Yanlord - Small but packed with goodies

Four reasons why Yanlord is our top-pick. Yanlord continues to be one of our top choices in the sector as: a) 60% of its NAV is exposed to Shanghai and the neighbouring cities where property prices going forward will benefit from the development of Shanghai into a major global financial hub, b) its landbank is situated in urban locations where demand is more assured and prices firmer, c) it boasts one of the best corporate governance track records among mainland developers, and d) there is further upside potential on its NAV if the Yanlord brand continues to command premium prices on the new projects and as it ventures into new cities.

Sales so far this year came mainly from Shanghai. Following an amazing April, Yanlord generated another Rmb1.4b (52% from Shanghai Yanlord Riverside City and 25% from Yanlord Peninsula in Suzhou) contract sales in May. Some 72% of the total Rmb5.3b generated up to May this year came from Shanghai Yanlord Riverside City. As a result, almost 85% of the 0.2m sqm completed but unsold inventories brought forward from 2008 have been sold. The bulk of the remaining unsold space relates to the 30,000sqm at Nanjing Yanlord International Apartments. As inventories have already come down sharply, there is no rush to sell any units now.

Sales progress exceeded expectations. The rate of sales has exceeded expectations. Contract sales in the first five months this year are already 13% above that generated in the whole of 2008, and account for some 58% of the Rmb9b that could be generated this year assuming all units that are available for sale are sold.

Non-compromising sales strategy pays off. Unlike its peers, Yanlord did not resolve to price cuts to clear stocks around the end of last year. Hence, contract sales only started to pick up in March when Yanlord took advantage of the improved market conditions to sell. Yanlord’s patience has paid off handsomely. Gross development margins improved to 64% in 1Q09, from 2008’s average 56%, and we expect margins will rise further to close to 70% in 2Q09. This means Yanlord’s interim results will compare favourably with that of its peers whose development margins are likely to suffer as a result of the earlier price cuts.

Selling prices sustained by brand. But Yanlord is only able to have a margin-focus strategy because it has built a successful brand over the years. As can be seen from the table below, ASP of the major projects have not softened along with the market in 2008.
Upcoming launches. Yanlord has projects in seven cities. While revenues have concentrated in Shanghai and Nanjing, the geographical spread will widen as projects in other cities mature. Yanlord Riverside Plaza, the Group’s first project in Tianjin and indeed northern China, will be launched next month. The response will indicate how well Yanlord can replicate its success in a city where its brand is not known. This will be followed by Yanlord Yangtze Riverside City in Nanjing in 4Q. The initial batches of both projects are expected to price at Rmb15,000-16,000psm, or a 10% premium to neighbouring projects, and the gap will eventually rise to a typical 20-30% in subsequent phases.

Cash call? We estimate Yanlord’s gearing is only about 50% at present. But as can be seen from the various cash calls made by mainland developers, high gearing is not a pre-requisite for fund-raising. Rather, companies are tempted to take advantage of this unusually liquid market to beef up their coffers. So in this sense, one can never rule out a cash call by Yanlord.

Some 90% of 2009 revenue already secured. As Yanlord’s contract sales in May have again beat expectations, this has given us confidence that Yanlord’s brand carries a solid premium. As a result, we are now using more upbeat ASP assumptions in our model, raising our 2009 net profit forecast by 9% to S$265m, representing a 60% yoy growth, followed by a 20% upgrade for 2010. Some 90% of our 2009 revenue has been secured through sales.

Raise target price by 10%. We have replaced our original assumption of a 10% increase in property prices in 2009 by a more upbeat 20% to take into account Yanlord’s premium brand, thereby raising our NAV from S$2.61 to S$2.88/share. Our target price is based on a three-tier system whereby target price for Yanlord, regarded as a solid private enterprise, is set at a 10% premium to NAV, equivalent to S$3.17, 10% above our previous S$2.87. Our target valuation is above the historical average discount to NAV and can be justified by the re-rating of Shanghai as far as property price potential is concerned.

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Cosco Maintain SELL

Sevan Driller 2 will likely be the first order clinched in 2009. According to management, there is practically no enquiry for dry bulk newbuilds but there are interests in ship repairs and conversions. To date, there are no new orders for shipbuilding. The hull of Sevan Driller 1 that was contracted in Mar 07 at US$170m will be delivered to Sevan Marine in Oct 09. COSCO (S) has also received US$10.0m for Sevan Driller 2. The contract is pending finalisation. If this contract materialises, it will be COSCO (S)’s first contract clinched in 2009.

Shipping earnings to fall by 35-50% yoy in 2009. COSCO (S) expects dry bulk shipping revenue to fall by 35-50% yoy in 2009 (2008: S$257.4m). Should the Baltic Dry Index (BDI) remain at around the current level of 3874, two of its dry bulk shipping vessels that were fixed at BDI level of 8000 will be put on voyage charter when their time charter contracts expire in Jun 09 and Aug 09 respectively. The other 10 vessels are on voyage charter at an average charter rate of US$17,000 per vessel day. Management expects BDI to average 3000-3500 for 2009 (ytd average: 2,045). We, however, maintain our forecast of 2500 for 2009.

Maintain SELL. We believe COSCO (S)’s share price will underperform in view of the current low level of contract wins and worse dry bulk shipping market projected for 2010. Maintain SELL, but we raise our fair price from S$0.89 to S$0.95 on a higher P/B valuation for COSCO (S)’s shipping business.

Midas Holdings: Huge contract wins bolster earnings visibility

A slew of contract wins recently. Over the last week, Midas announced that it has won 4 contracts to supply aluminium extrusion profiles for various inter-city high speed projects worth a total of RMB775m, to be delivered from the second half of 2009 to 2011.

Strong order book of >S$250m, with potential for more contract wins. With these latest contract wins, we estimate that Midas has secured our projected revenue for the rest of 2009 and more than 80% for 2010. Meanwhile, the Group is still bidding for more high-speed train and metro train projects, which should further boost its order books and increase earnings visibility to 2011 and beyond.

Associate Nanjing Puzhen (NPRT) also has huge order book and good prospects. NPRT has a backlog of over 750 train cars to be delivered, worth c. RMB4.5bn, and with its production capacity on track to be enhanced to 500 train cars by the end of 2009, it is also in a prime position to win more metro train projects.

Maintain BUY, target price raised to S$0.93. We raise our target price by rolling over our valuation multiple of 15x PE (unchanged) to FY10 earnings (from FY09//10) as Midas' earnings visibility has improved substantially following these contract wins. HK-listed peers, CSR Zhuzhou and China South Locomotive, are trading at over 20x earnings.

Yanlord: "We revise up FY09-10 earnings and NAV. Outperform"

Valuations are pricey across the board. Hence we prefer companies that can stay ahead of the competition in acquisition, which will drive NAV growth and narrow discounts. Yanlord fills the bill with net gearing to fall below 20% on contracted sales achieved YTD and the latest fundraising, which is gearing neutral but cashflow positive. With a revised target price target of S$2.5 we reiterate Outperform.

Fundraising: A combination of debt and equity. On 18 June, Yanlord Land (YLLG SP - S$2.28 - O-PF) placed 110m new shares at S$2.08 to raise S$228.8m. Meanwhile, the company also issued a S$275m convertible bond (CB) in aggregate principle amount with a coupon rate of 5.85%.

Gearing neutral, but cashflow positive. The impact on the net gearing from placement/CB issuance is neutral: The company's 1Q09 net gearing was 53% (before the strong sale of April and May) with net debt of S$1,054m against equity of S$2,004m. Post placement/CB issuance, we expect net gearing to drop marginally to 51% (new net debt of S$1,129m against equity of S$2,204m). This is before factoring in cash proceeds form sales already contracted, which should bring net gearing down to around 15% by end of FY09 (before land acquisition).

Growth enhancing. Even on conservative assumptions of land cost accounting for 40% of selling price and an after-tax net profit margin of 20% (Yanlord’s historic after tax net margin is around 30%), every Rmb1bn the company spends on land acquisition will enhance NAV by 2.3%.

Earnings and NAV revised up. We have lifted our FY09-10 earnings forecasts by 30% and 66% factoring in contracted sales YTD. Our NAV is revised up by 14% to S$2.5. We have re-pegged our target price to par with NAV (from a 10% discount) given prospects of NAV growth from acquisition, which we estimate can generate between 10-15% of NAV growth. Maintain Outperform.

MIDAS - Significant Contract Win

Midas has secured 2 contracts worth a total of RMB603mln to supply aluminium alloy extrusion profiles for 1,600 train cars for the inter-city high speed train “CRH3-380” project with speeds up to 350 km/h.

The first contract worth RMB306mln was awarded by CNR Changchun Railway Vehicles Co Ltd and Midas will supply aluminium alloy extrusion profiles for 50 train sets or 800 train cars while the second contract worth RMB297mln was awarded by CNR Tangshan Railway Vehicles Co Ltd and Midas will supply aluminium alloy extrusion profiles for another 50 train sets or 800 train cars for the “CRH3-380” project. Both contracts are expected to be fulfilled from 2H 2009 till 2011.

According to Patrick Chew, Midas’s CEO, this is the single largest project win in the company’s history and both customers are repeat customers, demonstrating their confidence in the quality and delivery service of the company. This will also position them favourably into the downstream aluminium alloy extrusion component fabrication business. He expects to continue to benefit from the government’s RMB4 trn stimulus package which has a strong emphasis on the rail infrastructure market.

Based on the contracts secured by Midas since early 2007 (see Exhibit 5) the latest RMB603mln contract compares extremely well with full year 2007’s total contracts of RMB245mln, full year 2008’s RMB405mln and its current order book of RMB600mln. This explains management’s recent decision to invest in a fourth production line sometime in 2010/2011.

With the latest contract win, we believe the 3rd new production line (50% increase in production capacity) coming on-stream in 1H 2010 should reach full utilization rate fairly quickly, potentially providing upside surprises to consensus estimates next year. However, even without the positive surprise element, the stock is only trading at 11x next year’s earnings on an expected growth rate of 30%, giving an undemanding PEG of 0.37x. We maintain BUY.

