more of a downstream company, and the rationale for such an acquisition is questionable, in our view. We would have preferred PetroChina to have acquired pure upstream assets instead with US$2.4bn. Nevertheless, despite the slightly high price tag and minimal earnings accretion for the next few years, we believe the market will view this acquisition positively as PetroChina starts its international expansion. We reiterate our 3 (Hold) rating on the stock on valuation grounds, and our six-month target price of HK$6.10, which is based on an average of: 1) a target PER of 8x on our FY09 EPS forecast, and 2) a DCF valuation that uses a long-term normalised WTI oil-price assumption of US$85/bbl.
Sinotel Technologies – Sales up 24.0%, PAT up 17.7%
Revenue in 1Q09 increased by RMB18.7m or 24.0% to RMB96.6m compared to 1Q08. This was mainly due to the increase in contribution from the Emergency Mobile Communication (EMCS) and sales of 3G cards.
Overall gross profit for 1Q09 was 41.2%, a marginal decrease of 0.9ppt compared to 1Q08.
General and admin expenses for 1Q09 increased by RMB1.4m or 25.0% to RMB7.2m due mainly to the increase in depreciation of RMB3.3m, arising from the fixed assets additions in the third and fourth quarters last year.
The bank facilities available to the Group as at 31 March 2009 were RMB65m, of which RMB33.7 m was utilized.
There are some positive developments for Sinotel during 1Q09, particularly (1) rapidly growing telecommunication industry in China, (2) swelling order book and (3) new credit facilities secured. China’s telecommunication industry is undergoing a rapid expansion and upgrading activities since the official issuance of 3G license in January 2009. As the industry is in its growth stage, there are a lot of business opportunities for Sinotel. The capex for wireless network enhancements in China is estimated to be RMB33-50 billion. Its order book, currently standing at RMB390m, is expected to swell. In addition, the new credit facilities secured by Sinotel recently ease our concern over lack of capital to finance its growth plan. On valuation front, we peg at 4x PER FY09 (previous 3x) to derive a target price of S$0.330. Maintain BUY.
Overall gross profit for 1Q09 was 41.2%, a marginal decrease of 0.9ppt compared to 1Q08.
General and admin expenses for 1Q09 increased by RMB1.4m or 25.0% to RMB7.2m due mainly to the increase in depreciation of RMB3.3m, arising from the fixed assets additions in the third and fourth quarters last year.
The bank facilities available to the Group as at 31 March 2009 were RMB65m, of which RMB33.7 m was utilized.
There are some positive developments for Sinotel during 1Q09, particularly (1) rapidly growing telecommunication industry in China, (2) swelling order book and (3) new credit facilities secured. China’s telecommunication industry is undergoing a rapid expansion and upgrading activities since the official issuance of 3G license in January 2009. As the industry is in its growth stage, there are a lot of business opportunities for Sinotel. The capex for wireless network enhancements in China is estimated to be RMB33-50 billion. Its order book, currently standing at RMB390m, is expected to swell. In addition, the new credit facilities secured by Sinotel recently ease our concern over lack of capital to finance its growth plan. On valuation front, we peg at 4x PER FY09 (previous 3x) to derive a target price of S$0.330. Maintain BUY.
MIDAS - No Surprises
As expected 1Q ‘09 net profit grew a pedestrian 11% yoy and 1% qoq to $8.52mln reflecting the full utilization rate of their aluminium extrusion production facility since last year, good cost controls helping to offset weaker demand from the other business segments (non-aluminium extrusion business business fell from $5.9mln to only $1.7mln) as well as lower tax rate and higher scrape sales (income rose 151% to $908,000).
Looking ahead, management remains optimistic of prospects due to their exposure to the booming rail infrastructure market in China with the government recently having purchased 1,600 train cars worth RMB39.2bln and expecting more investments in the coming months to help ease traffic congestion and improve travelling time.
To cope with higher orders going forward, the company is on track to commission their 3rd production line by early 2010, thereby increasing production capacity by 50% to 30,000 tonnes per year.
In Dec ’08, the company has also purchased additional land, buildings and machineries worth RMB168mln to cater to their growth going forward. While their 32.5% owned associate company NPRT was loss making in 1Q ‘09 due to no scheduled delivery of train sets, management remains optimistic of their prospects due to their strong order backlog of 768 train cars worth RMB4.5bln expected to be delivered from 2H ‘09 onwards.
While financial position remains strong with cash of $42.7mln against debts of $33.3mln due to their capex plans of $30mln this year, their quarterly div payment has been halved to 0.25 cents since 3Q ‘08 and has been maintained at this level for the current quarter, representing a quarterly payout ratio of 24%. Annualizing this gives a yield of only 1.4%.
With the stock having recovered a strong 168% from its Oct ’08 low and having broken out of its 10 month trading range, the market momentum is going along with management’s optimistic outlook. We maintain medium-term BUY.
Looking ahead, management remains optimistic of prospects due to their exposure to the booming rail infrastructure market in China with the government recently having purchased 1,600 train cars worth RMB39.2bln and expecting more investments in the coming months to help ease traffic congestion and improve travelling time.
To cope with higher orders going forward, the company is on track to commission their 3rd production line by early 2010, thereby increasing production capacity by 50% to 30,000 tonnes per year.
In Dec ’08, the company has also purchased additional land, buildings and machineries worth RMB168mln to cater to their growth going forward. While their 32.5% owned associate company NPRT was loss making in 1Q ‘09 due to no scheduled delivery of train sets, management remains optimistic of their prospects due to their strong order backlog of 768 train cars worth RMB4.5bln expected to be delivered from 2H ‘09 onwards.
While financial position remains strong with cash of $42.7mln against debts of $33.3mln due to their capex plans of $30mln this year, their quarterly div payment has been halved to 0.25 cents since 3Q ‘08 and has been maintained at this level for the current quarter, representing a quarterly payout ratio of 24%. Annualizing this gives a yield of only 1.4%.
With the stock having recovered a strong 168% from its Oct ’08 low and having broken out of its 10 month trading range, the market momentum is going along with management’s optimistic outlook. We maintain medium-term BUY.
Celestial May Slip On Bond Repayment Troubles
Celestial Nutrifoods may slip after the soy-based food and drink maker warns it is not in position to meet upcoming convertible bond repayment. Company says in statement it has received notification from holders of its S$235 million convertible bond requiring redemption on June 12. Warns, "based on the funds currently available to the company outside the PRC and after considering its working capital requirements in the PRC, the company shall not be in a position to meet its payment obligations to the holders of the bonds." Creates uncertainty over how company will meet payment, may raise fear of rights issue, need to take on expensive debt. Pre-open quotes show selling interest down to S$0.21; shares closed +2.0% at S$0.26 yesterday.
CELESTIAL NUTRIFOODS LIMITED said it has on 23 May received notification from the holders of its Convertible Bonds, requiring the Company to redeem the Bonds held by them amounting to S$234,800,000. The due date for the redemption payment shall be on June 12, 2009. Based on the funds currently available to the Company outside the PRC and after considering its working capital requirements in the PRC, the Company shall not be in a position to meet its payment obligations to the holders of the Bonds on June 12, 2009, unless new funding in non-PRC currency drawable outside the PRC is in place by the due date. While the Company is not optimistic in its ability to obtain the said new funding by the due date, it shall, nevertheless, continue with its fund raising efforts, which have been in progress since early 2008. In the meantime, the Company will initiate discussions with the Bond holders in exploring various options to address its payment obligations to the Bond holders. As a result of the above, there are considerable uncertainties in its attempts to settle the obligations of its Bonds. Eventual settlement of its Bonds may result in additional borrowings and issuance of new shares or a combination of both which will have an impact on the interests of its existing shareholders.
CELESTIAL NUTRIFOODS LIMITED said it has on 23 May received notification from the holders of its Convertible Bonds, requiring the Company to redeem the Bonds held by them amounting to S$234,800,000. The due date for the redemption payment shall be on June 12, 2009. Based on the funds currently available to the Company outside the PRC and after considering its working capital requirements in the PRC, the Company shall not be in a position to meet its payment obligations to the holders of the Bonds on June 12, 2009, unless new funding in non-PRC currency drawable outside the PRC is in place by the due date. While the Company is not optimistic in its ability to obtain the said new funding by the due date, it shall, nevertheless, continue with its fund raising efforts, which have been in progress since early 2008. In the meantime, the Company will initiate discussions with the Bond holders in exploring various options to address its payment obligations to the Bond holders. As a result of the above, there are considerable uncertainties in its attempts to settle the obligations of its Bonds. Eventual settlement of its Bonds may result in additional borrowings and issuance of new shares or a combination of both which will have an impact on the interests of its existing shareholders.
Yanlord - Encouraging 1Q09 Result and YTD Sales Performance
1Q09 net profit up 161% yoy – Yanlord reported its FY09 first quarter result with net profit surging 161% yoy to S$24.3mn, compared to S$9.3mn a year earlier. While turnover increased only 60%yoy, the recognition of the highly profitable Shanghai Yanlord Riverside City Ph 2 & 3 in 1Q09 resulted in the robust bottom line growth. Gross profit margin was up 26.6% pts, from 37.5% in 1Q08 to 64.1% in 1Q09, while the net profit margin rose to 21.3% during the period, versus 8.7% in 1Q08.
High earning visibility on the back of strong contracted sales – Yanlord has achieved around RMB3.9bn (RMB2.4bn in Apr 09) contracted sales in the YTD period to end-Apr 09, already representing around 80% of the RMB5bn sales made in FY08. Aggregating with the RMB1.1bn unrecognized sales brought forward from FY08, Yanlord possessed around RMB5bn property sales that can be recognized in FY09 or afterwards. On our analysis, assuming 80% of the RMB3.9bn contracted sales will be booked in FY09, Yanlord has already locked in about 72% of our estimated property salesrevenue for 2009.
