Sponsored Links
Synear Food Holdings - Profit fell off the cliff
4Q08 core net profit collapsed 80% yoy to Rmb12.6m, significantly below our expectations and consensus, representing 24% of our estimate and 16% of consensus. FY08 core net profit to Rmb208.3m formed 84% of our FY08 core net profit estimate and 76% of consensus. 4Q08 core net profit margin collapsed to 2.5% from 13% in 4Q07, on the back of narrower gross margins, increased selling and distribution expenses, and the end of the tax holiday. Revenue fell 15.8% to Rmb501.7m as the 26% sales volume decline to around 54k tonnes more than offset the 15% yoy increase in overall ASP to around Rmb9,200/tonne. FY09-10 core EPS estimates cut 31-35% on account of lower volume and margin expectations. Cash levels dropped to Rmb866m with significant risks of further cash drain. Our target price is cut to S$0.13 from S$0.21, still based on 5x CY10 P/E. Downgrade to Underperform from Neutral.
China Zaino - Driven by higher ASPs and volume
China Zaino's 4Q08 net profit (+12.9% yoy to Rmb106.8m) came in 3% above our forecast and consensus. Revenue increased 29.4% yoy to Rmb615.3m, led by higher ASPs and volume growth. However, we have cut our FY09-10 earnings forecasts by 19-25% to factor in a slowdown in sales of its products as consumer spending declines. Based on checks with other retailers in the mid-end market, we believe Zaino's target customers are starting to cut down on their discretionary spending. Following our earnings reductions, our target price has been lowered to S$0.37 from S$0.49, still based on 4x CY10 P/E. Maintain Outperform given the substantial upside potential to our target price.
Tsit Wing Int'l Holdings Ltd: FY08 earnings marred by hedging losses
Earnings slump exacerbated by hedging losses. Tsit Wing International Holdings Ltd's (TWI) 4Q08 earnings were slightly short of our estimates, mainly due to hedging losses. 4Q08 revenue grew 8.1% YoY to HK$107.1m but net profit slumped 72.8% to HK$2.5m. For the full year, revenue climbed 10.9% to HK$402.4m while net profit slid 43.5% to HK$20.0m. Net profit for the year would have fallen by a smaller 16.0% to HK$29.7m if not for hedging losses of HK$8.1m and goodwill impairment of HK$1.6m. The hedging losses arose from the group's attempt to smoothen out volatile coffee prices by taking positions in the futures market. Unfortunately, the group's effort backfired as wild swings in coffee prices led to losses instead.
Dividends disappoint. TWI has declared a second and final dividend of 2.5 HK cents, falling short of our expectations of a 7.5 HK cents dividend. This brings the group's total dividends for the year to 6.0 HK cents, substantially lower than its 11.0 HK cents historical track record and bringing its yield down to 5.6% from 10.3% previously. We think that the decision to reduce dividends could have been motivated by cash conservation priorities in light of the global credit crunch. Our dividend assumptions have been lowered to incorporate the group's lower payout.
Margins came under pressure. Profit margins came under pressure in FY08 due to high commodity prices in 1H08. Gross profit margin contracted 3.7ppt to 34.8% while net profit margin shrank 4.8ppt to 5.0%. Excluding impairment and hedging losses, net profit margin would have fallen by a smaller 2.4ppt to 7.4%. On a brighter note, margin pressure appeared to have somewhat eased in 4Q08 with gross profit margin recovering 2.6ppt QoQ to 36.1%. We expect margins to improve gradually in FY09. However this could take a few quarters as TWI's inventory still consists of costly raw materials purchased during the commodity boom, as reflected in its high level of inventories amounting to HK$73.2m (vs. HK$57.4m a year ago).
Maintain HOLD. We rollover our valuation to FY09F NTA, and keeping our 0.9x parameter intact, derive a fair value estimate of S$0.22 (previously S$0.21). We do not anticipate any major price catalysts for the stock, but the group's consistent dividends, albeit much lower now, provide regular returns. We maintain our HOLD rating on the stock.
Dividends disappoint. TWI has declared a second and final dividend of 2.5 HK cents, falling short of our expectations of a 7.5 HK cents dividend. This brings the group's total dividends for the year to 6.0 HK cents, substantially lower than its 11.0 HK cents historical track record and bringing its yield down to 5.6% from 10.3% previously. We think that the decision to reduce dividends could have been motivated by cash conservation priorities in light of the global credit crunch. Our dividend assumptions have been lowered to incorporate the group's lower payout.
Margins came under pressure. Profit margins came under pressure in FY08 due to high commodity prices in 1H08. Gross profit margin contracted 3.7ppt to 34.8% while net profit margin shrank 4.8ppt to 5.0%. Excluding impairment and hedging losses, net profit margin would have fallen by a smaller 2.4ppt to 7.4%. On a brighter note, margin pressure appeared to have somewhat eased in 4Q08 with gross profit margin recovering 2.6ppt QoQ to 36.1%. We expect margins to improve gradually in FY09. However this could take a few quarters as TWI's inventory still consists of costly raw materials purchased during the commodity boom, as reflected in its high level of inventories amounting to HK$73.2m (vs. HK$57.4m a year ago).
Maintain HOLD. We rollover our valuation to FY09F NTA, and keeping our 0.9x parameter intact, derive a fair value estimate of S$0.22 (previously S$0.21). We do not anticipate any major price catalysts for the stock, but the group's consistent dividends, albeit much lower now, provide regular returns. We maintain our HOLD rating on the stock.
Asia Environment Holdings: BOT flow is strengthening
FY08 profit exceeded our forecast as BOT revenue kicked in faster than expected in 4Q08. Going forward, rising BOT income, underpinned by higher utilization and commercial operations of more plants, would support earnings in FY09 as EPC revenue softens on slower orderbook growth. However, as BOT is capital intensive, funding will remain a challenge for AENV amid ongoing credit crunch. Upgrade to Hold as valuation is undemanding at 4.3x FY09 PER.
4Q08 surprised on the upside. Headline net profit of RMB19.7m was significantly higher than our RMB4m forecast. Key variances were higher than expected O&M takings, which boosted Q4 revenue to RMB119m (-7%y-o-y, 23% q-o-q) vs our RMB70m forecast. Gross margin was also substantially higher at 34%, compared to our expectation of 25% as cost containment was better than expected.
Secured funding to execute projects. Despite ongoing credit woes, AENV managed to secure new financing of RMB168m since Sep 08 from the Chinese local banks. Of this, c. RMB90m was secured after the fiscal year. Better yet, borrowing costs have remained stable as lower interbank rates more than offset slightly higher credit spread. With the higher borrowings, AENV closed the fiscal year with net gearing of 0.5x. Most importantly, the company now has resources to operate completing projects.
Upgrade to Hold. We have raised FY09 net earnings to RMB40m compared to previous forecast of RMB31m to account for stronger BOT contributions and a slightly higher gross margin assumption. Consequently, our TP was raised to $0.11, still peg to 6x FY09 PER.
4Q08 surprised on the upside. Headline net profit of RMB19.7m was significantly higher than our RMB4m forecast. Key variances were higher than expected O&M takings, which boosted Q4 revenue to RMB119m (-7%y-o-y, 23% q-o-q) vs our RMB70m forecast. Gross margin was also substantially higher at 34%, compared to our expectation of 25% as cost containment was better than expected.
Secured funding to execute projects. Despite ongoing credit woes, AENV managed to secure new financing of RMB168m since Sep 08 from the Chinese local banks. Of this, c. RMB90m was secured after the fiscal year. Better yet, borrowing costs have remained stable as lower interbank rates more than offset slightly higher credit spread. With the higher borrowings, AENV closed the fiscal year with net gearing of 0.5x. Most importantly, the company now has resources to operate completing projects.
Upgrade to Hold. We have raised FY09 net earnings to RMB40m compared to previous forecast of RMB31m to account for stronger BOT contributions and a slightly higher gross margin assumption. Consequently, our TP was raised to $0.11, still peg to 6x FY09 PER.
China New Town Development - FY08: Net loss at core earnings level lower than expected
• Improvements in topline were encouraging CNTD reported a sharp increase in net revenue in FY08, underpinned by land sales of its various projects.
• Reported bottomline numbers are misleading, distorted by exceptional items, which includes a revaluation loss on its investment properties amounting to RMB488m. FY08 core net loss of RMB35.1m is a vast improvement from the core net loss of RMB256.9m in FY07.
• This is ahead of the RMB43.7m net loss we previously estimated the difference due to higher mark-to-market valuation loss related to the repurchase of convertible bond in FY08, which are essentially non-recurring.
• CNTD was hit by the deterioration of the retail rental market. The group has provided a revaluation loss of RMB488m for the investment properties in FY08. Though not quite articulated, the group could potentially reverse the overprovision should there be a recovery of the rental market condition going forward.
• Financing cost, going forward will be greatly reduced as the increase in capitalization of the interest expenses kick in, in tandem with the progress of construction works.
• Balance sheet seems constraint after the repayment of RMB503m Shanghai project loan in FY08. However, we think that the company will still be in good stead as it has secured RMB96m facility last month to meet FY09 working capital need.
• Additionally, CNTD is finalizing its project financing facility that will step in after the group repays the RMB1.1bn Shanghai Luodianproject loan that is due in Sept09.
• We understand from management that the term of the project financing will be favorable as Municipals are now pushing ahead on various infrastructure projects to pump prime the economy.
• The relaxation of austerity measures, which included temporary exemption of the land appreciation tax could eventually lead to a revived property sector and attract developers’ interest once again.
• Though details are not given, CNTD said that it will be concluding another parcel of land auction in Shanghai next month, and has talked to about 20 developers to date.
• The group is confident that its various projects (in different provinces at different stages of development) will continued to generate decent gross profit margins between 45-50%. In addition, CNTD has also gradually built up its source of stable income streams through investments in golf courses, hotels, commercial and retail space operations, as well as hospitals and schools.
• We slashed FY09 earnings quite drastically by 74% as we realign our assumptions by imputing the pushing back of income recognition schedule for various projects. Consequently, we upped our FY10 estimates by 81% to incorporate all future contribution of these rescheduled projects.
• Reiterate Buy and target price reduced to S$0.05. Still pegged at 3.8x CY09 P/E, we derived a lower target price of S$0.05 (from S$0.17) due to earnings cut. Given a 33% upside from this level, we maintain our Buy rating. A better land auction outcome and the group’s successful refinancing activities would catalyses share performance.
• Reported bottomline numbers are misleading, distorted by exceptional items, which includes a revaluation loss on its investment properties amounting to RMB488m. FY08 core net loss of RMB35.1m is a vast improvement from the core net loss of RMB256.9m in FY07.
• This is ahead of the RMB43.7m net loss we previously estimated the difference due to higher mark-to-market valuation loss related to the repurchase of convertible bond in FY08, which are essentially non-recurring.
• CNTD was hit by the deterioration of the retail rental market. The group has provided a revaluation loss of RMB488m for the investment properties in FY08. Though not quite articulated, the group could potentially reverse the overprovision should there be a recovery of the rental market condition going forward.
• Financing cost, going forward will be greatly reduced as the increase in capitalization of the interest expenses kick in, in tandem with the progress of construction works.
• Balance sheet seems constraint after the repayment of RMB503m Shanghai project loan in FY08. However, we think that the company will still be in good stead as it has secured RMB96m facility last month to meet FY09 working capital need.
• Additionally, CNTD is finalizing its project financing facility that will step in after the group repays the RMB1.1bn Shanghai Luodianproject loan that is due in Sept09.
• We understand from management that the term of the project financing will be favorable as Municipals are now pushing ahead on various infrastructure projects to pump prime the economy.
• The relaxation of austerity measures, which included temporary exemption of the land appreciation tax could eventually lead to a revived property sector and attract developers’ interest once again.
• Though details are not given, CNTD said that it will be concluding another parcel of land auction in Shanghai next month, and has talked to about 20 developers to date.
• The group is confident that its various projects (in different provinces at different stages of development) will continued to generate decent gross profit margins between 45-50%. In addition, CNTD has also gradually built up its source of stable income streams through investments in golf courses, hotels, commercial and retail space operations, as well as hospitals and schools.
• We slashed FY09 earnings quite drastically by 74% as we realign our assumptions by imputing the pushing back of income recognition schedule for various projects. Consequently, we upped our FY10 estimates by 81% to incorporate all future contribution of these rescheduled projects.
• Reiterate Buy and target price reduced to S$0.05. Still pegged at 3.8x CY09 P/E, we derived a lower target price of S$0.05 (from S$0.17) due to earnings cut. Given a 33% upside from this level, we maintain our Buy rating. A better land auction outcome and the group’s successful refinancing activities would catalyses share performance.
China Powerplus - issued profit guidance
• Yesterday evening, China Powerplus issued a profit guidance the for its FY08 result.
• The group said that the current financial turmoil has brought much uncertainty to the global economic outlook and it expects the challenging conditions to remain for some time.
• As such, the group expects FY08 result will be significantly weaker as compared to FY07.
• It also mentioned that persistent cautious spending attitudes continue to affect sales while higher production costs continue to exert pressure on margins.
• This news does not come as a surprise as we mentioned in our initiation report yesterday that earnings visibility of CPOW has deteriorate over the last few quarters.
• The PRC market has always been the group’s main revenue generator. However, we think that a continuous slowdown in China could is weighing down on the group’s performance in FY08-09.
• With China accounting for only 49% of revenue in 9M08 (down from 65% in 9M07), the outlook does not look sanguine, especially with a lack of new product launches.
• Target price cut. We reduce target price from S$0.08 to S$0.04, as we assigned another additional 50% discount to the 3.5x CY09 P/E to the stock, as negative sentiments of S-Chips are mounting high in the last couple of days.
• Downgraded to SELL. We believe that a lack of catalysts and its smallish market capitalization, could cap a re-rating of the stock in the near future. More importantly, the profit warning issued will be perceived negatively by investors, and stock could see fresh selling pressure. Downgraded from Neutral to Sell.
• The group said that the current financial turmoil has brought much uncertainty to the global economic outlook and it expects the challenging conditions to remain for some time.
• As such, the group expects FY08 result will be significantly weaker as compared to FY07.
• It also mentioned that persistent cautious spending attitudes continue to affect sales while higher production costs continue to exert pressure on margins.