Nylon Industry Seeing Signs Of Recovery

China’s chemical fibre industry has likely hit bottom after entering a downcycle from late-4Q08 to early-1Q09. Implications include the plunge in selling prices, lower production, decreased profitability, longer receivables and asset turnover, as well as heavy cutbacks in fixed asset investment (FAI).

Since early 2Q09, the chemical fibre industry has begun to experience a recovery, especially from May 09 onwards. The improvement appears quite substantial with production revisiting double-digit growth in May 09.

Recall in 4Q08 when prices fell sharply, nylon fibre makers suffered from both sales decline (as a result of lower selling prices) and severe margin erosion when they had to purchase chips at a higher price level and sold yarn products at a lower price level. The situation has since reversed and prices are now rising. Thus, we believe the benefits to fibre producers would also double in terms of higher sales and better margins.

The chemical fibre industry will soon enter the strong July-August season when fibre producers will fulfil more export orders for Christmas sales. Business climate and consumer confidence appear to be picking up in many western countries, especially the US. We therefore expect fibre makers to see more orders rolling in. Although textile and garment exports for July-August could still record a yoy decline due to relatively high base last year, we believe the chemical fibre industry will still benefit as the stronger demand will help the sector step further out of the trough, heading towards recovery.

Among chemical fibre stocks under our coverage, both Li Heng and China Sky (CSky) have witnessed increased sales and margins from Apr 09 onwards. We expect both companies to record qoq earnings improvement for 2Q09. We like Li Heng for its consistent capability to maintain production at full capacity and generate profits. As a market leader, we expect the company to benefit more from the industry’s recovery in terms of charging more decent prices and reporting better margins. For CSky, the underperformance at QZ may offset such benefits, to some extent. In addition, the risks associated with the company’s balance sheet could also give rise to potential problems. Maintain BUY on Li Heng with a target price of S$0.29, based on Hong Kong peers’ average FY10 PE of 5x. Reiterate HOLD on Csky. Our fair price is S$0.22, based on 4x FY10 PE. Entry price is S$0.15.

Yangzijiang with its 52 year track record

Yangzijiang significantly improved the efficiency of its existing yard over the past year. On top of this it started producing larger, more complex vessels at its new yard. The company reduced the production cycles for its containerships and bulk carriers by 7 to 30%. This is the result of extensive new worker training programs and the adoption of new engineering technology. At the new yard it delivered 4,250 TEU containerships and 92,500dwt bulk carriers more than double the size of previous vessels.

Thanks to its 52 year track record Yangzijiang delivered 27 vessels in 2007 or 3% of the total Chinese shipbuilding output. So far this year the company has delivered 16 vessels and is on schedule to deliver another 24 vessels by the end of the year. In 2008 the company was only using 25% of its new yard’s capacity, so it has enough space to deliver 40 vessels in 2009 and 45 in 2010.

Yangzijiang has consistently collected cash for the vessels under construction. Out of its US$6.9 billion order book as of the end of 2008, the company had received US$3B or 44% in cash payments. It had only recognized US$0.7B in revenues for the vessels under construction; the remainder remains a liability on its order book. Hence, we believe that the 6 months delivery delays that the company has been granting to some of its customers should not create a cash constrain especially since Yangzijiang is in a 67% net cash position.

We increased our PE-derived target price from S$050 to S$0.75 as a result of the increase in PE estimate from 6x FY09 to 9x in-line with global rise in valuations of shipbuilding stocks. We think Yangzijiang deserves to trade at a premium to Cosco Corp’s shipbuilding business, which we have valued at 8x FY09, thanks to its efficiency and track record. The stock continues to look attractive relative to its historical PE. Maintain O-PF.

S-Shares or S-Chips - Strength from within

Some improvements in scorecard. Post 1Q results, we reviewed and adjusted our scorecards for S-Share companies. 8 companies showed higher scores, with substantial improvements from Yanlord and China Sports (both of which have been upgraded to BUYs, from HOLDs), whilst 5 companies had lower scores, and the other 4 have the same scores vs 4Q08.

team believes China is well on track to achieve 7.5% GDP growth this year, driven by its fiscal stimulus package and growth in fixed asset investments (which is helped by loose monetary policy), with domestic consumption remaining steady. Against this backdrop, our top picks are Midas (BUY, TP S$0.82) and Epure (BUY, TP S$0.64), both of which should benefit from the government’s spending on infrastructure. We also like Yanlord (BUY, TP S$2.78) and China Fish (BUY, TP S$1.39) as proxies for China’s continued steady domestic consumption spending.

Although the sequential trend for exports seems to be bottoming with some improvement, exports for the whole of 2009 is expected to fall 5% yoy, compared to 17% growth in 2008. Hence, we remain cautious on export-dependent companies like China Sky (Fully Valued, TP S$0.14). Meanwhile, we believe shipyards are facing a prolonged industry down-cycle and that current mid-cycle valuations assigned to Cosco (Fully Valued, TP S$0.85) and Yangzijiang (Fully Valued, TP S$0.68) are overly optimistic. We also cease coverage on Celestial as the outcome and timeline of negotiations with bondholders is uncertain.

Despite rebounding from lows, since Mar, on market recovery and the absence of negative news-flows, we believe jitters could return to haunt S-shares in the event of another bout of scandal(s).

MIDAS - Adding To Order Books

Midas has secured 2 additional contracts worth a total of RMB172mln to supply aluminium alloy extrusion profiles for a total of 480 train cars for inter-city high speed train projects with speeds up to 350 km/h. Both contracts were awarded by CNR Tangshan Railway Vehicles Co Ltd, a repeat customer.

The first contract valued at RMB115mln is for the supply of aluminium alloy extrusion profiles for 320 train cars for the “CRH3-380” project and is expected to be fulfilled between 2H 2009 till 2011. This follows on the original 1,600 train cars that Midas won on 16 June’09 and brings the total number of train cars for that project to 1,920.

The 2 nd contract worth RMB57mln is to supply aluminium alloy extrusion profiles for 160 train cars for “CRH3-300” project and is expected to be fulfilled between 2H2009 till 1H2010.

Mr Patrick Chew, CEO of Midas said that the ability of the company to secure sizeable contracts for the latest projects demonstrates their strong market leadership position and authenticates their competitive advantage in the booming railway industry in China. The recurring contract wins from existing customers reflects their strong working relationships and will position them in good stead to capitalize on the booming industry (benefitting from the government’s RMB4trn stimulus package).

So far the 2 contract wins amount to only about half of management’s targeted contract wins for this year, implying potential for more wins going forward. This would provide fuel for even better share price performance despite having risen a strong 200% since hitting its all time low of 25 cents in Oct ’08.

And its undemanding valuations with 2010 PE at only 12x versus expected growth rate of 30% justifies maintaining our BUY recommendation.

Midas - Considering a fourth production line

In an interview with Business Times recently, management highlighted that it is considering building a fourth production line as it bids for more rail contracts in China. We believe this would be dependant on overall contract order flow as well as the utilisation rate for its third production line once it is ready by 1st quarter 2010.

A fourth production line would probably add 10,000 tonnes or 33% to the existing 30,000 tonnes/ annum (including third line) capacity. However, we believe any concrete plans for this would only materialize after the third line is up and running. This means the earliest completion date would likely be in 2H2011, taking into account previous expansions.

We have not factored this into our forecasts, but our preliminary estimates suggest this could potentially add around $60million in revenue and $13million in net profits once it is fully operational. We also believe such a line would involve capital expenditure of around $40million which can be funded by a combination of cash and debt.

Management is currently chasing $200m worth of contracts to supply aluminium alloy profiles for use in the manufacturing of high-speed and metro trains in China. This includes projects such as the Beijing-Shanghai high-speed railway line and metro projects in Shanghai, Hangzhou, Guangzhou and Xi’an.

We believe the probability of new contract announcements will increase as the third production line comes onstream. Customers are unlikely to commit new orders without the production capacity in place. Furthermore, we note that the third line is for a different profile size from existing lines and customers may require some trial sample. Our target price and forecasts remain unchanged.

Oceanus Group - All geared up for growth

Preparing for exponential growth. Oceanus Group Ltd (Oceanus) is engaged in the breeding, processing and sale of abalones. It currentlytargets the domestic PRC market but plans to branch out to exports after its ongoing expansion plans gain traction. The group is in the expansion phase of its business life cycle, suggesting that while the business entails a fair amount of risk, returns could potentially be rewarding if its growth strategy is well executed. Oceanus' growth will be propelled by two key drivers - the expansion of its abalone population and the maturing age profile of the abalone population.

King of abalone producers. Oceanus is the largest land-based abalone producer with a population of 137.9m caged abalones and 24,000 tanks spread across 41 farms. It ranks among the lowest cost producers in the world with breeding costs amounting to RMB35/kati as compared to RMB60-70/kati for average PRC sea farmers, and RMB150-160 for Australian and South African farmers. In our view, Oceanus' strategic advantages lie in the group's economies of scale and its partnership with reputed industryplayers such as Ah Yat Abalone Group. The favourable breeding climate at its farms serves as a further boost to the group's competitiveness.

Aggressive expansion strategy. The group is embarking on aggressive expansion plans as part of its strategy to ward off competition from new entrants. These include acquiring land, building more tanks and breeding more abalones. The group plans to expand its capacity to 40,000 tanks from 24,000 by end FY09, and will increase its abalone population by 150m per year.

Growth opportunities abound. Additional growth areas will come from its downstream activities. Oceanus is evolving from upstream farming towards downstream activities such as processing and restaurants. We view this strategy positively as it not only enlarges the group's target market, but also reaps better profit margins. The group is in early stages of its downstream activities, and we expect these businesses to only contribute meaningfully to the group's earnings in the next two years.

Initiate with BUY. Oceanus offers growth amid a recessionary environment. We expect the growing numbers and maturity of its abalone population to drive the growth of the group's earnings and asset valuations. Key risks include execution risk and spread of diseases. As the essence of Oceanus' value lies in its biological assets, we value the group based on 2x blended FY09/10F NAV, deriving a fair value estimate of S$0.40. We initiate coverage on Oceanus with a BUY rating.