Improved financial position – Thanks to the strong cash inflow from property sales, Yanlord's cash balance increased from S$375.7mn at Dec 08 to S$579.6mn as at 1Q09 while the net gearing ratio was lowered from 64% at end-08 to the latest of 56.3%, which remains comfortable, in our view.
Reiterate Buy (1S) – The strong 1Q09 result and sales performance reaffirm our view that Yanlord should be able to take advantage of the recent recovery in the China property market. Reiterate Buy with TP of S$2.09/sh.
High earning visibility on the back of strong contracted sales – Yanlord has achieved around RMB3.9bn (RMB2.4bn in Apr 09) contracted sales in the YTD period to end-Apr 09, already representing around 80% of the RMB5bn sales made in FY08. Aggregating with the RMB1.1bn unrecognized sales brought forward from FY08, Yanlord possessed around RMB5bn property sales that can be recognized in FY09 or afterwards. On our analysis, assuming 80% of the RMB3.9bn contracted sales will be booked in FY09, Yanlord has already locked in about 72% of our estimated property salesrevenue for 2009.
Improved financial position – Thanks to the strong cash inflow from property sales, Yanlord's cash balance increased from S$375.7mn at Dec 08 to S$579.6mn as at 1Q09 while the net gearing ratio was lowered from 64% at end-08 to the latest of 56.3%, which remains comfortable, in our view.
Reiterate Buy (1S) – The strong 1Q09 result and sales performance reaffirm our view that Yanlord should be able to take advantage of the recent recovery in the China property market. Reiterate Buy with TP of S$2.09/sh.
RAFFLES EDUCATION - Low EPS growth and high capital requirements make RLS a SELL
When comparing Raffles Education to Educomp and Megastudy, two other major listed education providers in India and South Korea Korea, Raffles Education fails to stand out due to a lack of growth drivers. The company’s cashflow issues are apparent relative to its peers. Raffles has the lowest expected ROE and ROIC among the three. Moreover, it is expensive trading at the highest FY10CL PE, while we expect it to post the slowest EPS growth. SELL Raffles Education. BUY Educomp and Megastudy.
Slow earnings growth. We expect Raffles Education (RLS SP - S$0.48 - SELL) to post slower earnings growth than both Educomp (EDSL IB - Rs2423.2 - BUY) and Megastudy (072870 KQ - 206,600 won - BUY) over the next two years. This is a result of Raffles Education focusing on high-fee tertiary education programs, while Educomp and Megastudy focus on low-fee K-12 programs, where demand will be more robust. Moreover, Raffles Education’s growth strategy, which is very capital intensive unlike Educomp’s and Megastudy’s due to a high number of acquisitions and high set-up costs of new schools, slowed down significantly due to a lack of access to new capital.
Margin pressure. Educomp and Megastudy are expected to benefit from operating leverage in the next few years that will see their margins improve. Both companies have a number of sunken fixed costs, so adding new students only comes at an incremental cost. Raffles Education on the other hand, decided to set up six new schools, on top of the 28 schools it currently owns. As these schools take two-to-three years to reach breakeven, they will be a drag on margins in the coming years.
Cashflows under pressure. Raffles Education has the highest gearing among the three companies at 42%. The company had historically never been geared but needed to take on loans to finance its Oriental University City (OUC) acquisition. If we include the OUC obligations, Raffles Education’s gearing is 123%. Cashflow generation will decelerate as a result of lower earnings growth, making it harder for the company to pay off its obligations. Hence, we expect Raffles Education to stop paying dividends.
Valuations remain unattractive. Raffles Education is the most expensive education stock that we cover at 17.5x FY10CL PE and has the lowest expected earnings growth. The company shows the lowest expected FY09 ROE and ROIC due to the high capital intensity of its business and the near zero expected earnings growth.
Slow earnings growth. We expect Raffles Education (RLS SP - S$0.48 - SELL) to post slower earnings growth than both Educomp (EDSL IB - Rs2423.2 - BUY) and Megastudy (072870 KQ - 206,600 won - BUY) over the next two years. This is a result of Raffles Education focusing on high-fee tertiary education programs, while Educomp and Megastudy focus on low-fee K-12 programs, where demand will be more robust. Moreover, Raffles Education’s growth strategy, which is very capital intensive unlike Educomp’s and Megastudy’s due to a high number of acquisitions and high set-up costs of new schools, slowed down significantly due to a lack of access to new capital.
Margin pressure. Educomp and Megastudy are expected to benefit from operating leverage in the next few years that will see their margins improve. Both companies have a number of sunken fixed costs, so adding new students only comes at an incremental cost. Raffles Education on the other hand, decided to set up six new schools, on top of the 28 schools it currently owns. As these schools take two-to-three years to reach breakeven, they will be a drag on margins in the coming years.
Cashflows under pressure. Raffles Education has the highest gearing among the three companies at 42%. The company had historically never been geared but needed to take on loans to finance its Oriental University City (OUC) acquisition. If we include the OUC obligations, Raffles Education’s gearing is 123%. Cashflow generation will decelerate as a result of lower earnings growth, making it harder for the company to pay off its obligations. Hence, we expect Raffles Education to stop paying dividends.
Valuations remain unattractive. Raffles Education is the most expensive education stock that we cover at 17.5x FY10CL PE and has the lowest expected earnings growth. The company shows the lowest expected FY09 ROE and ROIC due to the high capital intensity of its business and the near zero expected earnings growth.
Midas - Lower revenue is inconsequential
Midas posted revenue of $31.4m and net profit attributable of $8.5m for the period. Though revenue fell 13.1% on a yoy basis, bottomline grew 11.2% on a yoy basis and 0.9% on a qoq basis. This is largely within our expectations, forming 22.8% of our full year net profit forecast. The Group also maintained its quarterly interim cash dividend of 0.25cents per share.
Business volume for its Aluminum Alloy remains stable. The decline in revenue is mainly attributed to the lower selling prices of the Group’s aluminum extrusion profiles due to falling raw material costs. We believe this is inconsequential to the Group’s profitability since under its pricing model, it will be offset by the improvement of gross margins.
Midas utilises either a cost-plus or back-to-back pricing model. In a cost-plus contract, the customer effectively takes on the raw material price risk whereas in a back-to-back contract, Midas places an order for the raw material immediately at the prevailing future price. In both situations, the customer pays an absolute dollar fee per tonne of aluminium processed. Hence, the Group’s profitability is not affected by raw material prices.
Midas’s 31.5% associated company, Nanjing SR Puzhen Rail Transport Co (NPRT), a metro train body manufacturer, did not contribute in this period as there was no delivery scheduled. As highlighted earlier, we expect to see its main contributions in 2H09, where the delivery schedule is skewed towards. NPRT currently has an orderbook of $1b.
We continue to be optimistic about the Group’s prospects once capacity expansions kick in for FY10. Our target price is lifted to $0.82 based on 15X FY10 estimated net profit to reflect the overall improvement in market conditions. We have kept our profit estimates unchanged, but adjusted our revenue forecasts in line with the change in raw material costs.
Business volume for its Aluminum Alloy remains stable. The decline in revenue is mainly attributed to the lower selling prices of the Group’s aluminum extrusion profiles due to falling raw material costs. We believe this is inconsequential to the Group’s profitability since under its pricing model, it will be offset by the improvement of gross margins.
Midas utilises either a cost-plus or back-to-back pricing model. In a cost-plus contract, the customer effectively takes on the raw material price risk whereas in a back-to-back contract, Midas places an order for the raw material immediately at the prevailing future price. In both situations, the customer pays an absolute dollar fee per tonne of aluminium processed. Hence, the Group’s profitability is not affected by raw material prices.
Midas’s 31.5% associated company, Nanjing SR Puzhen Rail Transport Co (NPRT), a metro train body manufacturer, did not contribute in this period as there was no delivery scheduled. As highlighted earlier, we expect to see its main contributions in 2H09, where the delivery schedule is skewed towards. NPRT currently has an orderbook of $1b.
We continue to be optimistic about the Group’s prospects once capacity expansions kick in for FY10. Our target price is lifted to $0.82 based on 15X FY10 estimated net profit to reflect the overall improvement in market conditions. We have kept our profit estimates unchanged, but adjusted our revenue forecasts in line with the change in raw material costs.
LI HENG - Still Uncertain And Volatile Prospects
As warned by management in Mar ’09 1Q ‘09 net profit plunged 96% yoy on the back of 41% yoy decline in sales, reflecting the downturn in both domestic as well as export demand and lower selling prices.
Sequentially though gross margin improved 4% points to 12.9% due to lower cost of raw materials and stabilizing selling prices. And the forex loss narrowed from RMB48mln to RMB21mln sequentially, resulting in bottom-line turning around from a loss of RMB8.72mln to a profit of RMB10.19mln.
Looking ahead, management maintained their cautious stance due to the continued weakening in consumer demand, expecting 2009 to be a challenging year. While export demand which accounts for 50% of their business remains weak in the near term, management is hoping that China’s government stimulus package will help domestic demand to pick up thereby helping to take up part of the slack. They added 6 new customers in 1Q ‘09.
Fortunately the company is well capitalized with cash of RMB1.323bln versus debts of RMB200mln, giving a net cash position of RMB1.123bln, representing about 54% of its current market cap. But the company will be spending another RMB350mln on capex for this year.
While trailing PE is a low 3.5x, price to sales andprice to book is 0.6x, this likely reflects the weak prospects as warned by management.
While we maintain our HOLD recommendation, we believe the stock will remain stuck in its 9-10 month trading range (low of 10 cents and high of 30 cents) reflecting the weak and uncertain prospects, hence would be looking to sell on further strength as it approaches the upper end of its trading range.
