Synear Food - Expect flat gross margin in 2Q09

Stagnant sales in 2Q09. Given fierce competition and weak demand, Synear did not raise its ASP in 2Q09. Although the company continued to launch new products with higher margins, the blended ASP for Synear in 2Q09 was continuously under pressure as more sales were generated by mid-tier to lowend products. Despite the low base of comparison caused by the Sichuan earthquake in the previous year, sales volume for Synear was still disappointing, which resulted in a decrease in turnover growth by over 20% yoy in 2Q09. Since 3Q is traditionally the low season for the frozen food industry, a meaningful turnaround for Synear might take place only from 4Q09 onwards.

Expect flat gross margin in 2Q09. The gross margin pressure in 1H08 is no longer a major challenge this year as most input prices have been on a downtrend since 1Q09. The lower input cost will help to offset some of the negative effects from a shift in product mix towards mid-tier to low-end products. However, as Synear’s raw material purchases are based on wholesale prices, which experience fewer fluctuations than retail prices, Synear is not expected to benefit significantly from the raw material price corrections. Together with the seasonal effect (due to the Dragon Boat Festival, 2Q is a peak season for selling rice dumplings, which command higher margins than the savoury dumplings and glutinous sweet dumplings), Synear is expected to record flat or slightly wider gross margin in 2Q09, compared with 1Q09.

Net profit decline might continue in 2Q09. In order to boost sales and maintain its market share, Synear’s marketing expenses remained at a high level even after the Beijing Olympic Games. The percentage of selling and distribution expenses over turnover in 2Q09 might be higher than that in 2Q08, partially due to the lower turnover growth. Operating margin expansion was unlikely in 2Q09 as the utilisation rate for its two new plants (Huzhou and Chengdu) lingered at 20-30% levels, and the utilisation rate for its Zhengzhou plant dropped significantly from a historical average of over 80% to approximately 50% in 2Q09. The decrease in turnover growth, high operating expenses and low utilisation rate will cause Synear to experience another 30-40% yoy earnings decline in 2Q09.

Maintain HOLD on Synear Food. Although a meaningful turnaround might only take place from 4Q09 onwards, Synear appears to be reasonably valued as it is trading at a 40% discount to Singapore- and Hong Kong-listed F&B counters. Synear’s strong brand name, nationwide distribution channel and leadership position also support its long-term growth potential. Maintain HOLD with a fair price of S$0.27, based on 10x 2010 PE. Entry price is S$0.21.

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Pine Agritech - Gross margin remains low despite lower input cost

Sales decrease continued in 2Q09. Due to the decelerating economy, consumers cut their discretionary spending on healthcare products, which resulted in Pine encountering weak demand and sales decline across all product categories in 1Q09. We expect this downward trend to continue for most of Pine’s products in 2Q09 (except its SPI product). Benefitting from the recovery in overseas demand, the utilisation rate of Pine’s SPI product was expected to improve from 42% in 1Q09 to approximately 50% in 2Q09, but still lower than its historical level of over 60%, as demand in the domestic market remained weak. Sales of its soy oligosaccharide syrup (SOS) products were still disappointing.

The utilisation rate for this product was hovering at low levels in 2Q09, probably reaching the same level as that in 1Q09 (6%), which was significantly lower than 44.7% in FY07 and 12.1% in FY08. The poor sales of SOS were within our expectation and we do not expect sales to rebound quickly, considering that consumers are cutting their discretionary spending. Moreover, since 4Q08, Pine has scaled back its advertising and promotional (A&P) campaigns in order to reduce operating expenses, which also caused the slowdown in SOS sales, given the current depressing market atmosphere and Pine’s weak brand recognition.

Gross margin remains low despite lower input cost. In line with the decrease in commodity prices, soybean cost for Pine fell by 15-20% yoy in 2Q09. The lower input cost, together with higher demand from the overseas markets which command higher ASPs as well as higher margins, will help Pine to increase the gross margin of its SPI products in 2Q09, to some extent. However, the collapsed sales of SOS would drag down the company’s overall profitability, causing Pine’s gross margin to be flat compared to 1Q09 (8.0% in 1Q09), lower than the 23.8% registered in 2008 and 20.5% in 2Q08.

High probability of recording a loss in 2Q09. Pine reported a net loss of Rmb22.6m in 1Q09. Although sales volume and gross margin for its SPI product would see some improvement in 2Q09, this will not boost Pine’s sales and net profit. The plunge in SOS sales, lower gross margins and heavy CBsincurred financial burden will further drag down its earnings, leading to a high probability that Pine might record a loss again in 2Q09.

Reiterate SELL on Pine Agritech. The net loss in 1H09 reflected the tough operating environment for the Group and we expect it to be the same in the near term. International soybean price has jumped 60% from its lowest point in 2008. Together with the probability of an output reduction in North China, domestic soybean price has continued to rebound since Jun 09. This will put further pressure on Pine’s profitability in the next few quarters. Pine’s earnings remain at risk as the demand for health products may continue to fall. Reiterate SELL. Our DCF-based fair price is S$0.06 (cost of equity of 17.4% and terminal growth rate of 3% on a 10-year horizon).

People Food - Pork price bottoming out might help margin recovery in 2H09

Top-line growth still under pressure. In tandem with the declining hog price, Pfood experienced an ASP decrease for the majority of its product categories in 1Q09. Utilisation rate reached only 35.1% in 1Q09 as the company tried to reduce its high-cost frozen pork inventory, given the sharp drop in hog prices. As hog supply continued to pick up in 2Q09, which caused hog price to fall further, we did not expect Pfood’s utilisation rate to improve drastically in 2Q09. Moreover, the downward pressure on Pfood’s ASPs still exist, especially without the Chinese New Year effect in 2Q09, when compared with 1Q09.

Pork price bottoming out might help margin recovery in 2H09. Affected by the accumulation of frozen pork by the central government and feed price increase, domestic pork price rebounded from the bottom in Jun 09, but remained at a relatively low level. Pfood’s management expects sales and margin improvement in 2H09, backed by hog price recovery.

Expect poor 2Q09 results. Gross margin contraction for upstream products might continue in 2Q09 as hog price continues to decline. Although a lower hog price will lift the gross margin for downstream processed meat products to some extent, given that upstream products contributed more than half of the Group’s gross profit, we expect Pfood’s gross margin to be even lower in 2Q09 than 1Q09. Other than the lacklustre turnover growth and contracted margins, losses from its associates, including Pine Agritech, also dragged down Pfood’s net profit in 2Q09. Thus, we expect Pfood to record another 60-70% yoy earnings decrease in 2Q09.

Maintain SELL on People’s Food. Pfood is on the path of an upstream integration to tap into hog farming. The first stage target is to raise about 40,000 heads by end- 10, which can meet approximately 10% of the Group’s slaughter demand. Considering the fluctuations in the profitability of rearing pigs and the risk of an outbreak of pig illness, we are concerned that the pig farm project might drag down Pfood’s profit. The operating environment for Pfood is still challenging, and it takes some time for the Group to experience a recovery and boost its pricing power. Maintain SELL on Pfood with a fair price of S$0.55, based on 8.5x FY09 PE and a 30% discount to China Yurun’s 12.2x FY09 PE.

Midas - Strong demand for 120 million share placement

Midas announced last week that it has successfully raised gross proceeds of $90.6m through a private share placement of 120m new shares at $0.755 per share. This represents 14.2% of the existing share capital of Midas and was at a discount of approximately 7% to the average market price the preceding day.

The proceeds will immediately fund Midas’s 4th and 5th extrusion production lines fully, which are imperative if the Group wants to benefit from the next round of contracts flowing to aluminium alloy profile suppliers around 4Q09. While bank loans were another alternative, Midas’s management has always preferred to remain debt-free.

The amount raised for expansion is in line with our previous expectations of $40m a line. These two lines would be for larger profiles, which allow Midas to supply a fuller range. We expect the 4th line to be operationally ready from 4Q10 and the 5th line from 1Q11. This would bring total capacity up from the current 30,000 tonnes to 50,000 tonnes per annum.

Even taking into account the expected schedule for the two new extrusion lines, we estimate Midas to be already fully booked till FY10 and 42% booked for FY11. Our profit estimates assume Midas to be 90% booked for FY11, which is equivalent to new contracts for another 100 high-speed train set. This is not unrealistic given that the 2nd round of order from Ministry of Railway is three times larger than the 1st round in March 09.

Our adjusted profit estimates mean FY10 EPS will be diluted by 10% due to the limited impact of capacity expansion by then, while FY11 EPS has been boosted by 8%. Our target price has been adjusted to $0.985, still based on 18X FY10E. We recommend buying on weakness, ahead of possible strong contract announcements in 3Q09-4Q09.

Yanlord - Sales well ahead of expectations

We provide an update to Yanlord in light of its strong June 2009 YTD sales and recent new share and convertible bond (CB) placements. We reiterate our positive stance on the company and maintain our Outperform rating.

Achieved Rmb6.3bn June 2009 YTD sales. We believe our full-year FY09 cash sales target for Yanlord of Rmb7.5bn is likely to be exceeded given the strong sales achieved up to June YTD. Yanlord has achieved ~84% of our full year target already. We understand that Yanlord’s YTD contracted sales have also generally exceeded market expectations, which range from Rmb6 to 8bn for the full year. Shanghai is still the key driver, contributing ~75% of contracted sales achieved so far. On top of Rmb1.1bn in contracted sales carried forward from FY08, we understand Yanlord should have locked in around Rmb7.4bn in sales to be booked in FY09, representing >95% of our FY09 revenue booking target already. Despite no indication as such, we believe management may lift future completion targets at the interim results to reflect the more positive overall China property market. Market should focus on new launches in Tianjin and Nanjing. Yanlord expects to launch the first phases of Tianjin Riverside Plaza and Nanjing Riverside City during 3Q09. The impending new project launches should help reduce Yanlord’s focus on Shanghai property sales to drive revenue, which currently comprises ~75% of total cash sales (as at June 2009 YTD) to around 60-65% for the full year FY09. We believe the successful launch of these two projects should help Yanlord in striving to expand out of Shanghai as well.

Raised S$603.8m from new shares and CB. Yanlord raised S$228.8m from issuing 110m new shares (~6% of the expanded share base) and S$375m from a new five-year, 5.85% CB maturing in July 2014. The CB conversion price is S$2.62/sh, which if fully exercised should result in ~143m new shares. CB bondholders have the option of ‘putting’ the CB back to Yanlord in 2012. We understand management intends to use the new funds primarily to buy new sites and working capital. It identified several sites for acquisition already. We believe 3–6% earnings dilution and 3% reduction in NAV results from the new shares issued.