Pacific Andes Holdings - Dilution from rights issue

PAH's 4Q09 core net profit of HK$341.4m (+55% yoy) beat our estimate of HK$198.4m and consensus of HK$207.5m. The main reasons for divergence were higher sales, wider gross margins from the volatile SCM business, lower-than-expected operating expenses, and a tax rebate from fishmeal operations. Management has proposed a renounceable one-for-one rights issue with warrants. Our FY10-11 core EPS estimates have been raised by 5-17% on higher SCM sales and margins assumptions. Our cum-rights-and-warrants sum-of-the-parts target price has been lifted to S$0.53 (from S$0.36). Post-rights dilution, our target price will fall to S$0.26. Downgrade to Neutral from Outperform due to limited upside to our target price ex-rights.

Yanlord Land : Making A New Mark

Another Strong Month. It was another good month of sales for Yanlord, as it managed to register about RMB1.4bn of pre-sales for May. While this was down on a m-o-m basis (RMB1.9bn in April), it was still a better result than any month in 1Q09. With this, 5M09 sales revenue has hit RMB5.3bn, which exceeds the RMB5bn achieved for the whole of FY08.

Shifting to Tianjin and Nanjing. With the excellent performance YTD still largely attributed to Yanlord Riverside City in Shanghai, we believe the company may choose to slow on the launch momentum for this project, saving the remainder of the GFA for 2010-11, whereupon higher ASPs could potentially be achieved. Instead, it is likely to shift its focus in 2H09 to its Tianjin and Nanjing projects instead. We remain confident on the company’s execution ability, particularly for Nanjing where it already has brand presence.

Maintain BUY, TP S$2.78. With improved fundamentals for the sector, we have adjusted our ASP assumptions for the Chinese property market, pricing in a 0% price change for 2009 and a 10% price increase for 2010. We continue to like Yanlord, given its strong management and proven execution as well as lowered cashflow risks given recent improvements in balance sheet. It continues to trade at a discount to its HK-listed mid-cap peers. Maintain BUY, TP of S$2.78 based on a 10% discount (from 30% previously) to RNAV of S$3.09 (from S$2.99).

Things are getting uglier for Beauty China

Beauty China – Things are getting uglier for Beauty China, with the group now facing a winding-up petition by its creditors at the High Court in Hong Kong. A winding-up petition filed on June 18 alleged that Beauty China was indebted to and had failed to pay the petitioners a sum of HK$133.36 million (S$25 million) as at June 1. The petitioners are Industrial and Commercial Bank of China (Asia), Banco Weng Hang SA, CIMB Bank Berhad Hong Kong Branch, MCL Global Portfolios SPC Ltd - MCL Focus Opportunities Segregated Portfolio Fund and Public Bank (Hong Kong) Ltd. Beauty China said it became aware of the filing only yesterday. The petition is to be heard on Aug 26. A statutory demand from these syndicated lenders was first issued in March, demanding repayment by March 27. This was followed by a 'standstill' till April 27 to allow negotiations between Beauty China and potential investors, due diligence or conclusion of any transaction to proceed. This loan default has cast uncertainty over Beauty China's ability to continue as a going concern.

Beauty China auditors troubled by trade receivables

Beauty China's joint auditors Grant Thornton and HLB Hodgson Impey Cheng steered clear of expressing an opinion on the group's financial statements for the year ended Dec 31, 2008, after they were unable to verify the recoverability of outstanding trade receivables and found significant uncertainties facing its going-concern status. 'The significant uncertainties relating to whether the going-concern basis is appropriate are so extreme that we have disclaimed our opinion,' the joint auditors said. Beauty China has outstanding trade receivables of HK$85.04 million (S$15.96 million), on which the auditors were unable to obtain sufficient evidence to assess whether they could be recovered in full or to determine the amount of impairment needed. Any adjustment would have an impact on the net assets of the group as at Dec 31, 2008 and its fiscal year net loss, and related disclosures in the consolidated financial statements. The group's net trade receivables of about HK$111.48 million as at Dec 31, 2008 was pared down to HK$85.04 million after some settlement since the balance sheet date. And repayment agreements were said to have been entered into between the company and the customers.

China Sportswear Industry Diverging Fortunes In 2009

Li Ning, Anta and China Dongxiang, China Hongxing’s bigger sportswear competitors in China recently reported that based on trade fairs conducted so far this year, they are expecting sales growth of between 22-24% for 2009.

In contrast, China Hongxing disclosed in their 1Q ‘09 results release that based on their trade fairs conducted so far, sales orders are expected to decline between 10-20% for 2009. China Hongxing’s management explained that the order decline reflects weak consumer sentiments due to the global financial crisis as well as higher than expected inventories in the channels (distributors have 4-5 months worth of inventories versus the usual 2-3 months).

Based on the above indicative order flows for 2009, it suggests that China Hongxing is losing market share to its bigger competitors in China.

Bloomberg consensus estimates are expecting Anta and Li Ning to grow 2009 profits by 22% to RMB1.094bln and RMB877mln respectively while China Dongxiang’s profit is expected to increase 14% to RMB1.4bln, putting their respective PEs at 17x, 20x and 16x and PEGs at 0.8x, 0.9x and 1.1x.

China Hongxing’s 2009 expected net profit on the other hand is expected to decline 25% to RMB335mln, putting its forward PE at 8x, but with no meaningful PEG as earnings growth is negative. Based on the historical trading range, China Hongxing’s PE at about half that of its bigger peers is in line (for example, in 2006 Li Ning’s average PE was 40x while Anta’s 2007 average PE was also 40x against China Hongxing’s 20x and in 2008 Anta and Li Ning’s PE fell to an average of 10x against China Hongxing’s 5x).

A new sportswear company (361) is looking to list in Hong Kong at an estimated 2009 PE of only 4x as its 2009 profit of RMB500mln is expected to decline 44% from 2008’s RMB890mln. (China Hongxing’s 2009 profit is expected to decline 25% to RMB335mln).

While we maintain our HOLD recommendation, we would also be monitoring closely China Hongxing’s collections from their distributors (prepayments of RMB940mln and receivables of RMB387mln as at Mar ’09).

TPV - Improving Fundamentals Look Priced In

1Q ‘09 bottom-line turned around from 4Q ‘08’s loss of US$31mln to a profit of US$14.9mln despite 31% qoq decline in sales reflecting better profit margins due to streamlining of their supply chain, stabilization of raw material prices, better cost controls and improved forex environment. This was in line with Bloomberg consensus expectations.

Compared to a year ago however, net profit was down 67% while sales was down 42% reflecting severe price erosion (PC monitor which accounts for 72% of sales saw prices fall 37% yoy while LCD TV prices fell 45%). If not for the price declines, 1Q ‘09 sales would have been US$2.2bln versus last year’s US$2.38bln and last quarter’s US$1.99bln.

Looking ahead, prices for large screen panels have started to increase and this generally signals a positive market development while both monitor and TV panel prices are expected to rise steadily with some supply tightness in popular screen sizes in the near term. However, management cautioned that there is growing concern over surplus supply if the end market demand fails to materialize during the peak selling season in 2H ‘09.

China is the largest market for the company, accounting for 32% of sales, above US’s 28% and management expects to continue to benefit from the government’s subsidy program to accelerate the replacement of CRT TVs with flat panel TVs.

Admist the tough operating environment, management will continue to improve their overall cost structure as well as management inventory levels, especially in Brazil. The assembly plant in Poland has been getting new orders and is expected to be fully loaded during the peak season. As part of management’s long term growth strategy, they are targetting to increase their market presence in India.

Financial position has improved with net gearing having been reduced from 31% to only 10%, reflecting the reduction in borrowings from US$603mln to US$450mln versus cash of US$310mln.

While fundamentals continue to improve, the stock has risen a robust 220% from its Oct ’08 low and is currently trading at 8-9x PE which is in line with its 7-8 year historical trading range. This suggests fair valuations for now, hence we are recommending investors to “Take Profit”.

China Sports - A low-end sports fashion brand

Company Overview — Despite management believing that there are still uncertainties on sportswear demand this year, China Sports targets to improve its profit margin in 2010/2011 on a change of revenue mix and lower effective tax rate. China Sports has net-cash of Rmb679m (S$143m), representing 111% of market cap. It trades on 4x 2010 PER, with 16% earnings growth in 2010, based on consensus estimates.

Business Strategy — Retail network expansion. Brand building through advertising and celebrity endorsement. Expand products offering and increase in-house production.

Industry Overview — China sportswear market has doubled to Rmb41bn from 2003-07, according to Euromonitior.

Competitive Analysis — The sportswear market in China is largely dominated by a few international brands and national domestic brands. The key competitors of China Sports are ERATAT, Doublestar, Aokang, etc.

Recent Results — 1Q09 earnings were up only 7% to Rmb50 despite revenue being up 32% yoy. No dividend was declared for 1Q09. China Sports does not have a fixed policy on dividend. In FY08, payout was only 10%.

Strengths — Large distribution network in China. Good recognition of its core Yeli brand in the low-end segment. Strong balance sheet.

Weaknesses — The sportswear market in China is competitive and distributors are bargaining for more support. Sportswear goods are sensitive to the economic cycle.

China Hongxing - A mid-end sportswear brand

Company Overview — China Hongxing said the inventory burden has started to ease recently and the SSS growth also improved to 13% in the first two weeks of May-09 from 3% in Apr. Mgmt aims to maintain its discount to distributor at35-36% this year and expects footwear gross margin to improve on lower rawmaterial costs. China Hongxing has net-cash of Rmb2,259m (S$476m), representing 87% of market cap. The stock currently trades on 6x 2010 PER, with 15% earnings growth in 2010 based on consensus estimates.

Business Strategy — Retail network expansion; Strengthen brand equity through advertising and promotion. Expand and enhance product offering.

Industry Overview — China sportswear market has doubled to Rmb41bn from 2003-07, according to Euromonitior.

Competitive Analysis — The sportswear market in China is largely dominated by a few international brands and national domestic brands. The key competitors of China Hongxing are Anta, Xtep, 361, PEAK, and Jordan, etc.