Sequentially though gross margin improved 4% points to 12.9% due to lower cost of raw materials and stabilizing selling prices. And the forex loss narrowed from RMB48mln to RMB21mln sequentially, resulting in bottom-line turning around from a loss of RMB8.72mln to a profit of RMB10.19mln.
Looking ahead, management maintained their cautious stance due to the continued weakening in consumer demand, expecting 2009 to be a challenging year. While export demand which accounts for 50% of their business remains weak in the near term, management is hoping that China’s government stimulus package will help domestic demand to pick up thereby helping to take up part of the slack. They added 6 new customers in 1Q ‘09.
Fortunately the company is well capitalized with cash of RMB1.323bln versus debts of RMB200mln, giving a net cash position of RMB1.123bln, representing about 54% of its current market cap. But the company will be spending another RMB350mln on capex for this year.
While trailing PE is a low 3.5x, price to sales andprice to book is 0.6x, this likely reflects the weak prospects as warned by management.
While we maintain our HOLD recommendation, we believe the stock will remain stuck in its 9-10 month trading range (low of 10 cents and high of 30 cents) reflecting the weak and uncertain prospects, hence would be looking to sell on further strength as it approaches the upper end of its trading range.
Hongxing - Weaker same-store-sales and order book
CHHS’s 1Q09 net profit fell by 51% yoy to RMB 56m. Earnings disappointed due to weaker-than-expected revenue and high A&P expenditure. Revenue weakness was evident in the sports footwear (-32%) and sports accessories (-74%), which saw declining volumes and ASPs. Point of sales decreased from 3824 to 3785 as there were more store closures versus store additions during the quarter.
The group’s same-store-sales were down approximately 11% yoy in 1Q09 and it continues to observe weak same-store-sales. Adding to the weak outlook was the poor showing of its recent trade fair orders in May where orders decline 14.5% to RMB 440m. Despite orders worth RMB 2.5bn to be delivered by Sep 2009, revenue recognition could be much smaller as the orders will be repriced at lower ex-factory prices, while some orders delivery will be delayed to avoid inventory pile up.
With inventory piling up at the distributors front from an average of 2-3 months to 4-5 months, the group has to continue with its product discounts to its distributors to sustain their retail business. In general, the group will reduce its ex-factory price from 40% of retail price to 35%. The on-going product discounts will continue to compress its margins.
Costly A&P against falling revenues led to net margin compression. Selling and distribution costs, which largely comprise of A&P surged to 30% of revenue from 20% a year ago. With a 5-year sponsorship deal to be the official apparel sponsor and partner of the Shanghai Masters ATP1000 games, A&P will continue to weigh on the group’s bottomline.
We have lowered our FY09 earnings estimates by 7% to reflect the weaker revenue and high operating expenses. Risks on deteriorating earnings fundamentals and defaults on advances to its distributors (~RMB 940m) prevail amid weak demand. Although the group may consider resuming dividends payout, we doubt it will be enticing given its weak earnings and need for working capital support. Reiterate Sell at a target price of $0.16 pegged to its net cash per share. Facing rising challenges in its core business, Chin Hongxing may not benefit from the expected cyclical recovery in the China consumer market.
The group’s same-store-sales were down approximately 11% yoy in 1Q09 and it continues to observe weak same-store-sales. Adding to the weak outlook was the poor showing of its recent trade fair orders in May where orders decline 14.5% to RMB 440m. Despite orders worth RMB 2.5bn to be delivered by Sep 2009, revenue recognition could be much smaller as the orders will be repriced at lower ex-factory prices, while some orders delivery will be delayed to avoid inventory pile up.
With inventory piling up at the distributors front from an average of 2-3 months to 4-5 months, the group has to continue with its product discounts to its distributors to sustain their retail business. In general, the group will reduce its ex-factory price from 40% of retail price to 35%. The on-going product discounts will continue to compress its margins.
Costly A&P against falling revenues led to net margin compression. Selling and distribution costs, which largely comprise of A&P surged to 30% of revenue from 20% a year ago. With a 5-year sponsorship deal to be the official apparel sponsor and partner of the Shanghai Masters ATP1000 games, A&P will continue to weigh on the group’s bottomline.
We have lowered our FY09 earnings estimates by 7% to reflect the weaker revenue and high operating expenses. Risks on deteriorating earnings fundamentals and defaults on advances to its distributors (~RMB 940m) prevail amid weak demand. Although the group may consider resuming dividends payout, we doubt it will be enticing given its weak earnings and need for working capital support. Reiterate Sell at a target price of $0.16 pegged to its net cash per share. Facing rising challenges in its core business, Chin Hongxing may not benefit from the expected cyclical recovery in the China consumer market.
China Taisan Technology Group - how bad can it be?
China Taisan Technology Group (China Taisan) is due to announce its 1Q FY09 results on 15 May. We forecast a 40.8% YoY decline in net profit for the period to Rmb38.2m.
While there is no doubt the company’s 1Q FY09 performance will be weaker than for 1Q FY08, as management has said that orders for the first two months of 2009 declined by 20% YoY, we think the key items to watch for should be: 1) the degree of impact on the gross-profit margin and the sales volume, and 2) the orderbook outlook (for signs of a recovery).
Our 1Q FY09 net-profit forecast of Rmb38.2m factors in a 25% YoY fall in sales volume, a 10% QoQ decline in the average selling price, and a 4.8-percentage-point drop in the gross-profit margin as a result of our expectation of a lower capacity-utilisation rate and higher depreciation for new equipment.
Our six-month target price of S$0.13 for China Taisan is based on a peer-average PER of 2.5x on our 12-month earnings forecasts to 2Q FY09. We will publish an update after the 1Q FY09 results have been announced.Catalysts and action
We maintain our Hold rating for China Taisan. While the market has become more positive on the textile segment, we believe that any upside for this stock will be capped until clear signs of an earnings recovery emerge.
While there is no doubt the company’s 1Q FY09 performance will be weaker than for 1Q FY08, as management has said that orders for the first two months of 2009 declined by 20% YoY, we think the key items to watch for should be: 1) the degree of impact on the gross-profit margin and the sales volume, and 2) the orderbook outlook (for signs of a recovery).
Our 1Q FY09 net-profit forecast of Rmb38.2m factors in a 25% YoY fall in sales volume, a 10% QoQ decline in the average selling price, and a 4.8-percentage-point drop in the gross-profit margin as a result of our expectation of a lower capacity-utilisation rate and higher depreciation for new equipment.
Our six-month target price of S$0.13 for China Taisan is based on a peer-average PER of 2.5x on our 12-month earnings forecasts to 2Q FY09. We will publish an update after the 1Q FY09 results have been announced.Catalysts and action
We maintain our Hold rating for China Taisan. While the market has become more positive on the textile segment, we believe that any upside for this stock will be capped until clear signs of an earnings recovery emerge.
Cosco Corp: Still in the doldrums; FULLY VALUED
1Q09 net profits plunged 60% to S$33.2m, below expectation. Adjusting for fair value losses on forward currency contracts, the fall in net profits narrowed to -37% to S$52.9m.
Shipbuilding in the red due to poor execution, low margins and forex losses.
Key risks: contract cancellations, shipowners negotiating for discount on newbuild contract prices on vessel delivery, deferment of vessel deliveries, deferment of payments, sliding BDI.
Maintain Fully Valued, its PE at 15.7x is the highest in the sector, despite earnings plunge and its order book at risk. Shipyard net profit contributions plunged two-thirds to S$16m, below expectations. 1Q09 net earnings accounted for 18% of our forecasts and 15% of street estimates. While sales were flat at S$714.4m, net profit plunged 60% yoy to S$33.2m on lower margins across Shipping and Shipyard operations. Key disappointments came from Cosco Shipyard Group which was hit by : (1) weak execution on shipbuilding contracts, leading to slow recognition of its order book, (2) fair value Losses on forward currency contracts of S$39m, (3) lower margins from shipbuilding, shiprepair divisions. Adjusting for forex losses, net profit decline would be smaller at 37%.
Shipping earnings fell 54% on rate decline. Average day rates fell 26% to US$26k/day, although this is higher than our forecasts of US$15k, as 8 of its 12 vessels were trading on time charter contracts. However, the plunge in spot rates implies that shipping earnings will decline sequentially going forward, as 7 charter contracts have expired by early May 09 and 3 more will expire by Aug 09.
Most expensive marine stock - maintain Fully Valued. Valuations are demanding at 15.7x FY09 EPS for a stock facing order book risks and execution problems yet to be resolved at its yard. We cut our EPS by 7% for FY09 to adjust for lower margins at CSG.
Shipbuilding in the red due to poor execution, low margins and forex losses.
Key risks: contract cancellations, shipowners negotiating for discount on newbuild contract prices on vessel delivery, deferment of vessel deliveries, deferment of payments, sliding BDI.
Maintain Fully Valued, its PE at 15.7x is the highest in the sector, despite earnings plunge and its order book at risk. Shipyard net profit contributions plunged two-thirds to S$16m, below expectations. 1Q09 net earnings accounted for 18% of our forecasts and 15% of street estimates. While sales were flat at S$714.4m, net profit plunged 60% yoy to S$33.2m on lower margins across Shipping and Shipyard operations. Key disappointments came from Cosco Shipyard Group which was hit by : (1) weak execution on shipbuilding contracts, leading to slow recognition of its order book, (2) fair value Losses on forward currency contracts of S$39m, (3) lower margins from shipbuilding, shiprepair divisions. Adjusting for forex losses, net profit decline would be smaller at 37%.