• This news does not come as a surprise as we mentioned in our initiation report yesterday that earnings visibility of CPOW has deteriorate over the last few quarters.
• The PRC market has always been the group’s main revenue generator. However, we think that a continuous slowdown in China could is weighing down on the group’s performance in FY08-09.
• With China accounting for only 49% of revenue in 9M08 (down from 65% in 9M07), the outlook does not look sanguine, especially with a lack of new product launches.
• Target price cut. We reduce target price from S$0.08 to S$0.04, as we assigned another additional 50% discount to the 3.5x CY09 P/E to the stock, as negative sentiments of S-Chips are mounting high in the last couple of days.
• Downgraded to SELL. We believe that a lack of catalysts and its smallish market capitalization, could cap a re-rating of the stock in the near future. More importantly, the profit warning issued will be perceived negatively by investors, and stock could see fresh selling pressure. Downgraded from Neutral to Sell.
People's Food PFood - On a rebound
In line. FY08 net profit of Rmb703m (+43% yoy) was in line with our estimate of Rmb705m but 8.9% ahead of consensus. Turnover grew 22% yoy, underpinned by strong fresh pork and LTMP sales which contributed to slightly-higher-than- expected gross margins of 9.6%. However, disappointing results from its associate tempered the better performance. The group declared a final DPS of Rmb0.105.
Solid improvement. We are encouraged by the improvement in sales of fresh pork and LTMPs, up 55% and 106% yoy respectively. This helped to lift blended gross margins to 9.6% from just 7.9% in FY07 when the group reeled under a shortage of live hogs. Operating costs, however, were slightly higher than expected as the group stepped up efforts to promote its Jinluo brand. But EBITDA margins still improved to 9.3% from 7.8% in FY07.
Limited upside for hog prices. Hog prices have once again retreated in recent weeks as demand fell after Chinese New Year. We believe there is room for prices to fall further to the Rmb11-12/kg level as hog supply gradually builds up. Barring unforeseen circumstances including swine disease and natural disasters, we see no reason why hog prices would revert to previous highs.
Maintain Outperform. Given that the earnings recovery is on track, we are keeping our forecasts intact. We also introduce FY11 numbers. We continue to value the stock using sum-of-the-parts valuation, applying 4x CY10 P/E to its upstream business and 6x to its downstream operations, in line with valuations for the other F&B stocks under our coverage. Our unchanged target price of S$0.85 implies 5.2x CY10 P/E. Maintain Outperform.
Solid improvement. We are encouraged by the improvement in sales of fresh pork and LTMPs, up 55% and 106% yoy respectively. This helped to lift blended gross margins to 9.6% from just 7.9% in FY07 when the group reeled under a shortage of live hogs. Operating costs, however, were slightly higher than expected as the group stepped up efforts to promote its Jinluo brand. But EBITDA margins still improved to 9.3% from 7.8% in FY07.
Limited upside for hog prices. Hog prices have once again retreated in recent weeks as demand fell after Chinese New Year. We believe there is room for prices to fall further to the Rmb11-12/kg level as hog supply gradually builds up. Barring unforeseen circumstances including swine disease and natural disasters, we see no reason why hog prices would revert to previous highs.
Maintain Outperform. Given that the earnings recovery is on track, we are keeping our forecasts intact. We also introduce FY11 numbers. We continue to value the stock using sum-of-the-parts valuation, applying 4x CY10 P/E to its upstream business and 6x to its downstream operations, in line with valuations for the other F&B stocks under our coverage. Our unchanged target price of S$0.85 implies 5.2x CY10 P/E. Maintain Outperform.
Fibrechem Technologies - Audit issues
Audit issues. Fibrechem posted during the lunch break that it has appointed Nicky Tan as an independent investigator and financial advisor. The official announcement says that there were certain difficulties encountered by auditors during the finalization of the audit of the group's trade receivables and cash balances. In short, accounting fraud - the worst-case scenario for the company. CEO James Zhang has offered to resign from his position as CEO and acting CEO Mr. Xu Xu Hui, takes his place. No information flow. We are still hitting a brick wall in getting any access to management or board member. Phone calls are unanswered - all we know is that the management team is currently in China.
Balance sheet shows no warning signs. We attach the last reported balance sheet of the firm. Revenue per quarter is about HK$480m while full-year revenue run-rate is HK$1.9bn to HK$2.0bn. Trade receivables stand at HK$280m. Although revenue growth was growing, trade receivables had not grown by much. Assuming all the current trade receivables are fictitious, net cash of HK$544m (S$0.12 per share) will be halved. Bigger problem would be if trade receivables have been made up all along and clients had been fictitious. This could transpire into a situation where even the cash on the balance sheet is not real. It is pointless to speculate at this point. Shares remain suspended, book value is S$0.62 but accuracy is in serious doubt, fair value is impossible to ascertain.
Suspending coverage. Our last target price was S$0.72 and our last rating was Outperform. We are suspending coverage on this stock until further information is disclosed.
Balance sheet shows no warning signs. We attach the last reported balance sheet of the firm. Revenue per quarter is about HK$480m while full-year revenue run-rate is HK$1.9bn to HK$2.0bn. Trade receivables stand at HK$280m. Although revenue growth was growing, trade receivables had not grown by much. Assuming all the current trade receivables are fictitious, net cash of HK$544m (S$0.12 per share) will be halved. Bigger problem would be if trade receivables have been made up all along and clients had been fictitious. This could transpire into a situation where even the cash on the balance sheet is not real. It is pointless to speculate at this point. Shares remain suspended, book value is S$0.62 but accuracy is in serious doubt, fair value is impossible to ascertain.
Suspending coverage. Our last target price was S$0.72 and our last rating was Outperform. We are suspending coverage on this stock until further information is disclosed.
Yangzijiang - 2008 profit in line with UBSe and consensus
YZJ reported NPAT of Rmb1,580m (+82%YoY) and revenue of Rmb7,359m (+91%YoY) for 2008. Both are largely in line with UBS estimates (-5% and 3% above consensus, respectively). Note YZJ’s GM fell to 18.5% in 08 from 23.0% in 07, mainly due to the margin contraction to 12.7% in Q408 (19.9% in Q407), as it raised provision for potential cost variation to 8% of contract price from 0.5%.
YZJ’s mgmt guided the company would stick to its original delivery schedule of 40 vessel in 2009, though it could provide 3-6mo berthing time upon receiving the full payment and if required by ship owners. YZJ has not yet encountered order cancellation, and will proactively co-work with its customers to avoid or reduce such risk down the road.
The recently announced industry revitalization plan by China govt would benefit two large state-owned shipbuilding giant, CSSC and CISC, as well as some selected names such as YZJ, one of three private yards in Jiangsu named. With 27 vessels of 850k DWT delivered in 08, YZJ was ranked 6th in China with an orderbook of 155 vessels of US$6.9bn. However, it is difficult to quantify the policy benefits, as most are guideline only as of now.
We will review our forecast following the results. We maintain our Buy rating and 12-month price target of S$1.30, based on 2.5x 2009E book value.
YZJ’s mgmt guided the company would stick to its original delivery schedule of 40 vessel in 2009, though it could provide 3-6mo berthing time upon receiving the full payment and if required by ship owners. YZJ has not yet encountered order cancellation, and will proactively co-work with its customers to avoid or reduce such risk down the road.
The recently announced industry revitalization plan by China govt would benefit two large state-owned shipbuilding giant, CSSC and CISC, as well as some selected names such as YZJ, one of three private yards in Jiangsu named. With 27 vessels of 850k DWT delivered in 08, YZJ was ranked 6th in China with an orderbook of 155 vessels of US$6.9bn. However, it is difficult to quantify the policy benefits, as most are guideline only as of now.
We will review our forecast following the results. We maintain our Buy rating and 12-month price target of S$1.30, based on 2.5x 2009E book value.
Yanlord Land Group Limited - look out for capital
Expect 5% core net profit growth, dividend cut possible? Yanlord will announce FY08 results on 26 Feb 09 pre market. We expect core net profit and EPS (excluding revaluation gains) of S$191mil and S$0.10/share, up 5% and 2% YoY respectively. We also estimate 4Q08 contract sales to amount to S$211mil, bringing the full year contract sales estimates to RMB5.2bn, down 17% YoY. Given an extremely uncertain year ahead and the potential for CB put back option to be exercised in Feb 2010, it is likely for the group, in our view, to cut its FY08 dividend, estimated at S$0.01/share, to preserve cash.
Key things to watch for would include: 1) Strategy for FY09 on how the group would cope with potentially further price cuts in Yangtze River Delta (YRD)region. 2) Capital management – we expect the group’s gearing to trend higher to 70% (from 59% in 3Q08). Whether the group would chose cash flow over pricing power would be a crucial decision to look for.
Sales YTD beat our expectation, but too early to turn positive. Based on management’s estimates, contract sales for Jan and Feb-to-date has reached RMB420mil and RMB300mil respectively, higher than our estimates of about RMB350mil/month on average. However, we believe the stock would likely to remain range bound between S$0.75/share to S$0.95/share until we see sustained recovery in volume at the current price level.
We maintain our Neutral rating on the stock with Dec-09 price target of S$1.10/share, based on 50% discount to our RNAV estimates. Key downside risks include worse than expected property sales or the company’s inability to source funding for redeeming back the CB if the put option is exercised. Key upside risk would be a quicker than expected turn around in the China property market, YRD region in particular.
Key things to watch for would include: 1) Strategy for FY09 on how the group would cope with potentially further price cuts in Yangtze River Delta (YRD)region. 2) Capital management – we expect the group’s gearing to trend higher to 70% (from 59% in 3Q08). Whether the group would chose cash flow over pricing power would be a crucial decision to look for.
Sales YTD beat our expectation, but too early to turn positive. Based on management’s estimates, contract sales for Jan and Feb-to-date has reached RMB420mil and RMB300mil respectively, higher than our estimates of about RMB350mil/month on average. However, we believe the stock would likely to remain range bound between S$0.75/share to S$0.95/share until we see sustained recovery in volume at the current price level.
We maintain our Neutral rating on the stock with Dec-09 price target of S$1.10/share, based on 50% discount to our RNAV estimates. Key downside risks include worse than expected property sales or the company’s inability to source funding for redeeming back the CB if the put option is exercised. Key upside risk would be a quicker than expected turn around in the China property market, YRD region in particular.
Midas Holdings Ltd - On the right track
As a dominant supplier of large-section aluminium extrusion products to the rail and power industries, Midas is expected to benefit from Rmb2tr of rail infrastructure spending and Rmb500bn of metropolitan rail spending by China's top cities. Midas's 32.5% stake in metropolitan rolling stock manufacturer, NPRT, gives it direct exposure to a slew of contracts awarded by China's Ministry of Railways and Tier-1 Chinese cities. It is also the sole certified China-based supplier to global top-3 players. We like Midas's business model and the fact that it is in the right place at the right time, to harness China's increased rail infrastructure spending. Valuations are attractive relative to peers. Our target price of S$0.70 is based on DCF valuation (WACC of 11.2%). Initiate with Outperform.
China Hongxing Sports Ltd Off 31%; Margin Calls and A slower rhythm
We caught up with Hongxing's management recently to gain clarity on the company's outlook for 2009 and forward strategy. Although volume growth has been robust so far, we expect future volumes to fall as distributors attempt to sell off their old stock. We see signs of a slowdown with inventory levels increasing at both the retail and distributor levels and lower same-store sales growth post-Chinese New Year, We remain Neutral on the stock with our target price unchanged at S$0.20, based on 6x CY10 P/E.
China Hongxing Sports down 31.0% at record low of S$0.10 in heavy volume. Traders, analysts suspect margin calls, say ongoing disappointment over recent 4Q08 results also likely weighing. "It''s likely to be on margin call. Most of those SMEs like to use their shares as collateral to finance some of their operations. But in a market like this, leveraging just doesn''t work," says dealer. "The company is not paying a final dividend, which has made some investors worry about their cash position," says analyst at bank-backed brokerage; adds weakness may also be due to investors offloading some convertible preference shares issued by company few years back to raise funds for expansion; "looking at their latest balance sheet, some holders of the company''s RCPS (redeemable convertible preference shares) may have converted into ordinary shares. There''s no restriction on these newly converted shares from being sold." When contacted, Hongxing spokesperson says not aware of reason for sharp share price fall; "there''s nothing company-specific. We are not aware of what''s happening." Orderbook quotes suggest stock may find bottom at S$0.08.
China Hongxing Sports down 31.0% at record low of S$0.10 in heavy volume. Traders, analysts suspect margin calls, say ongoing disappointment over recent 4Q08 results also likely weighing. "It''s likely to be on margin call. Most of those SMEs like to use their shares as collateral to finance some of their operations. But in a market like this, leveraging just doesn''t work," says dealer. "The company is not paying a final dividend, which has made some investors worry about their cash position," says analyst at bank-backed brokerage; adds weakness may also be due to investors offloading some convertible preference shares issued by company few years back to raise funds for expansion; "looking at their latest balance sheet, some holders of the company''s RCPS (redeemable convertible preference shares) may have converted into ordinary shares. There''s no restriction on these newly converted shares from being sold." When contacted, Hongxing spokesperson says not aware of reason for sharp share price fall; "there''s nothing company-specific. We are not aware of what''s happening." Orderbook quotes suggest stock may find bottom at S$0.08.
China Essence - Potato protein & fibre production updates; in line with our expectations
Potato protein successfully passed production trial runs and independent third party test ? China Essence has sent sample products to an independent third party accreditation board, the China Commercial Union of Feed Quality Supervision and Testing Centre, which successfully passed all the test as of 20 November 2008, after successful test trials for the production line of potato protein took place for 10 days in November 2007 and 3 weeks in September 2008. As noted in our previous report dated 13 Feb 2009, China Essence has commenced large-scale production in late September 2008 and has sent samples of potato protein to local and international distributors for further testing. The Group is cautiously optimistic that it will be able to secure orders from these customers and anticipates this to be a key performance driver in the 4Q09, though we remain skeptical. We understand from management that the Group has the ability to ramp up production quickly once firm orders are received from the customers for the next harvest season.