Recent Results — Despite Q109 order book was up 46% year-on-year, total revenue in Q109 was down 12% and earnings declined 51%. No dividend was declared for 1Q09 and there is no fixed payout policy.

Strengths — Large distribution network in China. Good recognition of its core Erke brand in the low-end segment. Strong balance sheet.
Weaknesses — Sportswear market in China is competitive and distributors are bargaining for more support. Sportswear goods are sensitive to economic cycle.

People Food - 1Q09 Earnings Fell 69.9%

Company Overview — While mgt believes profit margins could potentially recover in 2H09 if there is a gradual increase in hog prices, operating environment this year is challenging and it is difficult to make up for the 69.9% earnings decline in 1Q. Mgt is more optimistic on the FY10 outlook. The market has factored in only a modest 8.9% earnings decline this year. Share price dropped 11.5% this year, compared to China Yurun's 31.5% gain. People's Food trades on 5.5x consensus FY09E estimate with Rmb1.1bn net cash.

Business Strategy — Maintain slaughtering capacity. Focus on downstream processed products operation. Began upstream integration into hog farming.

Industry Overview — While Pork represents over 60% of China's total meat consumption, its supply is still very fragmented with the top three operators accounting for less than 4% of the market supply. China hog prices have become much more volatile in recent years, which cause significant swings in food supplier margins.

Competitive Analysis — Large scale in slaughtering operating. Also downstream integrated with its own brand of processed meat products. Began upstream integration into hog farming.

Recent Results — 1Q09 net profit fell 69.9% yoy on 15% revenue decline. While Fresh Pork revenue rose 12.4% yoy, Frozen Pork, High Temp Meat Products and Low Temp Meat Products fell 31.8%, 21% and 8% respectively.

Strengths — Large operating scale. Free cash generation. Net cash.

Weaknesses — Volatile hog supply. Animal illness and food safely issues could affect consumer confidence.

Hongguo International Holdings - Sell: Better Inventory But Weaker Margins

What’s new – We revise up our 2009E and 2010E earnings by 7% and 17%, respectively, to mainly reflect better sell-through in 1Q09. Our target price is raised to S$0.22 (from S$0.19) on EPS revision and rollover, but we maintain a Sell rating as we think the risk-reward still looks unfavorable given margin compression risk, weaker earnings growth and lower ROE. We forecast a 10% earnings decline over 2009-10E, compared to 8% earnings growth over 2007- 08. Our 2009-10 earnings estimates are 5-10% below consensus.

Discounting to clear inventories – 1Q09 revenue was up 22% yoy and inventory days improved from 199 days in Dec-08 to 164 days in Mar-09 as Hongguo offered bigger discounts to clear some old inventories. However, the group gross margin declined 6ppt to 36%. The gross margin for its core C.banner brand declined 11ppt to 40% and mgmt expects to offer similar discounts in Q209. While we remain cautious on margins, we think the risk of an inventory write-off has reduced given the improved inventory days.

Outlets addition target lowered – Hongguo has revised down its outlets addition target for 2009 from 120 to 100 as mgmt believes there are still uncertainties on the macro environment. During 1Q09, Hongguo added 35 outlets for the C.banner and E.blan brands but also closed down 8 outlets for JUC.

1Q09 results – Net profit was down 34% yoy to Rmb23m though sales was up 22%. Net margin was down 7ppt to 8.3% due to decline in gross margin and higher opex and tax rate. Hongguo has net-cash of Rmb160m. Capex in 2009 should be lower than Rmb10m. No dividends declared for 1Q09 and FY08.

Tsit Wing Int'l Holdings Ltd: Proposes voluntary delisting

Privatisation offer at S$0.27/share. Tsit Wing International Holdings Ltd (TWI) has proposed a voluntary delisting. The major shareholders of the group, who collectively owns 75.9% of issued capital, have sought to take the company private by making an exit offer at S$0.27 per share via its investment vehicle Fair Link Investments Ltd. The offer price represents a 35.0% premium to TWI's pre-suspension price and six-month VWAP of S$0.20, and a 22.7% premium to our S$0.22 fair value estimate. The offer prices TWI at 14.2x FY08 PER and 13.9x FY09F PER, a premium to the stock's historical high PER of 10.1x and average of 7.5x. In terms of P/B, it is priced at 1.2x FY08 NAV and 1.1x FY09F NAV, close to its average of 1.3x. Given that the stock has been hovering at S$0.20 with minimal price movement and extremely low liquidity, we are in favour of the privatisation offer.

Rationale behind delisting. TWI's decision to delist was driven by the stock's low trading liquidity, compliance costs of maintaining its listed status, and low valuations in management's view. We are not surprised by the company's decision to delist, given that the stock turned in an average daily volume of just 38,254 shares over the past year, and exchanged hands on only 25 days in the past 12 months. The low liquidity was in part due to its small free float of just 24.1%. Given its extremely low liquidity, the costs of maintaining its status as a listed company outweighs the benefits. A delisting could allow the group greater flexibility in its restructuring and expansion plans while allowing it to save on listing-related expenses.

No near term price drivers; accept the offer. TWI's earnings have been lacklustre. 1Q09 earnings fell by 49.4% YoY to HK$4.4m while FY08 earnings plunged 43.5% to HK$20.0m. Earnings have been volatile with poor visibility owing to wild swings in profits and losses incurred from the group's coffee hedging derivative instruments. The group's weak earnings have impaired its dividend payout, which was cut from 11 HK cents in FY07 to just 6 HK cents in FY08. Going forward, there are no near term price drivers or earnings catalysts. TWI's delisting offers shareholders an opportunity to exit at relatively reasonable valuations, in our view. As such, we are inclined to accept the offer.

Epure International - Buy: 32% Net Profit Growth in 1Q09

Target price raised to S$0.60 — FY09-11 FD EPS forecasts increased 5-6% to reflect lower tax rate and good order books. Target P/E raised to 11x (0.5 S.D. below historical avg on improved B/S and likelihood of rising order books but declining industrial demand). Epure generated Rmb54m operating cash in 1Q09, from Rmb10m outflow in 1Q08, thanks to working capital improvement. At end-Mar 09, it had Rmb776m net cash, representing ~30% of mkt cap.

EPC order books — About Rmb1bn at end-08 (07: ~Rmb300m; 9M08: ~Rmb 1bn). We expect EPC orders to rise further, as mgt guides for good municipal demand. 1Q total rev grew 8% on the back of equipment sales from Hi-Standard, acquired in 2H08. GM dropped 2.4ppt y/y but improved 5.9ppt q/q to 35%, compared with guidance of 30%. Operating margin reduced 1.7ppt y/y to 32% due to amortization of patents from acquisition of Hi-Standard and related office expenses. Thanks to tax credit, NP jumped 32% y/y to Rmb41m.

Cash to support expansion to BOT — To develop a recurring and stable rev. stream over the long term, Epure acquired its 4 th BOT project in May, located in Gansu Province, through forming a 15-85% JV with parent. Total project investment is Rmb129m. Based on a 30% equity portion, Epure, relying on internal resources, will have to invest ~Rmb5.85m.

Stock up 98% YTD — Mgt expects competition in EPC segment to remain keen. Financial tsunami has weakened demand from industrial segment. Stocks trades at 5.6x 12-mth EV/EBITDA. At our new TP of S$0.60 (from S$0.30), the stock would trade at ~6x FY10E EV/EBITDA, vs. avg. of 11x.

Midas - Largest order to date firms up revenue visibility

Midas has secured two contracts worth RMB603m to supply aluminum alloy extrusion profile for 100 inter-city high-speed train sets (1,600 train cars) to subsidiaries of the China Northern Railway Group (CNR Group). This will comprise of a 50 train set RMB306m contract from CNR Changchun and a 50 train set RMB297m contract from CNR Tangshan.

The train cars involved will be part of the “CRH3-380” project which has speeds of up to 350km/h. We believe these cars will be used for the Beijing-Shanghai High-Speed train line. Thisamounts to a high profile and prestigious project and is also Midas’s single largest project to date.

We estimate these contracts, which will be delivered from 2H2009 to 2011 will involve about 18,000 tonnes of Assuming an even delivery schedule, these contracts alone will utilize about25% of Midas’s enlarged 30,000 tonnes per annum production capacity during this period. It also forms 30% and 28% of our revenue estimates for FY10 and FY11 respectively.

While initially produced on its existing lines, this project will involve the upcoming third production line once it comes onstream in 1Q2010. A minor portion of the contracts will also be for downstream fabrication work on the profiles, which we believe will eventually aid Midas’s foray into this area.

As highlighted earlier in our 9 June report “The Fantastic 4th?”, we believe that new contract announcements are likely as the third production line comes onstream. The PRC government’s RMB 4 trillion stimulus package will continue to benefit the rail infrastructure sector and we believe there will be more contract wins for Midas as we approach 2010.

Industrial & Commercial Bank of China - Buy: Raising Estimates, Inexpensive and Laggard

Raising estimates and target – We raise FY09E/10E earnings 12% to reflect lower credit costs/higher loan growth. Our new estimates are 14%/18% above FY09E/10E consensus. ICBC remains attractive on: (1) inexpensive valuations currently on FY09/10E PEs of 11.6x/9.9x with 5% FY10E yield; and (2) likely upward revisions to consensus earnings. ICBC has been a laggard YTD. Our new target of HK$6.30 reflects our earnings revision and valuation roll-forward to mid-FY10E. At our target, ICBC would be on FY10E 11.9x PE / 2.4x P/B.

Benign NPLs, improving macro / property – We lower FY09E/10E credit cost to 60bps of average loans (from 85-95bps previously) as we believe NPLs are likely to continue the gradual downtrend evidenced in 1Q09. We believe NPLs/credit cost is supported by an improving physical economy, recovering property market and ICBC's somewhat high provision coverage (1Q09 132%).

Raising loan growth assumptions – System loan growth in May was robust, with Rmb665bn of new lending, bringing loan growth to 30.6% yoy / 19.3% YTD. Loan growth this year will likely reach Rmb8-9 trillion, or 27-31% growth yoy. We raise our FY09E loan growth assumption to 24%, from 19% previously.