Shipping earnings fell 54% on rate decline. Average day rates fell 26% to US$26k/day, although this is higher than our forecasts of US$15k, as 8 of its 12 vessels were trading on time charter contracts. However, the plunge in spot rates implies that shipping earnings will decline sequentially going forward, as 7 charter contracts have expired by early May 09 and 3 more will expire by Aug 09.
Most expensive marine stock - maintain Fully Valued. Valuations are demanding at 15.7x FY09 EPS for a stock facing order book risks and execution problems yet to be resolved at its yard. We cut our EPS by 7% for FY09 to adjust for lower margins at CSG.
Epure International - Improving margins and stronger balance sheet
Epure's 1Q09 net profit of Rmb40.7m (+32.4% yoy) was within expectations. Though 1Q09 accounts for only 15% of our FY09 forecast, there is no cause of concern due to the lumpy nature of EPC earnings. Gross margins climbed to 35.4% in 1Q09. Balance sheet strengthened as net cash shot up to Rmb505.9m from Rmb381.3m in 4Q08. Management expressed a positive outlook for the water industry. We have kept our forecasts intact. However, we roll forward our P/E target to CY10 and peg it at 10x (from 8x) to reflect an industry-wide re-rating, raising our target price to S$0.52 from S$0.37. Maintain Outperform.
Raffles Education - 3QFY09 Results Confirm Depressed Growth Trends
Fundamental concerns remain — The weaker-than-expected 3Q results confirm our concerns of slowing organic growth (only 1% YoY in 3Q vs. 10% in 1H; 8% QoQ decline), and we expect growth to remain depressed near term, as newly set-up colleges take time to ramp, making current Street estimates appear too aggressive. Our cautious thesis is unchanged; we continue to seek clarity on execution steps for OUC. Despite lowering estimates, we raise TP to S$0.60 (from S$0.40) as we roll over to ’10 base year and apply a higher PEG (0.8x) to reflect market re-rating. We lower risk rating to High (based on our quant system).
3QFY09 (end-Mar) results below expectation — Revs of S$49.9m (-7.9% QoQ, +1.4% YoY) were below our S$55.6m est. REC dipped into net loss of S$16.5m, though affected by S$33.1m provision for write-down of its Oriental Century investment and S$1.5m reversal of 1H gain; however, even excluding this, net profit of S$18.0m was still below our S$25.9m. No dividend due to net loss.
Slowing organic growth — 3Q was the 1st quarter in the past 2 years to purely reflect REC’s organic growth, without new acquisitions. While the 9.7% YoY organic growth for 1H had already been softer than expected, the further deceleration to 1.4% in 3Q was a negative surprise (esp. considering RMB strength). This slowdown was attributed to ~10% enrollment growth partly offset by rev mix shift toward lower-tuition NES. The 8% QoQ decline was explained by weaker seasonality and surprisingly, the econ slowdown.
Balance sheet — At end-3Q, REC had S$58m in cash & equivalents (down from S$76m in 2Q). Short-term debt was S$178m (vs. S$164m in 2Q).
3QFY09 (end-Mar) results below expectation — Revs of S$49.9m (-7.9% QoQ, +1.4% YoY) were below our S$55.6m est. REC dipped into net loss of S$16.5m, though affected by S$33.1m provision for write-down of its Oriental Century investment and S$1.5m reversal of 1H gain; however, even excluding this, net profit of S$18.0m was still below our S$25.9m. No dividend due to net loss.
Slowing organic growth — 3Q was the 1st quarter in the past 2 years to purely reflect REC’s organic growth, without new acquisitions. While the 9.7% YoY organic growth for 1H had already been softer than expected, the further deceleration to 1.4% in 3Q was a negative surprise (esp. considering RMB strength). This slowdown was attributed to ~10% enrollment growth partly offset by rev mix shift toward lower-tuition NES. The 8% QoQ decline was explained by weaker seasonality and surprisingly, the econ slowdown.
Balance sheet — At end-3Q, REC had S$58m in cash & equivalents (down from S$76m in 2Q). Short-term debt was S$178m (vs. S$164m in 2Q).
People's Food : Downgrade to SELL
Declining ASPs and gross margins in 1Q09. In anticipation of further pork price decline, several PFH's commercial customer reduce their purchase volume, together with lower ASPs, turnover from the frozen pork recorded 32% yoy decline in 1Q09. Although ASP for the fresh pork also faced downward pressure, thanks to the pick up of sales volume, turnover for the fresh pork achieved 12% yoy growth in 1Q09. Sales for the downstream products (HTMP and LTMP) both experienced decrease due to lower ASP as a result of fierce competition. The lower hog price helped gross margin for the downstream products, as HTMP and LTMP improved by 2.4ppt and 8.6ppt respectively in 1Q09 on the year-on-year basis. However, lower gross margin for the upstream products, which contributed 52% of total turnover (vs. processed meat products' 32%) , dragged down the overall gross margin by 1.9ppt in 1Q09.
Fall behind its peers in 1Q09. According to Henan Shuanghui's (000895 CH) 1Q09 results, turnover declined 6.7% yoy due to lower ASPs which is in tandem with lower hog price. However, lower raw material cost was translated into higher margins, resulting gross margin expanding by 4.2ppt from 7.5% in 1Q08 to 11.6% in 1Q09. China Yurun (1068 HK) didn't not release the 1Q09 results, but management gave positive guidance that its slaughtering volume grew by no less than 30% yoy and sales volume of its LTMP products rose by over 20% yoy in 1Q09. Considering PFH's lower utilization rate (35.1% in 1Q09 vs. 43.9% in 1Q08) for its slaughtering business and contracted gross margin, we believe that PFH has limited pricing power and is losing market share to its peers.
2Q09 might be even worse. Wholesale pork price has declined for consecutive 15 weeks to Rmb14.4/kg in the second week of May, downing 34% yoy. This downward trend will continue in 2Q09, which will further put pressure on PFH's ASP and gross margin. Other than the lower disposable income which restricts consumer' spending power, several negative news, such as the food safety concerns and H1N1 flu spreading also have negative impact on the pork consumption. As such, management guide that gross margin in 2Q09 might be even lower than that of 1Q09 (6.4% in 1Q09).
Pig farm project post further downside risk. PFH intends to expand its upstream business by investing approximately Rmb2b to build several pig farms with land area of approximately 4.7m sqm in the following five years. The first site of the stage I is near completion and a batch of pig breeders was purchased. This will offer quality and stabilized supply for the company in the long-term. However, considering that the ratio of hog unit price to corn unit price have already been lower than 6:1, the breakeven point, in 36 big and middle-sized cities and some cities have already showed loss for pig rearing, we concerns that the pig farm project might drag down the company's profit.
Downgrade to SELL. We cut our earnings forecast by 28.5-48.3% fro FY09-11 to factor in our lower ASP and lower gross margin assumptions. Downgrade to SELL with fair price of S$0.55, which is based on 8.5x FY09 PE (70% discount to China Yurun's 12.2x FY09 PE).
Fall behind its peers in 1Q09. According to Henan Shuanghui's (000895 CH) 1Q09 results, turnover declined 6.7% yoy due to lower ASPs which is in tandem with lower hog price. However, lower raw material cost was translated into higher margins, resulting gross margin expanding by 4.2ppt from 7.5% in 1Q08 to 11.6% in 1Q09. China Yurun (1068 HK) didn't not release the 1Q09 results, but management gave positive guidance that its slaughtering volume grew by no less than 30% yoy and sales volume of its LTMP products rose by over 20% yoy in 1Q09. Considering PFH's lower utilization rate (35.1% in 1Q09 vs. 43.9% in 1Q08) for its slaughtering business and contracted gross margin, we believe that PFH has limited pricing power and is losing market share to its peers.
2Q09 might be even worse. Wholesale pork price has declined for consecutive 15 weeks to Rmb14.4/kg in the second week of May, downing 34% yoy. This downward trend will continue in 2Q09, which will further put pressure on PFH's ASP and gross margin. Other than the lower disposable income which restricts consumer' spending power, several negative news, such as the food safety concerns and H1N1 flu spreading also have negative impact on the pork consumption. As such, management guide that gross margin in 2Q09 might be even lower than that of 1Q09 (6.4% in 1Q09).
Pig farm project post further downside risk. PFH intends to expand its upstream business by investing approximately Rmb2b to build several pig farms with land area of approximately 4.7m sqm in the following five years. The first site of the stage I is near completion and a batch of pig breeders was purchased. This will offer quality and stabilized supply for the company in the long-term. However, considering that the ratio of hog unit price to corn unit price have already been lower than 6:1, the breakeven point, in 36 big and middle-sized cities and some cities have already showed loss for pig rearing, we concerns that the pig farm project might drag down the company's profit.
Downgrade to SELL. We cut our earnings forecast by 28.5-48.3% fro FY09-11 to factor in our lower ASP and lower gross margin assumptions. Downgrade to SELL with fair price of S$0.55, which is based on 8.5x FY09 PE (70% discount to China Yurun's 12.2x FY09 PE).
Oceanus 1Q09 results; Maintain BUY
Gain in fair value increased by RMB93.2m or 116% yoy to RMB173.1m in 1Q09. This was mainly due to the increase in abalone population by 48m units to 152.7m units in 1Q09.
Maiden sales of RMB2.7m contributed by its downstream businesses ? processing and food chain.
Cost of electricity and fuel increased by 166% to RMB10.3m in 1Q09, as a result of the increase in the number of tanks used from 6,950 in 1Q08 to 21,500 in 1Q09.
Staff cost increased 507% yoy to RMB10.7m in 1Q09 due to the increase in production workers, from 400 in 1Q08 to 1,050 workers in 1Q09. On a quarterly basis, staff cost decreased 44.7% due to a provision of FY08's management bonus in 4Q08.