Potato fibre to commence production in May 2009 ? As with potato protein, China Essence has completed the trial run of the potato fibre production facility and have successfully passed 2 rounds of tests conducted by the same accreditation board as of 13 January 2009. The Group has sent sample products, to be fed to piglets and calves on a trial basis, to an animal-rearing organization under the local Heilongjiang government to conduct further testing and expect testing to be completed by May 2009. According to China Essence's announcement, there are approximately 40,000 tonnes of dried unprocessed potato skins under storage and rescheduling of commercial production of potato fibre from December 2008 to May 2009 will lead to cost savings in fuel.
Upgrade to BUY; Target price maintained at S$0.25 We maintain our FY09F earnings estimates, as we have adjusted our estimates in our report dated 13 February 2009. Based on last transacted price of S$0.205, China Essence is trading at 2.2x FY09F P/E and a 60% discount to FY09F book value. Given that stock price has fallen 7% since our last report from the broad market sell off, we believe value has emerged with 22% upside potential to our target price of S$0.25, pegged at an unchanged 0.5x FY09F P/B. As such, we upgrade China Essence to BUY.
Potato fibre to commence production in May 2009 ? As with potato protein, China Essence has completed the trial run of the potato fibre production facility and have successfully passed 2 rounds of tests conducted by the same accreditation board as of 13 January 2009. The Group has sent sample products, to be fed to piglets and calves on a trial basis, to an animal-rearing organization under the local Heilongjiang government to conduct further testing and expect testing to be completed by May 2009. According to China Essence's announcement, there are approximately 40,000 tonnes of dried unprocessed potato skins under storage and rescheduling of commercial production of potato fibre from December 2008 to May 2009 will lead to cost savings in fuel.
Upgrade to BUY; Target price maintained at S$0.25 We maintain our FY09F earnings estimates, as we have adjusted our estimates in our report dated 13 February 2009. Based on last transacted price of S$0.205, China Essence is trading at 2.2x FY09F P/E and a 60% discount to FY09F book value. Given that stock price has fallen 7% since our last report from the broad market sell off, we believe value has emerged with 22% upside potential to our target price of S$0.25, pegged at an unchanged 0.5x FY09F P/B. As such, we upgrade China Essence to BUY.
Cosco Corporation: Bombshell, not bombed out
Despite dropping a bombshell of losses in 4Q08 to take into account provisions for inventory write-downs, doubtful debts and cost overrun at its shipbuilding division, we do not expect an imminent recovery in earnings. The focus in 2009 is on the extent of plunge in rates for its bulk shipping division, which was the shining star last year accounting for 58% of earnings. Meanwhile, execution issues at its shipyard will continue to hamper performance of the stock. Maintain Fully Valued, target price cut to 62cts.
4Q08 plunged into losses of S$24m, due to provisions totaling S$170m at its shipbuilding division for doubtful doubts, inventory write-down for the plunge in the value of steel price and losses on its shipbuilding contracts arising from cost overrun due to weak execution, higher steel prices, sub-contracting cost and additional development cost at Zhoushan. About 29 vessels are under construction and only one delivered in early 2009.
Drastic cut in vessel delivery schedule. The group cut its planned delivery of vessels from 40 to 20 vessels for 2009. This will lead to a 25% drop in our shipbuilding revenue assumptions to S$1.7bn. In the absence of new orders, we estimate its order book has declined to US$6.8bn following recent contract cancellations.
Shipping in doldrums, no recovery in sight yet. We cut our net earnings forecasts for 2009 by 31% to S$189m and 15% for 2010 to S$226m, following the change in delivery schedule for 2009 and cut in freight rate assumptions for bulk carriers. Maintain Fully Valued, the stock is caught in a midst of a cyclical downtrend for both shipping and shipbuilding, which is not expected to turn around in the near term. Concerns over its ability to execute on its order book will put additional pressure on the stock. Target price cut to 62cts.
4Q08 plunged into losses of S$24m, due to provisions totaling S$170m at its shipbuilding division for doubtful doubts, inventory write-down for the plunge in the value of steel price and losses on its shipbuilding contracts arising from cost overrun due to weak execution, higher steel prices, sub-contracting cost and additional development cost at Zhoushan. About 29 vessels are under construction and only one delivered in early 2009.
Drastic cut in vessel delivery schedule. The group cut its planned delivery of vessels from 40 to 20 vessels for 2009. This will lead to a 25% drop in our shipbuilding revenue assumptions to S$1.7bn. In the absence of new orders, we estimate its order book has declined to US$6.8bn following recent contract cancellations.
Shipping in doldrums, no recovery in sight yet. We cut our net earnings forecasts for 2009 by 31% to S$189m and 15% for 2010 to S$226m, following the change in delivery schedule for 2009 and cut in freight rate assumptions for bulk carriers. Maintain Fully Valued, the stock is caught in a midst of a cyclical downtrend for both shipping and shipbuilding, which is not expected to turn around in the near term. Concerns over its ability to execute on its order book will put additional pressure on the stock. Target price cut to 62cts.
Cosco - More bad news possible, but market braced for this; maintain Hold
Cosco Corp will be releasing its FY08 results this evening (23rd February 2009). We are expecting FY08 earnings to come in at around S$320m, versus consensus at S$330m. Our forecast is consistent with Cosco’s profit guidance made at the end of last year, stating that FY08 earnings will be lower than FY07. In context, Cosco recorded net profit of S$336.6m for FY07. With Cosco already having posted net earnings of S$326.5m for the first 9M08, the implied lowered loss in 4Q08 will mainly be due to provisions for doubtful debts.
We warn that the level of provisioning could also be significantly higher, on the back of customer requests to delay progress payments and ship deliveries. Cosco also cited increased operational costs such as higher steel and sub-contracting costs and additional development costs at Zhoushan. While these issues were already well-know, these operational issues have also contributed to further delivery delays.
Looking beyond FY08 results, we expect Cosco to earn S$408.2m in FY09, but once again, this may be hampered by further contract delays and cost overruns. While Cosco has consistently paid a healthy dividend of between 40-45% of its earnings in the past 3 years, we believe that this may be reduced due to 1) a much more challenging environment 2) decelerating earnings and 3) a more conservative stance adopted by the company under the new President.
Our SOTP fair value stands at S$1.35. Despite the potential upside, we are maintaining our recommendation at Hold, as we are still unable to determine the full level of provisioning at this point, raising the risk of further earnings downgrades. Cosco’s Price to Book stands at 1.5x, on Book Value of S$0.52.
We warn that the level of provisioning could also be significantly higher, on the back of customer requests to delay progress payments and ship deliveries. Cosco also cited increased operational costs such as higher steel and sub-contracting costs and additional development costs at Zhoushan. While these issues were already well-know, these operational issues have also contributed to further delivery delays.
Looking beyond FY08 results, we expect Cosco to earn S$408.2m in FY09, but once again, this may be hampered by further contract delays and cost overruns. While Cosco has consistently paid a healthy dividend of between 40-45% of its earnings in the past 3 years, we believe that this may be reduced due to 1) a much more challenging environment 2) decelerating earnings and 3) a more conservative stance adopted by the company under the new President.
Our SOTP fair value stands at S$1.35. Despite the potential upside, we are maintaining our recommendation at Hold, as we are still unable to determine the full level of provisioning at this point, raising the risk of further earnings downgrades. Cosco’s Price to Book stands at 1.5x, on Book Value of S$0.52.
Bright World: Soft 4Q08; but far from inundation
Soft 4QFY08 performance. Bright World (BWPM) reported a set of 4QFY08 results that were below our expectations, with revenue down 12.5% YoY (- 21.8% QoQ) at RMB127.6m and net profit down 62.9% YoY (-46.9% QoQ) at RMB18.4m. The negative surprise came from slower-than-expected sales of its conventional stamping machines, which was further impacted by higher selling and distribution costs, administrative expenses and allowance for doubtful debts. However, thanks to an overall increase in sales orders from its high performance stamping machines and improved selling prices, BWPM still managed to eke out a 13.5% growth in FY08 sales to RMB642.6m, and a slower 8.6% decline in earnings to RMB131.9m. The full-year revenue was just 3.6% shy of our FY08 forecast, while the net income was 8.6% short of our figure. Despite that, we note that BWPM had fulfilled our view that it would meet the profit target pre-condition as stipulated in the voluntary cash offer by China Holdings Acquisition Corp (CHAC).
Product development, VAT reforms to mitigate slowdown. Going forward, BWPM remains optimistic about the long-term prospects of its businesses and the metal stamping machine industry in PRC. While the global economic downturn has inevitably affected the export-driven manufacturing industry in China, management is confident that the demand for its high performance stamping machines and its continual focus on product development to expand its product range and markets are likely to buffer the impact of the market slowdown. In addition, the group also believes that reforms to the Value-Added Tax (VAT) system effective from 1 January 2009 are likely to encourage purchases on capital equipment, and in turn lead to increased demand for its stamping machines.
Discontinue coverage on BWPM. We believe that capital equipment manufacturers including BWPM are likely to encounter further slowdown on the back of a sputtering global economy. Our last rating on the stock was a BUY, with a view to accept the offer. However, there are now some uncertainties on the offeror's part in terms of fulfilling the pre-conditions for the deal to go through. We are STOPPING COVERAGE on BWPM due to reallocation of resources, anticipated weak global demand and lack of regular daily trading liquidity in the stock.
Product development, VAT reforms to mitigate slowdown. Going forward, BWPM remains optimistic about the long-term prospects of its businesses and the metal stamping machine industry in PRC. While the global economic downturn has inevitably affected the export-driven manufacturing industry in China, management is confident that the demand for its high performance stamping machines and its continual focus on product development to expand its product range and markets are likely to buffer the impact of the market slowdown. In addition, the group also believes that reforms to the Value-Added Tax (VAT) system effective from 1 January 2009 are likely to encourage purchases on capital equipment, and in turn lead to increased demand for its stamping machines.
Discontinue coverage on BWPM. We believe that capital equipment manufacturers including BWPM are likely to encounter further slowdown on the back of a sputtering global economy. Our last rating on the stock was a BUY, with a view to accept the offer. However, there are now some uncertainties on the offeror's part in terms of fulfilling the pre-conditions for the deal to go through. We are STOPPING COVERAGE on BWPM due to reallocation of resources, anticipated weak global demand and lack of regular daily trading liquidity in the stock.
China XLX - 4Q results came in below expectation
China XLX reported 37% decline in 4Q08 net profit, which is 28% below our estimate. 4Q08 turnover dropped 14.4% to Rmb464m while net profit dropped 37% to Rmb45.7m. The lower-than-expected 4Q08 results were primarily due to a further decline in ASP during 4Q08. Looking ahead, we believe that further downside risk in urea price is limited as it is close to the the cash cost. For the next two years, we believe that volume growth remains the key driver for China XLX. Earnings for 2010 will be mainly driven by the ramp-up of production of its new plant expected in 2H09. Our analyst, Ken Lee, is travelling this morning. We will revisit our earings model and provide more details after we discuss with the management. For the time being, we maintain our 12-month fair value of S$0.57. China XLX remains the most attractively priced fertliser stock in our universe. We will use weakness to accumulate the stock.
China Hongxing - Changed Fron Usual Optimism To Caution
While 4Q ‘08 sales of RMB857.3mln (+28% yoy and +23% Due to the weak global economic environment which qoq) did not disappoint, gross margin fell a disappointing will likely negatively impact consumer demand, 2% point yoy and 4% point qoq due to bigger than expected management has turned from their usual optimistic product discounts given to their distributors and retailers.
outlook to one of caution and warns that the near term market condition is expected to be challenging. 4Q ‘08 pretax profit was also hit by an unexpected big forex loss of RMB23.653mln, up 265% yoy and offsetting At the results briefing this morning, management said that first 9 months of forex gain of RMB11.906mln. Due to same store sales growth in 4Q ‘08 averaged only 17% in the expiry of tax exemption status of certain subsidiaries, 4Q08 versus the usual 25-30% and recovered slightly to tax rate rose from 14.3% a quarter ago and 6% a year 20% in Jan ’09, but growth have since declined sharply to ago to 17.8%.
only 10% in Feb ’09, reflecting the very cautious consumer sentiment in China. And with 4 months worth of As a result, 4Q ‘08 net profit (-30% yoy but up 4% qoq to inventories, management would be monitoring the sales RMB110mln) came in about 10% below expectations. This trend closely so as to control obsolescence risks. would be the company’s first quarterly yoy profit decline since listing.
So far the prepayment milestones have been on track, collecting about RMB30-70mln a month, but given the But trade receivables rose 82% sequentially versus only same store sales slowdown experienced in Feb ’09, we 23% qoq increase in sales, straining its working capital. would monitor collections closely going forward. The increase in trade receivables of RMB216mln resulted Management targets to recover the RMB1.16bln by in negative operating cash flow of RMB24mln, up from 1H2010.
RMB9.5mln last year. After capex of RMB27mln and repayment of loans, cash holdings fell from RMB2.059bln Capital expenditure is expected to be around RMB120mln to RMB1.982bln. in 2009, down from RMB178mln in 2008 which the company is able to finance comfortably with their cash The company also disappointed by skipping their final holdings of RMB1.982bln.
dividend payment versus RMB2.2 cents last year and RMB1.5 cents during the interim. If they had maintained As a result of management’s warning of very challenging final dividend, full year yield would have been 4%. near term business conditions, we are reducing our 2009 profit forecast from RMB 500mln (consensus is currently Management said that while the company is currently well at RMB520mln) to RMB404mln, which implies a 10% capitalized with cash of RMB1.982bln versus little debts, decline from 2008’s RMB449mln.
the challenging and uncertain near term business outlook means that the board deems it more appropriate to be While valuation is not demanding (87% of its share price prudent to keep as much cash in the company as possible. backed by cash, 0.6x price to book and 5x trailing PE), we 2008 payout ratio is only 10% and the company does not believe the stock will not be able to perform given have a dividend policy at the moment, and would review management’s warning about the very challenging near this on a half yearly basis. term business outlook, negative suprise on the final dividend payment and rapidly weakening same store sales growth. We downgrade to HOLD.
outlook to one of caution and warns that the near term market condition is expected to be challenging. 4Q ‘08 pretax profit was also hit by an unexpected big forex loss of RMB23.653mln, up 265% yoy and offsetting At the results briefing this morning, management said that first 9 months of forex gain of RMB11.906mln. Due to same store sales growth in 4Q ‘08 averaged only 17% in the expiry of tax exemption status of certain subsidiaries, 4Q08 versus the usual 25-30% and recovered slightly to tax rate rose from 14.3% a quarter ago and 6% a year 20% in Jan ’09, but growth have since declined sharply to ago to 17.8%.
only 10% in Feb ’09, reflecting the very cautious consumer sentiment in China. And with 4 months worth of As a result, 4Q ‘08 net profit (-30% yoy but up 4% qoq to inventories, management would be monitoring the sales RMB110mln) came in about 10% below expectations. This trend closely so as to control obsolescence risks. would be the company’s first quarterly yoy profit decline since listing.