12-month price target: S$3.10 based on a PER methodology. We will revisit our full-year cash sales target when Yanlord launches new projects and reports its 2Q09 results – likely to be mid-August. The CBRC’s increased focus on enforcing existing second mortgage rules may slow Yanlord’s sales going forward given high investor demand for its projects. To date, we believe the impact of the changed stance has been limited. We maintain Yanlord as one of our preferred China developers and have an NAV of S$2.9/sh with a target price of S$3.1/sh based on a PER methodology.

Cosco - Cancellation and variation of shipbuilding orders

Cancellation and variation of shipbuilding orders. Cosco announced that the subsidiaries of China Cosco Holdings Company Ltd had rescheduled the delivery of three bulk carriers of 57,000 DWT each and cancelled the shipbuilding contracts for eight bulk carriers of 57,000 DWT each. The total value of the cancelled vessels was about US$298.726m.

Furthermore, two European ship owners had rescheduled the delivery of six bulk carriers of 92,500 DWT each and two bulk carriers of 79,500 DWT each. Expect more cancellations and rescheduling. We are expecting more cancellations and rescheduling of shipbuilding orders. Although the shipping industry is showing signs of recovery, the shipping companies continue to have excess capacities and have laid up vessels. They are more likely to cancel and vary shipbuilding orders to reduce the number of empty vessels.

Reduction in net profit forecast for FY2009F. As a result of the cancellation, we have adjusted our net profit forecasts. The greatest impact is in FY2009F, which will see net profit reduced by 4.9% from S$389.7m to S$370.6m. The net profit for FY2010F and FY2011F are S$383.7m and S$395.9 respectively, which are only slightly different from our earlier estimates of S$383.5m and S$395.8m.

From the list, we note that the average P/E and P/B for the industry are 11.12 and 2.67 respectively. Cosco is currently valued at 8.73 times P/E and 2.31 times P/B. Maintain SELL with fair value reduced from S$0.92 to S$0.91. We maintain our sell recommendation on Cosco as it is expected to see more cancellations and rescheduling of ship deliveries. The fair value is reduced from S$0.92 to S$0.91, which works out to 1.5 times book value for FY2009F. This is because of the reduction in net profit for FY2009F due to the cancellation of shipbuilding orders. As Cosco is a mid-sized shipbuilding company, it is valued below the average P/B for the industry.

China Zaino - BUY On Current Price Weakness Despite Flat 2Q09 Sales Expectations

2Q09 sales to remain unchanged yoy but EPS could be down 10% yoy. While Zaino’s 2Q09 sales are likely to be flat yoy, we expect EPS to be dragged down 10.6% yoy as a result of lower ASPs and the negative impact of the outbreak of the H1N1 influenza in China. However, we expect sales to recover in 2H09 as the company restarts its TV advertisements to strengthen its brand image, and as the country’s economic climate begins to improve.

Earnings revision and valuation. We remain positive about Zaino’s outlook for FY09-11 but have lowered our ASP assumptions for its both backpack and luggage segments in FY09. Our new forecasts for its net profits stand at Rmb387.2m, Rmb435.9m and Rmb476.7m for FY09-11 respectively, implying a three-year CAGR of 10%. We value the stock at a 25% discount to its S-shares average and arrive at our target price of S$0.35, implying 4x FY09 PE.

Great opportunity at current price levels for both short-term and long -term investors. We reiterate that although the market does not forsee encouraging operating results from Zaino this year, we still favour the company due to its prospects for further growth, especially at current price levels which present good opportunities for both short-term and long term investors.

Short-term trading catalyst: 1) trading below net cash/share. 2) trading below recent share placement price at S$0.23/share.

Long-term investment catalyst: 1) EPS: 10% CAGR growth from FY09 to FY11. 2) Zaino restarted its TV advertisements from June to strengthen its brand image, and thus enhancing its future growth potential. 3) Possible M&A opportunities in the next 1-2 years.

China XLX Fertiliser - Proposed dual listing in Hong Kong

CXLX announced this morning that it is contemplating a dual listing of its shares on the main board of the Hong Kong Stock Exchange, so that it can have ready access to different equity markets in the Asia Pacific when opportunities arise. CXLX has appointed professional parties to commence preparatory work for theproposed listing. Further announcements will be made once an application has beenfiled with the Hong Kong Stock Exchange. An EGM will be held at a later date to seek shareholders’ approval.

This proposed dual listing might not work as well as perceived. We believe CXLX’s discount to its Hong Kong peers might not narrow following a Hong Kong listing, given its limited urea export exposure compared with China BlueChemical (3983 HK) and its less diversified portfolio compared with Sinofert Holdings (0297 HK).

Liquidity could be affected. Additionally, it is possible that there will not be any new shares issued for the dual listing, i.e. CXLX will have to “take out” existing shares on the SGX and “transfer” them to Hong Kong. That would undermine its trading liquidity. We also believe that the two markets will not necessarily expose CXLX to a wider range of private and institutional investors.

Situation remains fluid. The listing may or may not occur, pending the results of the preparatory work and market conditions.

But overall picture still bleak. CXLX’s urea ASP stays low, as overcapacity in the Chinese market limits its ability to raise sales volume and ASPs. Management is also uncertain when the oversupply will end. In fact, it has guided that urea prices could remain weak for a period of time. Chinese urea exports remain uncompetitive at the current export tax rate. Additionally, CXLX’s tax holiday has expired and the company will attract a 17.5% tax rate in FY09-11.

Downgrade to UNDERPERFORM from Neutral. Market rumours could have fuelled its share-price rally in recent days, coupled with a broader market rally. We advise investors to lock in gains and downgrade the stock to UNDERPERFORM with an unchanged target price of S$0.34, still pegged at 6.2x CY09 P/E.

China XLX Fertiliser May Sell Shares in September

China XLX Fertiliser Ltd. may seek an initial public offering in Hong Kong in September, Ming Pao Daily reported, without citing anyone.

Company management visited analysts and media representatives last year and had expressed interest in listing its shares in Hong Kong, the Chinese-language newspaper said, without providing further details.

The Henan, China-based maker of urea and methanol was listed in Singapore in 2007.

Chinese Shipyards - a real recovery in ship orders is still far away

JES and YZJ are still getting enquiries for bulk carriers, containerships and tankers. Global new ship orders rebounded from zero in May to 1.83m dwt in June. That said, ytd order level is significantly lower than historical levels.

New YZJ shipyard in Jiangsu.

• The yard has a 1.9-km deepwater coastline, a 1,508,857 sqm production area, and a dry dock that can accommodate up to two 100,000 dwt and two 50,000 dwt vessels at any one time. The shipyard employs about 15,000 workers, of which 15-20% are contract workers.

• We attended the launching ceremony of a 92,500 dwt dry bulk carrier - Chanchal Prem. The ship is one of the 16 bulkers ordered from YZJ’s shipyard by Liberty Maritime International. Shipyard management has guided gross margin of these ships at 20%.

• Shipbuilding enquiries are mainly on tankers, dry bulk carriers and containerships, particularly reefers (for transporting refrigerated containers).

• While YZJ has no order cancellation to date, it recently acceded to the requests of its clients to change four containerships into dry bulk carriers.

• China’s taxation laws require local shipowners to pay an additional 20% on ship purchases while foreign shipowners are exempted. Thus, local shipowners would form JVs with foreign partners or use their overseas units to buy ships.

• Two Panamax dry bulk carriers costing US$70m each were delivered to Guangdong Yuedian in Apr 09 and early July. These high-value ships have a gross margin of 40-50%.

JES’ shipyard.

• The shipyard has a gross land area of 167,000 sqm and a coastline 720m long. The yard has two slipways to accommodate one 100,000 dwt vessel each.

• The new dry dock, which is under construction, can accommodate up to three Capesize dry bulk carriers or two Very Large Crude Carriers (VLCCs) when it becomes operational by end-09.

• Recently, JES’ clients cancelled orders for three dry bulk carriers with a total value of US$127.0m.

• Shipbuilding enquiries are mainly on dry bulk carriers and reefers.

• Net orderbook as at 31 Mar 09 stood at US$1.03m for 34 vessels to be delivered in 2009-12.

According to Clarksons, global new ship orders rebounded to 1.83 mdwt in Jun 09 from zero in May 09, of which 87%, or 1.6m dwt, are contracted to Chinese shipbuilders. Ytd, most of the global newbuild orders are mainly for tankers and Very Large Ore Carriers (VLOC).

Low order wins ytd. While the strong orderbooks for some shipyards can keep them busy until 2012, the global contract wins ytd of 3.4 mdwt are significantly low compared with a year ago (Jun 08: 19.0 mdwt). Ytd, COSCO (S), JES and YZJ have not secured any newbuild orders.

Slippage remains an issue. Tight global liquidity remains an issue although it has eased somewhat. Some shipowners are still facing difficulties in securing credit to finance newbuilds. Recently, JES’ clients cancelled orders for three dry bulk carriers and COSCO (S) announced last week that it has acceded to the requests of two European clients on delayed deliveries of eight dry bulk carriers by some 3-9 months. Shipyards are still facing a high risk of order cancellations and delays.

We believe a real recovery in ship orders is still far away. The massive 547.3m dwt (9,277 ships) contracted over the past three years will lead to an oversupply of ships, with some of these starting to hit the waters. The Singapore-listed Chinese shipyards are trading at average PEs of 14x for 2009 and 16x for 2010. In view of the low contract wins globally ytd and the risk of order cancellations or delays, we remain UNDERWEIGHT on Chinese shipyards and maintain SELL on COSCO (S) with a fair price of S$0.95 based on sum-of-the-parts valuation.

Cathay Pacific - 1H09 will see about HK$2b in fuel hedging write-backs

Write-backs of about HK$3.0b for 1H09. 2008 saw Cathay Pacific (CX) recognise unrealised fuel hedging losses of HK$7.6b as at end-08, when WTI crude oil price was US$44.70. As at end-June, WTI was US$69.80. Based on this, we estimate write-backs of about HK$3.0b for 1H09.

Mere accounting write-backs and not a cash flow item thus far. Market could react positively to the write-backs, given that consensus is estimating just HK$866m for 2009. We have estimated HK$1.4b for 2009 but we have not included any write-backs for 2010 and 2011. CX has hedged up to 2011. Book value will rise by HK$0.76 to HK$11.16. The stock price is now close to that level.

Write-backs are a moving target. If fuel price falls back to US$60/bbl, the estimate of HK$3b in write-backs will have to be adjusted down again.

We believe CX’s stock price would react ahead of results on expectation of write-backs. However, it is not logical to pay a premium for a seemingly random mark-to-market pricing of crude oil at US$69.80 as at end-Jun 09. We also expect CX to report an operating profit of HK$2.0b vs a HK$1.1b loss in 1H08. However, the improvement in earnings for 2009 will not be due to top-line growth but fuel cost savings. 2010 will also be a lacklustre year as we do not expect a significant improvement in yoy traffic growth. We still maintain our SELL recommendation on the stock and have a 12-month fair price of HK$9.57. We recommend readers to sell into any rallies. A potential resistance would be 1.1x P/B, or HK$12.30.