Income tax increased by almost seven-fold due to expiry of full tax exemption in FY08 and higher provision of deferred tax of rmb8.7m and provision of withholding tax of RMB3.2m.
The 1Q09 results reassure us to maintain our view that Oceanus is substantially undervalued compared to its peer and the risk-reward ratio is in its favor. We continue to adopt conservative stance on valuation front by applying by applying 30% discount to the industry multiples. Based on FY09 book value and sales figure (instead of gain in fair value) and equally weighted P/B and P/S multiples, we derive our target price of $0.44. BUY.
Maiden sales of RMB2.7m contributed by its downstream businesses ? processing and food chain.
Cost of electricity and fuel increased by 166% to RMB10.3m in 1Q09, as a result of the increase in the number of tanks used from 6,950 in 1Q08 to 21,500 in 1Q09.
Staff cost increased 507% yoy to RMB10.7m in 1Q09 due to the increase in production workers, from 400 in 1Q08 to 1,050 workers in 1Q09. On a quarterly basis, staff cost decreased 44.7% due to a provision of FY08's management bonus in 4Q08.
Income tax increased by almost seven-fold due to expiry of full tax exemption in FY08 and higher provision of deferred tax of rmb8.7m and provision of withholding tax of RMB3.2m.
The 1Q09 results reassure us to maintain our view that Oceanus is substantially undervalued compared to its peer and the risk-reward ratio is in its favor. We continue to adopt conservative stance on valuation front by applying by applying 30% discount to the industry multiples. Based on FY09 book value and sales figure (instead of gain in fair value) and equally weighted P/B and P/S multiples, we derive our target price of $0.44. BUY.
Li Heng Chemical - Average selling prices may not have bottomed
1Q09 revenue of RMB472.5m was down 41.2% yoy, grossly missing the market’s and our house’s estimates by about 30%. Net profit declined 95.5% to RMB10.2m due to lower revenue and gross margins, as well as an unrealized forex loss of RMB20.6m. Excluding the forex loss; 1Q09 net profit would still have missed expectations at RMB33.9m.
The disappointing topline performance was mainly the result of a lower 1Q09 average selling price (ASP) of its nylon yarn products at RMB16,420/ton, down 25% from 4Q08. Market prices are still trending lower. On a positive note, sales volume in the quarter declined only 9.8% sequentially and was 28.6% higher than in 1Q08 as LHCF added new customers during the quarter. New customers contributed about 6.5% to revenue.
Gross margin edged up to 12.9% in 1Q09 (9.3% in 4Q08) as a shorter inventory holding period of about one month effectively reduced the inventory’s exposure to fast-declining raw material market prices.
The consensus estimates puts FY09F revenue and net profit at RMB2759.6m and RMB448.4m, respectively. However, the ASPs of nylon yarn products in China are likely to continue to weaken and remain volatile. Pending further updates from the management during our conference call later, we are putting our forecasts and recommendation under review.
The disappointing topline performance was mainly the result of a lower 1Q09 average selling price (ASP) of its nylon yarn products at RMB16,420/ton, down 25% from 4Q08. Market prices are still trending lower. On a positive note, sales volume in the quarter declined only 9.8% sequentially and was 28.6% higher than in 1Q08 as LHCF added new customers during the quarter. New customers contributed about 6.5% to revenue.
Gross margin edged up to 12.9% in 1Q09 (9.3% in 4Q08) as a shorter inventory holding period of about one month effectively reduced the inventory’s exposure to fast-declining raw material market prices.
The consensus estimates puts FY09F revenue and net profit at RMB2759.6m and RMB448.4m, respectively. However, the ASPs of nylon yarn products in China are likely to continue to weaken and remain volatile. Pending further updates from the management during our conference call later, we are putting our forecasts and recommendation under review.
Synear Food - Overvalued
1Q09 core net profit Rmb48.3m (-48.1% yoy) was in line with our expectations, representing 42% of our estimate and 17% of consensus. Core net profit margin slid to 9.3% from 13.7%, on the back of lower other income (including interest income) and less than proportionate decline in operating expenses. Weak consumer confidence continues to batter sales, with top line falling 23.5% to Rmb518.9m A 15% rise in ASP to Rmb9,600/tonne due to better sales mix helped to cushion 34% decline in sales volume. Gross margin remained firm at 26.6% vs 26.8% in 1Q08 as a result of stabilising costs of key raw materials such as pork, flour and packaging materials. Maintain FY09-11 EPS estimates. In light of increased market risk appetite and signs of costs stabilisation, we lift our target price to S$0.12, based on 6x CY10 P/E (from S$0.10, based on 0.2x P/BV). Maintain Underperform.
Midas - expect rail-related contract wins in coming
Midas reported 1Q09 earnings that were in line with expectations, as earnings rose by 11% yoy to S$8.5m. Whilst revenue declined by 13% yoy, due mainly to lower ASPs for their aluminium extrusion products as a result of lower raw material prices and lower contribution from the PE pipe business. Gross profit still rose by 2% yoy to S$13.2m as G.P. margin improved to 42% from 36%. Railway related projects accounted for nearly 70% of total revenue. Otherwise, despite associate NPRT reporting a small loss, lower operating costs and lower taxes helped lift net earnings to 11% growth.
Operating cashflow was a healthy S$15m and the Group invested a further S$16m to expand its capacity and capabilities. Company remains in a net cash position.
Looking ahead, we expect Midas to win more rail-related projects in the coming months as China executes on its infrastructure projects. Potential projects up for grabs include the Beijing-Shanghai high-speed railway line and metro projects in Shanghai, Hangzhou, Guangzhou and Xi ‘an. We also expect a stronger contribution from NPRT, which had no deliveries scheduled in 1Q, but has a backlog of 768 train cars to be delivered from 2H09 onwards.
Maintain BUY, target price raised to S$0.82, as we raise our valuation multiple to 15x FY09/FY10 earnings for Midas, still at a 25% discount to HK-listed CSR Zhuzhou Times Electric, which has been re-rated strongly in recent weeks to 20x FY09 PER.
Operating cashflow was a healthy S$15m and the Group invested a further S$16m to expand its capacity and capabilities. Company remains in a net cash position.
Looking ahead, we expect Midas to win more rail-related projects in the coming months as China executes on its infrastructure projects. Potential projects up for grabs include the Beijing-Shanghai high-speed railway line and metro projects in Shanghai, Hangzhou, Guangzhou and Xi ‘an. We also expect a stronger contribution from NPRT, which had no deliveries scheduled in 1Q, but has a backlog of 768 train cars to be delivered from 2H09 onwards.
Maintain BUY, target price raised to S$0.82, as we raise our valuation multiple to 15x FY09/FY10 earnings for Midas, still at a 25% discount to HK-listed CSR Zhuzhou Times Electric, which has been re-rated strongly in recent weeks to 20x FY09 PER.
China Hongxing Sports - Inventory build-up at distributors
Hongxing's 1Q09 net profit (13% of our FY09 forecast) was 52% below our expectation and consensus on higher-than-expected selling & distribution expenses. We expect further declines in volume and ex-factory ASPs due to high inventory levels at distributors. We have cut our FY09 earnings estimate by 12.5% in view of the higher A&P expenses in 1Q09. On the other hand, our target price has been raised to S$0.18 from S$0.10, now pegged at 6x CY10 P/E (previously at a 40% discount to cash) in light of increased market risk appetite. Maintain Neutral given the limited upside to our share price.
As warned by management 1Q ‘09 net profit plunged 51% yoy and 49% qoq to RMB56mln on the back of 13% yoy and 34% qoq decline in sales to RMB568mln. Gross profit margin was steady at 40%.
However, due to aggressive promotional activities, selling and distribution expenses rose 33% yoy and 31% qoq to RMB171mln, dragging down operating margin to only 11.4% versus 19.2% last year and 16% last quarter. If not for a forex gain of RMB16.4mln, bottomline would have been worse.
One positive aspect is that management delivered on their promise to collect prepayments of RMB219.2mln during the quarter, reducing their prepayments to RMB939.9mln as well as collectingRMB91mln worth of receivables, thereby generating operating cash flows of RMB303mln. We would continue to monitor prepayment and receivable collections as the consumer sentiments deteriorate in China.
Financial position remains robust with cash of RMB2.265bln versus little debts, but until management start to buy back shares or restart their dividend payments, the market would likely pay little regard to their cash holdings.
Looking ahead, management maintained their Feb ’09 cautious guidance and expect the near term market conditions to remain challenging as the weak economic climate continues to negatively impact consumer demand.
At 21 cents a share, market cap is $588mln with 77% of it represented by cash, trailing PE is 7.5x, price to sales is 1x and price to book is 0.7x. Our last call in Feb ’09 was HOLD when the stock was at 18 cents, but with the stock having rebounded by 282% (to 21 cents currently) from its Mar ’09 low (of 5.5 cents) and coming close to the upper end (about 25 cents) of its 9 month trading range, we would be looking to sell on further strength.
As warned by management 1Q ‘09 net profit plunged 51% yoy and 49% qoq to RMB56mln on the back of 13% yoy and 34% qoq decline in sales to RMB568mln. Gross profit margin was steady at 40%.
However, due to aggressive promotional activities, selling and distribution expenses rose 33% yoy and 31% qoq to RMB171mln, dragging down operating margin to only 11.4% versus 19.2% last year and 16% last quarter. If not for a forex gain of RMB16.4mln, bottomline would have been worse.
One positive aspect is that management delivered on their promise to collect prepayments of RMB219.2mln during the quarter, reducing their prepayments to RMB939.9mln as well as collectingRMB91mln worth of receivables, thereby generating operating cash flows of RMB303mln. We would continue to monitor prepayment and receivable collections as the consumer sentiments deteriorate in China.
