Raffles Education: The worst is over

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

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

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

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

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China Hongxing Sports - order book off to a weak start

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

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

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

China Fishery: Wider margins due to lower fuel costs

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

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

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

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

Pacific Andes Holdings: Optimising vessel deployment

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

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

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

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

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

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

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

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

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

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

Li Heng: Cautiously more upbeat for 2H09

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

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

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

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

Sihuan Pharmacuetical - Strong operating performance

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

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

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

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

Abterra - Right place, Right time

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

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

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

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

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

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

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

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

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

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

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

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

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

Zaino - Luggage products still the key growth driver

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

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

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

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

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

Yanlord Land - Buy: Strong Sales and Rising Margins

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

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

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

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

China Taisan Technology Group - More water in the ship

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

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

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

China Hongxing - Costs hit bottom line

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

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

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

Midas Holdings: Set to enlarge its production capacity

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

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

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

Li Heng - Expanding customer base against all odds

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

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

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

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

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

China Essence - Extension of loan

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

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

China Hongxing – Same-store-sales remains weak

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yanlord Land Group: Cashed Up

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

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

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

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

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

Midas: raise target to $1.10

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CHINA SPORTS - "Cum-Rights" Impt Date

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

China Hongxing Sports: Disappointing Earnings

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

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

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

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

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

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

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

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

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

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

Li Heng – Earnings Strengthened By Forex Gains

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

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

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

China Sky – Likely To Turn Profitable In 2Q09

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

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

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

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

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

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

Cosco - still some distance from operational turnaround

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

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

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

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

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

Raffles Education – Humble valuations despite superior track record

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

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

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

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

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

China Sunsine Chemical - Positive sign in volume growth

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

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

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

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

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

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

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

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

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

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

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

China Animal Healthcare: The Privileged Animal Drug Manufacturer

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

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

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

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

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

S-Chips - Who could be next?

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

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

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

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

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

Cosco - still struggling ahead

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

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

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

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

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

Yanlord - Expecting strong interim results

Expecting a 179% increase in interim profit. Yanlord will announce results around midnight on 11 August. We are looking for a 179% increase in interim net profit to S$214m. In fact, the actual number could be higher as the Group managed to sell almost all of the 0.1m sqm completed but unsold inventories at Shanghai Riverside City in 1H09. In any case, profit will be heavily skewed towards the first half this year. The Group does not pay interim dividend.

95% of full-year revenue secured. Up to July this year, Yanlord had generated over Rmb7.6b proceeds from contract sales, already 65% above that made in the whole of 2008, and accounting for 85% of our already very bullish sales target for 2009. Adding the Rmb1.15b unbooked contract sales carried forward from last year, over 95% of our forecast revenue for 2009 has been secured.

A sought-after brand. Yanlord launched a new project, Nanjing Yanlord Yangtze Riverbay Town P1, on 18 July. Even though the project will not be completed till Dec 10, almost 95% of the 636 units were sold within a week at a decent Rmb15,000psf, generating Rmb1.15b in proceeds.
Watch out for Tianjin. Yanlord has projects in seven cities. While revenues have concentrated in Shanghai and Nanjing, the geographical spread will widen as projects in other cities mature. The Group has delayed the launch of Yanlord Riverside Plaza, the Group’s first project in Tianjin and indeed northern China. Given the more serious marketing efforts, we expect Yanlord to replicate its success in this city where its brand is not known. Presale results of this project could affect share price.

Recap the four reasons for Yanlord being our top pick. a) 48% of its NAV is exposed to Shanghai and the neighbouring Nanjing where property prices going forward will benefit from the development of Shanghai into a major global financial hub, b) its landbank is situated in urban locations where demand is more assured and prices firmer, c) it boasts one of the best corporate governance track records among mainland developers, and d) there is further upside potential on its NAV if the Yanlord brand continues to command premium prices on new projects and as it ventures into new cities.