So far the prepayment milestones have been on track, collecting about RMB30-70mln a month, but given the But trade receivables rose 82% sequentially versus only same store sales slowdown experienced in Feb ’09, we 23% qoq increase in sales, straining its working capital. would monitor collections closely going forward. The increase in trade receivables of RMB216mln resulted Management targets to recover the RMB1.16bln by in negative operating cash flow of RMB24mln, up from 1H2010.
RMB9.5mln last year. After capex of RMB27mln and repayment of loans, cash holdings fell from RMB2.059bln Capital expenditure is expected to be around RMB120mln to RMB1.982bln. in 2009, down from RMB178mln in 2008 which the company is able to finance comfortably with their cash The company also disappointed by skipping their final holdings of RMB1.982bln.
dividend payment versus RMB2.2 cents last year and RMB1.5 cents during the interim. If they had maintained As a result of management’s warning of very challenging final dividend, full year yield would have been 4%. near term business conditions, we are reducing our 2009 profit forecast from RMB 500mln (consensus is currently Management said that while the company is currently well at RMB520mln) to RMB404mln, which implies a 10% capitalized with cash of RMB1.982bln versus little debts, decline from 2008’s RMB449mln.
the challenging and uncertain near term business outlook means that the board deems it more appropriate to be While valuation is not demanding (87% of its share price prudent to keep as much cash in the company as possible. backed by cash, 0.6x price to book and 5x trailing PE), we 2008 payout ratio is only 10% and the company does not believe the stock will not be able to perform given have a dividend policy at the moment, and would review management’s warning about the very challenging near this on a half yearly basis. term business outlook, negative suprise on the final dividend payment and rapidly weakening same store sales growth. We downgrade to HOLD.
China Animal Healthcare proposed dividend
China Animal Healthcare Ltd, which manufactures and distributes animal drugs, posted a net profit of 34.5 million yuan (S$7.7 million) for the fourth quarter ended December 2008. This compares with Q4 2007's net loss of 11.7 million yuan, which factored in a $47.4 million goodwill write-off arising from the reverse acquisition of Colorland Animation. Ignoring the goodwill write-off item, Q4 2008's net profit is just 3.3 per cent lower than Q4 2007's 35.7 million yuan. Revenue for the three months rose 12.9 per cent to 97.3 million yuan. Net profit for 2008 full year climbed 134.6 per cent to 138.3 million yuan from 2007's 58.9 million yuan (taking into consideration goodwill write-off), on the back of a 40.2 per cent rise in revenue to 385.1 million yuan. The company has proposed a first and final tax exempt (one tier) dividend of 2.2 fen per share. This amounts to 20.8 per cent of 2008 net profit.
Pacific Andes Holdings: Downside is limited
Decent set of 3Q earnings. Despite the gloomy economic outlook, Pacific Andes Holdings (PAH) delivered a fairly decent set of 3Q FY09 results. Net earnings rose 11% YoY to HK$87.1m, while revenue rose 40% YoY to HK$1562.1m. The bottomline improvement was due to another quarter of tax credit. For the 9-month period, net earnings rose 16% YoY to HK$302.8m on a 13% YoY rise in revenue to HK$5445m. Fishing, fishmeal and fishoil accounted for 46% of revenue, while its Frozen Fish SCM unit accounted for the balance. The PRC remains its core market and accounted for 70% of its 9-mth revenue, followed by East Asia with 15%. Margins fell for the 9- mth period due to higher fuel costs seen earlier in the financial year.
CFG's relatively muted performance. China Fishery Group (CFG) saw a relatively muted set of FY08 results. Earnings rose 6.5% YoY to US$94.3m, while revenue grew 13.4% YoY to US$459m. This was partly due to lower selling prices for fishmeal which partly tracked commodity prices. At the net level, there was a tax credit of US$2.8m as its Peru operation is subject to deferred tax liabilities. With the recent strengthening of the USD, it resulted in smaller deferred tax liabilities which in turn led to a tax reversal.
Business updates. Management reiterated that it will be in a good position to benefit from the implementation of the long awaited Individual Transferable Quota (ITQ) system in Peru from 2009 onwards. Organically, its Alaskan Pollock is deemed to be an affordable fish, and there is still demand for it. The group has also secured the term loans from three banks for its expansion in the Pacific. Out of US$29m trade loans, US$20m has been renewed. Capex for FY10 is estimated at around US$20-25m for its South Pacific expansion.
Maintain BUY and fair vale estimate of S$0.30. We are retaining our FY09 estimates of net earnings of HK$492m. While global market conditions remain uncertain, we believe the downside for the stock is limited at current level. Demand for fish could soften in the coming months if market conditions remain weak, but PAH has put in place longer term operational strategies for both the North and South Pacific and this should enable PAH to enjoy higher catch volumes once market conditions improve. We are maintaining our BUY rating and fair value estimate of S$0.30.
CFG's relatively muted performance. China Fishery Group (CFG) saw a relatively muted set of FY08 results. Earnings rose 6.5% YoY to US$94.3m, while revenue grew 13.4% YoY to US$459m. This was partly due to lower selling prices for fishmeal which partly tracked commodity prices. At the net level, there was a tax credit of US$2.8m as its Peru operation is subject to deferred tax liabilities. With the recent strengthening of the USD, it resulted in smaller deferred tax liabilities which in turn led to a tax reversal.
Business updates. Management reiterated that it will be in a good position to benefit from the implementation of the long awaited Individual Transferable Quota (ITQ) system in Peru from 2009 onwards. Organically, its Alaskan Pollock is deemed to be an affordable fish, and there is still demand for it. The group has also secured the term loans from three banks for its expansion in the Pacific. Out of US$29m trade loans, US$20m has been renewed. Capex for FY10 is estimated at around US$20-25m for its South Pacific expansion.
Maintain BUY and fair vale estimate of S$0.30. We are retaining our FY09 estimates of net earnings of HK$492m. While global market conditions remain uncertain, we believe the downside for the stock is limited at current level. Demand for fish could soften in the coming months if market conditions remain weak, but PAH has put in place longer term operational strategies for both the North and South Pacific and this should enable PAH to enjoy higher catch volumes once market conditions improve. We are maintaining our BUY rating and fair value estimate of S$0.30.
No distribution from Saizen Reit for Q2
Saizen Real Estate Investment Trust (Saizen Reit) yesterday said that it will not be giving out any distribution for its FY2009 second quarter.
Saizen Reit, listed on the Singapore Exchange in November 2007, invests in Japanese regional residential properties. The Reit reported that income attributable to its unitholders for the three months ended Dec 31, 2008 (Q2 2009) came to 214.7 million yen (S$3.5 million). In Q2 the previous year, Saizen Reit recorded income attributable to its unitholders of negative 565.2 million yen on the back of high IPO expenses. Due to an increase in the size of the Reit's property portfolio, gross revenue and net property income rose by 24.5 per cent and 24.7 per cent respectively in Q2 2009 compared to a year ago.
Saizen Reit has a total of 5.28 billion yen of loans due in the first half of 2009. The Reit said that while it has sufficient cash resources on hand to fully repay that amount, it has a further 13.40 billion yen of loans due in November and December 2009. 'Discussions with various potential lenders on their refinancing is ongoing,' it informed. To facilitate and improve the likelihood of refinancing, the Reit's manager in December 2008 announced a proposed rights-cum-warrants issue to strengthen the Reit's capital base. Documentation of the rights-cum-warrants issue is in progress and regulatory clearance is now being obtained, it said. The relevant EGM could be convened in or around end-March or early-April 2009.
On Jan 13, the manager further proposed a scrip-only dividend scheme, subject to unitholders' approval, 'to provide the flexibility for Saizen Reit to pay out part or whole of a dividend by way of new scrip dividend units (in the event that a dividend is announced) and allows cash to be conserved for loan repayments'. Yesterday, the trust said that the payment of dividends in the form of units will be a 'temporary measure to conserve cash during this uncertain period'. Saizen Reit will resume its dividend payment in the form of cash once the loan refinancing issues are resolved, it said.
Looking ahead, the trust said that while deteriorating economic conditions have resulted in increased leasing competition in certain cities, the negative impact on portfolio's occupancies and operations have been relatively subdued as Saizen Reit's portfolio properties cater to the local mass market segment instead of the high-end or expatriate markets.
Saizen Reit, listed on the Singapore Exchange in November 2007, invests in Japanese regional residential properties. The Reit reported that income attributable to its unitholders for the three months ended Dec 31, 2008 (Q2 2009) came to 214.7 million yen (S$3.5 million). In Q2 the previous year, Saizen Reit recorded income attributable to its unitholders of negative 565.2 million yen on the back of high IPO expenses. Due to an increase in the size of the Reit's property portfolio, gross revenue and net property income rose by 24.5 per cent and 24.7 per cent respectively in Q2 2009 compared to a year ago.
Saizen Reit has a total of 5.28 billion yen of loans due in the first half of 2009. The Reit said that while it has sufficient cash resources on hand to fully repay that amount, it has a further 13.40 billion yen of loans due in November and December 2009. 'Discussions with various potential lenders on their refinancing is ongoing,' it informed. To facilitate and improve the likelihood of refinancing, the Reit's manager in December 2008 announced a proposed rights-cum-warrants issue to strengthen the Reit's capital base. Documentation of the rights-cum-warrants issue is in progress and regulatory clearance is now being obtained, it said. The relevant EGM could be convened in or around end-March or early-April 2009.
On Jan 13, the manager further proposed a scrip-only dividend scheme, subject to unitholders' approval, 'to provide the flexibility for Saizen Reit to pay out part or whole of a dividend by way of new scrip dividend units (in the event that a dividend is announced) and allows cash to be conserved for loan repayments'. Yesterday, the trust said that the payment of dividends in the form of units will be a 'temporary measure to conserve cash during this uncertain period'. Saizen Reit will resume its dividend payment in the form of cash once the loan refinancing issues are resolved, it said.
Looking ahead, the trust said that while deteriorating economic conditions have resulted in increased leasing competition in certain cities, the negative impact on portfolio's occupancies and operations have been relatively subdued as Saizen Reit's portfolio properties cater to the local mass market segment instead of the high-end or expatriate markets.
China Aviation Oil warns of fourth-quarter net loss
China Aviation Oil (Singapore) has issued a profit warning, saying that it expects a net loss for the fourth quarter of 2008 due to costly jet fuel inventories procured at Shanghai Pudong Airport even as oil prices fell in the quarter, although it will remain profitable for FY2008. Giving an update on Q4 - ahead of its full-year results announcement on Feb 25 - CAO said that its 33 per cent owned associate company, Shanghai Pudong International Airport Aviation Fuel Supply Company is expected to incur a net loss of about US$33 million for Q4.
This is due to a sharp decline in oil prices in the final quarter of 2008, as a result of which the unit incurred an operating loss due to higher procurement costs of jet fuel versus its sales revenue. 'The decline in the regulated domestic prices in the PRC during the month of December 2008 exacerbated the losses,' CAO added. As a result, CAO group's share of net loss from the unit is expected to be about US$11 million. The unit's management has, however, indicated to CAO that 'in view of falling oil prices for the past months and the inventory procured during the period of high oil prices is expected to be fully consumed by the first quarter of 2009, the aforesaid loss is to be considered exceptional'.
Notwithstanding the Q4 setback - its first quarterly net loss for the year - CAO said that it would remain profitable for the year ended Dec 31, 2008. It also stressed that 'despite the current global economic downturn, the fundamentals of CAO's core businesses have remained strong'. 'The group is taking proactive steps to further diversify its earnings base. It is also actively seeking to invest in more synergetic oil-related assets,' it added. Last December, CAO said that it was already discussing alternative jet fuel supplies, including long-term supply deals for Chinese airports with various parties including British Petroleum.
It indicated that it was talking to traders, oil refiners and oil majors in countries such as Japan, South Korea and Taiwan regarding the supplies. These long-term deals will supplement those which CAO obtains through monthly tenders from these countries, which so far have been its sole source of the jet fuel. Pending the outcome of the negotiations, BP Singapore will supply 'a small portion' of CAO's monthly fuel requirements for onward supply to China under a one-year deal, which started earlier this January.
This is due to a sharp decline in oil prices in the final quarter of 2008, as a result of which the unit incurred an operating loss due to higher procurement costs of jet fuel versus its sales revenue. 'The decline in the regulated domestic prices in the PRC during the month of December 2008 exacerbated the losses,' CAO added. As a result, CAO group's share of net loss from the unit is expected to be about US$11 million. The unit's management has, however, indicated to CAO that 'in view of falling oil prices for the past months and the inventory procured during the period of high oil prices is expected to be fully consumed by the first quarter of 2009, the aforesaid loss is to be considered exceptional'.
Notwithstanding the Q4 setback - its first quarterly net loss for the year - CAO said that it would remain profitable for the year ended Dec 31, 2008. It also stressed that 'despite the current global economic downturn, the fundamentals of CAO's core businesses have remained strong'. 'The group is taking proactive steps to further diversify its earnings base. It is also actively seeking to invest in more synergetic oil-related assets,' it added. Last December, CAO said that it was already discussing alternative jet fuel supplies, including long-term supply deals for Chinese airports with various parties including British Petroleum.
It indicated that it was talking to traders, oil refiners and oil majors in countries such as Japan, South Korea and Taiwan regarding the supplies. These long-term deals will supplement those which CAO obtains through monthly tenders from these countries, which so far have been its sole source of the jet fuel. Pending the outcome of the negotiations, BP Singapore will supply 'a small portion' of CAO's monthly fuel requirements for onward supply to China under a one-year deal, which started earlier this January.