Financial position remains robust with cash of RMB2.265bln versus little debts, but until management start to buy back shares or restart their dividend payments, the market would likely pay little regard to their cash holdings.
Looking ahead, management maintained their Feb ’09 cautious guidance and expect the near term market conditions to remain challenging as the weak economic climate continues to negatively impact consumer demand.
At 21 cents a share, market cap is $588mln with 77% of it represented by cash, trailing PE is 7.5x, price to sales is 1x and price to book is 0.7x. Our last call in Feb ’09 was HOLD when the stock was at 18 cents, but with the stock having rebounded by 282% (to 21 cents currently) from its Mar ’09 low (of 5.5 cents) and coming close to the upper end (about 25 cents) of its 9 month trading range, we would be looking to sell on further strength.
China Sports International: Surprisingly Good Results & Strong B/S
Results were above expectations, with net earnings increasing 7% y-o-y to RMB50m in 1Q09, on the back of 32% y-o-y jump in sales to RMB530m in 1Q09.
The surprising increase in revenue was mainly attributable to the higher sales volume arising from the upgrade and opening of more specialty stores. However, gross margins narrowed 5ppt due to lower average selling prices.
B/S became even sturdier with healthy operating cash flow of RMB170m received in 1Q09 derived from higher operating profit and faster T/O of working capital. Net cash increased from RMB504m from end FY08 to RMB676m as of end 1Q09, translating into S$21.5cts net cash/share.
Looking ahead, we believe the company's top line can maintain the growth momentum above 25% for the full year with its focus on 2nd to 4th tier cities, leveraging on the popularity of its newly signed pop band Fahrenheit for advertising and promotion campaigns. Meanwhile, we believe margins will remain under pressure due to lower average selling prices and more advertising expenses related to Fahrenheit.
Upgrade to BUY, Price Target S$0.29, based on 5x FY09 P/E and backed by S$21.5cts net cash/share. We've revised up our earnings forecast for FY09 and FY10 by 21% and 25% respectively, to factor in better than expected revenue growth while maintaining assumptions related to margins which were relatively in line with our expectations.
The surprising increase in revenue was mainly attributable to the higher sales volume arising from the upgrade and opening of more specialty stores. However, gross margins narrowed 5ppt due to lower average selling prices.
B/S became even sturdier with healthy operating cash flow of RMB170m received in 1Q09 derived from higher operating profit and faster T/O of working capital. Net cash increased from RMB504m from end FY08 to RMB676m as of end 1Q09, translating into S$21.5cts net cash/share.
Looking ahead, we believe the company's top line can maintain the growth momentum above 25% for the full year with its focus on 2nd to 4th tier cities, leveraging on the popularity of its newly signed pop band Fahrenheit for advertising and promotion campaigns. Meanwhile, we believe margins will remain under pressure due to lower average selling prices and more advertising expenses related to Fahrenheit.
Upgrade to BUY, Price Target S$0.29, based on 5x FY09 P/E and backed by S$21.5cts net cash/share. We've revised up our earnings forecast for FY09 and FY10 by 21% and 25% respectively, to factor in better than expected revenue growth while maintaining assumptions related to margins which were relatively in line with our expectations.
Pine Agritech - Weak Demand To Weigh Heavily On Performance
As warned by management on 4 May ’09, the company swung into the red (-RMB22.6mln) in 1Q ‘09 versus profit of RMB70.16mln last year and profit of RMB8mln in 4Q ‘08. Sales plunged 57% yoy and 16% qoq to RMB190mln. The weak set of results reflect lower export as well as domestic demand due to the global financial crisis.
Looking ahead, management remains very cautious as the slow down in the domestic market will continue to weigh heavily on its performance while overseas demand will also remain weak due to the on-going global financial crisis. Selling prices will remain under pressure and management will be very vigilent on cost control measures.
Fortunately the company has cash of RMB2.619bln (up from RMB2.394bln last year) against debts of RMB1.973bln, giving a net cash position of RMB646mln. Shareholders funds total RMB1.81bln.
At 14.5 cents a share, market cap is S$435mln, trailing PE is 24x, price to sales is 1.8x and price to book is 1.2x. Since mid-2008 the stock has been stuck between mid single digits and mid-high teen levels and with the stock coming close to the upper end of the range coupled with management’s very cautious remarks we would be looking to sell it on further strength.
Looking ahead, management remains very cautious as the slow down in the domestic market will continue to weigh heavily on its performance while overseas demand will also remain weak due to the on-going global financial crisis. Selling prices will remain under pressure and management will be very vigilent on cost control measures.
Fortunately the company has cash of RMB2.619bln (up from RMB2.394bln last year) against debts of RMB1.973bln, giving a net cash position of RMB646mln. Shareholders funds total RMB1.81bln.
At 14.5 cents a share, market cap is S$435mln, trailing PE is 24x, price to sales is 1.8x and price to book is 1.2x. Since mid-2008 the stock has been stuck between mid single digits and mid-high teen levels and with the stock coming close to the upper end of the range coupled with management’s very cautious remarks we would be looking to sell it on further strength.
Synear - Very Challenging Outlook
Synear Food’s (SF) 1Q ‘09 net profit fell 55% yoy (to RMB48.3mln) on the back 24% yoy decline in sales to RMB518.9mln. Sequentially, sales rose 3.4%, weaker than last year’s 13.8%, but net profit surged 269% qoq, much faster than last year’s 67% due to the low base effect in 4Q ’08 (profit was only RMB12.6mln). Overall the weak set of results were in line with market expectations and management’s guidance, reflecting dampened consumer sentiments due to the global financial crisis, especially as the company focuses on mid-high end products which suffered the most.
Due to these same factors as well as uncertainties relating to the recent H1N1virus (resulting in overallfactory utilization rate in the region of 50% for Zhengzhou and 20% for Huzhou and Chengdu), management expects business conditions to be very challenging for the rest of the year, and will bedeferring all capital expenditure plans for the time being except the acquisition of land and production facilities in Zhengzhou in 3Q ‘09. But it will require 4 years to complete the construction of the new facility.
Fortunately, the company remains well capitalized with cash of RMB875.88mln (albeit down from RMB2bln last year) versus zero debts which should be able to help fund their expansion plans as well as working capital requirements.
At 25 cents (market cap is S$343.75mln, trailing PE is 10.5x, price to sales is 0.9x and price to book is 0.6x), the stock is unchanged since our last update in Nov’08, vindicating our HOLD recommendation.
Since mid-late 2008, the stock has been stuck in a trading range between low teens to high twenties and with management’s cautious outlook (reflecting challenging yoy comparisons) but stabilizing sequential performance we expect the stock to remain stuck in this range. This implies selling on further strength as it moves close to the upper end of the trading range.
Due to these same factors as well as uncertainties relating to the recent H1N1virus (resulting in overallfactory utilization rate in the region of 50% for Zhengzhou and 20% for Huzhou and Chengdu), management expects business conditions to be very challenging for the rest of the year, and will bedeferring all capital expenditure plans for the time being except the acquisition of land and production facilities in Zhengzhou in 3Q ‘09. But it will require 4 years to complete the construction of the new facility.
Fortunately, the company remains well capitalized with cash of RMB875.88mln (albeit down from RMB2bln last year) versus zero debts which should be able to help fund their expansion plans as well as working capital requirements.
At 25 cents (market cap is S$343.75mln, trailing PE is 10.5x, price to sales is 0.9x and price to book is 0.6x), the stock is unchanged since our last update in Nov’08, vindicating our HOLD recommendation.
Since mid-late 2008, the stock has been stuck in a trading range between low teens to high twenties and with management’s cautious outlook (reflecting challenging yoy comparisons) but stabilizing sequential performance we expect the stock to remain stuck in this range. This implies selling on further strength as it moves close to the upper end of the trading range.
Oceanus Group: Delivering ambitions
Growing abalone population. Sales grew 38% q-o-q to RMB65m, while fair value gain grew 59% to RMB173m due to its growing abalone population. Adjusted profit, which replaces fair value gain with sales income and excludes exceptionals, improved q-o-q from RMB49m loss in 4Q08 to RMB2.7m loss. We expect adjusted net profit to turn positive in the following quarters if consumer sentiment in China continues to improve.
Biological asset continued to increase to RMB547m due to a larger abalone population and larger abalone size. PP&E also grew to RMB494m following the construction of more abalone tanks. These account for a combined 96% of total asset as at end 1Q09. Cash and debt are almost equal, with minimal net cash of RMB81,000.
Downstream expansion, namely an abalone processing plant and cafeterias, progressed smoothly in 1Q09 and received positive response from clients. We expect these to contribute to group profit when they are fully ramped up in the following quarters.
Oceanus’ cash level is strained (only RMB13.5m on B/S). But it announced that it had received confirmation from AIF Capital regarding a USD25m loan investment with warrants, and it is currently in active negotiations with other investors as well.
Biological asset continued to increase to RMB547m due to a larger abalone population and larger abalone size. PP&E also grew to RMB494m following the construction of more abalone tanks. These account for a combined 96% of total asset as at end 1Q09. Cash and debt are almost equal, with minimal net cash of RMB81,000.
Downstream expansion, namely an abalone processing plant and cafeterias, progressed smoothly in 1Q09 and received positive response from clients. We expect these to contribute to group profit when they are fully ramped up in the following quarters.
Oceanus’ cash level is strained (only RMB13.5m on B/S). But it announced that it had received confirmation from AIF Capital regarding a USD25m loan investment with warrants, and it is currently in active negotiations with other investors as well.