China Property - Talk of a bubble is premature

With rising investment-led purchases and a revival in land transactions, the market is abound with talk of a re-emerging bubble, with calls for a market clamp-down. We believe these concerns are misplaced: The government should be careful not to rock the boat as the repair process in the property market continues.

Despite the rapid fall in inventories, the market still needs about six to nine months to absorb the “fat tail” of supply that is the legacy of the exuberance of 2007-08. But, even with a moderate 10-15% recovery in 2009 sales and a re-acceleration in housing starts, we should see a return to equilibrium and the start of a new cycle by 2Q10.

The land market came alive in May-June, culminating in several headline-grabbing transactions in Beijing with the “diwang” (“King of sites”) sold to Franshion Properties for RMB15,216/sqm. However, we still believe that developers are by and large rational, only chasing the super-prime sites; it is still early days yet, given the 18-month hiatus.

The latest US unemployment figure is a stark reminder of the economic difficulties still ahead. Also, the PBOC could regulate credit in coming months. With 80-85% of sales going to end-users, even a moderation in liquidity will have a limited impact, perhaps only slowing the price rise.

With an oligopoly emerging, the listed universe deserves a long-term re-rating. Moreover, all major developers are delivering on significant volume increases as they broaden or deepen their footprints. Further NAV and earnings upgrades are on the horizon, justifying the current valuations. We prefer regionally-focused plays such as Sino-Ocean, Shimao and Guangzhou R&F, which appear set to deliver a quantum jump in sales and earnings.

China XLX - 2Q09 profit may be dragged down by one-off expenses

Margin decline for urea. We expect gross margin for urea to decline in 2Q09 due to the following factors: a) potential one-off expenses during the period, and b) urea price decline exceeds coal cost decline.

One-off items may drag down profit. China XLX (XLX) may see substantial one-off expenses from capacity ramp-up at a new plant and maintenance work at old plants in 2Q09. Ramp-up expenses for the new plant should have been incurred during the trial period April to June. Also, the Group shut down its old plants by a week for regular maintenance.

Urea prices softened in May-Jun 09. Industry sources say that average ex-factory price of urea in Henan edged down from Rmb1,720/tonne in 1Q09 to Rmb1,700/tonne in 2Q09 due to seasonality. During the high season in Mar 09, urea price in Henan topped Rmb1,900/tonne before declining to Rmb1,800/tonne in Apr 09 and below 1,600/tonne now.

Anthracite coal price only dropped in Jun 09. Anthracite coal price in Henan remained at about Rmb1,200/tonne in Apr-May 09 before falling below Rmb1,000/tonne.

Methanol segment still making losses. Despite having rebounded from the trough of Rmb1,200/tonne as at end-08 to Rmb1,500-1,600/tonne, exfactory price of methanol remains below XLX’s unit cost of >Rmb1,900/tonne. Compound fertiliser. Sales of compound fertilisers should decline in 2Q09. According to industry sources, farmers are starting to switch from compound fertilisers to nitrogen, phosphate and potash due to cost considerations.

Maintain profit forecasts. Despite the poor results expected for 2Q09, we maintain our earnings forecasts for 2009-11. We expect profit to resume growth next year, driven by the full-year contribution from the new plant. A recovery in urea and methanol prices next year could also spur profit growth.

Consolidation in China urea industry. Standing at the cash breakeven point of urea producers in general, urea prices in China are stabilising at Rmb1,600/tonne and downside is limited. Consolidation in China’s urea industry is speeding up, with the expansion of large low-cost producers edging out small high-cost plants. About 10% of China’s urea capacity (6m tonnes) has been shut down. As its production costs are 15-20% lower than competitors’, XLX is set to expand its market share.

Contribution of Plant III. The new plant – Plant III – completed the trail run in Apr-Jun 09 and started commercial production in Jul 09. It is expected to reach full utilisation next year. The capacity ramp-up expenses are one-off. In addition, Plant III will start contributing to profit in 2H09. Given its more advanced technology, the new plant boasts a unit cost that is Rmb50/tonne lower than the two old plants’ average cost of Rmb1,350/tonne, implying higher margins.

Recovery in international urea prices in 2010. With the drop in global urea demand and prices, the export window for Chinese urea producers was closed in Feb-Jun 09. This aggravated the oversupply in China’s urea market, dragging down domestic urea prices. We expect the recovery in international urea prices – a result of easing credit conditions and higher grain prices – to spur domestic urea prices next year.

XLX is trading at 6.1x 2009F PE and 4.7x 2010F PE, much lower than the average PE for domestic and global peers. Despite the industry headwinds in the near term, we remain upbeat on XLX, given its strong position amid the industry consolidation in the medium to long term. Maintain BUY with a target price of S$0.57 based on 8x 2010F PE.

Alibaba.com - Early release of share lock-up may hurt near-term sentiment

Although Alibaba.com reaffirms early termination of lock-up aims to improve the public float, we see it would create near-term pressure on share price. Maintain HOLD.

Alibaba.com announced the company, Alibaba Group and the IPO joint book runners have agreed to waive the Cornerstone investors from a 24-month shares lock-up period, which is scheduled to terminate in Nov 09. In addition, the company said it has no intention conducting equity financing in the near term.

According to company filings, eight Cornerstone investors subscribed 157.76m shares at HK$13.50/share, and the release of lock-up would lift the public float by 14% (from 22% to 25%) to 1.3b shares.

Typically, a listed company prohibits cornerstone investors to sell their IPO shares for six to 24 months. Although management said the early termination is entirely the company’s decision, which aims mainly to improve the public float after seeing the recent increase in trading volume, we do not see any particular shareholder having an immediate need to liquidate his Alibaba.com shares for the purpose of improving his capital structure. We believe the decision may hurt sentiment and create short-term pressure on share price.

We maintain our forecasts and target price. In the mean time, we see share price catalysts include Chinese monthly exports figures before the interim results due in late-August.

Sudden placement by any cornerstone investors, or a change in shareholding relationship with Yahoo! Inc..

In the past two quarters, we have seen Alibaba.com’s strategic transformation bringing positive results in its operating performance (including pick-ups in total register users and paying subscribers growth despite the poor macro environment). However, with the deferred revenue recognition mechanism, the impact on performance improvement will only begin to reflect on next year’s earnings. With concerns from the early lock-up termination and the macro uncertainty not fading away yet, we maintain HOLD with entry price of HK$7.20.

Pacific Andes Holdings: Post rights, still a BUY

Rights issue to raise S$209m. Pacific Andes Holdings' (PAH) Rights issue is progressing smoothly with the current trading of the "nil-paid" rights. Upon the completion of the rights and warrant exercise, the group would have raised about S$208.68m (or a net proceed of S$204m). Funds from the Rights cum warrant issue will be largely deployed as part of its working capital and for general corporate expenses. With this exercise, the overhang on capital raising is removed and the group is in a better financial position. Gearing is also expected to come down from 0.9x to about 0.6x.

Is current high oil price a concern? Recent rebound in crude oil prices could once again sparked concerns over its costs of bunkers. However, bunker cost as a percentage of PAH's cost of sales is fairly manageable at about 10% in FY08 and 11% in FY09 (even when oil prices shot to record high levels of more than US$140 per barrel). As such, at current crude oil price of US$70 per barrel, we are not overly concerned about the impact on its margins.

Maintain BUY, adjusting fair value post-Rights. Recently, PAH's posted a credible double-digit earnings growth of 38% in FY09 earnings to HK$664m. For the current year, we are expecting earnings of HK$720m before rising to HK$822m in FY11. The improvement will come largely from organic growth, stemming from the deployment of five vessels to the South Pacific (which will mean increased catch volume) as well as better synergies from its integrated Peru operation.

While global economic signals remain mixed, we believe that fish consumption will at most be mildly affected as consumption patterns are unlikely to change too drastically and fish is an affordable source of protein. Risks to our earnings include the escalation of the current H1N1 outbreak, slower fish demand from China, and any regulatory issues with the Russian fishing quotas (which still formed the bulk of its operation). Maintaining the same peg of 6x blended earnings, our post-rights adjusted fair value estimate is 31 cents. The stock has done very well this year, outperforming the STI with a gain of 68% versus 32% for the STI. With the current softness in the market and with a potential upside of 48% to our fair value, we are reiterating our BUY rating.

China Shenhua Energy - High volume delivery and low contract price – the keys to future growth

We maintain Outperform rating for China Shenhua Energy (Shenhua) as we have turned more positive on the coal- price outlook. We expect the ongoing supply constraints and pick-up in demand for coal used for generating power to provide strong support for coal prices.

Our FY09 and FY10 EPS forecasts are now 2% and 17%, respectively, higher than those of the Bloomberg consensus following the upward adjustments to our coal-price and volume assumptions. We have revised down our FY09 and FY10 EPS forecasts by 12% and 5%, due mainly to upward adjustments to our unit-cost assumptions.

Key positives: 1) high volume growth for self-produced coal (we forecast an FY09 increase of 18% YoY), and 2) high contract price hike in 2009, but still the lowest price among its peer group. We assume Shenhua raises its contract prices by 13% and 5% for 2009 and 2010, and do not believe this has been factored fully into the share price.

Target price raised to HK$32.78 from HK$24.60, using a sum-of-the-parts methodology (a DCF of HK$7.52/share for its power segment and HK$25.26/share for its coal segment, based on the post-listing average PBR of 2.8x vs. 1.54x previously, and in line with our target PBR of 1.8x for Yanzhou Coal [1171 HK, HK$10.76, 1] after adjusting for its higher ROE). We see the key risks to our rating as policy-related taxes and slower-than-expected power-demand growth.

Yanlord Land Group Ltd - Positives priced in

Yanlord achieved Rmb960m sales in June, down 31.4% from a high base in May. But 1H09 sales stayed encouraging at Rmb6.2bn, double the sales in 1H08. Cash flow has improved after a recent share placement and convertible bond offering. Higher-than-expected ASPs and sales in 1H09 prompt us to upgrade our core earnings and RNAV estimates, but our fully-diluted EPS estimates have been cut to reflect dilution. Sales are expected to slow down in 2H09 as the bulk of its available stock had been sold in 1H. Current valuations also appear unappealing. Maintain NEUTRAL despite a higher target price of S$2.19 (from S$2.06, still pegged at a 20% discount to RNAV) following adjustments to our RNAV.

China Merchants Bank - Capital Issue – Finally?

US$3bn equity raising? — Despite management's acknowledgement that CMB has no urgent need for capital, Bloomberg today reported that CMB is planning to raise US$3bn through a rights offer by the end of the year. The report suggests that CMB has started talks with investment banks about the offer.