China Milk: Strong 3QFY09 raw milk revenue
Strong raw milk revenue contribution despite tainted industry. Raw milk production increased by 26% YoY to 13,187 tonnes in 3QFY09. This is a positive as many of the bigger players in China’s dairy industry have fallen into the pit. Raw milk revenue grew by 24% YoY to RMB42m. We firmly believe that China Milk will be able to sell a total of 54,000/tonnes of raw milk for FY09 which equates to RMB155.5m revenue.
Firm operating profit growth of 27% but weak net profit due to CB. All of China Milk’s core businesses saw strong revenue growth during 3QFY09. Operating profit grew by 27% to RMB150.4m during the same period. However, its convertible bond was the main culprit which caused its net profit to slump to a growth of 1.9% to RMB119.1m in 3QFY09. Due to its change in fair value of derivative financial instruments component in its income statement, the company saw a loss of RMB8.1m in 3QFY09 compared to a gain of RMB24.6m in 3QFY08. We are concerned that China Milk has not bought back these CBs in the open market. We believe that China Milk will continue to monitor these convertible bonds and buy-back when the right opportunity arises.
Strong cash position offsets concerns of CB. The company is sitting on nearly RMB2b worth in cash (US$292.2m) which exceeds its US$150m convertible bond (maturing in 2010). Long term outlook. We believe that the key to China Milk’s success will be going downstream. The commencement of its own proprietary brand, Yinluo is a major step forward. However, the next step for China Milk is sealing what has been a long period of negotiations with an OEM customer. The milk processing business offers China Milk the ability to capture a large market share in China’s dairy industry. We will continue to monitor these developments. Maintain BUY. Pending our earnings revision, we maintain our price target of S$0.67 based on 5.0x FY09 P/E. We have given China Milk a premium to the FSTC FY09 P/E of 3.9x.
Firm operating profit growth of 27% but weak net profit due to CB. All of China Milk’s core businesses saw strong revenue growth during 3QFY09. Operating profit grew by 27% to RMB150.4m during the same period. However, its convertible bond was the main culprit which caused its net profit to slump to a growth of 1.9% to RMB119.1m in 3QFY09. Due to its change in fair value of derivative financial instruments component in its income statement, the company saw a loss of RMB8.1m in 3QFY09 compared to a gain of RMB24.6m in 3QFY08. We are concerned that China Milk has not bought back these CBs in the open market. We believe that China Milk will continue to monitor these convertible bonds and buy-back when the right opportunity arises.
Strong cash position offsets concerns of CB. The company is sitting on nearly RMB2b worth in cash (US$292.2m) which exceeds its US$150m convertible bond (maturing in 2010). Long term outlook. We believe that the key to China Milk’s success will be going downstream. The commencement of its own proprietary brand, Yinluo is a major step forward. However, the next step for China Milk is sealing what has been a long period of negotiations with an OEM customer. The milk processing business offers China Milk the ability to capture a large market share in China’s dairy industry. We will continue to monitor these developments. Maintain BUY. Pending our earnings revision, we maintain our price target of S$0.67 based on 5.0x FY09 P/E. We have given China Milk a premium to the FSTC FY09 P/E of 3.9x.
China Fishery: Decent results in FY08
China Fishery’s revenue grew 13% to US$459.4m in FY08 which was inline with our expectations. Its strong revenue growth was achieved through an increase in sales volume of Alaskan Pollock by 10.3% to 213,000 MT. ASP for Alaskan Pollock also increased by 7.5% to US$1,609/MT. Through its fishmeal operations in Peru, CFGL was able to acquire 5 addition fishing vessels and 1 fishmeal processing plant in FY08. This helped them increase its catch volume by 39.3% to 326,000 MT and increased production volume of fish oil by 25.6% to 131,260 MT.
Net profit grew slightly by 6.6% to US$94.3m due to high fuel costs. We had expected CFGL to achieve net profit of US$98.9m. High bunker fuel cost throughout the year led to the milk earnings growth. We believe that FY09 will be a different story for CFGL as fuel prices are at its lowest from its peak of US$147/bbl in July 2008. We forecast FY09 bunker cost of US$61.8m, 35% less than our FY08 estimate.
High gearing remains, but long term strategy in the South Pacific Ocean is a positive. As of 31 Dec 2008, CFGL has a cash position of US$15.3m as compared to US$18.3m in 2007. We remain concerned that CFGL has a high gearing ratio of 0.92x and a sizeable net debt of US$309.5m. Management has indicated to us that their high gearing is for its CAPEX plans in the South Pacific Ocean. The South Pacific Ocean has an abundant resource of Chilean Jack Mackerel which is used for fishmeal as well as human consumption in Africa. We believe that its trawling operations in the South Pacific Ocean will be revenue contributing in 2H09 and firmer growth is expected in FY10.
We maintain BUY with a target price of S$0.86. We have a price target of S$0.86 based on 3.8x FY09 P/E which is pegged to the FSTC FY09 P/E of 3.9x.
Net profit grew slightly by 6.6% to US$94.3m due to high fuel costs. We had expected CFGL to achieve net profit of US$98.9m. High bunker fuel cost throughout the year led to the milk earnings growth. We believe that FY09 will be a different story for CFGL as fuel prices are at its lowest from its peak of US$147/bbl in July 2008. We forecast FY09 bunker cost of US$61.8m, 35% less than our FY08 estimate.
High gearing remains, but long term strategy in the South Pacific Ocean is a positive. As of 31 Dec 2008, CFGL has a cash position of US$15.3m as compared to US$18.3m in 2007. We remain concerned that CFGL has a high gearing ratio of 0.92x and a sizeable net debt of US$309.5m. Management has indicated to us that their high gearing is for its CAPEX plans in the South Pacific Ocean. The South Pacific Ocean has an abundant resource of Chilean Jack Mackerel which is used for fishmeal as well as human consumption in Africa. We believe that its trawling operations in the South Pacific Ocean will be revenue contributing in 2H09 and firmer growth is expected in FY10.
We maintain BUY with a target price of S$0.86. We have a price target of S$0.86 based on 3.8x FY09 P/E which is pegged to the FSTC FY09 P/E of 3.9x.
Midas Holdings - Rail infrastructure still far from optimal in PRC
Midas established a strong presence in the highly specialised aluminium alloy train profiles market in the PRC within a short span. Despite being a late entrant, it has secured an impressive 80%-market share for components that are used in high-speed train/metro bodies. It is also the only PRC supplier certified by all top three global train manufacturers: Alstom, Siemens and Bombardier.
Midas is a key beneficiary of the PRC government’s recent fiscal stimulus package, where an additional RMB750b was set aside for the rail infrastructure industry. Currently, only 10 out of 48 heavily-populated cities have a rapid transit network, a sign of China’s rudimentary rail transport system.
Midas took a 32.5-% stake in Nanjing SR Puzhen Rail Transport (NPRT) back in Sep 2006, which holds one of only four licenses in the manufacturing of complete metro train units in the PRC. Its bottomline contribution is still out of sight, possibly disappointing the market. However, with the high barrier of entry to the market and sizeable order book of RMB4.5b, this JV could be the wild card in the medium term.
Due to its prudent stance and effective capital management, Midas has been in a net cash position since its listing despite paying attractive and regular dividends. This will allow the group to fund its expansion plans for the next growth phase, including capex plans of S$85m.
With FY09 being a year of consolidation for Midas as its 3rd production line and downstream fabrication activities come onboard, we have used FY10 estimated profits in our SOTP approach. We value Midas at 12X its net core earnings and 15X NPRT net profits. Our target price of S$0.69 will provide a 31.4% upside.
Midas is a key beneficiary of the PRC government’s recent fiscal stimulus package, where an additional RMB750b was set aside for the rail infrastructure industry. Currently, only 10 out of 48 heavily-populated cities have a rapid transit network, a sign of China’s rudimentary rail transport system.
Midas took a 32.5-% stake in Nanjing SR Puzhen Rail Transport (NPRT) back in Sep 2006, which holds one of only four licenses in the manufacturing of complete metro train units in the PRC. Its bottomline contribution is still out of sight, possibly disappointing the market. However, with the high barrier of entry to the market and sizeable order book of RMB4.5b, this JV could be the wild card in the medium term.
Due to its prudent stance and effective capital management, Midas has been in a net cash position since its listing despite paying attractive and regular dividends. This will allow the group to fund its expansion plans for the next growth phase, including capex plans of S$85m.
With FY09 being a year of consolidation for Midas as its 3rd production line and downstream fabrication activities come onboard, we have used FY10 estimated profits in our SOTP approach. We value Midas at 12X its net core earnings and 15X NPRT net profits. Our target price of S$0.69 will provide a 31.4% upside.
China - PROPERTY - Hungry for an inflexion point
Guangzhou R&F, E-House, Soho China and CC Land presented at our Asia Investors’ Forum in Las Vegas earlier this week. The overall message remains downbeat with just a few positive spots. Investors at the forum, however, seem to welcome the few positive news, such as higher January sales, admitting a better appetite for any signal of an inflexion point than more confirmation of the well expected downtrend.
Guangzhou R&F - Strong January/February sales. Guangzhou R&F (2777 HK - HK$7.25 - SELL) reported strong sales in January at Rmb1.28bn, up 39% YoY. But we note the number includes sales of strata title offices in Guangzhou and not just residential units. February started equally strong with first week sales at Rmb250m. The company believes government supportive policies, combined with friendlier mortgage approval at the banks, were the key reasons for the strength. Questions from the audience on this point include whether recent trends are sustainable as opposed to being related to delayed purchases.
On leverage and hotel properties. R&F plans to reduce net gearing to below 80% by end of 2009. But the reduction could well be non-cash and driven by revaluation gains of its rental properties, as the company expects net debt in dollar terms to drop to Rmb15-17bn (and not so much a reduction compared to the Rmb18.6bn in 1H08). Other questions surrounded occupancy of hotel properties, which are most running at around 50-55%. E-House - Business still bad. E-House China (EJ US - US$7.28 - N-R) saw business as bad, falling apart in 4Q08. Total transaction volume plunged 40% in 2008 YoY, with prices flat. The company guided for downward pressure on prices in 2009. Among its clients (developers), 50% are willing to take price cuts this year against just 20% in 2008.
Where challenges and opportunities lie. The audience asked what cities are the most challenging and which have the most upside opportunities. The cities with bubbles are challenging, says E-House. The smaller the bubble, the better support for a rebound (Shanghai was the best example). The inner cities are an exception because no one provides support at lower prices (no market depth).
CC Land - Upbeat on Chongqing. CC Land (1224 HK - HK$1.83 - N-R) started its presentation giving an upbeat guidance on the outlook of Chongqing, and believes the debated income-tax rebate on home purchase will go ahead. However, the company also mentioned that it could take Chongqing three to four years to digest the 80m m² that is under construction. And despite its low gearing (net gearing of just 7.3%), the company is not prepared to make any major new acquisitions and will be cautious in assessing how much it should build depending on demand. We believe the latter statements might be more telling of the company’s outlook on the market.
Soho China – Eyeing Shanghai. Soho China (410 HK - HK$2.95 - N-R) nearly doubled its total presales from Rmb4bn in 2007 to Rmb7bn in 2008, despite the challenging market. Gross floor area sold grew to 159,000m² from 112,000m² in 2007, but average selling prices dropped only in the residential segment last year. However, the company was not bullish on the China property sector or the economy in 2009. He believes the property market has not hit bottom. In fact, in the past six months, Soho has seen an astounding 25-35% vacancy rate and a 15-20% drop in rents in Beijing. It also has a strong balance sheet, with Rmb10.7bn in cash reserves and is one of the few developers with negative net debt to equity. For 2009-10, it plans to expand its landbank using its large cash position, eyeing the Shanghai market, where it has seen a significant increase in offers. So far, the company has not seen many contract cancellations.
Guangzhou R&F - Strong January/February sales. Guangzhou R&F (2777 HK - HK$7.25 - SELL) reported strong sales in January at Rmb1.28bn, up 39% YoY. But we note the number includes sales of strata title offices in Guangzhou and not just residential units. February started equally strong with first week sales at Rmb250m. The company believes government supportive policies, combined with friendlier mortgage approval at the banks, were the key reasons for the strength. Questions from the audience on this point include whether recent trends are sustainable as opposed to being related to delayed purchases.
On leverage and hotel properties. R&F plans to reduce net gearing to below 80% by end of 2009. But the reduction could well be non-cash and driven by revaluation gains of its rental properties, as the company expects net debt in dollar terms to drop to Rmb15-17bn (and not so much a reduction compared to the Rmb18.6bn in 1H08). Other questions surrounded occupancy of hotel properties, which are most running at around 50-55%. E-House - Business still bad. E-House China (EJ US - US$7.28 - N-R) saw business as bad, falling apart in 4Q08. Total transaction volume plunged 40% in 2008 YoY, with prices flat. The company guided for downward pressure on prices in 2009. Among its clients (developers), 50% are willing to take price cuts this year against just 20% in 2008.
Where challenges and opportunities lie. The audience asked what cities are the most challenging and which have the most upside opportunities. The cities with bubbles are challenging, says E-House. The smaller the bubble, the better support for a rebound (Shanghai was the best example). The inner cities are an exception because no one provides support at lower prices (no market depth).
CC Land - Upbeat on Chongqing. CC Land (1224 HK - HK$1.83 - N-R) started its presentation giving an upbeat guidance on the outlook of Chongqing, and believes the debated income-tax rebate on home purchase will go ahead. However, the company also mentioned that it could take Chongqing three to four years to digest the 80m m² that is under construction. And despite its low gearing (net gearing of just 7.3%), the company is not prepared to make any major new acquisitions and will be cautious in assessing how much it should build depending on demand. We believe the latter statements might be more telling of the company’s outlook on the market.