Raffles Education Corporation: Key asset to be securitised
Imputing impairment in 3Q09. Raffles Education Corporation (Raffles) reported a loss-making quarter (-S$16.5m) as it had decided to book in S$33.1m as allowance for impairment charges for its associate Oriental Century (ORIC). Excluding this non-cash charge and land sales (as continued payment for Oriental University City, or OUC), Raffles' 3Q09 net profit would have come in at S$14.7m. Student numbers held steady instead of a marginal increase as we anticipated as recruitment drive slowed.
Securitising OUC. Management continues to be optimistic about OUC and shares our sentiments that it is a well worth investment to embark on its next phase of growth. We were updated on the plan to pay for this asset by securitising it. To do that, management hopes to list OUC in China/HK (earliest in 2011) due to listing rules requiring operating history of three years under Raffles' jurisdiction. Currently, the majority of the debt (~S$320m) owed by Raffles for OUC is primarily to the provincial government supporting this University City project. While Raffles will continue to pay down this debt, we expect it to fulfil a significant part through the listing. As such, post listing, it will remain a major shareholder along with the provincial government.
No dividends. Raffles will not be paying any dividends this quarter. The Dividend Re-Investment Scheme (DRIS) has also been terminated in view of the volatile share price and poorer-than-expected take-up rate. We had earlier forecast that Raffles would cut its dividend to 0.75 S cents/quarter to preserve cash and pay off its debts.
Trough reached, next year will be better. Raffles has undergone a winter season in the last months with the ORIC scandal coupled with a tight liquidity situation that has prohibited the company in embarking on an M&A route to grow the business. However, we think that the next year would start bearing the first fruit of its labour when it finalises the securitisation plan for OUC, aggressively pay down its other debt and refocuses on student recruitment for its new schools. While the share price might take a tumble in view of its loss-making position this quarter, we look past this event and set our valuations to FY10F where the company will resume its growth trajectory. We roll our valuation to FY10F based on the same 12x PER, still close to its lower historical trading band. Our fair value is edged down slightly to S$0.59 (prev. S$0.60). Maintain BUY.
Securitising OUC. Management continues to be optimistic about OUC and shares our sentiments that it is a well worth investment to embark on its next phase of growth. We were updated on the plan to pay for this asset by securitising it. To do that, management hopes to list OUC in China/HK (earliest in 2011) due to listing rules requiring operating history of three years under Raffles' jurisdiction. Currently, the majority of the debt (~S$320m) owed by Raffles for OUC is primarily to the provincial government supporting this University City project. While Raffles will continue to pay down this debt, we expect it to fulfil a significant part through the listing. As such, post listing, it will remain a major shareholder along with the provincial government.
No dividends. Raffles will not be paying any dividends this quarter. The Dividend Re-Investment Scheme (DRIS) has also been terminated in view of the volatile share price and poorer-than-expected take-up rate. We had earlier forecast that Raffles would cut its dividend to 0.75 S cents/quarter to preserve cash and pay off its debts.
Trough reached, next year will be better. Raffles has undergone a winter season in the last months with the ORIC scandal coupled with a tight liquidity situation that has prohibited the company in embarking on an M&A route to grow the business. However, we think that the next year would start bearing the first fruit of its labour when it finalises the securitisation plan for OUC, aggressively pay down its other debt and refocuses on student recruitment for its new schools. While the share price might take a tumble in view of its loss-making position this quarter, we look past this event and set our valuations to FY10F where the company will resume its growth trajectory. We roll our valuation to FY10F based on the same 12x PER, still close to its lower historical trading band. Our fair value is edged down slightly to S$0.59 (prev. S$0.60). Maintain BUY.
Cosco Corp: Unimpressive 1Q09 Results
1Q09 results below expectations. Cosco Corporation (Cosco) released its 1Q09 results yesterday. While revenue declined marginally (0% YoY, -1% QoQ) to S$714m, PATMI (excluding gains from currency translation reserves as a result of revised FRS accounting) fell 70% YoY to S$33m.
We are turning slightly positive in our medium-term outlook, as we note of Cosco's capability to undertake offshore conversion projects from its recent award from Modec. Separately, we note that Cosco is finalising two other FPSO conversion projects valued at a total of US$150m. In addition, we think stabilisation in the dry bulk market is likely, considering the demand-supply conditions. Any recovery in the BDI is positive for Cosco as 1) it reduces the possibility of further cancellations, 2) increase revenue for its dry bulk shipping division as the current rates are based on spot market.
Still, we do not deny that the near-term outlook is bleak, with more order cancellations expected and 2Q09 could possibly be the worst quarter. Going forward, we remain concerned over yard execution and potential late delivery penalties as the management has once again reduced their guidance on vessel deliveries from 25 to 15 for FY09. We pared down our FY09 and FY10 topline down by 7% and 3% respectively. FY09 and FY10 bottomline were reduced by 25% and 14% correspondingly as we take into account lower 1Q09 numbers, reduced margins from shiprepair and shipping as well as higher tax rates.
Recent rally signified increased risk-reward appetite, TP raised, but SELL maintained. We revise up the target price to S$0.92 (from S$0.74), more skewed toward pre-shipbuilding boom cycle PB range of 1.5x P/B, to reflect subsiding risk adverse sentiment in the market. Maintain SELL.
We are turning slightly positive in our medium-term outlook, as we note of Cosco's capability to undertake offshore conversion projects from its recent award from Modec. Separately, we note that Cosco is finalising two other FPSO conversion projects valued at a total of US$150m. In addition, we think stabilisation in the dry bulk market is likely, considering the demand-supply conditions. Any recovery in the BDI is positive for Cosco as 1) it reduces the possibility of further cancellations, 2) increase revenue for its dry bulk shipping division as the current rates are based on spot market.
Still, we do not deny that the near-term outlook is bleak, with more order cancellations expected and 2Q09 could possibly be the worst quarter. Going forward, we remain concerned over yard execution and potential late delivery penalties as the management has once again reduced their guidance on vessel deliveries from 25 to 15 for FY09. We pared down our FY09 and FY10 topline down by 7% and 3% respectively. FY09 and FY10 bottomline were reduced by 25% and 14% correspondingly as we take into account lower 1Q09 numbers, reduced margins from shiprepair and shipping as well as higher tax rates.
Recent rally signified increased risk-reward appetite, TP raised, but SELL maintained. We revise up the target price to S$0.92 (from S$0.74), more skewed toward pre-shipbuilding boom cycle PB range of 1.5x P/B, to reflect subsiding risk adverse sentiment in the market. Maintain SELL.
Midas Holdings - Core business growth to resume in FY10
Midas will be reporting its 1Q09 results on 13 May. We believe the upcoming 1Q results will be a reflection of our full year expectations, where bottomline growth will be derived mainly from subsidiary NPRT, a manufacturer of metro trains. Consequently, we expect 1Q results to be stronger on a yoy basis but flat on a qoq basis.
Midas’s expansion plan which includes its 3rd extrusion production line and downstream fabrication activities is expected to be operational by early FY10 and 2H09 respectively. With utilization already at its optimal of approximately 80% since 2H07, growth for its core aluminum alloy division will be subdued until new capacity kicks in.
While NPRT only contributed $1.9m under share of associates, we expect it to make a more meaningful contribution in FY09, on the back of its S$1b orderbook. However, we would only expect to see the strength of this increased contribution in 2H09, where the delivery schedule is skewed towards.
China Zhongwang Holdings, a private China-based aluminium extrusion producer is due to debut on the Hong Kong Exchange on the 8 May, in the largest IPO in the world year-to-date, raising S$1.4b. While much larger, the two companies share several similarities. Being a peer, a stellar performance could bring positive spill-over interest into Midas.
We maintain our BUY call on Midas with a SOTP target price of $0.68. Currently trading at 11.9X FY09E, which is close to Zhongwang’s IPO valuation of 11X FY09E, we believe Midas is a more direct proxy to the PRC railway sector and will continue to benefit from the government’s infrastructure-focused fiscal stimulus spending.
Midas’s expansion plan which includes its 3rd extrusion production line and downstream fabrication activities is expected to be operational by early FY10 and 2H09 respectively. With utilization already at its optimal of approximately 80% since 2H07, growth for its core aluminum alloy division will be subdued until new capacity kicks in.
While NPRT only contributed $1.9m under share of associates, we expect it to make a more meaningful contribution in FY09, on the back of its S$1b orderbook. However, we would only expect to see the strength of this increased contribution in 2H09, where the delivery schedule is skewed towards.
China Zhongwang Holdings, a private China-based aluminium extrusion producer is due to debut on the Hong Kong Exchange on the 8 May, in the largest IPO in the world year-to-date, raising S$1.4b. While much larger, the two companies share several similarities. Being a peer, a stellar performance could bring positive spill-over interest into Midas.
We maintain our BUY call on Midas with a SOTP target price of $0.68. Currently trading at 11.9X FY09E, which is close to Zhongwang’s IPO valuation of 11X FY09E, we believe Midas is a more direct proxy to the PRC railway sector and will continue to benefit from the government’s infrastructure-focused fiscal stimulus spending.
Raffles Education - Hit by impairment charges
The group recorded a net loss of $16.5m in 3Q09 as it wrote off the $34.6m allowance of impairment for Oriental Century in the quarter. 3Q09 core net profit after adjustment of exceptional items was $14.65m (-27% yoy, -38% qoq). 9M09 core net profit of $66.2m was below our expectation mainly due to lack of growth in student enrolment, hefty set up costs of new premises, its more prudent bad debt policy and lower forex gains.
Normalised core earnings in 3Q09 weakened as operating costs out-paced revenue. Rental costs surged in line with the business expansion and additions of OUC, Wanbo and Shaanxi, while personnel expenses rose 27% qoq due to expanded headcount. Meanwhile the lack of student enrolment during the seasonally weak recruitment period (total students 32797 vs 32873 in 2Q09) weighs on its top-line.