New estimates still conservative – Despite being significantly above consensus, we believe our new estimates are still conservative as our FY10E estimate assumes no NIM recovery while loan growth decreases to 14%. Should NPLs continue to decline, we see further downward risk to credit cost assumptions.

Yanlord Land - Buy: Strong Sales Volume and Firm ASP Drive Powerful Growth

Reiterate Buy, lower risk rating to Medium — With its focus on prime city-center locations and premium quality offerings, Yanlord should be able to take better advantage of the recent recovery in the China property market to return to growth after the earnings pullback in 2008. Current valuations remain attractive with a 30% NAV discount and with its quality portfolio. Reflecting continued strong contracted sales and higher ASP assumptions we raise our 2009E-11E earnings 16%-58%, increase our target price to S$2.91, and lower the risk rating to Medium (from Speculative). We reiterate our Buy rating.

Strong contracted sales YTD — In May, Yanlord achieved another RMB1.42bn of contracted sales, pushing total contracted sales in the first five months of 2009 to RMB5.3bn. It continues to benefit from the strong Shanghai market, and sales at Riverside City contributed about 50% of total sales in 2009 YTD.

High earnings visibility — Taking into account RMB1.15bn of presales made in 2008 but not yet booked at end-2008, Yanlord had already secured over 90% of our estimated property sales revenue for the financial year 2009 by end-May 2009 (assuming 80% of contracted sales YTD are booked in FY09). The promising sales also accounted for 62% of Yanlord’s full-year sales guidance, and we believe the company is on the right track to accomplish its sales target.

More resilient margins — Yanlord’s focus on prime-location, high-end, mixed-use multi-product developments presents a unique product offering versus its peers, and helps it achieve more resilient margins in our view. Despite a tough year in 2008, the company was able to record improvements in overall margins. With continued recovery of the China property market, Yanlord should see strong earnings growth powered by higher volume and ASPs.

China Zaino - First-mover Position Unchallenged

Based in China's Fujian Province, China Zaino International Ltd (Zaino) designs, manufactures and sells backpacks and luggage under its Dapai brand. Its products are sold through an extensive distribution network of 3,500 concessionaires in all the major provincial capitals of China.

Strong demand in China's backpack and luggage market is sustainable. This is underpinned by three factors: a) double-digit growth of China's retail sales over the next one to two years, b) double-digit growth of China's urban and rural per capita disposable income and c) steady increase in outdoor activities and the number of customers, including students and tourists.

Market leader with obvious advantages. Dapai is the top brand in China's backpack industry with a 35.8% market share. We believe further sales growth is achievable as Zaino enjoys several advantages over its peers: a) it is the only manufacturer focusing on backpack and luggage business as there is less competition for brand building, b) strong R&D and good quality help to secure orders and c) a vast distribution network operated by experienced local distributors.

Earnings forecasts. For Zaino, we forecast revenue growth at a CAGR of 9.8% for 2009-11, driven by growing sales of backpacks and luggage, and expect earnings growth to slightly outperform its top-line growth of 10.7% CAGR during the same period, with a better product mix. Luggage sales are likely to continue to contribute more to total sales, in tandem with the Group's strategy to expand its product portfolio.

In addition, Zaino has also promised a yearly dividend payout ratio of at least 20%. Valuation and recommendation. We believe Zaino is a unique China play given its exposure to the niche backpack and luggage market, leading market position as well as extensive distribution network. Considering its short history as a listed company and low brand equity compared with sportswear names, we have applied a 10% discount to the industry average 2009 PE, valuing the stock at 4x. Maintain BUY with a 12-month target price of S$0.39.

Midas: Expanding capacity if orders ramp up

Potential for new contracts. Midas CEO Patrick Chew revealed in an interview with Reuters that the company was targeting to win S$200m worth of contracts for high-speed and metro trains in China with the roll-out of increased spending on infrastructure projects. If it succeeds in bagging this deal, its orders will be trebled to around S$300m, the highest ever since IPO.

Fourth production line if deals flow. If the new orders do get clinched soon, and extra orders continue to pile up for block-booking, management reveals that it may have to build a fourth production line, a move which would bring its total extrusion capacity to 40,000 tonnes per annum. We estimate that a fourth line should cost around the same as the third (S$32-S$35m). The third line will be operational in 1Q10, and boost the Group’s capacity by 50%.

Maintaining estimates. We are maintaining our earnings estimates for now, and will review if and when new deals flow through. We continue to favour Midas given that it is one of the chief beneficiary of China’s stimulus package. Maintain BUY with target price of S$0.855, based on our DCF.

Cathay's May pax traffic falls 6.7%. Influenza virus blamed

Cathay's(CX) traffic numbers show that Influenza A virsus is affecting traffic - CX's number showed a reversal in pax traffic from April 5.3% gain. We were concerned about lower traffic in 2H09, but was expecting the liberalisation of Cross straits traffic between China and Taiwan to lead to a decline. It appears that Influenza virus has taken a lead. Year to date, pax traffic has fallen by 1-9%. We are estimating -1.5% for the full year. We are not tweaking our traffic assumption for Cathay for the moment and still maintain our Sell call on the stock with a HK$9.57 price target. CX also indicated that premium traffic continues to fall unabated. Cargo traffic moderated to a 14.2% decline vs 14.7% in Arpil, but CX has indicated that there are signs that the bottom has reached in terms of volume. Nothing was mentioned about yield,

Implications of Cathay's number on SIA- Clearly, the threat of infection is deterring traffic. However, Cathay has a substantially greater exposure to North Asia in comparison to SIA. However, even so we suspect that SIA's passenger traffic in May would be dismal and unlikely to improve significantly from the 17.7% decline seen in April. SIA will release its traffic numbers on Monday. If numbers do not show an improvement, that will pour cold water onto the recovery story. We have a Sell recommendation on SIA and based on current price, the stock has greater downside risk in comparison to CX.

Cosco Corporation: 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. Adjusting for a loss of S$38m from forward currency contracts and a gain of S$10m from currency exchange, core operating profit would have been S$77m, below estimates of S$116m. 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, near-term outlook is bleak, with more order cancellations expected… In addition, Cosco announced the cancellation of a bulk carrier order and deferment of two others from a European ship owner, bringing the total number of vessels that were cancelled to five and rescheduled to 26. We expect some cancellations from parent, Cosco Group, as HK-listed China Cosco Holdings has indicated plans to “cancel or defer” bulk carriers in its recent results’ guidance. Our forecast assumes 20% cancellations and 50% deferments.

..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. Shipbuilding is unlikely to be profitable. Ship repair will continue to face declining contributions due to both reduced work scope per vessel and number of ships repaired. Shipping revenue is likely to fall further as previous contracts on favourable terms lapsed (Current chartering contracts are based on spot market rates and at 70% lower than previous contracts). As such, 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 and 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.

China New Town Development: The route to survival

1 parcel sold in May’09, looking to launch up to 3 more in 2H09. CNTD’s land sales division, its core business segment, with only 1 listing since the start of the year, has seen sales slowly coming through. This sale of a 250mou (c168k sqm) land parcel at Lodian New Town was successfully auctioned off to CNTD’s parent company at S$3,635psm, priced at 20% lower than the previous auctioned price. Looking ahead, the group is preparing to list up to 3 more plots of land, with sizes ranging from 90-400 mou at Lodian and Shenyang projects.

Proposed early retirement of senior notes. With hefty interest obligations on its senior yield notes and scheduled loan repayment (est. RMB 175m) continuing to burden CNTD financial flexibility, CNTD has proposed to buy back a significant portion of its senior notes through an issuance of shares and new equity. This hybrid scheme is expected to cost CNTD RMB 304m in cash coupled with new equity issue of c180m shares. This will be funded internally and a loan from the executive chairman, Mr. Shi Jian, who has opted to receive in lieu of repayment through new shares in CNTD, which could mean a further 1,104m shares or 40% of share base.

Maintain HOLD, TP S$0.10, 30% discount to RNAV of S$0.14. While the new repayment scheme could be seen as a positive step in relieving the group of its burdensome interest obligations, the potential dilution from new share issuance (estimated at 40% of revised share base) could cap re-rating opportunities.

Epure International - Upward earnings revisions, maintain NEUTRAL

Along the water value chain in China, we remain cautious on the EPC and equipment providers. Their exposure to industrial/private customers, their compromised business models, increasing competition and higher funding costs all cloud earnings visibility.

There were no major surprises from Epure’s 1Q09 results. The company reported a profit of RMB40.7mn (+32.4% y-y), accounting for 15% of our FY09F forecast. While project completion is generally slowest in the first quarter due to the Lunar New Year holiday, we expect a strong up-tick over the remainder of the year. Gross margin widened to 35.4% in 1Q09, from 29.5% in 4Q08. But we are sceptical that this level is sustainable since we don’t think the first quarter is representative of the company’s strength and weakness. While Epure still intends to enter the BOT (build-operate-transfer) segment, it has yet to make any concrete progress.

Although management has not revealed the latest status of the EPC orderbook (RMB1bn as of end-FY08), the company said it is negotiating a few large EPC orders. Securing some of these orders would likely mean upside to our estimates.

We upgrade our FY09-10F earnings forecasts by 4-5% on a wider gross margin assumption of 32% (previously 30%), versus 33% in FY08 and 35% in 1Q09. We also roll forward our valuation base to FY10F and lift our target P/E to 10x, from 8x, to capture near-term growth. All in, our P/E-based price target rises to S$0.51, from S$0.35.

Our target P/E multiple (10x) is 1.5 sd (previously 2.0 sd) below the stock’s historical average since listing in 2006. We believe this factors in potential risks from the BOT operation, plus limited visibility on growth owing to the company’s small market cap. We apply a higher P/E multiple given improved market sentiment on small-cap water stocks, and we believe that Epure will trade at a small discount going forward.