Soho China – Eyeing Shanghai. Soho China (410 HK - HK$2.95 - N-R) nearly doubled its total presales from Rmb4bn in 2007 to Rmb7bn in 2008, despite the challenging market. Gross floor area sold grew to 159,000m² from 112,000m² in 2007, but average selling prices dropped only in the residential segment last year. However, the company was not bullish on the China property sector or the economy in 2009. He believes the property market has not hit bottom. In fact, in the past six months, Soho has seen an astounding 25-35% vacancy rate and a 15-20% drop in rents in Beijing. It also has a strong balance sheet, with Rmb10.7bn in cash reserves and is one of the few developers with negative net debt to equity. For 2009-10, it plans to expand its landbank using its large cash position, eyeing the Shanghai market, where it has seen a significant increase in offers. So far, the company has not seen many contract cancellations.
China Essence Group Ltd - Results slightly ahead of our forecasts; warns of challenging times ahead
Earnings ahead of our forecast ? China Essence reported a net profit of RMB81.2m in 3Q09, reflecting a yoy decline of 19.5%. 9M09 earnings of RMB161.3m accounted for 86% of our forecasts versus approximately 70% of consensus estimates. Selling and distribution cost and administrative expenses decreased 13.8% and 27.6% respectively, leading to a 2% increase in 3Q09 operating profits.
Challenging outlook ahead ? Given the dynamic and rapidly changing global business environment, management has guided for a challenging outlook for FY09~10F. To sustain demand, the Group has further reduced the selling price of potato starch in Jan 2009 by approximately 10% or RMB500/tonne.
Potato protein and potato fibre updates ? China Essence has commenced large-scale production in late September 2008 and has sent samples of potato protein to local and international distributors for further testing. The Group is cautiously optimistic that it will be able to secure orders from these customers and anticipates this to be a key performance driver in the 4Q09, though we remain skeptical. China Essence has completed the trial run of the potato fibre production facility and would likely to commence in May 2009, later than expected. As such, we have pushed back contribution from potato fibre to 2Q10F.
Maintain Hold; Target price of S$0.25 We raise our FY09F earnings estimates by 3.0%, due to a better than expected 3Q09, implying a 61.2% qoq decline in 4Q09F earnings amid the challenging economic climate. Given that the stock is already trading at 2.4x FY09F P/E and a 57% discount to book value, we maintain HOLD, valuing China Essence at S$0.25, pegged at an unchanged 0.5x FY09F P/B.
Challenging outlook ahead ? Given the dynamic and rapidly changing global business environment, management has guided for a challenging outlook for FY09~10F. To sustain demand, the Group has further reduced the selling price of potato starch in Jan 2009 by approximately 10% or RMB500/tonne.
Potato protein and potato fibre updates ? China Essence has commenced large-scale production in late September 2008 and has sent samples of potato protein to local and international distributors for further testing. The Group is cautiously optimistic that it will be able to secure orders from these customers and anticipates this to be a key performance driver in the 4Q09, though we remain skeptical. China Essence has completed the trial run of the potato fibre production facility and would likely to commence in May 2009, later than expected. As such, we have pushed back contribution from potato fibre to 2Q10F.
Maintain Hold; Target price of S$0.25 We raise our FY09F earnings estimates by 3.0%, due to a better than expected 3Q09, implying a 61.2% qoq decline in 4Q09F earnings amid the challenging economic climate. Given that the stock is already trading at 2.4x FY09F P/E and a 57% discount to book value, we maintain HOLD, valuing China Essence at S$0.25, pegged at an unchanged 0.5x FY09F P/B.
Beauty China released profit warning
Last night, Beauty China warned that its 4Q08 earnings may be worse yoy due to reduced revenue growth and slower collections of trade receivables. As a result, it may be required to make additional provisions for the impairment of trade receivables in 4Q08. We now expect 4Q08 revenue of HK$220.2m (+4% yoy) and a net profit of HK$35.8m (-10% yoy), after taking into account the above. Following our earnings reductions of 10-22%, our target price drops to S$0.47 from S$0.54, still based on 4x CY10 P/E. Downgrade to Neutral from Outperform on the back of its weaker earnings visibility.
In our last update, we have already mentioned that the company had encountered some receivable problems in 4Q08 and expected that the company might make some impairment provision. But it seems that the situation is worse than our previous expectation. We expect the company's announcement will put some pressure on share price today. Our current FY08 net profit forecast is HK$185.6m, which is 3% lower than the consensus's HK$191m.
In our last update, we have already mentioned that the company had encountered some receivable problems in 4Q08 and expected that the company might make some impairment provision. But it seems that the situation is worse than our previous expectation. We expect the company's announcement will put some pressure on share price today. Our current FY08 net profit forecast is HK$185.6m, which is 3% lower than the consensus's HK$191m.
China Yuanbang Property - 1HFY09 results
Yuanbang reported core net profit of Rmb3.2m in 1HFY09, which remains insignificant and represents only 7% of our full year estimate due to lack of completions. Presales for the Nanchang project remained sluggish with receipts amounted to Rmb41m during 2QFY09. As earnings visibility remains low for the stock, we believe investor interest in the stock will wane during the current downcycle. We are therefore ceasing coverage of the stock.
C&O Pharmaceutical - We expect a lengthy transition period
We have lowered our six-month target price for C&O to S$0.12, from S$0.17, given the likelihood of limited growth due to a prolonged transition period. Our target price is based on a PER that has been revised down to 3.5x (from 5.9x), which is at a discount of 53% (from 10%) to the peer-average PER of 7.5x, and on our 12-month EPS forecast to June 2009.
We forecast C&O to record a net profit of HK$32.7m for 2Q FY09, up 29.4% YoY, due to an improvement in profit margins for its antibiotic products. However, we do not foresee anything that would change our outlook significantly for the company during the forthcoming results announcement. In our view, the company’s attempt to boost the sales of its new products and reduce its reliance on the maturing Amoxycillin, which accounted for about 40% of sales and gross profit for 1Q FY09, will take some time.
While C&O’s share price has corrected considerably over the past few months and is trading at a relatively low PER, we still do not find it attractive. We see better investment options, such as Wuyi, which we believe offers better sales- and earnings- growth prospects and more clarity on its outlook, and is trading at a similar PER.
We forecast C&O to record a net profit of HK$32.7m for 2Q FY09, up 29.4% YoY, due to an improvement in profit margins for its antibiotic products. However, we do not foresee anything that would change our outlook significantly for the company during the forthcoming results announcement. In our view, the company’s attempt to boost the sales of its new products and reduce its reliance on the maturing Amoxycillin, which accounted for about 40% of sales and gross profit for 1Q FY09, will take some time.
While C&O’s share price has corrected considerably over the past few months and is trading at a relatively low PER, we still do not find it attractive. We see better investment options, such as Wuyi, which we believe offers better sales- and earnings- growth prospects and more clarity on its outlook, and is trading at a similar PER.
AsiaPharm Group - Fishing for catalysts
We have lowered our six-month target price for AsiaPharm to S$0.33, from S$0.48, to factor in the reduced likelihood of another privatisation attempt this year. Our target price is based on a weighted average of the previous privatisation offer price for the company of S$0.725, and its valuation at the peer- average PER of 7.5x based on our 12-month EPS forecasts to June 2009. We have lowered the weighting for privatisation to 10%, from 50%, in view of the current soft market conditions.
We forecast AsiaPharm to record a net profit of Rmb23.9m for 4Q FY08, up 329.9% YoY, marking the recovery from the company’s transition in 2008. We see the possibility for positive surprises to arise from the continued strong sales growth of Lipusu, a cancer drug that has become the company’s top-selling drug, and better management of its distribution costs, which accounted for almost 50% of its sales from 4Q FY07 to 3Q FY08.
At the current share price, we believe that the market is pricing in more of its operating outlook and less of its privatisation prospects. A further reduction in AsiaPharm’s share price, coupled with continued top-line growth and signs of better cost management would be factors that might lead us to upgrade our rating for the stock.
We forecast AsiaPharm to record a net profit of Rmb23.9m for 4Q FY08, up 329.9% YoY, marking the recovery from the company’s transition in 2008. We see the possibility for positive surprises to arise from the continued strong sales growth of Lipusu, a cancer drug that has become the company’s top-selling drug, and better management of its distribution costs, which accounted for almost 50% of its sales from 4Q FY07 to 3Q FY08.
At the current share price, we believe that the market is pricing in more of its operating outlook and less of its privatisation prospects. A further reduction in AsiaPharm’s share price, coupled with continued top-line growth and signs of better cost management would be factors that might lead us to upgrade our rating for the stock.
Sihuan Pharmaceutical - High-growth stock at cyclical-low prices
However, we have lowered our six-month target price to S$0.88, from S$1.46, in line with the recent market sell-down, and the decline in its peer-average PER to 6.6x (using a blended PER for 2007 and 2008), from 12.4x previously. Our target price is based on a 6.6x PER on our 12-month earnings forecast to 1Q09. We see the consistent delivery of growth and products as the key elements for sustaining our call.
Beyond the current market uncertainty, we see Sihuan Pharmaceutical (Sihuan) trading at S$2.72 in three years, based on a mid-cycle PER of 11.2x for the pharmaceutical sector, and our earnings forecast of Rmb525.1m for 2011. The company’s key growth drivers over the medium term include its traditional core products Kelinao, Anjieli and Chuanqing, new products Aogan and Edaravone Injection, possible patent sales from 2009, and a series of Category I products scheduled for launch from 2010.
Sihuan recorded a 52.9% YoY increase in 3Q08 net profit to Rmb66.5m, amidst the prevailing economic uncertainty. The strong performance was driven by the increasing penetration of its products in hospitals across China. We have revised up our FY08-10 earnings forecasts by up to 7.5%, to factor in the strong performance, and the potential contribution from new products.
Beyond the current market uncertainty, we see Sihuan Pharmaceutical (Sihuan) trading at S$2.72 in three years, based on a mid-cycle PER of 11.2x for the pharmaceutical sector, and our earnings forecast of Rmb525.1m for 2011. The company’s key growth drivers over the medium term include its traditional core products Kelinao, Anjieli and Chuanqing, new products Aogan and Edaravone Injection, possible patent sales from 2009, and a series of Category I products scheduled for launch from 2010.
Sihuan recorded a 52.9% YoY increase in 3Q08 net profit to Rmb66.5m, amidst the prevailing economic uncertainty. The strong performance was driven by the increasing penetration of its products in hospitals across China. We have revised up our FY08-10 earnings forecasts by up to 7.5%, to factor in the strong performance, and the potential contribution from new products.
United Laboratories (3933 HK)
Our six-month target price of HK$3.12 for United Laboratories (TUL) is based on a peer-comparison PER of 6.6x (blended for 2007 and 2008) on our earnings forecasts for FY08. Given our forecast of continued rises in earnings, we think the stock is attractive as it is trading currently at a PER of 3.6x on our FY08 EPS forecast, and offers a forward dividend yield of 11.1%. We see the stock trading to S$8.95 in three years’ time, based on the mid-cycle PER of about 12x for the pharmaceuticals sector, and our earnings forecasts for FY11.
TUL is one of the largest manufacturers of generic antibiotic products in the PRC. We believe it has the scale to provide a competitive edge in production costs, the integration to generate better profit margins and operational flexibility, and the quality to ensure ready demand and higher pricing for its products. We see these as the core attributes to drive continued market-share gains in the mature but expanding antibiotic market in the PRC.
We expect TUL to record slower but continued net-profit growth for FY08-10, backed by capacity expansion. While prices of antibiotic products have been trending down since 2H07, we expect the increase in sales volume at TUL to more than offset the decline. We also expect prices to stabilise over the next six-to-12 months, as they have already dropped to near historical levels.
TUL is one of the largest manufacturers of generic antibiotic products in the PRC. We believe it has the scale to provide a competitive edge in production costs, the integration to generate better profit margins and operational flexibility, and the quality to ensure ready demand and higher pricing for its products. We see these as the core attributes to drive continued market-share gains in the mature but expanding antibiotic market in the PRC.
We expect TUL to record slower but continued net-profit growth for FY08-10, backed by capacity expansion. While prices of antibiotic products have been trending down since 2H07, we expect the increase in sales volume at TUL to more than offset the decline. We also expect prices to stabilise over the next six-to-12 months, as they have already dropped to near historical levels.
Wuyi International Pharmaceutical (1889 HK)
Our six-month target price of HK$1.58 for Wuyi International Pharmaceutical (Wuyi) is based on a peer-comparison PER of 6.7x on our 12-month earnings forecasts to 1H FY09. We forecast strong earnings growth, driven by the contribution from Perilla Oil Capsule, to result in a positive rerating for the company’s share price over the medium term.
Wuyi, an integrated manufacturer of branded prescription and over-the-counter drugs in Fujian Province in the PRC, launched Perilla Oil Capsule in March 2008. Perilla Oil Capsule is an exclusive new drug used to manage high blood cholesterol, and the company claims it is more effective and has fewer side effects than existing products in the market. It accounted for 5.1% of Wuyi’s sales and almost 7% of the company’s gross profit for 1H FY08, based on only three months of sales. We forecast Perilla Oil Capsule to raise Wuyi’s earnings-growth rate to 24.1% for FY09 and 26.2% for FY10, up from 14.6% for FY08.
Wuyi is trading currently at below book value and at 0.9x its net cash. It is also trading at a PER of 2.4x on our FY09 earnings forecast, and offers a forward dividend yield of 8.0%, based on the company’s target of paying out at least 25% of net profit as dividends.
Wuyi, an integrated manufacturer of branded prescription and over-the-counter drugs in Fujian Province in the PRC, launched Perilla Oil Capsule in March 2008. Perilla Oil Capsule is an exclusive new drug used to manage high blood cholesterol, and the company claims it is more effective and has fewer side effects than existing products in the market. It accounted for 5.1% of Wuyi’s sales and almost 7% of the company’s gross profit for 1H FY08, based on only three months of sales. We forecast Perilla Oil Capsule to raise Wuyi’s earnings-growth rate to 24.1% for FY09 and 26.2% for FY10, up from 14.6% for FY08.
Wuyi is trading currently at below book value and at 0.9x its net cash. It is also trading at a PER of 2.4x on our FY09 earnings forecast, and offers a forward dividend yield of 8.0%, based on the company’s target of paying out at least 25% of net profit as dividends.
China Steel Sector - Destocking on track, expect firm pricing in long product, and mild downcycle in the near term
Steel prices in China have started seeing correction this week, with HRC price in eastern China declining by 2% week-on-week to US$517/t, the first week-on-week fall since end of 2008. Rebar price, on the other hand, improved by 3% over the period.