Adds 1.9% points to CAR — We have been of the view that CMB needs to raise new equity due to its relatively low Tier 1 ratio of 6.5% in 1Q09. This is despite a total CAR (11.0% 1Q09) that meets the CBRC's requirement. We think extra Tier 1 capital would be beneficial especially in the current strong loan growth environment. An issue size of US$3bn is in fact not a huge size for CMB in our view, as it would lift FY09E T1 CAR by 1.9% points to 8.7%, which would still be shy of the 9.5% to 10% range for the big state banks.

Proportional A/H share issue makes most sense — We believe a rights issue proportional to the split of A/H shares would be most equitable and beneficial. 82% of CMB's shares are A-shares, whereas 18% are H-shares. With the A-shares trading at a 25% premium, issuing more A-shares in-line with this share mix would reduce the number of new shares needed (less EPS dilution).

ROE and EPS dilution — A US$3bn equity issue would dilute ROE by 3% points – our FY10E ROE would fall from 18.5% to 15.5%. A proportional rights issue at say a 20% discount to current prices we estimate would lead to an increase in outstanding shares of 7-8%, and EPS dilution of 6-7%. The amount of dilution increases with the size of the discount/lower share price (see Figure 1 for sensitivities).

Still premium valuations — After factoring in book value accretion from a potential capital issue, CMB would be on 2.7x 09E P/B and 2.4x 10E P/B, or ~20% premium to the sector average. After factoring in EPS dilution, CMB would be on 16.3x FY10E PE, or ~50% premium to the sector average. Given rich valuations and near-term earnings growth issues (slower loan growth, rising operating costs due to continued branch expansion), we maintain our Sell rating on CMB and prefer CCB, ICBC and CNCB in the sector.

Raffles Education - Balance sheet shored up, OUC value creation up next

RLS's balance sheet has been strengthened by two placements in the last three months, which in aggregate raised S$130.9 mn in net proceeds, and reduced gearing from 44% to 7%. With funding issues addressed, RLS looks set to achieve a debt-free balance sheet ahead of its end-2010 target.

Management is targeting some S$60-70 mn in revenue contributions from Oriental University City (OUC) over the next 12 months, more than double our estimates. With growth primarily driven by education services, we see upside likely from further acquisition of NES colleges in OUC, and new PES schools.

We have lowered interest expenses, in line with reduced borrowings, and forecast 30% earnings CAGR through FY11E. However, including impact of dilution from the recent placement, our FY10/11 EPS forecasts are lowered by 4-7%.

Given enviable growth and profitability metrics, RLS's valuations remain compelling at 11x FY June-10 P/E, at a 50% discount to its US-based peer average of 22x and a 39% discount to its Asianbased peers at 18x P/E. Maintain OUTPERFORM.

Midas - Contracts have continued coming in

Since our last update on 22 June 09, minor contracts worth a total of RMB277.8m have continued to pour in for Midas. This brings total value of contracts won in the past month toRMB1.05b. Having highlighted earlier that contract are likely to come in as its 3rd production line nears operation, we are encouraged by the intensity of contract momentum.

Including these contracts, we estimate net orderbook to be about S$300m currently. To put things in perspective, we believe Midas’s three extrusion production lines are fully booked till FY10 and 70% booked for FY11. While we have already factored this type of utilization rates in our earlier forecasts due to the expected strong demand, a firm orderbook now has lend greater credence to our revenue and profit models.

Of these contracts, RMB121.8m is for downstream fabrication work. Midas has installed the first fabrication line, which will likely start operations in 2H09. Since this is still a new ventureoperationally, we have adopted a conservative view and our current estimates only factor in the current magnitude of contracts won.

Midas also announced that it has been awarded the International Railway Industry Standard certification, which is the first for a PRC company in its business category. Together with its status as the only highest grade certified supplier to all three major international train manufacturers, we believe that Midas is still ahead of the pack in its arena.

With extrusion capacity largely accounted for, we now believe further upside to our earnings estimate will likely come from 1) Downstream fabrication contracts, 2) NPRT contracts and 3) Possible addition of 3rd and 4th extrusion lines. We have adjusted our FY10 net earnings by 4% and derive a new target price of $1.04, based on 18X FY10 PER.

CNOOC - Raise oil price assumptions; upgrade to BUY

We raise our oil price assumption to US$60/bbl and US$70/bbl for 2009 and 2010 from US$55/bbl and US$65/bbl respectively, and correspondingly, net profit forecasts by 11% and 7%. Upgrade to BUY.

Raise oil price assumptions to US$60 and US$70 per barrel for 2009 and 2010 respectively. Benchmark oil price has gone up 30% in May. Compared with the low at the beginning of year, oil price has doubled. The average oil price was US$49/bbl ytd, and we believe it is very likely to stay above US$70/bbl (currently US$68/bbl). If so, average oil price will be US$60/bbl in 2009. For 2010, we believe a few catalysts, such as an economic recovery, sufficient liquidity and geographical turmoil will drive oil price higher. As such, we lift our oil price assumptions to US$60/bbl and US$70/bbl for 2009 and 2010. Our long-term oil price target is still US$75/bbl.

We notice a few houses have started to revise oil price assumption recently. Bloomberg’s consensus average oil price assumption for 2009 has been revised to US$57/bbl from US$53/bbl a month ago. Amid more signs of an economy recovery, we believe more houses will raise their oil price targets.

CNOOC’s earnings are sensitive to changes in oil price. It plans to produce 184mmbbl of oil in 2009 and 195mmbbl in 2010. Remember when realised oil price is above US$40/bbl, the company has to pay a special oil gain levy to the government. Applying a 10% discount to benchmark, the realised oil price is US$55/bbl for 2009 and US$64/bbl for 2010. After the special oil gain levy, EPS will increase by Rmb0.015 for 2009 and Rmb0.013 for 2010 for every dollar rise in oil price. Hence, we raise our net profit forecasts by 11% and 7% in 2009 and 2010 to Rmb28.1b and Rmb36.1b respectively. Our forecasts are now 11% and 4% higher than consensus. We believe the company’s re-rating is still under way amid the strong rebound in oil price.

We upgrade the stock to BUY and raise our target price to HK$13.85, which translates to 15x 2010F PE. Share prices of international independent oil companies have risen strongly recently. They are trading at an average 16.5x 2010F PE. CNOOC’s closest peers, Occidental Energy (OXY US) and Encana Energy (ECA US), are trading at 15x and 20x 2010F PE respectively.

China Fishery Group: Jacking up growth with Mackerel

Harvesting Chilean Jack Mackerel- new growth driver in 2010. A total of 2 upgraded supertrawlers, on top of the current 3, will be deployed there from Sep for the harvest of Chilean Jack Mackerel, which will contribute more significantly in 2010. Management remains confident that this area will be a new growth driver.

Other queries on fishmeal and gearing. Peruvian fishmeal operations will show improvement from 1Q's loss. We expect production volume to rise significantly, from 1Q's 3,900 mt, to about 54,000 mt YTD. Gearing, at 0.89x, is largely (60%) made up of senior notes due in Dec 2013. We expect the group to be able to meet the obligations with internally generated cashflow by then.

200k additional quota in Russia? Seafood International reported that Russian scientists have indicated that the (Russia) quota for Alaska Pollock could increase by 200k mt to 1.7m in 2010. This is new to us and not widely reported. Assuming this translates to additional quota for CFG and does not change pricing dynamics, it could potentially translate into US$50m, potentially raising revenues by10% pa.

Buy, TP: S$1.39, 46% potential upside. Valuations are undemanding at 5.4x FY09 and 4.6x FY10 earnings, a discount to peers' average of 12x on current year's earnings. We maintain our Buy rating with a 46% upside potential to our TP, premised on 8x FY09F earnings. Risks to our call include reduction in quota, major adverse weather patterns, and loss of fishing licences.

China Mobile - A hidden consumption play

Mobile usage has shown initial signs of recovery. We expect further recovery in 2H09 when domestic consumption gains momentum. China Mobile is the best proxy to capitalise on this trend. Reiterate BUY.

Statistics from Ministry of Industry and Information Industry (MIIT) indicated the telecom industry’s revenue has showed initial signs of recovery in 1Q09 (+1.7% yoy) and continued to improve in Apr 09 (+2.8% yoy). Among the different services segments, contribution from mobile services as a percentage to total industry revenue increased steadily from 43.7% in Jan 04 to 60.4% in Apr 09 as the number of mobile subscribers keeps rising while fixed-line users decline.

For the past few months, telecom operators have underperformed the market due to the slowdown in overall usage growth and margin declined as China Telecom enters the mobile services market. But telecom usage, mobile services in particular, should resume growth over the next few quarters given the expected improvement in business activities, economic growth and domestic consumption.

With a 73.6% share of the mobile subscribers market and a monthly user net addition share of over 60% in 4M09, China Mobile (CMHK) will be the major beneficiary when mobile service resumes growth. Our conservative forecast may underestimate the growth potential if it sustains through the rest of the year.

We maintain our subscriber growth and usage assumptions, but we may raise them if the company posts better 2Q09 usage numbers.

CMHK’s share price is down 6.8% ytd due to poor 1Q09 results and investors' concern that intensified competition will hurt the company in the longer term. Year-to-date, MSCI China Consumer Staples Index has risen 23.1% and Hang Sang Index (HSI) is up 21.0%. With the one-year relative performance between CMHK and the HSI getting close to the lowest, China Mobile may play catch-up soon as mobile usage recovers. Reiterate BUY with HK$85.00 target price based on 13x FY09F PE (or an 11.8% discount to our HK$96.40 DCF fair value based on 11.0% WACC and 2.0% terminal growth).

Sino Techfibre - Expect a recovery in 2H09

Continued weakness in 2Q09. Most chemical fibre manufacturers have benefitted from the industry’s recovery and seen increased selling prices and margins since Apr 09. In contrast, leading synthetic leather producer Sino Techfibre (Sinotech) continued to suffer from weak sales and low profitability in 2Q09 as a result of the industry downturn and sluggish demand.

Market is switching to low-end products. Due to the deterioration in the apparel/garments/shoes export market as well as the mass discounts offered in the domestic consumer market, the demand for Sinotech’s high-end synthetic leather products has largely evaporated. The market is switching to low-end products, which have wider applications.

ASPs remained low. To cater to the change in the market’s preferences, Sinotech has also taken up the production of more low-end products. As a result, the average selling prices (ASPs) of its products in 2Q09 remained low, and are likely to be similar to ASPs in 1Q09.

2Q09 sales likely to improve 10% qoq on higher sales volume. Owing to the adjustment to its product mix to include more low-end products, Sinotech witnessed a higher sales volume in 2Q09 relative to that in 1Q09. Revenue for 2Q09, therefore, is expected to rise 10% qoq on the back of the increase in sales volume.