Celestial Nutrifood bond issue and Raffles Education share placement

CELESTIAL NUTRIFOODS LIMITED said that, as at 23 May 2009, the Company received notification from the holders of its Bonds, requiring the Company to redeem the Bonds held by them amounting to S$234,600,000 (instead of S$234,800,000). The total amount payable on 12 June 2009 in respect of the redemption of the S$234,600,000 Bonds is S$273,660,900. The Company shall not be in a position to meet its payment obligations as stated above to the holders of the Bonds on 12 June 2009. The Board has appointed Merrill Lynch Far East Limited and its affiliates as its sole dealer manager to assist the Company in reviewing strategic options to restructure and/or repurchase the Bonds, including negotiating with the Bondholders.

RAFFLES EDUCATION CORPORATION LIMITED announced 160,000,000 shares placement to raise S$101.2 million at the Issue Price of S$0.64 per Placement Share. The Net Proceeds will be allocated as follows: (i) approximately S$41.2 million (or 40.7% of the Net Proceeds) will be utilised to retire or pay down certain bank loans; (ii) approximately S$60.0 million (or 59.3% of the Net Proceeds) will be utilised to repay part of the outstanding purchase consideration for the acquisition of Oriental University City Development Co., Ltd in Langfang City, Hebei Province, the People's Republic of China; and (iii) the balance of the Net Proceeds, if any, will be used for working capital consideration purposes. Pending deployment, the Net Proceeds may be deposited with banks and/or financial institutions or invested in short term money markets and/or marketable securities, as the Directors may deem appropriate in the interests of the Group.

We view the placement positively as it eases investors' concerns over the company's cashflow and gearing. We raise our target price to S$0.71, based on 16x CY10, in line with the low end of peers, from S$0.44 (based on 30% discount to peer valuation). Maintain Neutral.

Yangzijiang: Excellent execution priced

Shipbuilding industry is not expected to turnaround soon. Unlike consumer and manufacturing industries, where recovery could be expected by 2H09, the new orders for newbuilds are not expected to flow in materially till 2011, in view of the huge order backlog and bleak shipping outlook. YTD, there were only two orders of handymax vessels placed. In fact, there could wellbe more cancellation of contracts, which has virtually gained momentum in April. We believe shipbuilders’ earnings are likely to peak this year. The cancellations and deferments as well as price cut for existing orders would be a drag on shipbuilders’ revenue stream and profitability in 2010. We have built in 25% cancellations / deferments of Yangzijiang’s current order book of US$6.7bn and assumed new order wins of US$50m a year in 2009-2010.

Trading at unjustifiable premium over Korean peers. Yangzijiang’s share price soared c.80% after it posted record 1Q results. It is now trading at a notable premium of >20% over the Korean shipbuilders. This appears overdone to us given Korean yards’ larger market capitalization and stronger execution. This should suggest limited upside to share price in the near term. In addition, the anticipated correction of BDI in coming weeks should impose additional downward pressure on Yangzijiang’s share price as well, in view of its high correlation with BDI (0.68).

Downgrade to FULLY VALUED. We advise investors to take profit. We are leaving our earning forecasts intact. However, our TP is raised to S$0.68, on a higher multiple of 6.5x 09PE vs 5x previously, which is in line with the average valuation for Korea and HK-listed peers. This translates to 2.0x P/Bv, in line with the historical average P/Bv for Korea shipbuilders.

Cosco - Fair valuation on depressed earnings

Key catalyst: Clinch of offshore conversion projects. Cosco has recently clinched Modec’s offshore conversion project, affirming its capability to undertake these projects. We note that Modec has identified other contract work opportunities for Petrobras, including a Floating Storage RegasificationUnit, a Tension Leg Platform and FPSO for Petrobras’ Papa Terra oil field, in its website. We think any contract win would put Cosco in good standing to explore further working opportunities. Separately, we note that Cosco is finalising two other FPSO conversion projects at a potential value of US$150m.

Maiden newbuild expected for delivery in 3Q09. According to Sevan’s recent annual report, Sevan Driller 1 is currently 90% completed at Cosco, with expected delivery in 3Q09. The successful completion and delivery of this maiden cylindrical drilling rig would enhance Cosco’s track record. Furthermore, we understand Cosco has been awarded the contract to build Sevan’s second cylindrical drilling rig.

Still, we do not deny that the near-term outlook is bleak, with more order cancellations expected… So far, Cosco announced the cancellation of 5 bulk carrier orders and deferment of 26 others (excluding the orders from parent Cosco Group). While we expect some cancellations from parent, Cosco Group, as HK-listed China Cosco Holdings has indicated plans to cancel or defer bulk carriers in its recent results’ guidance, we believe the market has already factored in these negative announcements.

We are reverting our valuations to mid-cycle P/E multiples from trough P/B valuations. Cosco is currently trading at a P/E of 16.3x/13.2x on FY09F/10F EPS, a premium to the Chinese and Singapore peers. In view of the higher investor risk appetite and the potential offshore order flow, we peg a valuation parameter of 12x P/E on FY10F earnings for its shipbuilding/ conversion and offshore and NAV of the 12 bulk carriers under its shipchartering business arm, deriving a target price of S$1.14 (from S$0.92 previously). We upgrade Cosco from SELL to NEUTRAL, given the balanced risk-reward and fair valuations.

Goldlion - Buying a leading China menswear brand for 0.01x PE

Founded in 1968 and listed in 1992, Goldlion is one of the leading men's apparel distributor in Mainland China with men's wear under the brandname "Goldlion". The Group also has investment properties in Hong Kong and Mainland China.

Selling its branded apparel for almost three decades. Goldlion has been operating in Mainland China since the late 1980s. However, the Group has encountered major setback in 1998-99 by making HK$250m provision for inventory as a result of its negligence on product design, product quality and inventory control. In 2000, Goldlion underwent a major re-structuring by replacing its China management team. The Group currently has about 900 retail outlets in Mainland China with over 30 of them under direct management (located in Guangzhou, Beijing and Shanghai). The Group has over 100 distributors (under license agreement) which supply merchandise to over 900 Goldlion branded stores in Mainland China. Apparel turnover has been growing at 22% CAGR in 2004-2008 with growth mainly coming from MainlandChina (over 24% CAGR). Hong Kong market now accounts for less than 1% of total apparel turnover. Goldlion management believes that its success is attributed to its focus on products and the design of retail outlet. Goldlion also benefit from its highly successful and asset light wholesale business model.

Operating performance remains robust so far this year. Management was very surprised with our naïve question "was there a substantial slowdown in your Mainland China apparel business?". On the contrary, Goldlion's operating performance in Mainland China remains robust with double digit growth so far this year. Both gross margin and operating margin have been maintained similar to last year level as a result of lower sourcing cost but higher quality products (thanks to the slump in export market). While Singapore and Malaysia markets are faced with the financial tsunami, Goldlion has been able to maintain the sales level similar to last year level.

Low receivable risk. Even though Goldlion's China apparel business is primarily wholesaling to over 100 distributors, the receivable risk is very low with receivable turnover of only 13 days. It is attributed to the fact that distributors need to pay 50% upfront in cash at the time of placing orders, which will be sufficient for Goldlion to cover the cost of the merchandise. And the distributors need to pay the remaining 50% amount in cash at the time of delivery. Turnover growth would have been even stronger if Goldlion had relaxed its credit policy. However, management maintains its prudent approach in receivable management.

Over HK$1.64b worth of investment properties, representing 90% of current share price. The Group has several investment properties in mainland China and Hong Kong, representing a total of about HK$1.64b in its book. Major investment properties in mainland China include Goldlion Digital Network Centre (located in Tianhe, Guangzhou, GFA 50,582 sq m, representing slightly over HK$1.1b in its book, rental income of Rmb80-90m per year), Goldlion Commercial Building in Shenyang (GFA 14,801sq m, rental income of Rmb8m-9m). Major investment properties in Hong Kong include Goldlion Holdings Centre in Shatin (GFA 19,580 sq m, representing about HK$200m in its book) and No 3 Yuk Yat Street in To Kwa Wan (GFA 7,013 sq m). Rental income from Hong Kong property portfolio contributes over HK$20m per year. The total rental income for the Group in 2008 stood at HK$109m per year. If we plug in the rental yield of 6%, the Group's China and Hong Kong investment property portfolio will have a value of over HK$1.82b. This does not include its Meizhou low-density residential property development project (unsold portion: 17,672 sq m residential area, 4,317 sq m car parking area and 13,228 sq m commercial area).

Valuation. The Group has a cash pile of over HK$600m (HK$0.61/share) and HK$1.64b worth of investment and development properties (HK$1.67/share), with no debt. The current share price is trading at 22% discount to its investment properties and net cash. Don't forget that Goldlion has a lucrative and growing apparel distribution business with leading position in the Mainland China menswear market. Taking a 30% discount to its investment properties, Goldlion's investors are buying the rest of the group (net profit from apparel business minus headquaters' expenses) at 0.01x FY09 PE. Hence, the market is paying almost nothing for its strong and leading business franchise in the world's fastest growing mid-to-high end consumer market. Another mid-to-high-end China apparel distributor Ports Design (589.HK) is trading at 16x FY09 PE. Assuming that Goldlion's apparel business is worth 10x 2009 earnings, the stock will have a fair value of HK$4.

Increasing dividend payout with no corporate governance issue. Historical dividend yield is 10%. Dividend payout has been increasing at 32% in 2004-2008. Management is very low key in promoting the company to investors, making the stock grossly under-researched. However, the Chairman of the Group, Dr Tsang Hin Chi, is a well-known and reputable figure both in Hong Kong and Mainland China. There has been no corporate governance issue.

Cosco - Weak earnings, even before write-down

Cosco recorded net earnings of S$33.2m for 1Q09, down 60% versus 1Q08. This includes a non-cash mark-to market write down of forward currency contracts totaling S$38.8m. Excluding the write down, underlying gross profit was also below expectations, down 42% to S$116.9m, due to higher than expected material and operational costs.

The write-down of S$38.8m pertains to foreign currency hedges that Cosco had made in relation to its ship building contracts and materials purchasing. However, this will be reversed at the turnover level as the value of these contracts is progressively recognised. Going forward, we expect this to add volatility to Cosco’s quarterly reported earnings.