Steel price hikes have been driven by deep production cuts, continued inventory correction of downstream finished goods, moderate restocking in downstream sectors, and mild restocking by traders. With steel utilisation likely up by 8% from the trough, in the context of mostly unchanged real demand, we see short-term corrections in steel prices especially for flat products in the coming weeks. Nevertheless, long product prices should remain firm, outperforming flat products on seasonal basis.
We see the destocking cycle on track based on recent data points, and our positive view on Chinese steel stocks for six-nine months, as the best destocking cycle play, remains intact. In the short term, softening of HRC prices is likely to put pressure on Angang (0.9x P/B), but Maanshan (0.7x P/B) would be more preferred given its higher exposure to long steel.
The concern of potential imports of steel from Russia is overstated in our view. According to CBI, a Shanghai based consultancy, there have been orders from traders for Russian HRC, at China CIF price of USD440/t (USD45/t discount to local prices), for March-April delivery. However, the volume is 0.3 mn tonnes, which is 1% of 2008 China imports œ impact on domestic steel market should be limited in our view.
Steel price hikes have been driven by deep production cuts, continued inventory correction of downstream finished goods, moderate restocking in downstream sectors, and mild restocking by traders. With steel utilisation likely up by 8% from the trough, in the context of mostly unchanged real demand, we see short-term corrections in steel prices especially for flat products in the coming weeks. Nevertheless, long product prices should remain firm, outperforming flat products on seasonal basis.
We see the destocking cycle on track based on recent data points, and our positive view on Chinese steel stocks for six-nine months, as the best destocking cycle play, remains intact. In the short term, softening of HRC prices is likely to put pressure on Angang (0.9x P/B), but Maanshan (0.7x P/B) would be more preferred given its higher exposure to long steel.
The concern of potential imports of steel from Russia is overstated in our view. According to CBI, a Shanghai based consultancy, there have been orders from traders for Russian HRC, at China CIF price of USD440/t (USD45/t discount to local prices), for March-April delivery. However, the volume is 0.3 mn tonnes, which is 1% of 2008 China imports œ impact on domestic steel market should be limited in our view.
China Mengniu Dairy - Quality of products in question
The Chinese authorities are yet to verify the questioned substances found in Mengniu‘s products and this delay could be detrimental to consumers‘ confidence in Mengniu‘s products in the near term. Subjected to the new developments that may arise, one of the key differences of this second quality —scandal“ with the melamine scandal, which occurred less than six months ago, is that Mengniu is the only named dairy player to date, which could bring new uncertainty to its market positioning ahead.
While the premium milk product series account for less than 10% of Mengniu's overall sales, the impact on the overall consumer confidence towards the brand could be affected and consumers may be induced to switch to other brands. Sales aside, the premium milk product series command one of the highest margins for Mengniu and this incident could bring further uncertainty to the maintenance of historical margins. Overall, the event adds to the uncertainty risks of the post-melamine recovery period of Mengniu. We maintain our UNDERPERFORM rating.
While the premium milk product series account for less than 10% of Mengniu's overall sales, the impact on the overall consumer confidence towards the brand could be affected and consumers may be induced to switch to other brands. Sales aside, the premium milk product series command one of the highest margins for Mengniu and this incident could bring further uncertainty to the maintenance of historical margins. Overall, the event adds to the uncertainty risks of the post-melamine recovery period of Mengniu. We maintain our UNDERPERFORM rating.
China Oil and Gas Sector Maintain UNDERWEIGHT
Local press in China (quoted by Bloomberg) suggests that the windfall tax trigger could be raised to US$60/bbl from US$40/bbl.
This is positive for oil companies œ using US$60/bbl for 2009, EPS upside is 14% for PetroChina and 7% each for Sinopec and CNOOC. Gains under lower oil price scenarios are limited.
Note that resource tax increases are on the cards and this adjustment could be a precursor to such a hike. Our conversation with oil companies suggests that resource tax hike could be heading for NPC approval this year.
Although this is positive in the short term, structural issues remain for Chinese oil and gas companies. Their ROEs are heading for all-time lows since their IPOs and their P/B multiples could follow with consensus estimates downgrades.
We maintain our UNDERWEIGHT stance on the China oil sector and recommend selling into current strength. We prefer Sinopec over PetroChina (strictly on a relative basis). We like CNOOC as a business, but lower oil price would be an overhang in 1H09, as top line gets crunched and as costs continue to rise.
China Business News, quoted by Bloomberg, suggests that according to unidentified experts, the windfall tax trigger could be raised from US$40/bbl to US$60/bbl.
Windfall taxes were introduced in 2006 œ companies were taxed progressively as their realisation rose above US$40/bbl. Effectively, this tax would therefore be applicable as WTI oil prices rose above US$48-50/bbl.
On the face of it, this is a positive. It will reduce costs œ for example for PetroChina, assuming a US$60/bbl WTI oil price, it would reduce the windfall tax by about US$2.5/bbl. This could raise EPS by about 14%. For Sinopec the benefit is smaller (7% on EPS). For CNOOC, given the inherently high margins, the benefit is muted (7%).
The case for raising the trigger is to an extent fair œ costs have galloped and as a result, the definition of windfall tax should change. As we have noted in our piece Venus or Venus Flytrap (published on 28 November 2008), the all-in costs per barrel are now above US$35/bbl. Including capex, the number is close to US$50/bbl.
The article quoted unnamed experts and does not even attribute this to the NDRC (only indirectly). As such, the article appears to be more on the lines of expert opinions rather than based on concrete developments. Sinopec suggested that this was not something that was on its agenda from a lobbying point of view (although PetroChina has been lobbying for it). That said, the government works in mysterious ways œ costs have gone up, and under the threat of lower production growth, the NDRC might be looking to act.
At US$60/bbl WTI, the impact of the increase in the threshold of windfall tax would be 14% for PetroChina, 7% for Sinopec and about 7% for CNOOC. PetroChina would be the biggest beneficiary. As oil prices fall below US$60/bbl and stay there, the gains are limited. Tax under the existing regime would also be tending towards zero i.e,. if oil was US$40-45/bbl, the EPS would not be different even if windfall tax is adjusted.
We also note that there is still the talk of resource taxes œ which had resurfaced at the beginning of the year. Our conversations with the oil companies suggest that the resource tax increase could be heading for approval to the NPC later in March this year. As such, any adjustment in windfall taxes could be a precursor to an increase in resource taxes which have been on the cards for a few years.
Under a low oil price environment, the cut in windfall taxes is immaterial œ however, with consensus forecasting a sharp recovery in oil prices in 2010, the EPS upgrades could be material. As such, the stocks could perform in the short term. That said, we note that: a) the government could tax these benefits away if oil does rise once again b) resource taxes are on the cards and c) this proposal is not yet final.
Structural issues with oil stocks in China remain as costs continue to rise œ we expect the lowest ROEs in their history in 2009. P/B multiples could follow œ we see 20-30% downside if multiples do get to historical lows. We prefer Sinopec over PetroChina (strictly on a relative basis). We like CNOOC as a business, but note that it faces challenging times in 1H09, as top line gets crunched and as costs continue to rise.
We maintain our UNDERWEIGHT stance on the China oil sector, and would sell into the current strength.
This is positive for oil companies œ using US$60/bbl for 2009, EPS upside is 14% for PetroChina and 7% each for Sinopec and CNOOC. Gains under lower oil price scenarios are limited.
Note that resource tax increases are on the cards and this adjustment could be a precursor to such a hike. Our conversation with oil companies suggests that resource tax hike could be heading for NPC approval this year.
Although this is positive in the short term, structural issues remain for Chinese oil and gas companies. Their ROEs are heading for all-time lows since their IPOs and their P/B multiples could follow with consensus estimates downgrades.
We maintain our UNDERWEIGHT stance on the China oil sector and recommend selling into current strength. We prefer Sinopec over PetroChina (strictly on a relative basis). We like CNOOC as a business, but lower oil price would be an overhang in 1H09, as top line gets crunched and as costs continue to rise.
China Business News, quoted by Bloomberg, suggests that according to unidentified experts, the windfall tax trigger could be raised from US$40/bbl to US$60/bbl.
Windfall taxes were introduced in 2006 œ companies were taxed progressively as their realisation rose above US$40/bbl. Effectively, this tax would therefore be applicable as WTI oil prices rose above US$48-50/bbl.
On the face of it, this is a positive. It will reduce costs œ for example for PetroChina, assuming a US$60/bbl WTI oil price, it would reduce the windfall tax by about US$2.5/bbl. This could raise EPS by about 14%. For Sinopec the benefit is smaller (7% on EPS). For CNOOC, given the inherently high margins, the benefit is muted (7%).
The case for raising the trigger is to an extent fair œ costs have galloped and as a result, the definition of windfall tax should change. As we have noted in our piece Venus or Venus Flytrap (published on 28 November 2008), the all-in costs per barrel are now above US$35/bbl. Including capex, the number is close to US$50/bbl.
The article quoted unnamed experts and does not even attribute this to the NDRC (only indirectly). As such, the article appears to be more on the lines of expert opinions rather than based on concrete developments. Sinopec suggested that this was not something that was on its agenda from a lobbying point of view (although PetroChina has been lobbying for it). That said, the government works in mysterious ways œ costs have gone up, and under the threat of lower production growth, the NDRC might be looking to act.
At US$60/bbl WTI, the impact of the increase in the threshold of windfall tax would be 14% for PetroChina, 7% for Sinopec and about 7% for CNOOC. PetroChina would be the biggest beneficiary. As oil prices fall below US$60/bbl and stay there, the gains are limited. Tax under the existing regime would also be tending towards zero i.e,. if oil was US$40-45/bbl, the EPS would not be different even if windfall tax is adjusted.
We also note that there is still the talk of resource taxes œ which had resurfaced at the beginning of the year. Our conversations with the oil companies suggest that the resource tax increase could be heading for approval to the NPC later in March this year. As such, any adjustment in windfall taxes could be a precursor to an increase in resource taxes which have been on the cards for a few years.
Under a low oil price environment, the cut in windfall taxes is immaterial œ however, with consensus forecasting a sharp recovery in oil prices in 2010, the EPS upgrades could be material. As such, the stocks could perform in the short term. That said, we note that: a) the government could tax these benefits away if oil does rise once again b) resource taxes are on the cards and c) this proposal is not yet final.
Structural issues with oil stocks in China remain as costs continue to rise œ we expect the lowest ROEs in their history in 2009. P/B multiples could follow œ we see 20-30% downside if multiples do get to historical lows. We prefer Sinopec over PetroChina (strictly on a relative basis). We like CNOOC as a business, but note that it faces challenging times in 1H09, as top line gets crunched and as costs continue to rise.
We maintain our UNDERWEIGHT stance on the China oil sector, and would sell into the current strength.
Li Heng Chemical Fibre downgraded to hold with target price $0.31
Li Heng Chemical Fibre had issued a profit-guidance in respect of the results for FY08, which will be released on 27 Feb, 2009. The Group is expected to incur a loss for 4Q2008 (quarter-ended Dec-08) due to declining operating profits and the unrealized translation loss of its SGD bank deposits, mainly attributable to a depreciating SGD against the RMB.
We had downgraded LHCF to a Hold on 18 December 2008 at a target price of $0.31.
Operationally, we had already expected the Group to turn in single-digit margins in 4Q08 due to the rapidly declining ASPs of its nylon products during the last quarter of 2008. We maintain our full year net profit forecast for FY08 at RMB848.5m, although the actual full year net profit may miss our estimate marginally by 3-5% due to the unrealized translation losses. With the stock currently trading at 3.2x forward PER and with a net cash position of 23 S cts as at Sep-08, we are still maintaining our Hold recommendation.
We had downgraded LHCF to a Hold on 18 December 2008 at a target price of $0.31.
Operationally, we had already expected the Group to turn in single-digit margins in 4Q08 due to the rapidly declining ASPs of its nylon products during the last quarter of 2008. We maintain our full year net profit forecast for FY08 at RMB848.5m, although the actual full year net profit may miss our estimate marginally by 3-5% due to the unrealized translation losses. With the stock currently trading at 3.2x forward PER and with a net cash position of 23 S cts as at Sep-08, we are still maintaining our Hold recommendation.
China Fishery Group: Fishing through the storm
China Fishery Group Ltd (CFGL) is currently benefiting from China’s growing demand for aquatic products. China accounts for 57% of CFGL’s revenue. According to the National Bureau of Statistics of China, aquatic products CPI rose 11.2% YoY in Nov 2008, suggesting that demand remains robust relative to supply. We believe that this trend could persist for a few more quarters.
Falling oil prices will benefit CFGL. Crude oil prices have fallen from a high of US$147/bbl in July 2008 to US$40/bbl as of Feb 2009. We are assuming FY09 average crude oil price of US$65/bbl, lower than FY08’s US$100/bbl. Consequently, we forecast FY09 bunker cost of US$61.8m, 35% less than our FY08 estimate. We forecast FY09 net profit growth of 18.7%, which we believe will excite investors.
High gearing, but strong operating cash flow. We are concerned that CFGL has a high gearing ratio of 0.93x and a sizeable US$245.8m long term loan. However, CFGL has strong operating cash flow (US$60.2m for 9M08) which is expected to persist and help its refinancing of US$80m short term loan. Its 9m08 interest coverage was an acceptable 4.5x. In addition, we believe that lower interest rates in FY09 will be positive.
We rate CFGL a BUY with a target price of S$0.86. We have a price target of S$0.86 based on 3.9x FY09 P/E which is pegged to the FSTC FY09 P/E of 3.9x.
Falling oil prices will benefit CFGL. Crude oil prices have fallen from a high of US$147/bbl in July 2008 to US$40/bbl as of Feb 2009. We are assuming FY09 average crude oil price of US$65/bbl, lower than FY08’s US$100/bbl. Consequently, we forecast FY09 bunker cost of US$61.8m, 35% less than our FY08 estimate. We forecast FY09 net profit growth of 18.7%, which we believe will excite investors.