Target price under review. With the continuous rally of the sector, Yanlord is now close to our target price. Admittedly, trading at a 4% premium to NAV, the stock is not cheap. But liquidity will boost the sector valuation to an otherwise unjustifiable level. As Yanlord is one of the most solid and transparent mainland developers, we are keen to keep the stock as one of our top picks. Thus, we will upgrade our target price, but we will leave that exercise till after the results announcement when we are in an even better position to assess the company. At the moment, our target price is based on a three-tier system whereby the target price for Yanlord, regarded as a solid private enterprise, is set at a 10% premium to NAV.

Oceanus Group Ltd: Still in gestation phase

Population growth cushions net profit. Oceanus Group Ltd (Oceanus) reported its 1H09 results with a 23.7% YoY decline in sales to RMB138.5m. Profit before tax and one-offs grew 16.0% YoY to RMB209.3m thanks to a larger abalone population, which boosted the fair value of its biological assets. Net profit recorded a nine-fold surge to RMB187.4m in the absence of oneoff RTO expenses.

Abalones feel the heat of recession. Weakness in the group's results came from its 2Q09 sales, which contracted by 43.8% YoY, as it came under pressure on two fronts - lower selling prices as well as leaner volumes. ASP fell by 10-15% as the global recession weighed on 'live' abalone prices, while volumes fell by 13% as the group set aside a portion of its livestock for future processing. Unusually high volumes sold a year ago due to an industry supply crunch magnified the volume squeeze. Further evidence of the recession was reflected in the group's biological assets, whose average unit fair value was marked down by 25% from a year ago.

Sowing today for future growth. Although Oceanus' 2Q09 results were uninspiring, management remains optimistic on its outlook as it believes that abalone prices have bottomed out and that demand remains firm. It expects 2H09 to be stronger and remains committed to expansion via downstream integration. As the group is in the expansion phase of its business life cycle, we expect fruits of labour sown today to be reaped over the next two years. For now, the business will have to endure a phase of high capital intensity and trial-and-error before its envisioned business model gains traction.

Downstream businesses to drive 2H09 and beyond. Riding on the success of its first Ah Yat Tian Xia restaurant, the group launched 3 new restaurants in 2Q09. Management targets to open 20 restaurants in 2009, 50 in 2010, and 100 in 2011, with eventual plans to list this chain as a separate entity. We expect Ah Yat Tian Xia to drive the group's growth as the chain gains critical mass and reaps economies of scale. Further driving Oceanus' downstream integration is its new processing plant, which is on track for completion in 3Q09. The plant will fully automate processes that are currently manual, and could lift capacity by 10-fold over the next two years. Overall, Oceanus remains on track with its long term growth plans. As such, we maintain our BUY rating and S$0.40 fair value estimate on the stock.

Yanlord Land - Buy: High-Grade Property Development and Investment

Valuations remain attractive with a 27% NAV discount and with Yanlord’s strong property sales and solid progress on the development of its highgrade investment property portfolio. We have adjusted down our TP to reflect the latest new share and CB issues, which enhanced financial positions.

In Jun-09, Yanlord achieved another RMB0.96bn of sales, pushing its total contracted sales in 1H09 to RMB6.2bn (or about SGD1.24bn), up 107% YoY. With its strong 1H09 contracted sales, Yanlord has already achieved over 70% of its full-year contracted sales target for 2009 and locked in 93% of our estimated property sales revenue to be recognized in 2009.

High-grade investment property portfolio taking shape — In addition to Yanlord Landmark in Chengdu and Yanlord Towers in Nanjing, Yanlord last Friday broke ground for its 300,000sqm integrated project – Zhuhai Yanlord Marina Centre, located in the Zhuhai city center, adjacent to the Gongbei Zhuhai-Macau immigration checkpoint and the ferry terminal, the two key gateways into Zhuhai. Yanlord’s investment properties, once completed, should help generate recurrent rental income to the company, and at the same time allow it to enjoy the long-term capital value appreciation of its urban city-center landbank.