Move to low-end market only a short-term strategy to retain market share. Sinotech would face much fiercer competition in the low-end market than it had faced previously in the high-end market, which would greatly reduce its margins. In addition, as a high-end synthetic leather producer, Sinotech is in a disadvantageous position in the low-end market due to its higher fixed costs and staff and administrative expenses, which would further drag down the company’s profitability. Thus, the penetration into the low-end market is merely a temporary move to help the company cover its fixed costs and part of its variable costs, as well as to retain customers and safeguard market share.

Another net loss likely to show up in 2Q09. Apart from the likely 10% qoq increase in revenue, Sinotech would not see any other material improvements in 2Q09. Demand for the company’s products was weak, keeping its operations running at below 50% utilisation rate. ASPs and margins would remain at low levels, similar to that in 1Q09. Thus, the company is likely to make a net loss again in 2Q09.

We expect a recovery for Sinotech in 2H09. Management says there was no sign of recovery in 2Q09 and expects the business environment to remain challenging in 2H09. We, however, do not expect such a negative industry outlook.

Cosco - Family Ties Broken

Cosco has announced a rash of new order cancellations, this time more severe – the latest round comes from related companies. China Ocean Shipping and related companies have rescheduled the delivery of 3 57,000 dwt bulk carriers and outright cancelled 8 bulk carriers. The total value of the cancelled orders is S$298.7m, or about 5% of its total bulk carrier orderbook.

Cosco says that the three rescheduled vessels will be delivered between August 2009 and October 2009 instead of the planned delivery of between June and December 2008. Noting that the time of the original delivery has is already way past, we find it discomforting that Cosco had not made indication of this rescheduling prior to this. Cosco says that the buyers are not pursuing late delivery claims. As for the cancellations, Cosco will refund the deposits paid for the ships.

Prior to this cancellation, interested parties transactions were worth S$579.8m. The cancellation effectively halves that exposure. We estimate Cosco’s orderbook at around US$6.5b Last week, Cosco also announced that it will delay the delivery of 8 bulk carriers (two 79,500 dwt and six 92,500 dwt bulk carriers) to two European ship owners by between 4-9 months.

We had been expecting even more delays and/or cancellations for Cosco, given the difficult market conditions for bulk carriers; however, these latest cancellations have exceeded our assumptions. While Cosco says that the latest cancellations are not expected to have a significant impact to earnings in 2009, they will surely be felt from FY10 onwards.

We are therefore cutting our net profit forecast for FY10 by 40% and FY11 by 50%, to S$154.3m and S$141.5m respectively. We are also factoring lower margins from cost overruns, which see our FY09 forecast cut by a further 28% to S$185.4m. With earnings expected to be volatile, we had pegged fair value at 1.5x price-to-book, or S$0.81, which remains unchanged. Our SELL recommendation is also maintained.

Four China-based firms issue profit warnings

At Least four more companies have issued profit warnings, with the economic downturn cited as a common factor. The four which sounded the alarm on their half-year results were China-based companies. Three of them expect to incur losses while one foresees lower net profits.

China Kangda Food Company said that it could report a lower unaudited net profit for the six months ended June 30, 2009, compared with the same period last year. Back then, it took in net earnings of 60.2 million yuan (S$12.9 million). The economic downturn shaved demand for rabbit meat in the European Union as well as for processed foods in Japan. Also, keen competition led to an excess supply of chicken meat products in China. These factors contributed to the projected drop in takings, China Kangda explained.

A second firm in the food industry, Oriental Food, expects to incur a loss for the first half ended Dec 31, 2009. It said that the downturn dampened average selling prices and sales volumes, leading to 'significantly less' total revenue compared with a year ago. A writedown of inventory - bought in the previous financial period when food prices were rising - could also hit the bottom line. Oriental Food had seen better times - for the first half ended Dec 31, 2008, it took home 428,000 yuan.

Another food company, China Angel Food, also projects a net loss for the first half ended June 30, 2009. In contrast, it had reported a net profit of 986,000 yuan in the same period last year. Consumer and corporate sales fell because of the economic slowdown, and not only that, the business of selling technical know-how in mooncake production 'declined significantly', China Angel Food said.

Fastube, a steel piping company, expects to incur a net loss for the first half ended June 30, 2009. It had made a net profit of 5.5 million yuan a year ago. The downturn, coupled with stiff competition, led to a drop in sales turnover and margins, the company said. The lower turnover also affected other operating income, mainly from the sale of scraps.

China Mengniu Dairy - Excessive boast of sales recovery by market; expensive valuations

Sales dropped more than 30% in Beijing and 25% yoy in Shanghai in 5M09. According to our channel check with a couple of retail giants in Beijing and Shanghai, Mengniu’s sales recovery was not as good as market expectation. In Beijing, sales fell 30% in a big supermarket chain and slumped 44% in another hypermarket chain in 5M09. In Shanghai, sales dropped more than 25% in a leading hypermarket chain.

Mengniu lost market share to Bright Dairy in Shanghai and Sanyuan in Beijing. Sales in Beijing and Shanghai normally account for 60% of its total sales. After the melamine scandal and Deluxe incident, Mengniu’s market share in Beijing declined from 56% to 40% while Sanyuan’s increased from 20% to 36% in 5M09, according to our channel checks. In Shanghai, Mengniu also lost market share to Bright Dairy which was confirmed by a leading hypermarket chain.

Gross margin will improve slightly while operating margin could be flat. According to China Statistical Bureau, average raw milk price dropped 11% yoy to Rmb2.56/kg in 1Q09. We forecast raw milk prices will only decline 7% in FY09 and rebound in 4Q09. Although gross margin will improve in FY09, we see operating margin to stay flal due to higher operation and selling expenses.

Sales to rise 4.3% in 2009. Although the market expects Mengniu’s sales to increase more than 5% yoy in 2009, we maintain our sales growth forecast of 4.3% based on our channel checks. Historically, second-half sales increased 15-17% compared to first-half’s. Even if sales would recover more than 80% in 1H09, which implies sales of Rmb10,961m, annual sales growth could not increase more than 5% in 2009.

Raw milk prices could surge in 2H09. As raw milk prices plunged significantly in 1H09, many dairy farmers sold their cows to slaughterhouses. In Ningxia province, the number of cows fell more than 20,000 in 1Q09. In Liaoning province, many dairy farmers confirmed they will sell their cows to slaughterhouses due to a hike in corn price and bean pulp price in March. In Inter-Mongolia, the number of cows dropped 10.2% to 316.6m in 1Q09. It is highly likely raw milk supply will be in shortage which will affect dairy companies’ gross margins.

High advertising expenses will erode profit in 2009. Mengniu has to put in more effort on its sales campaigns to restore consumer confidence for its products. Management guided advertising expenses will increase from 8.3% of total sales in 2007 to 8.5-8.8% in 2009. Mengniu also has to spend more on advertising to highlight its raw milk quality and product safety, particularly for its Milk Deluxe products.

Yanlord Land Group: Adding To The Bank

An Eye On Acquisitions. We hosted Yanlord Land at our 'Pulse of Asia' conference in Singapore and highlight some key takeaways. Chief among these would be the expected use of the funds from the recent share placement exercise and convertible bond offering. The bulk of funds raised will be used to replenish its landbank, with the focus on Shanghai and Chengdu. We expect that news of land acquisition could be forthcoming within the next few months. Given its development track record, particularly in Shanghai, successful acquisition would very likely be value accretive for the Group, and provide a re-rating catalyst.

From Yangtze to Bohai. Furthermore, we expect that June sales will continue to be strong, with at least RMB500m expected. This would bring 1H09 pre-sales to at least RMB5.8bn. Looking ahead into 2H09, we expect Yanlord to switch its marketing efforts away from Shanghai to its new projects in Nanjing and Tianjin. We expect ASPs of around RMB15,000 psm and RMB16,000 psm respectively. Its maiden foray into Tianjin and the Bohai Rim should see strong interest.

Maintain BUY, TP S$2.81. We remain positive on developers like Yanlord with exposure to luxury inner-city projects as well as presence in Shanghai, where we foresee supply scarcity. We have raised our ASP assumptions slightly for its Shanghai inner-city projects, for a revised RNAV of S$3.13 (prev S$3.02). We maintain our 10% discount for a TP of S$2.81 (prev S$2.72). Reiterate BUY.

Midas Holdings: Maiden foray into Middle East

Secures contracts worth Rmb86m. Within a span of less than three weeks, Midas announced yet another set of projects wins as its subsidiary Jilin Midas Aluminium Industries secured contracts to supply aluminium alloy extrusion profiles worth a total of Rmb86m which are expected to be fulfilled from 2H09 onwards. Out of this amount, Rmb54m would be for the Saudi Arabia Metro project and the Iran Metro project which was secured through its customer Changchun Railway – this also represents Midas’ first foray into the Middle Eastern market. The remaining Rmb32m is slated for the Changchun Light Rail project (also through Changchun Railway) and the Guangzhou Line 3 Airport Line project (through CSR Zhuzhou Electric Locomotive).

Order book is now around S$323m. These new contract wins amount to just 5.7% of Midas’ present order book at Rmb1.5b although we believe that they are noteworthy as they represent the company’s first foray into the Middle East. Going forward, management has also guided that they would continue to build on its strong track record to capitalise on opportunities seen in the foreign markets.

Recommendation. We have previously already assumed such contract wins in our FY09 earnings forecast. While our current BUY recommendation remains, our target price of S$0.855 is under review pending further discussions with management.

Sun Hung Kai Properties - Under the influence of hot money

Unless property prices pull back in a meaningful way, SHKP is well supported at the current level. Moreover, further inbound liquidity could move the stock significantly higher.
Under different scenarios. Residential sales volume and the accompanied price increase have surprised us on the upside. But we continue to question the sustainability of this rebound, which has been caused purely by the inflow of hot money in our opinion, given the economic backdrop is still worsening. Moreover, after rallying 84% from the bottom, the debate even in the bullish camp is whether SHKP is now fairly priced.

The table below shows the intrinsic value (NAV) of SHKP under three scenarios: a) as things currently stand, b) if the property market recovers further, and c) our base-case which assumes property prices will correct from here. Under each scenario, we compute its fair price under a normal market and a liquidity-driven market. As can be seen from the table, there is still another 9% upside if property prices stay flat. But for any meaningful share price upside, either property prices will have to go up further or hot money continues to come in to boost valuation.
Slight upgrade in our base-case- for residential, from -24% from peak to - 20%, from -24% to -15% for retail, office remains at -40%, and from -15% to -10% for China. The changes reflect the somewhat improved economic prospects brought on by the vibrant stock and property markets.

Fair price 9% higher. These new assumptions raise SHKP’s NAV from HK$101.31 to HK$109.99, and our fair price, which is based on the 12% historical discount to NAV, by 9% to HK$96.79. The by far biggest risk to our fair price is the accuracy of our property price assumptions.

SHKP willing to sell flats. The table below shows SHKP’s new launches ytd and the projects that are scheduled for presale for the rest of the year. While there are less than 5,000 units in total, this list of projects represents some 77% of the floor area that will be completed in the three years to FY11.