Bulk shipping revenue declined 22% to S$46.2m, due to lower charter rates. The bulk of its fleet is now on short-term voyage charter, with the last 3 long-term charters expiring by August. We expect this business to remain weak, with no recovery in rates expected anytime soon. Shipyard, despite revenues staying steady at S$665m, will continue to experience higher operational costs, and risks of more order cancellations.

Cosco also announced that a European customer has cancelled one 57,000 t bulk carrier order and delayed the delivery dates of 2 more by about 6 months. The shipowner has paid compensation to Cosco for the cancellation, and Cosco has said that it is enough to cover their costs. Management also reiterated the risk of further cancellations and delivery delays in the current dismal business environment.

Cosco has guided FY09 earnings to be substantially lower than FY08. We are cutting FY09 net profit forecast by 28% to S$258.8m, assuming even lower shipyard margins. With earnings expected to be volatile in the coming quarters with the risk of further cancellations, we peg fair value at 1.5x price-to-book, or S$0.81. Our Sell recommendation is maintained.

China Sportswear - Valuation gap should narrow

A compare and contrast of listed China sportswear companies. SG-listed China Hongxing and China Sports are generally smaller than the HK-listed peers, especially the latter, whereas China Hongxing is still relatively on par with the 2nd liners in HK such as Anta, Xtep and Dongxiang, in terms of market share, profitability, and number of stores.

Wide valuation range for companies in different market positions. Market leader Li Ning is trading at around 19x earnings whilst China Sports, which is amongst the smaller regional players, is trading at less than 4x earnings. 2nd liners in HK usually trade around 12-16x FY09 P/E, corresponding to their respective market shares and profitability. CHHS is trading at 7x earnings, substantially lower than its more comparable peers listed in HK.

Reiterate BUY for Li Ning for its premier status and CSPORT on cheap valuations. We continue to like Li Ning for its leading market position, strong brand equity, consistent track record and high ROE. We re-iterate BUY on CSPORT for its cheap valuation, which is now trading below its S$21.5cts net cash/share.

Upgrade CHHS to BUY, TP S$0.26, based on 10x FY09 P/E. CHHS’ valuation discount to its closest peer – Anta in terms of P/E shot up from its usually range of 20-40% to as high as 82% in Mar’09, due to other s-chips’ accounting issues or margin calls. The counter is now trading at 0.6x P/B and 7.2x FY09 P/E at S$19cts, 56% discount to Anta’s 16.2x, which we think is too wide, especially considering its net cash/share of S$17.6cts by 1Q09. Even at the higher end of its discount range of 40% or 10x FY09 PER, our target price for CHHS at S$0.26 still has >35% Upside.

Yongmao Holdings - Holding ground

Yongmao's 4Q09 net loss of Rmb20m was far below our expectation of a Rmb2.5m loss on weak sales and product mix and high raw material costs. FY09 net profit of Rmb47m fell short of our forecast by 27%. FY09 revenue slipped 8.9% yoy. Gross margin fell to 8.5% in 4Q09 from 27.5% in 3Q09 and 36% in 4Q08. Yongmao will be focusing on domestic market sales as well as its towercrane rental JV with Tat Hong in FY10. We cut our FY10-11 forecasts by 24-26% to reflect the challenging sales outlook. However, we now peg a CY10 P/E of 8x (0.8x CY09 P/BV previously) in line with sector mid-cycle multiples, which translates to a new target price of S$0.23 (from S$0.20). Yongmao is already trading at 7.7x CY10 P/E, in line with peers. Maintain Neutral.

Epure - Reiterate BUY at fair value estimate of S$0.55

In view of the current focus of the PRC Government towards environmental protection, we remain bullish on the potential developments of the water industry. Epure’s 1st quarter 2009 results show that its earnings have been rather resilient, with regards to the current economic situation, and posted a 32% year-on-year increase in net profit attributable to shareholders. We maintain our buy rating and, based on our free cash flow to equity model (Exhibit 2), have revised our fair value upwards to S$0.55 from our previous fair value estimate of S$0.44, which has already been achieved in the past few weeks.

Epure announced a net profit increase of 32% year-on-year for the first three months ended 31 March 2009 (1Q09). The rise in earnings were due mainly to (1) its existing engineering, procurement and construction (“EPC”) projects, (2) contribution from Beijing Hi-Standard Water Treatment Equipment Co Ltd (“Hi-Standard”), which the Group acquired last year and (3) a foreign exchange gain of RMB4.7 million due to the Chinese Yuan appreciating against the Singapore Dollar.

Gross profit margins declined slightly from 37.8% in 1Q2008 to 35.4% in 1Q2009. Although there is a drop of slightly more than 2 ppts for 1Q2009, the nature of turnkey projects and its revenue recognition are based on percentage of completion. This means that on a quarterly basis, we should see fluctuating margins and it would be more appropriate to view the Group’s margins on an annual basis. Over the last few years, the Group’s gross profit margins have been at a stable 30% or so.

Since our report earlier this year, the Group has incorporated a wholly-owned subsidiary to invest in a Build, Operate and Transfer (“BOT”) project located in Shaanxi Province, Hancheng City. It has also established a joint venture with BJ Sound Enviro for a BOT project in Lanzhou City in Gansu Province. These two projects will add to its portfolio of three wholly-owned BOT projects.

We believe that in the short term, industrial EPC projects should weaken with the economic downturn still in the background, however, the municipal segment should continue to see growth. We have not made any changes to our EPC revenue forecast, we did however make changes to our equipment fabrication and design service contracts segments to arrive at our upgraded fair value estimate of S$0.55. It is also good to note that we have not forecasted the Group’s BOT earnings in our valuation. According to a recent Reuter’s report, the PRC Government has intentions to raise water prices in Beijing due to the capital’s useable water being only a third of the national rate, along with 110 other cities. This price increase should subsequently be applied across China, which will lead to higher returns for BOT projects in the respective areas. We remain confident of China’s water sector and reiterate our BUY rating with a revised fair value estimate of S$0.55 based on our free cash flow to equity model. This represents a 23.6% upside potential from the last traded price of S$0.445.

Raffles Education - Positive steps forward

OUC debt update. We met up with the Raffles Education Corporation (Raffles) recently to obtain some updates. Raffles confirmed that there will be no interest paid for debt pertaining to its Oriental University City (OUC) purchase and that the subsequent payments of RMB1.5b would be phased into three tranches. The next major payment of RMB500m will be due on 30 Apr 10. We believe the interest-free deal was struck as a give-and-take agreement due to non performance of "Material Conditions" stated in the Schedule of the original agreement dated 11 Oct 07. In a gist, the main unfulfilled conditions include 1) transfer of Langfang Vocational and Health Schools (contributes up to 20,000 students) and; 2) obtaining permits for 1 private college and 2 public-private schools.

Securitising OUC in progress. Management continues to be optimistic that OUC is a well worth investment to embark on its next phase of growth. The listing plan to pay for this asset took its next step with the recent debt deferment deal where 60% of OUC debt is to be repaid in full "upon the recovery of the economy from the current global economic crisis." Post listing, the provincial government will likely own a significant part of OUC. While we are uncertain of the provincial government's intention with its shares, we think that it would still keep a stake seeing that it can be a cash producing asset that has now been turned around by Raffles. As education is largely driven by regulators, the government's stake in the listed entity will be seen as an advantage for Raffles.

ORIC update. Separately, Oriental Century (ORIC) released a 17-page update by PWC on 26 May 09. PWC basically indicated that it would be impractical to trust any of the accounts. While one of the three operating entities seem to be operationally profitable at this point, PWC warned of possible significant attrition of student numbers due to lack of confidence as a going concern. Raffles has indicated that it could possibly acquire ORIC if it ascertains all its documented and undocumented liabilities.

Paring expectations for the year. We have pared down our estimates for FY09 and FY10 as we mitigate our expectations on the rate of growth its organic expansion can bring. Our fair value is tweaked to S$0.57 (prev. S$0.59) at 12x FY10F PER. We are maintaining our BUY call and will be incentivised to re-peg when student enrolments exceed our expectations.

China Sunsine Chemical - Margin pressure

1Q09 revenue decline 19.8% YoY to RMB 134.1m mainly on lower ASP. Overall sales volume of rubber chemicals jumped 16.6% YoY from 7,877 tons to 9,187 tons in 1Q09. This we believe is largely due to 1) pent up demand from low 4Q08 volume due to disruption of 2008 Olympic; 2) lower ASP.

ASP for the period plunged drastically as expected from RMB 21,234 in 1Q08 to RMB 14,599 in 1Q09, some 31.2% YoY. QoQ decline was 37.6% due to higher base. Main reasons were because of decline in raw material prices and to match marketpricing. Management also noted their strategy to lower ASP to entice volume and increase market share.

Consequently, gross margin was significantly lower at 16.6%against 20% in 1Q08 and 30.6% in 4Q08. We believe that margin for the remaining quarters could come under some pressure but downside should be limited given a historical low ASP.

Operating expenses were well maintained within expectation, translating to a net profit of RMB 10.9m, down 33.9% YoY. Forecast and valuation

We maintain our earnings forecast for Sunsine but warn of earnings downgrade should margin fail to improve further. We value Sunsine with a 6.8x PE (due to increase in average industry PE) and derive a new target price of S$0.24 and potential upside of 23%. Maintain BUY.

Yanlord Land Group: Start Spreading The News, Buy

1Q09 In Line, Pre-Sales Strong. Yanlord’s 1Q09 net profit jumped 161% yoy to S$24.3m on a 60% increase in topline to S$186.4m. While this forms 25% of our FY09 forecast (and c.13% of consensus), we have increased our FY09 forecasts by 89% due to strong pre-sales by the company, particularly in April. In a conference call with analysts, the company shared that an additional RMB1.9bn of sales was booked in April alone, which nearly matched the RMB2bn achieved in 1Q09. In total, these formed about 80% of FY08 sales.