OUC continues to contribute positively to the group’s earnings, as its profit in 9M09 more thandoubled yoy to $10.6m. Growth potential from OUC remains huge, while the new colleges in Bangalore, Jakarta, Langfang, New Delhi and Yunan will contribute positively to student enrolment going forward. The group expects student enrolment to pick up by 4Q09, targeting a 15% increase in student population by year-end.
No dividends were declared this quarter, the first time since listing, as cash conservation has become the key priority. Positioning to be a stronger education player in the next upturn, the group aims to strengthen its balance sheet by reducing its gearing from 1.1x to zero by 2010.
We have reduced our earnings estimates for FY09/FY10 by 27% and 12% respectively as we built in lower student enrolment in FY09 and higher operating costs. However, with the stock trading near to the low of its PER cycle, weak earnings could have been priced-in. Moreover, its strong free cashflows of $117m YTD (+189% yoy) supports its value proposition of defensive earnings. Maintain BUY.
Normalised core earnings in 3Q09 weakened as operating costs out-paced revenue. Rental costs surged in line with the business expansion and additions of OUC, Wanbo and Shaanxi, while personnel expenses rose 27% qoq due to expanded headcount. Meanwhile the lack of student enrolment during the seasonally weak recruitment period (total students 32797 vs 32873 in 2Q09) weighs on its top-line.
OUC continues to contribute positively to the group’s earnings, as its profit in 9M09 more thandoubled yoy to $10.6m. Growth potential from OUC remains huge, while the new colleges in Bangalore, Jakarta, Langfang, New Delhi and Yunan will contribute positively to student enrolment going forward. The group expects student enrolment to pick up by 4Q09, targeting a 15% increase in student population by year-end.
No dividends were declared this quarter, the first time since listing, as cash conservation has become the key priority. Positioning to be a stronger education player in the next upturn, the group aims to strengthen its balance sheet by reducing its gearing from 1.1x to zero by 2010.
We have reduced our earnings estimates for FY09/FY10 by 27% and 12% respectively as we built in lower student enrolment in FY09 and higher operating costs. However, with the stock trading near to the low of its PER cycle, weak earnings could have been priced-in. Moreover, its strong free cashflows of $117m YTD (+189% yoy) supports its value proposition of defensive earnings. Maintain BUY.
China Fishery: High inventory of fishmeal in 4Q08 was sold in 1Q09
Management have updated us that they were able to sell off about 80% of their outstanding US$33m in inventory of fishmeal which was not sold at the end of 4Q08. This is a positive in our view as 1Q09 is usually low season for fishing. We believe that 1Q09 net profit will be relatively similar to 1Q08 of US$40.4m due to the sale of its outstanding inventory.
Since the beginning of 2009, crude oil prices have remained below US$60/barrel which is a benefit for China Fishery (as of 5 May 2009 oil price was US$54/barrel). Majority of the company’s cost incurred comes from transporting its fish caught and fishmeal to China. Therefore with oil prices remaining low in 1Q09 we expect to see better margins.
Management has also informed us that their 1,500/tonne freezing capacity vessel will be deployed at the end of May and is scheduled for operations between July to Aug 2009. With its South Pacific operations coming into full gear in 2H09, we believe that that this will help to boost revenue contributions. However, this will also mean that the company’s gearing may go up. The company expects their debt level to increase by 12% to US$33.6m. Though this will increase its gearing ratio, we are not too concerned as these loans are long term due within three years.
Share price has recently exceeded our target price of S$0.86. We will be revising our price target after next week’s 1Q09 results release.
Since the beginning of 2009, crude oil prices have remained below US$60/barrel which is a benefit for China Fishery (as of 5 May 2009 oil price was US$54/barrel). Majority of the company’s cost incurred comes from transporting its fish caught and fishmeal to China. Therefore with oil prices remaining low in 1Q09 we expect to see better margins.
Management has also informed us that their 1,500/tonne freezing capacity vessel will be deployed at the end of May and is scheduled for operations between July to Aug 2009. With its South Pacific operations coming into full gear in 2H09, we believe that that this will help to boost revenue contributions. However, this will also mean that the company’s gearing may go up. The company expects their debt level to increase by 12% to US$33.6m. Though this will increase its gearing ratio, we are not too concerned as these loans are long term due within three years.
Share price has recently exceeded our target price of S$0.86. We will be revising our price target after next week’s 1Q09 results release.
Yanlord Land - Asset Play with Prime Location, Premium
Reiterating Buy/Speculative Risk — We are raising our target to S$2.09 from S$1.21 on higher ASP assumptions for Yanlord’s property projects in Shanghai and on the recent solid recovery in transaction volume in the China property markets. With its focus on prime city-center locations and premium quality offerings, Yanlord should be able to take advantage of the recent recovery in the China property market to return to growth after the pullback in 08. We cut 09 estimate to reflect project completions, and raise 10E on higher ASPs.
More constructive market environment — Based on Soufun property statistics, in the first four weeks of April most cities recorded growth compared with the first four weeks in March, including Beijing, Dalian, Shanghai, Nanjing, Hangzhou, Chongqing and Ningbo; Shenzhen and Guangzhou recorded slight declines. In the 12 cities we track, the average digestion cycle was around 16.5 months as of the beginning of 2009.
Shanghai to become a global financial center and shipping hub by 2020 — In our view, the central government’s plan to accelerate the development of Shanghai should help stimulate the economic and property market sentiment in Shanghai, benefiting Yanlord given its landbank exposure and its experience in the Shanghai property market. Based on our estimates, about 22% of Yanlord’s NAV comes from Shanghai. In addition, Yanlord has been in the Shanghai property market for long. As a reference, according to Yanlord, about 58% of the company’s completed properties in the past came from Shanghai, in terms of total GFA.
More constructive market environment — Based on Soufun property statistics, in the first four weeks of April most cities recorded growth compared with the first four weeks in March, including Beijing, Dalian, Shanghai, Nanjing, Hangzhou, Chongqing and Ningbo; Shenzhen and Guangzhou recorded slight declines. In the 12 cities we track, the average digestion cycle was around 16.5 months as of the beginning of 2009.
Shanghai to become a global financial center and shipping hub by 2020 — In our view, the central government’s plan to accelerate the development of Shanghai should help stimulate the economic and property market sentiment in Shanghai, benefiting Yanlord given its landbank exposure and its experience in the Shanghai property market. Based on our estimates, about 22% of Yanlord’s NAV comes from Shanghai. In addition, Yanlord has been in the Shanghai property market for long. As a reference, according to Yanlord, about 58% of the company’s completed properties in the past came from Shanghai, in terms of total GFA.
Cosco - A contract win may boost sentiment but valuations not supported by fundamentals
COSCO Corp has secured its first contract for FY09; COSCO Dalian was awarded a contract to convert a VLCC to a FPSO vessel by Modec for an undisclosed amount.
While the contract win may be positive for sentiment on the stock, COSCO is well shy of our S$1 bn (US$640 mn) new contract assumptions for FY09 (Fig. 1).
We remain concerned about its shipbuilding business due to delayed deliveries and no demand. On our estimates, shipbuilding contributes S$2 bn (or 47%) to COSCO’s FY09E revenues, with ship repair (S$0.9 bn), conversions (S$1.15 bn) and shipping (S$0.15 bn) accounting for the remainder. We would caution that visibility on COSCO’s revenues and earnings remains limited.
At S$1.10, COSCO is trading at a FY09E P/E of 9.3x and P/B of 2x, at nearly twice the valuation of Yangzijiang, which is executing well and is our preferred exposure on the sector. There is no change in our estimates and rating for COSCO pending 1Q09 management on 7 May. Maintain UNDERPERFORM with a target price of S$0.51.
While the contract win may be positive for sentiment on the stock, COSCO is well shy of our S$1 bn (US$640 mn) new contract assumptions for FY09 (Fig. 1).
We remain concerned about its shipbuilding business due to delayed deliveries and no demand. On our estimates, shipbuilding contributes S$2 bn (or 47%) to COSCO’s FY09E revenues, with ship repair (S$0.9 bn), conversions (S$1.15 bn) and shipping (S$0.15 bn) accounting for the remainder. We would caution that visibility on COSCO’s revenues and earnings remains limited.
At S$1.10, COSCO is trading at a FY09E P/E of 9.3x and P/B of 2x, at nearly twice the valuation of Yangzijiang, which is executing well and is our preferred exposure on the sector. There is no change in our estimates and rating for COSCO pending 1Q09 management on 7 May. Maintain UNDERPERFORM with a target price of S$0.51.
Sihuan Pharmaceutical - Preliminary views of 1Q FY09 results
Sihuan's net profit of Rm61.0m was 13.7% below our forecasts, due mainly to its impairment charge on intangible assets.
We are concerned about the continued impairment of intangible assets, which has depressed earnings in the near term. We expect earnings growth to pick up when the provisioning subside.
We do not have much issues on the operations - sales and gross profit were in line with our forecasts.
However, we have a longer term concern over the two-invoice system to be implemented nation-wide in the PRC. We believe this will have an impact on Sihuan's future sales and earnings growth.
We will elaborate more about our concerns over impairment charges and two-invoice system in our coming report (just sent to production).
We are concerned about the continued impairment of intangible assets, which has depressed earnings in the near term. We expect earnings growth to pick up when the provisioning subside.
We do not have much issues on the operations - sales and gross profit were in line with our forecasts.
However, we have a longer term concern over the two-invoice system to be implemented nation-wide in the PRC. We believe this will have an impact on Sihuan's future sales and earnings growth.
We will elaborate more about our concerns over impairment charges and two-invoice system in our coming report (just sent to production).
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