Although the precise timing of project launches will depend very much on market conditions, this intended presale timetable looks aggressive in what eventually is still a downcycle, especially given it is well known that residential supply in Hong Kong will continue to dwindle.
Rental properties in Hong Kong. Despite the weakening office market, IFC is only 3% vacant with rents down 25% from the peak’s HK$125psf to HK$95psf. The new ICC is also 90% leased. On the other hand, SHKP’s offices in East Kowloon are facing fierce competition from new buildings. In order to retain tenants, SHKP has cut rents by more than 25% in less than a year to around HK$14psf. Retail rents, on the other hand, have continued to be resilient. Except for IFC mall where turnover has fallen 15-20%, the regional malls have only reported 1-3% decline in turnover.

In China. SHKP has 52.3m sf (70% residential and 30% commercial/hotel) of landbank under development in China, plus another 3m completed rental portfolio. The Group has not replenished landbank in this financial year and we do not expect to see any in the near future given the cautious management. We estimate China will only contribute 5-10% to bottom line until meaningful contributions are generated from Shanghai IFC in 2H11.

Office leasing market in Shanghai is extremely sluggish at present. Hence apart from the 22 floors taken up by HSBC, only about 10-15% of the remaining space in phase 1 has been leased. The slow leasing progress is partly due to foreign companies, SHKP’s target tenants, halting expansion plans. Current rent is about Rmb200psm and SHKP does not see any need to cut rents drastically now as it aims to attract quality tenants.

We maintain FY09 earnings forecast but raise FY10’s by 15% to take into account faster sales at The Cullinan. Our FY09 projection is some 10% ahead of consensus, which we believe has yet to take into account the rapid sales of The Cullinan in recent weeks. Development profit in FY09 has been fully secured while only 20% of that in FY10 has been locked in by presales.

Cosco Corporation - More delays but no surprise

Cosco has rescheduled the delivery of eight bulk carriers (by 4-9 months) to two European customers. Since end-2008, Cosco has had 34 vessels rescheduled for later deliveries and five cancellations. We have cut our earnings estimates by 9-12% for FY09-10 but raised by 2% for FY11, to reflect the deferment of some shipbuilding contracts from 2010 to 2011 and 2012. Maintain Underperform, albeit with a higher target price of S$0.69 (from S$0.39), still based on sum-of-the-parts valuation. Our higher target price is based on higher resale values for its bulk carriers as the second-hand market improves. We also peg a higher 7x CY10 P/E (previously 3x trough) for its ship repair and shipbuilding businesses, in line with its Chinese peers and an improved market risk appetite.

China Milk Products - Getting out of the trough; short-term outlook remains challenging

It has been nine months since the outbreak of the melamine scandal in China. Although people’s memories of the incident are fading away, the resulting damage still persists:

a) Dampened consumer confidence. About 40-60% consumers have stopped or cut down on buying local brands of dairy products, according to surveys conducted by Dairy Association of China (DAC). Per capita urban living expenditure on dairy products made a mild recovery in 1Q09 after plummeting in 4Q08, but we believe it will still take time for the dairy industry to see a meaningful turnaround.

b) Inventories piling up, working capital falling short. Laggard demand for dairy products has retarded sales and, in turn, led dairy producers to reduce both the amount and the price of raw milk collected. According to China Statistical Bureau, average raw milk price dropped 11% yoy in 1Q09.

c) Decreasing benefits of cattle raising. Lower raw milk prices and high feed costs have led to losses for dairy farmers. As a result, it has become quite common for farmers to dump milk and slaughter cows.

There are, on the other hand, some positive signs of an industry recovery as well. Apart from the rebound in per capita urban living expenditure on dairy products in 1Q09, dairy production has also recorded consecutive monthly yoy growth since Feb 09 after five consecutive months of yoy decline from Sep 08 to Jan 09. Such growth could partially be due to restocking by dairy producers after months of sharp falls in production and heavy de-stocking following the outbreak of the scandal. Sales of dairy products in supermarkets, in contrast, are not satisfactory, according to our observations. The dairy industry is improving, but there is still a long way to go before it can make a full recovery.

Short-term outlook remains challenging. Demand for dairy products is growing but still weak, and the selling price of raw milk is likely to remain low in 2H09. This, coupled with continued high feed costs, has significantly eroded the benefits of cattle raising and removed the incentives for dairy farmers to expand or even keep their herds. As a result, we expect the shortterm outlook for China Milk Products (CMilk) to remain challenging as the company’s core businesses, namely bull semen and cow embryos, are likely to face pressure from falling selling prices and sales volume.

Promising long-term prospects. For FY11, however, we expect the company to post strong earnings growth as demand for CMilk’s quality bull semen and cow embryo products should remain resilient in the long term. CMilk’s bull semen and cow embryos will continue to play an important role in cattle genetics and milk yield improvement in China. In addition, given the recent outbreak of another mad cow disease in Canada, the Chinese government would be reluctant to lift the import ban on dairy livestock from North America soon. This should enable CMilk to further leverage on its strength as a supplier of high-yield Canadian dairy cow embryos.

Our DCF-based target price remains at S$0.53, implying 5.4x FY10F PE. Maintain BUY.

Sino-Env defaults on $149m bonds

Sino-Environment Technology Group yesterday disclosed that it has defaulted on convertible bonds (CBs) worth $149 million after certain conditions under the bond agreement were not met. The news sent its stock spiralling downwards after its morning trading halt was lifted. It dived as much as 28.6 per cent to 7.5 cents before ending the day 14.3 per cent or 1.5 cents down at nine cents. The company was unable to meet a condition that requires it to pay interest on the bonds semi-annually in arrears on Jan 8 and July 8 of each year. This constituted an event of default on the bonds. Sino-Environment was also unable to confirm whether it could comply with two other conditions. One condition requires the group to ensure that at the end of each calendar quarter on and after June 30, 2008, the ratio of consolidated total debt to consolidated Ebitda (earnings before interest, tax, depreciation and amortisation) for the past 12 months is less than five. This is a common metric used by credit rating agencies to assess the probability of defaulting on issued debt. The other condition requires the group to publish in its quarterly earnings results as well as file with the trustee Bank of New York Mellon a statement affirming its compliance with the said. The group said that its inability to confirm compliance with the two conditions was due to a delay in the commencement of a review of certain significant cash transactions.

China Insurance Int’l Holdings - Fundamentals continue to improve across all units

Strong agency premium growth will lead to higher VNB growth. The recovery in premium growth in May was not only a reflection of increasing premium volume but of increasing quality as well. Like many insurers this year, TPL has been restructuring its premium composition to incorporate mostly agency-driven regular premium products. This will then result in higher APE (annual premium equivalent) growth, and ultimately on track to reach our VNB (value of new business) growth estimate of 18% yoy for 2009.

Strong auto sales will boost premiums of TPI, but we still expect an underwriting loss for the year. While increasing auto sales certainly bodes well for TPI in terms of written premiums, we continue to expect TPI to experience expense overruns due to its aggressive expansion. Hence, TPI should report an underwriting loss for the year. We estimate the loss ratio to be just under 60% for 2009 and the expense ratio to be just over 50%.

Strengthening reinsurance pricing will boost premium growth for CIRe.Following a turbulent 2008, CIRe is expected to stage a strong rebound in 2009 on both lower disaster claims and improving reinsurance pricing. According to a report by Aon Benfield, the financial crisis has damaged the capital of direct insurers more so than for reinsurers. Therefore, as direct insurers seek to boost their solvency margins, they have adopted to increasing the use of reinsurance.

The lack of major disasters thus far in 2009 also bodes well for CIRe in terms of claim payouts. We estimate the combined ratio for CIRe at 88% for the year, with the loss ratio of 58% and expense ratio of 30%.

We roll forward our target price to 2010 and raise our target price using the SOTP methodology to HK$20.00. We value TPL based on 1.8x 2010F P/EV and 17x NBV to arrive at an appraisal value of HK$15.30. We value TPI using P/B of 1.5x to arrive at HK$1.03, and value CIRe using P/B of 1.5x to arrive at HK$2.77. Finally, we use P/B of 1.0x to value CIIH’s other businesses to arrive at a SOTP price of HK$20.00. Maintain BUY.

Synergies with Ming An to improve profitability of TPI in the long-run. With the acquisition of Ming An Holdings (MAH), CIIH will be looking to overhaul the structure of TPI. In particular, CIIH will reorganise TPI so that underwriting is controlled at the central level rather than at the regional branches level. In the long run, this will enhance the risk selection process and ensure that TPI does not take on excessive risk just to run up premium volume at the branch level.

The acquisition of MAH will also allow the two to integrate their back-office operations and service networks. This will also lead to lower capital required for further expansion in China.

CIIH and MAH will also seek to achieve cost savings via reinsurance activities across its various insurance units. In spreading insurance risk across different units, it ensures that premium ceded to reinsurers stays within the group and at the same time, allows each unit to take advantage of the capital of other units.

Finally, the full acquisition of MAH will also increase the market capitalisation and free float of CIIH, which may lift the stock’s liquidity and attract more investors.

Sino-Ocean Land Holdings - Expanding landbank in Beijing

Sino-Ocean Land Holdings posted robust sales figures for the January-April 2009 period. Total sales reached RMB4.6bn, already 57.5% of this year’s RMB8bn contracted sales target, selling 470,000 sq m of developments. Cumulative January-April sales are 800% higher than the 2007 level. On an annualised basis — and assuming continued strength — we believe sales would be on track to reach RMB13.8bn for full-year FY09F.

Given strong sales, the company’s several projects have also witnessed a gradual rise in ASP. The ASP of Ocean Landscape Eastern Area Phase III trended up from RMB11,000/sq m to RMB14,000/sq m. Moreover, additional high-end products with higher margins are slated to be rolled out during 2H09F, including Ocean La Vie and larger-size units (200sq m) at Ocean Great Harmony.


In view of Sino-Ocean’s strong y-t-d contracted sales, as well as our forecasts for a continued strengthening in property market conditions, record nationwide sales volume in 2010F, and residential price rises of 10% in 2009F and 15% in 2010F, we increased our contracted sales volume, ASP and value assumptions for FY09F, FY10F and FY11F, respectively.

We estimate that Sino-Ocean Land will run out of landbank in Beijing by end-2010F if the current pace of sales continues. As such, we think acquiring additional land should be a top priority in the company’s work plan this year. We believe management was earlier looking to acquire 1-1.5mn sq m of new land this year.

In our view, Sino-Ocean Land’s visibility in terms of landbank acquisition is one of the best among its peers. This is because the company is now involved in the primary development of five plots of land for the government in Beijing. Of the five plots, two are next to the company’s existing projects, Ocean Landscape Eastern Area and Poetry of River. Thus, we consider it very likely that the Beijing government will award these pieces of land at a reasonable price to Sino-Ocean Land for the next phase of development.