Spreading from Shanghai. Once again, its Riverside City project in Shanghai was the key earnings driver, accounting for 80% of 1Q09 revenue. Going forward, Riverside Plaza in Tianjin and Yangtze Riverside City in Nanjing are scheduled for launch in 2Q09 and 3Q09 respectively. This is Yanlord’s maiden foray into the Tianjin market. Good ASPs and sales will be a catalyst, as it would further cement its ability to replicate its success in the Yangtze River Delta to other regions in China.

Upgrade to BUY, TP S$2.09. The pre-sales achieved by the company have not come at the expense of any substantial decline in ASP, a testimony of Yanlord’s brand equity in China. With this, we adjust our ASP assumptions closer to current levels for launched projects and reduce our ASP decline assumptions for landbank projects. Its success in asset turning its inventory, coupled with our eye on a recovery in the Chinese economy, also allows us to reduce our discount to RNAV. Upgrade to BUY, TP S$2.09 based on 30% discount (prev 60%) to RNAV of S$2.99 (prev S$2.40).

China Aviation Oil: Overvalued SELL

1Q09 results within expectations. CAO reported revenue of US$655.6m for 1Q09, down 34.8% YoY. This was on the back of lower jet fuel prices, which fell 47.3% during the previous corresponding period. However, the volume of jet fuel procured and supplied, alongside international trading increased by 0.3m tonnes YoY. NPAT also fell 54.6% YoY to US$4.1m for 1Q09, exacerbated by a US$2.6m loss from its associate SPIAFSC.

1Q09 gross profit outstanding. The Group registered a 223.5% YoY increase in gross profit for 1Q09 to US$10.2m. This was due to the addition of new business segments, namely jet fuel trading activities, freight optimisation and hedging activities. We stress however that this increase in gross profit is not sustainable as we estimate around US$5m out of the US$10.2m was contributed by trading activities. Stripping this estimated trading profit would have brought the Group's bottom line to a loss of around US$1m.

Changes to forecasts. Our new FY09 EPS estimate has increased 30.2% to 5.6S¢, due to our higher assumption of trading activity gains (S$5.0m versus S$3.0m previously) and increasing the spread per barrel (US40¢ versus US35¢ previously for FY09 and FY10) under its Jet Fuel Procurement and Supply segment. Our FY10 EPS estimate also increased by 5.1% from US6.6¢ previously to US6.9¢ as a result. We have retained our crude oil forecasts at US$51/bbl for FY09 and US$58/bbl for FY10.

Lack of a compelling story. We have updated our DCF model and lowered our required return on the market to 12.0% (from 15.0% previously) to account for an improvement in market sentiment, liquidity and risk aversion. Without further news of any asset injections, CAO's lacks a clear selling point. With the recent addition of the Tianjin ? Beijing Oil Pipeline, we do not foresee any further asset injections in the medium to long term.

Valuation stretched. According to our estimates, the stock currently trades at 22.9x FY09 and 18.3x FY10 P/E (versus 7.7x FY09 and 6.0x FY10 P/E for the FTSE ST China Index), which in our view is rich considering the lack of any strong growth drivers. Maintain SELL with a fair value of S$0.96.

Celestial Nutrifoods - In dire need of cash

1Q09 core net profit of Rmb73.1m was below expectations, forming 19% of our initial expectations and consensus. Deviation was due to lower-than-expected gross margins and higher-than-expected operating expenses. Revenue declined 22.5% on the back of a decline in sales volume and overall ASP. Gross margin slipped to 35% from 38% as the decline in sales volume and ASP was partially offset by a fall in soybean prices. Despite the potential S$274m CB redemption on 12 June 09, the company reported a further cash drain of Rmb200m mainly due to higher inventories, higher receivables and capex. With lower cash levels, weaker profits and lack of a re-financing agreement, default risks remain high. We are ceasing coverage of the stock with immediate effect due to lack of institutional interest. Our forecasts have not been updated with the latest 1Q09 numbers. Our last rating on the stock was Underperform with a target price of S$0.08, based on 0.11x P/B.

Pacific Andes: Taking a longer term view

Results above expectations. Net profit surged 38% to HK$664.3m on the back of a 12% growth in revenue to HK$7.8bn. The better than expected bottomline was due to its tax benefit of HK$70.2m. Else, operating profit would have been in line with our expectations.

Proposed Rights issue. The Group announced a 1-for-1 underwritten rights issue at S$0.15 for each Rights share (50.8% discount to last traded price of $0.305). The Rights issue is estimated to raise net proceeds of about S$204.4m, up to a maximum of S$223.6m (if principal amount of CBs fully converted to shares). The rationale of the Rights issue is to enlarge the Group's working capital and capital base. One warrant will also be given for 5 Rights shares subscribed. Exercise price of Warrant is S$0.23. We estimate that the Group's net gearing will retreat to c.0.43x, from the current 0.9x, post-rights.

Taking long term view, upgrade to Buy. While the huge discount and dilution could create overhang and result in price weakness in the near term, we believe the rights issue will be positive for the share price over the long term as it removes concerns of its high gearing. We raised our valuation peg to 6x on FY10F earnings (from 2.5x PER, 0.3x book based on its historical low) on the basis of a normalization of equity risk premium. This is based on a 20% discount to our target PE for China Fishery Group. Hence, our TP is raised to S$0.57. Our pro-forma post-rights TP is S$0.30.

Midas - operating margins of 42% is unlikely to be sustainable over the long-term

Good outlook. Management is upbeat on prospects given the group's dominant position in the manufacturing of train car bodies for China's rail transport industry. The group's market share in this segment is estimated at 80%. The group expects competition to heat up and its eventual market share to trend towards 50% (smaller share of bigger pie). Its fully-owned subsidiary Jilin Midas' orderbook is S$100m whereas associate Nanjing SR Puzhen Rail Transport (NSRPT; 32.5%-owned) has an orderbook of Rmb4.5bn. Management expects Jilin's orderbook to rise by S$200-300m in 2H as new contracts are awarded under China's stimulus package.

50% rise in capacity by 2010. Current capacity for Jilin Midas is 20,000tonnes/year but this will rise to 30,000 tonnes/year by 1Q2010 with the addition of a new production line (to the current two). Utilisation of current capacity is circa 80% but management expects new contract wins to drive demand for capacity growth. Should demand rises ahead if projections, the group can add new capacity, with a lead time of 1-1.5 years at a cost of S$30m/production line.

Competition heating up. Given the good outlook for the rail transport industry, management expects competition to intensify. In order to be ahead of the curve, the group plans to go upstream to fabricate modules for traincar bodies. This is part of the group's strategy to be an integrated player in this space.

Strong financials. Midas has a net cash balance of S$9m (S$0.01/share). Operating cashflows remain strong, with net operating cashflow of S$15m in 1Q09. In the absence of any major unplanned capex or M&A proposal, management has no plans for any capital-raising as capex will be internally funded.

Good prospects but competition is key. Though outlook is promising, competition could be a concern as limited growth for railway-related spending in other countries could result in most players focusing on China. Other than overseas players, local China companies (such as Zhongwang) are likely competitors too. Hence, we think Midas' 1Q09 operating margins of 42% is unlikely to be sustainable over the long-term.

China Fishery Group - Strong trawling offsets weak fishmeal

China Fishery Group CFG's 1Q09 net profit of US$43.7m (+8.2% yoy) was in line with expectations, forming 48% of our FY09 estimate and 39% of consensus. Trawling operations reported higher catch volumes and selling prices, with gross margins expanding to 42.3% from 38.3%. Fishmeal sales jumped 45% yoy on a 48% surge in sales volume. But low ASP and sparse anchovy catch volume resulted in a collapse in gross margins to 7% from 72.6%. Our core EPS estimates are intact. Our target price, however, rises to S$1.42, now based on 7.5x CY10 P/E, or a 20% discount to peers (from S$1.12, the peer average of 5.9x CY10 P/E). Ex-10% scrip dividend on 21 May, our target price will be adjusted to S$1.29. Maintain Outperform.

Li Heng Chemical Fibre : An imminent recovery of ASPs is crucial

Barely profitable. Li Heng reported 1Q09 revenue of RMB472.5m, down 41.2% YoY from 803.7m. Gross margins also fell 21.5ppt from 34.4% in 1Q08 to 12.9% in 1Q09. As a result, NPAT slumped 95.5% from RMB224.1m to RMB10.2m over the year.

Main causes of the poor NPAT performance. We attribute Li Heng’s huge fall in 1Q09 profitability YoY to the following factors:
(i) Fall in ASPs (RMB16,420/t in 1Q09 versus RMB34,370/t in 1Q08).
(ii) Fall in gross margins (12.9% in 1Q09 versus 34.4% in 1Q08).
(iii) Increase in income tax rate (43.9% in 1Q09 versus 13.1% in 1Q08).

Updates from management. The PA chip plant as part of Li Heng’s Phase III expansion plans has almost been completely installed, and trial testing should commence in Jul or Aug 09. The extra 70,000 tonnes of nylon capacity should come on stream by end 1Q10 (trial testing Jan or Feb 10), and the respective structures have already begun construction. This new capacity will be used for finer yarns that ultimately go towards making sweaters and lingerie. Hence, a lower tonnage of production should pan out, somewhere between 40,000 – 50,000 tonnes per year. Order visibility stands at two months, but customers are noticing a sharp fall in orders after July 09, especially for export segments.

Changes to our estimates. We have further lowered our gross margin assumptions from 15.1% and 16.7% previously to 13.5% and 15.1% for FY09 and FY10 respectively. ASPs have also been slashed from RMB19,350/t and RMB21,340/t previously to RMB16,590/t and RMB18,480/t for FY09 and FY10 respectively. Our production volume assumptions have remained unchanged as Li Heng is still able to maintain a 90% rate of utilisation. As a result, EPS has been reduced 17.9% to 2.8S¢ for FY09 and 7.9% to 4.4S¢ for FY10.

Valuation. We have updated our DCF model and lowered our required return on the market from 20.0% previously to 15.0% to account for an improvement in market sentiment, liquidity and risk aversion. This gives us a new target price of S$0.20 (S$0.22 previously) on the back of lower forecasted earnings. Given the limited upside, we are downgrading the stock to a HOLD.

Sinotel Technologies - Maintain BUY; TP: S$0.33

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.