Enhanced financial positions — On our estimates, with the cash from the share placement and strong property sales, Yanlord’s net gearing will be reduced meaningfully from 60% at end-08 to only about 40% at end-09 – this should allow it to adopt a more proactive property pricing strategy to maximize profit and margin, and take advantage of potential NAV-accretive landbank opportunities.

Sino Techfibre – Another Net Loss Likely To Show Up In 2Q09

Sinotech will release its 2Q09 results on 14 August. To cater to changes in the market’s preferences, Sinotech has taken up the production of more low-end products. As a result, the ASPs of its products in 2Q09 would have remained low and are likely to be similar to 1Q09 ASPs.

Owing to the adjustment of its product mix to include more low-end products, Sinotech saw a higher sales volume in 2Q09 relative to that in 1Q09. 2Q09 sales could improve by about 10% qoq to Rmb170m on the back of the sales volume increase.

Given the current low selling prices, the company is likely to continue striving for breakeven at the gross profit level. At the net profit level, we expect Sinotech to record a loss of Rmb30m in 2Q09.

Raffles Education - Exposure to China’s new liberal youth

Headline growth isn’t the story: Education motivation is We initiate coverage on Raffles Education (RLS), an education provider that aims to “nurture creative talents and design management expertise for the arts, design and lifestyle industries and expertise for business management” with a BUY and target price of SGD0.78. RLS runs private and national schools across Asia. Analyses on RLS usually include growth trend charts in China (Appendix 2). Invariably, they do not explain why growth will continue; just that RLS has been growing. In our view, RLS offers exposure to China’s social liberalization, specifically, the desire by young China to express itself in artistic fields, rather than on the assembly line. We believe this gives RLS unique market exposure.

RLS has displayed phenomenal growth since listing in 2002. Of specific concern is its penchant for equity financing to fuel growth. We often hear about management’s aggressive appetite for growth but the conservative streak in preferring equity over debt (to fuel it) is unappreciated just as often. RLS has been net-cash positive from the time of its listing until FY08. A track record of prudence allowed it to dip into debt when made a large opportunistic acquisition in FY08. We believe this will be pared down quickly. Although equity dilution was 71% from FY02 until FY08, net profit grew 28x over the same period.

RLS’ latest acquisition of Oriental University City (OUC) gives it the potential for double enrolment. Budding exposure in India is also exciting. We believe that RLS’ growth will be limited only by the amount of capital it can find. As such, we have predicated our base-case growth assumptions on existing schools.

Our TP implies a FY10 P/E of 19.1x compared with a historical average of 22x. We have included a DCF sensitivity analysis in the report. Returns have retreated from astronomical levels in its early years, but look to mature on a stable profile. Nonetheless, forward ROE, estimated to be around 19.1%, is commendable on low leverage. RLS’ growth potential is more than commensurate to its risks. Sustained profit growth should validate its investment concept and catalyze the stock.

Midas - Placement to drive new capacities and earnings

Midas has issued 120 mn new shares at S$0.755 each, at a 8% discount to the last closing price on 15 July 2009, and raised S$89.4 mn in net proceeds, of which more than 90% will be used to fund capacity expansion, including buying two new lines.

While we believe that management could have considered raising debt, given Midas’ low gearing, thus raising FY10E ROE by 5%, we view the placement positively, as we see increased capacities (new lines to contribute from late 2H10) boosting Midas’ bargaining strength, as it bids for further railway contracts.

We inputted new capacity/capex assumptions into our model, raising FY10/11E earnings by 6-14%. With almost Rmb1 bn in aggregate of contract wins in the last month, Midas’ order book stands at S$260 mn, based on our estimates, with more than 75%/20% of our new FY10/11E revenue forecasts secured.

After factoring in 14% dilution from new equity raised, FY09-11E EPS is lowered 4-8%, but our SOTP-based target price remains S$1.05. With contract momentum still strong and potential upside from new fabrication work, we reiterate our OUTPERFORM rating.