In our earnings model, we have assumed that Sino-Ocean Land would acquire five plots in Beijing this year with a GFA of 1.6mn sq m. We estimate the total cost would be RMB5.73bn. Sino-Ocean Land has ample funds to make these acquisitions, in our view, given that at end-April 2009, the company had some RMB10bn in cash. Moreover, we believe its application for issuance of RMB2.5bn in domestic bonds will likely be approved by the NDRC by end-June 2009.

We reaffirm our BUY call on Sino-Ocean Land with a 12-month price target of HK$11.59. Currently, the stock is trading at 7.9x our FY10F earnings forecast, which remains reasonable, in our view. On a 12-month rolling forward P/E band analysis, Sino-Ocean Land’s P/E of 14.2x remains below the stock’s historical average of 17x.

Risks. We believe the key risk to our call on Sino-Ocean Land is the company’s concentrated exposure to Bohai Bay. If Bohai Bay market conditions were to reverse sharply, it could affect Sino-Ocean Land’s revenue and profits in FY09F and FY10F.

Cosco Singapore - Expect weak shipping earnings and high material cost

According to the management, there is practically no enquiry for dry bulk newbuilds but there are interests in ship repairs and conversions. The Group’s gross orderbook currently stands at US$7.0b (we estimate net orderbook at US$4.7b) with progressive deliveries through 1H12. Out of which, US$4.5b are shipbuilding contracts, US$2.0b are offshore and marine projects and US$0.5b are conversion works.

Sevan Driller 2 will likely be the first order clinched in 2009. Ytd, there are no new orders for shipbuilding. The Group, however, has secured some repair works and the US$80m FPSO conversion contract awarded by MODEC in May 09. Construction has begun for 31 dry bulk vessels out 110 vessels in the orderbook. COSCO (S) expects to deliver 15, 30 and 49 ships in 2009, 2010 and 2011 respectively. 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 3,874, two of its dry bulk shipping vessels that were fixed at BDI level of 8,000 previously 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 3,000-3,500 for 2009 (Ytd average: 2,045). We, however, maintain our average forecast of 2,500 for 2009.


Order execution risk. While the gross orderbook of US$7.0b will keep COSCO (S)’s shipyards busy until 2012, the Group is currently facing a steep learning curve. Execution risk is still one of the key concerns.

Expect lower dry bulk shipping earnings. We forecast BDI to average 2,500 and 1,500 for 2009 and 2010, respectively in view of the huge capacity of dry bulk vessels that will hit the waters from 2H09 onwards. As such, dry bulk freight rates are expected to remain soft. COSCO (S)’s dry bulk shipping earnings could be worse in 2010.

Country Garden Holdings - Lagging peers

Compared with other major developers’ strong contracted sales performance in the first four months of 2009, Country Garden is behind the curve. From January to April, it reported contracted sales of RMB4.7bn, up only 15% y-y representing only 24.7% of its full-year FY09 year sales target of RMB19bn. During the same period, ASP saw a slight decline, an indication that Country Garden was trying to address the situation by moderately cutting prices, in our view. We believe the slow sales growth is due to the company’s large project distribution in suburban areas of Tier-2 and Tier-3 cities, where demand remains cool. Yet, we could see a possible pick-up in sales in 2H09F and 2010F, as residential prices in urban areas rise, prompting suburban projects to look like relatively good value.

We assume ASP of RMB4,667/sq m in FY10F, taking into account our expectation of a 5% increase in CG’s prices in 2009F and a 10% increase in 2010F. We also assume volume would increase in FY10F, as we look for record transaction volume nationwide. We expect Country Garden to record contracted sales of RMB20.61bn, RMB26.21bn and RMB28.07bn for FY09F, FY10F and FY11F, respectively.

The rationale for our assumption that developers will actively acquire land this year is that land prices are 30-50% lower than in 2007. However, Country Garden’s land is in suburban areas of Tier-2 and Tier-3 cities, where land values have been more stable in the past three years. In addition, Country Garden’s landbank stands at 44.7mn sq m and so it has no need to acquire landbank this year, on our reading. Its recent acquisition of a 98,000 sq m plot was insignificant in terms of size relative to previous acquisitions and probably relates to attaining synergies with existing developments.

We maintain our price target of HK$4.34, which is based on DCF (a 14.4% discount rate). We expect the company to witness property price increases of 5% in FY09F and 10% in FY10F, below our sector forecast since the company lacks pricing power.

Risks. Arguably the biggest risk to our price target for Country Garden is if prices in suburban areas of Tier-2 and Tier-3 cities disappoint in the next one or two years. This could squeeze margins, given the company’s hefty exposure in those areas.

Sa Sa International - Major milestone

Sa Sa’s success in the Malaysian market shows that Sa Sa has found the right formula for its mainland China operations. Meanwhile, we may see explosive growth of sasa.com which is connected to mainland China.

Net profit from continuing operations went up 14.4% yoy to HK$316m in FY09. Results were above market and our expectations (consensus: HK$268m; UOBKH: HK$273m) as a result of an improvement in the Malaysian market and sasa.com. While the regional consumer market was severely affected in Oct 08-Mar 09, Sa Sa still managed to achieve an organic earnings growth of 21.3% yoy during the period.

Sa Sa’s Hong Kong retail sales have softened in recent months, but this situation is not a major concern and will not last long. The three key growth areas (Malaysia, China and sasa.com) should create buying interest.

We have raised our FY10, FY11 and FY12 earnings forecasts by 16%, 35% and 35% respectively to reflect our positive view.

We feel Sa Sa has reached a major milestone. All of its markets and business units registered improvements in FY09. More importantly, the Malaysian operations and sasa.com will become more and more significant. There are signs that Sa Sa has found the right formula for its mainland China operations, with newly-opened stores being profitable in the first month of operation. The stock is trading at 11x FY10 PE, 8.5% dividend yield and 0.5x PEG. We raise our target price to HK$4.50 (based on 18.9x FY10 PE, historical average PE), representing 0.8x PEG.

Champion REITs - Upside priced in

According to management, Citibank Plaza’s spot rent has fallen to HK$90psf as of April/May 2009. Against an achieved rent of HK$87.5psf as of end-FY08, the gap between spot and achieved rental is converging quickly, which will kick-start negative rental reversion. Therefore, despite the attractive 9.6% yield that Champion currently trades at, we estimate that it will fall to 5.6% by FY11F, when we expect negative rental reversion to eventually reflect the 52% and 33% fall in FY09F office rents that we have assumed for Champion’s Citibank Plaza in Central and Langham Place in Mongkok, respectively. Based on our estimates, we expect to see a continuing declining trend in DPU from HK$0.320 in FY08 until FY14F, when DPU will trough at HK$0.075.


We do not expect the vacancy situation to provide any relief to rental growth in the near term, especially at Citibank Plaza. While vacancy at Langham’s office and retail properties has remained largely steady from end-FY08, Citibank Plaza’s vacancy has increased from 2% as of end-FY08 to 5% as of 2Q09, which management expects will rise to 10% by end-FY09F. With a large proportion of the office portfolio up for renewal over FY10-11F, ie, 40% and 27% over FY10F and FY11F, respectively, compared to 14% in FY09F, we see further risks of rising vacancy, which would likely dampen any recovery in rental growth over the next two years should the economy pick up.

Based on our sensitivity analysis, we estimate that Champion’s current share price of HK$2.51 has already factored in Central rents falling by 42-48% vs our assumed 52% drop, suggesting full valuation, in our view. Based on our estimates, for every HK$5psf change in Central office rent of HK$50-80psf, Champion’s DDM increases by an average 8%.

We have a REDUCE rating on Champion, which is based on our PT of HK$2.09, implying 17% downside. We value Champion REIT based on an 8% discount to our 10-year dividend discount model estimate of HK$2.27. The 8% discount represents potential dilution from a lower distribution from 100% to 90% should Champion lower its payout to preserve cash in light of the overhang from its Langham debt.

Champion’s debt associated with the Langham property saw its LTV ratio rise to 52.6% as of December 2008, leaving only a 12.4% devaluation buffer. We see such gearing and hence dilution risks (should Champion require a rights issue to raise cash to pay down debt) diminishing with the cap rate compression trend recently observed in the office strata title market. On the upside, Champion has received unitholders’ approval in its EGM held in early March 2009 to repurchase up to 10% of outstanding units. Any buyback of units by Champion could enhance unitholders’ returns, in our view.

Synear Food - Time needed to make a meaningful turnaround

Expect flat sales volume; margin pressure to ease slightly in 2Q09. Synear’s volume growth in 2Q09 is largely flat, reversing previous quarters’ downtrend, but momentum should improve in 2H09 partly due to the lower base in 2H08. As 3Q is traditionally a low season for the frozen food industry, a meaningful turnaround for Synear might only take place from 4Q09 onwards. The lower input cost will help offset some of the negative effects of a shift in product mix towards mid-tier to low-end products. As such, Synear’s gross margin might be flat or slightly wider in 2Q09.

Utilisation rate remains low. Utilisation rates for Synear’s Chengdu and Huzhou plants are expected to reach 20-30% for 1H09, improving slightly from that in 2008 (20% and 15% for the Chengdu and Huzhou plants respectively in 2008). However, the utilisation rate of the Zhengzhou plant has dropped significantly from a historical average of over 80% to about 50% in 1H09. Management attributes this decline to weak demand and production redistribution at its existing plants as Synear transfers some of orders from its Zhengzhou plant to the Huzhou and Chengdu plants.

Capacity expansion. The Guangzhou plant’s building has been completed and its machinery has been installed. However, operations will not commence so soon given weak demand and existing plants’ lower utilisation rates. Synear has also cancelled the construction of new production facilities in Shenyang so as to keep more cash in hand. Given Synear’s long operating history and strong ties with local suppliers in Zhengzhou, Henan province, management has decided to continue with the construction of its new Zhengzhou plant, which is scheduled to be completed by end-10. Long-term outlook still bright due to the following:

• Increasing expenditure on frozen food. Frozen food consumption per capita in China is only 8kg, much lower that that of developed countries: 60kg in the US, 30kg in Europe and 20kg in Japan. In view of the continuous rise in disposable income, growing awareness of food nutrition and hygiene and accelerated urbanisation, the gap is likely to narrow in the near future.

• Continuing with exploration of commercial market. Synear plans to launch a new dessert, Donut, with KFC in the near future. Although we do not expect this new product to perform superbly in the near future, we see huge potential as it can smooth out the seasonal fluctuations for traditional frozen food products and give the company a new income stream.
• Enhancing brand equity. In 2009, Synear was elected one of “China’s 500 Most Valuable Brands” for the sixth consecutive year by World Brand Laboratory. Synear’s brand value also increased 8.6% from Rmb4.1b in 2008 to Rmb4.5b in 2009, much higher than its peers’ (eg Sanquan was ranked 312th with an estimated brand value of Rmb2.4b in 2009).

Although a meaningful turnaround might only take place from 4Q09 onwards, Synear’s current valuation is reasonable as the stock is trading at a 34% discount to Singapore- and Hong Kong-listed food and beverage counters. We maintain our HOLD recommendation but raise our fair price from S$0.23 to S$0.27, which is based on 10x 2010 PE. Our entry price is S$0.21.

COSCO Pacific - May 09: Throughput continues to show sequential improvement

Pearl River Delta and Yangtze River Delta. In the Pearl River Delta, all terminals recorded declines in throughput numbers except for the Quanzhou Pacific Container Terminal (in Fujian Province). Overall throughput volume in the Pearl River Delta decreased 12.4% yoy in May 09.

In the Yangtze River Delta, throughput growth from Ningbo Yuandong Terminals remained resilient (+17.7% yoy). However, other terminals’ throughput plunged. Overall throughput volume in the Yangtze River Delta dropped 17.9% yoy in May 09.

Bohai Rim and overseas. Again, only the Bohai Rim region registered throughput growth in May 09 (+4.9% yoy), mainly driven by Yingkou Container Terminal (+50.9% yoy) as domestic transshipment business recorded robust growth. This is in line with our expectations that container throughput in the Bohai Rim may see an earlier recovery and continue to outperform Pearl River Delta and Yangtze River Delta. This is because: a) the Bohai Rim has a larger portion of state-owned enterprises which may benefit more from the government’s Rmb4t stimulus packages and loans expansion, and b) Bohai Rim’s industrial production has been exceeding the national average. Overseas container throughput plunged 22.3% yoy in May 09. It was dragged down by COSCO-PSA Terminals (-48.9% yoy) and Antwerp Gateway (-54.9% yoy).

Outlook. With the recent economic data showing positive signs (PMI, industrial production and imports from Asian countries), China’s exports may register smaller declines. In our view, China’s export prospects are turning more positive. We foresee China’s exports to gradually show a mild recovery from the distressed levels in 1Q09.

May – September has been a traditionally high season for CP’s container throughput volume. During 2004-07, the throughput numbers recorded mom increase in May – September. Therefore, if it follows the previous seasonality and trends, CP’s throughput volume may continue to improve on a mom basis.

CP is trading at 10.0x 2009F PE (vs historical average of 13.6x PE) and 0.91x 2009F P/B (vs historical average of 1.9 P/B), at a discount to its peers’ average. Also, with CP’s decent dividend yield and improving outlook, we regard its valuation as attractive.

Li Heng: Stability will be the key

Stable operations since 1Q09. We recently catch up with Li Heng Chemical Fibre (LHCF) for a quick update and are pleased to note that things have largely stabilized after a weak first quarter. As a recap, LHCF recorded a 41.2% YoY and 32.9% QoQ tumble in revenue, while overall ASP declined by as much as 52.2% YoY and 25.7% QoQ to just RMB16.4m/ ton. And in line with the recent rebound in crude oil prices, we understand that the ASP has risen by some 10% from 1Q09, heralding a possible end to the year-long ASP slide. Capacity utilization has remained high at 90%, although customers continue to remain cautious - most are still placing between two weeks' to one month's worth of orders. And LHCF cautioned that a full recovery would still take some time (likely FY10 story) and its current focus is still on how best to ride out the still-fragile situation - this involves the active management of its inventory (holding about one month's worth of raw material) and watching its accounts receivables (all customers are still paying on time).

Cautious expansion on track. As mentioned in our previous report, management has prudently decided to go slow on its Phase III expansion plan, where it will push back the addition of extra capacity from 2H09 to 1H10. LHCF is also targeting to complete its R&D centre by 1H10, which makes sense since the new products are expected to be produced by the new facility. On the other hand, the construction of its PA chip plant (200mt daily production capacity) is on track to be completed in 3Q09 as guided; this will allow LHCF to be quite self-sufficient and afford it more flexibility in managing its inventory. Last but not least, we understand that the planned major overhaul of its old Li Yuan Phase 1 and 2 is likely to be pushed back to 1H10 as opposed to 2H09.

Maintain HOLD. While things have largely stabilized in 2Q09, suggesting that the worst is over, we note that positive near-term catalysts are still somewhat lacking - persistent margin pressure may be the biggest challenge facing not only LHCF but also all other industry players. And until we see better clarity (likely only in late 2H09), we prefer to maintain our HOLD rating and S$0.25 fair value.

China Zaino - First-mover position unchallenged

Zaino is a unique China play given its exposure to the niche backpack and luggage market, leading market position and extensive distribution network. Maintain BUY with a target price of S$0.39, which implies 4x 2009F PE.

Strong demand in China’s backpack and luggage market sustainable. This is underpinned by three factors: a) double-digit growth in China’s retail sales in the next 1-2 years, b) double-digit growth in China’s urban and rural disposable income per capita, and c) steady increase in outdoor activities and the number of market consumers, including students and tourists.

A market leader. Dapai is the top brand in the backpack industry with a 35.8% market share. We believe further sales growth is achievable as the company enjoys several advantages over its peers: a) only focusing its brand building efforts on the backpack and luggage business which is less competitive, b) strong R&D and good quality help secure orders, and c) a vast distribution network operated by local experienced distributors.
A&P efforts to boost brand equity has worked well. Although the Group has seen good results from its advertising activities, it is worth noting that it had utilised its entire preliminary advertising budget of Rmb70m in six months. Management is likely to excise caution on the use of A&P expenditure to strike a balance between cost and efficiency.

Production capacity to double to 52.2m units by 2011. Construction of a new plant is underway and scheduled for completion in 1H10. The plant would boost capacity by adding 8m units to the 26m units currently, taking the total to 34m units by 1H10. Another 18.2m units are expected to come on stream from 2H11 onwards.

Eyeing M&A opportunities. Zaino is actively eyeing merger and acquisition (M&A) opportunities. The main targets are companies with a good track record in backpack manufacturing or original equipment manufacturers severely hurt by the slump in export orders. Although the current financial crisis has led to an overall slowdown in consumer demand, it also provides a good opportunity for the industry’s big boys to restructure.

We forecast revenue CAGR of 9.8% for 2009-11, driven by growing sales of backpacks and luggage, and expect earnings growth to slightly outperform top-line growth at a 10.7% CAGR in the same period on the back of a better product mix. Luggage sales are likely to continue to make up a larger proportion of total sales, which is in tandem with the company’s strategy to expand its product portfolio. In addition, the company has also promised a dividend payout ratio of at least 20%.

We believe Zaino is a unique China play given its exposure to the niche backpack and luggage market, leading market position and extensive distribution network. Considering its short listing history and weaker brand equity compared with big sportswear names, we have applied a 10% discount to the industry’s FY09 PE and value the stock at 4x. Maintain BUY and 12- month target price is S$0.39.

Sino-Ocean Land - Bond issue to support landbank acquisitions in 2H09

Sino-Ocean announced a Rmb2.6b bond issue in the domestic market. The six-year bond has a tentative coupon rate of 4.4-5% in the first three years. At the end of the third year, investors have the right to sell the bond back to Sino-Ocean, while the company has the option to increase the coupon by 0-100bp from the fourth year. The bond proceeds will be directly or indirectly used in land purchases, property developments and the restructuring of borrowings.

Sino-Ocean is ready for landbank acquisition. Thanks to the bond issue, the company can secure low-cost borrowings at interest rate even lower than the current three-year benchmark borrowing rate of 5.4%. Meanwhile, thanks to its strong property sales, the company’s current net gearing is at a low level of about 30%. Sino-Ocean is financially ready for landbank expansion. It plans to acquire 0.5m-1.0m sqm of landbank this year with an upper limit of target net gearing of 60%.

Beijing and Pan-Bohai Rim remain key market focus. Currently, Beijing and Pan-Bohai Rim account for 42% and 78% of Sino-Ocean’s total NAV respectively. It has become the largest developer in Beijing in terms of sales. Sino-Ocean has also outperformed the market, increasing its market share from 2.0% in 2007 to 4.6% in 2008 and 5.2% by end-Apr 09. The company’s potential landbank acquisitions will mainly focus on the Pan-Bohai region, in particular, its home market, Beijing, which should further strengthen its position in the capital city.

Projects from its primary land developments could be the targets. According to management, two of its primary land development projects could be put on the market in 2H09. One is a parcel with a GFA of more than 100,000sqm in the south of its Ocean Landscape project. The other is the Zhongfu project with a total GFA of more than 300,000sqm in the CBD of Beijing. The primary land development could give developers competitive advantages in land auctions, mainly due to: a) their better knowledge about project planning, environment as well as local demand and supply dynamics, b) savings on development costs as they already had research and planning inputs in primary land development, and c) shorter planning and construction period given sufficient preparation before the property development. On the other hand, the company might have to give up if the land auction prices are extremely high.
Robust sales. Sino-Ocean reported its ytd contracted sales at Rmb6.5b, representing about 80% of its 2009 sales target of Rmb8.0b. The company has decided to postpone the presale of Ocean La Vie, a top-end villa project in Beijing, to next year in order to ride on the uptrend in housing prices and maximise the returns. Management estimates the project could achieve an ASP of above Rmb50,000/sqm currently vs Rmb45,000/sqm early this year. Given the flexible presales launch criteria in Beijing (presale allowed once the foundation work is completed), the company can speed up the presale launches of other projects. The company is fully confident o achieving its sales target.

Some 85% of 2009 sales locked in. About Rmb5.4b of 2008 presales was carried forward to 2009 and we estimate Rmb4.3b of the presales to be booked this year. In addition, we estimate Rmb2.3b, or 35% of the ytd sales of Rmb6.5b, can be booked in 2009. Hence, Sino-Ocean has secured a total of Rmb6.6b, or 85% of our estimate 2009 sales of Rmb7.8b.

Price hikes to lift margins. We estimate the company has lifted selling prices for the projects in Beijing by 10-20%, and projects outside of the capital city also saw a moderate pick-up over the past couple of months. Among the projects, Ocean Great Harmony’s ASP increased from Rmb22,000/sqm to Rmb26,000/sqm, while Ocean Landscape East also saw prices increased from Rmb11,000/sqm as at end-08 to the current Rmb14,000/sqm. Thanks to the price hikes, we estimate Sino-Ocean’s gross margin to improve substantially from the low of 27% in 2009 (due to price cuts last year) to 34% in 2010.

The stock is trading at a 3% discount to current NAV of HK$8.21/share vs the sector’s 10% discount. With a solid track record in property sales and strong positioning in the Pan-Bohai Rim, Sino-Ocean has proven to be a quality and leading state-owned property company after COLI and CRL. In addition, the strong landbank replenishment potential on the back of low net gearing is a plus. We believe Sino-Ocean deserves a premium valuation over its peers. Our target price of HK$9.78 represents nearly a 20% premium to its NAV.