High gearing, but strong operating cash flow. We are concerned that CFGL has a high gearing ratio of 0.93x and a sizeable US$245.8m long term loan. However, CFGL has strong operating cash flow (US$60.2m for 9M08) which is expected to persist and help its refinancing of US$80m short term loan. Its 9m08 interest coverage was an acceptable 4.5x. In addition, we believe that lower interest rates in FY09 will be positive.
We rate CFGL a BUY with a target price of S$0.86. We have a price target of S$0.86 based on 3.9x FY09 P/E which is pegged to the FSTC FY09 P/E of 3.9x.
Yongmao Holdings - Sales faltering
3Q09 net profit of Rmb4.1m (-87.5% yoy) was far below expectations, with 9M09 constituting only 45.9% of our annualised forecast of Rmb145.6m. Revenue slumped 30.2% yoy on weak sales in all markets except China domestic sales, attributable to weak demand as a result of the global economic crisis. Gross margin fell to 27.5% in 3Q09, from 30.6% in 2Q09 and 39.9% in 3Q08, due to a weaker product sales mix as well as higher prices of steel materials purchased. Despite an outstanding order book of Rmb174m, management's guidance is for a possible loss in 4Q09 as some orders may be delayed or cancelled. We cut our FY09-11 forecasts by 55-73% as we resume coverage following our internal compliance research blackout. We peg a CY09 P/BV of 0.8x to the stock, in line with Singapore peers, which translates to a new target price of S$0.20 (previously S$0.80 based on CY09 P/E of 8x). Downgrade to Neutral.
China Insurance Sector - Read-through from CIIH's profit warning
CIIH is the second insurance company in the HK/China market to release a profit warning after China Life. This may give rise to concerns about the read-through for Ping An and PICC.
These concerns are well founded, in our view. The FY08 reporting season is going to be terrible for the China insurers. But it should not come as a surprise. As owners of financial assets (including equities), insurers‘ results are inherently exposed to equity market fluctuations, and the 65% decline in the Shanghai Composite Index in 2008 is about as severe as it comes.
Ping An is expected to report a loss for FY08. This has effectively been flagged since October when they took an impairment charge on the Fortis stake. PICC is forecast to report an 85% YoY decline in EPS. With the 1H08 loss underpinned by large catastrophe losses, our FY08 EPS forecast implies a moderate 2H08 recovery.
Within the sector, we prefer PICC as we believe its 2H08 results will provide evidence of cyclical improvement in operating profits. Confession season underway Earnings ”confession season‘ continued with CIIH releasing a profit warning that indicated it expected to report a net loss for FY08. This follows on from China Life‘s recent announcement that its PRC GAAP earnings would fall by more than 50% YoY.
This naturally leads to concerns about who is the next to come out with a profit warning and how bad might it be. In this note, we consider the prospects for Ping An and PICC.
Ping An
We expect Ping An to release a profit warning in the coming weeks. Given its A share listing, it is required to guide investors in relation to abnormal movements in its earnings and the FY08 results should certainly be considered abnormal.
We expect a FY08 loss of Rmb5.1 bn, or Rmb0.69 in EPS terms. Despite the shock value of such a large loss, it should not really come as a surprise. Ping An took an impairment charge of Rmb15.7 bn on its Fortis investment in its 3Q results and the combination of further falls in the value of this investment plus additional declines in the broader equity market should be sufficient to transform the Rmb1.8 bn profit achieved in 9M08 into a sizeable loss.
PICC
It is unclear whether PICC will release a profit warning. Given it is not listed in the A Share market, we do not believe it is required to provide a guidance on material earnings changes; however, like CIIH, it may decide it is good corporate governance to do so.
We forecast PICC will report a net profit of Rmb465 mn, representing an 85% YoY decline in EPS. While this is clearly a disappointing result, we believe a weak headline has largely already been known by the market since August when PICC reported a 1H08 loss due to abnormal catastrophe claims costs and weak investment markets.
Ironically, we are looking for signs of encouragement in this coming result. We believe underwriting profitability will show early signs of recovery based on stabilisation of premium rates, easing pressure on commission rates and PICC‘s focus on trimming costs from admin and claims settlement. After a difficult 1H08, evidence of improvement in 2H08 would bode well for the outlook for 2009.
These concerns are well founded, in our view. The FY08 reporting season is going to be terrible for the China insurers. But it should not come as a surprise. As owners of financial assets (including equities), insurers‘ results are inherently exposed to equity market fluctuations, and the 65% decline in the Shanghai Composite Index in 2008 is about as severe as it comes.
Ping An is expected to report a loss for FY08. This has effectively been flagged since October when they took an impairment charge on the Fortis stake. PICC is forecast to report an 85% YoY decline in EPS. With the 1H08 loss underpinned by large catastrophe losses, our FY08 EPS forecast implies a moderate 2H08 recovery.
Within the sector, we prefer PICC as we believe its 2H08 results will provide evidence of cyclical improvement in operating profits. Confession season underway Earnings ”confession season‘ continued with CIIH releasing a profit warning that indicated it expected to report a net loss for FY08. This follows on from China Life‘s recent announcement that its PRC GAAP earnings would fall by more than 50% YoY.
This naturally leads to concerns about who is the next to come out with a profit warning and how bad might it be. In this note, we consider the prospects for Ping An and PICC.
Ping An
We expect Ping An to release a profit warning in the coming weeks. Given its A share listing, it is required to guide investors in relation to abnormal movements in its earnings and the FY08 results should certainly be considered abnormal.
We expect a FY08 loss of Rmb5.1 bn, or Rmb0.69 in EPS terms. Despite the shock value of such a large loss, it should not really come as a surprise. Ping An took an impairment charge of Rmb15.7 bn on its Fortis investment in its 3Q results and the combination of further falls in the value of this investment plus additional declines in the broader equity market should be sufficient to transform the Rmb1.8 bn profit achieved in 9M08 into a sizeable loss.
PICC
It is unclear whether PICC will release a profit warning. Given it is not listed in the A Share market, we do not believe it is required to provide a guidance on material earnings changes; however, like CIIH, it may decide it is good corporate governance to do so.
We forecast PICC will report a net profit of Rmb465 mn, representing an 85% YoY decline in EPS. While this is clearly a disappointing result, we believe a weak headline has largely already been known by the market since August when PICC reported a 1H08 loss due to abnormal catastrophe claims costs and weak investment markets.
Ironically, we are looking for signs of encouragement in this coming result. We believe underwriting profitability will show early signs of recovery based on stabilisation of premium rates, easing pressure on commission rates and PICC‘s focus on trimming costs from admin and claims settlement. After a difficult 1H08, evidence of improvement in 2H08 would bode well for the outlook for 2009.
3 top buys and 3 top sells for Hong Kong
BUYs
1. China Mobile: A low penetration rate, increases in disposable income, falling tariffs and increasing network effect indicate strong subscriber growth over the medium-term.
2. China Resources Power: We like China Resources Power for its production efficiency, proven track record in controlling cost and experienced and performance oriented management team. Longer term earnings growth could be secured by its coal mine investment. Should electricity tariffs be allowed to increase, there will be further earnings upside.
3. BoC: Bank of China is our preferred H-share bank in the sector. The banks NIM is least exposed to narrowing Rmb lending spreads as it has the smallest domestic exposure. It also offers the highest dividend yields in the sector. We also expect the bank to re-rate when concerns over its US$ investments ebb.
SELLs
1. Parkson Group: Parkson’s 3Q08 results missed our expectation. Given the gloomier outlook for economic growth and dull prospects for the export-oriented industries in China, we expect Parkson to face lower sales growth and bigger margin pressure ahead.
2. Hang Seng Bank: GDP contraction in Hong Kong will put pressure on Hang Seng Bank's credit costs while lowering loan and fee income demand. We project an 18% earnings decline for Hang Seng Bank in FY09 earnings, higher than for other Hong Kong banks given the larger NIM impact and higher reliance on wealth management fees. The bank had significantly outperformed peers in 2008 and commands a premium for its defensiveness. We expect the premium to narrow as the market recovers.
3. Angang Steel: Steel prices in China are unlikely to stage a recovery in the next six months as it will take time for the massive investment push by the government to come through. We should see more provision for losses in 4Q08 as the Chinese composite steel price index in Oct was 22% below the average for 3Q08, we think its now a good time to sell.
1. China Mobile: A low penetration rate, increases in disposable income, falling tariffs and increasing network effect indicate strong subscriber growth over the medium-term.
2. China Resources Power: We like China Resources Power for its production efficiency, proven track record in controlling cost and experienced and performance oriented management team. Longer term earnings growth could be secured by its coal mine investment. Should electricity tariffs be allowed to increase, there will be further earnings upside.
3. BoC: Bank of China is our preferred H-share bank in the sector. The banks NIM is least exposed to narrowing Rmb lending spreads as it has the smallest domestic exposure. It also offers the highest dividend yields in the sector. We also expect the bank to re-rate when concerns over its US$ investments ebb.
SELLs
1. Parkson Group: Parkson’s 3Q08 results missed our expectation. Given the gloomier outlook for economic growth and dull prospects for the export-oriented industries in China, we expect Parkson to face lower sales growth and bigger margin pressure ahead.
2. Hang Seng Bank: GDP contraction in Hong Kong will put pressure on Hang Seng Bank's credit costs while lowering loan and fee income demand. We project an 18% earnings decline for Hang Seng Bank in FY09 earnings, higher than for other Hong Kong banks given the larger NIM impact and higher reliance on wealth management fees. The bank had significantly outperformed peers in 2008 and commands a premium for its defensiveness. We expect the premium to narrow as the market recovers.
3. Angang Steel: Steel prices in China are unlikely to stage a recovery in the next six months as it will take time for the massive investment push by the government to come through. We should see more provision for losses in 4Q08 as the Chinese composite steel price index in Oct was 22% below the average for 3Q08, we think its now a good time to sell.
3 top buys and 3 top sells for Singapore
BUYs
1. SingTel – SingTel’s high trading liquidity and exposure to regional Tier-1 cellcos make it a highly defensive stock to ride out the recessionary environment.
2. PLife REIT – Stable cash guarantee from formula structure of Parkway hospitals the key attraction in these times. No gearing and funding issues.
3. CCT – Likely to have no problems in refinancing. Share price is bashed down and already reflects recession rents and occupancies below previous recessions.
SELLs
1. Capitaland – As inventory in China residential markets start to build up, we expect Capitaland’s China exposure to be a negative. On top of that, current environment makes it difficult to fund AUM growth, eroding the merits of the Capitaland model.
2. SATS – There is limited potential for synergies from the acquisition of SFI, and maintain that the acquisition would increase the company's risk profile moving forward.
3. ST Engineering – We are negative on its US-based MRO business, given the outlook of an aviation slowdown and cost controls by airlines.
1. SingTel – SingTel’s high trading liquidity and exposure to regional Tier-1 cellcos make it a highly defensive stock to ride out the recessionary environment.
2. PLife REIT – Stable cash guarantee from formula structure of Parkway hospitals the key attraction in these times. No gearing and funding issues.
3. CCT – Likely to have no problems in refinancing. Share price is bashed down and already reflects recession rents and occupancies below previous recessions.
SELLs
1. Capitaland – As inventory in China residential markets start to build up, we expect Capitaland’s China exposure to be a negative. On top of that, current environment makes it difficult to fund AUM growth, eroding the merits of the Capitaland model.
2. SATS – There is limited potential for synergies from the acquisition of SFI, and maintain that the acquisition would increase the company's risk profile moving forward.
3. ST Engineering – We are negative on its US-based MRO business, given the outlook of an aviation slowdown and cost controls by airlines.
Esprit's inner strength as a brand
Management entitled its MD&A —steering steadily in the storm “and —paving the way for long-term growth“. These, in our view, are indeed its key management priorities at this point: positioning itself for a strong rebound in profits when normality returns.
On M&A, management seems to have again begun to warm up to such an option compared to five months ago: this probably reflects a degree of management comfort that the measures required to combat this downturn are either in place or put in motion, hence freeing up senior management attention, and meanwhile some possible distress sale opportunity as the downturn progresses.
On whether a new strategic shareholder may be forthcoming, management‘s stance remains that: 1) it does not need cash (we add: unless it identifies a sizeable use of cash, like M&A), 2) it is not worried about any new shareholder interfering with its operations or direction, as it does not see itself as an underperforming or pressured business and 3) as a publicly listed company, management cannot choose its shareholders who bought and sold on the open market.
Admittedly, these results were nothing to write home about but what also stood out was what CEO Heinz Krogner called the —inner strength“ of Esprit even amid the tough trading environment: group SSS was +6.3% in constant currency, led by a remarkable +6.9% in Europe (against peers‘ performance of -2% to -6% and well ahead of the ~+2% we were expecting). With what seems only a relatively modest sacrifice in retail G.M., the only explanation for this performance must be: 1) Esprit‘s loyal customers and Esprit‘s —intense“ customer nurture programme to bring repeat business and a higher conversion rate amid pressured footfall across the industry, 2) the desirability of Esprit‘s products in its core markets (its currentrevenue growth challenge is more a function of its wholesale channels and currency translation, not a broken product) and 3) its diversified product-price repertoire, which continues to give it the opportunity to pick up down-trading from higher-end brands œ its women‘s Esprit Collection division, at +6.7% YoY in HKD terms, was the second fastest growing line, second to edc men at +28% YoY (but about half the scale). Esprit women casual was flat.
We believe management has a good grasp of its core competencies, and hence its tactical response to this downturn has been to: 1) quickly streamline on product offering to focus on strong sellers (elimination of peripheral products is expected to yield a significant reduction in production and attendant savings, plus better merchandising accuracy and focus), 2) focus on delivering better quality products and price-value proposition. We believe these have already begun to produce results (witness its SSS). Longer-haul, its ongoing efficiency optimisation includes a new distribution centre in Germany, which it believes will reduce processing costs per unit, and investing in an advanced retail IT system that it expects to enhance its stock control and save on mark- downs. With a still very cashed-up balance sheet (HK$3.8 bn cash, even after paying an earlier HK$4 bn dividend, zero debt), Esprit has the luxury to continue to invest in more sophisticated back-end and new stores (retail space is budgeted to grow 12% YoY this year, of which 10.9% was already booked in 1H FY œ although Esprit is definitely becoming more careful on committing: focusing only on strong core markets and eschewing the heavy upfront investments from entering new markets: further expansion in Spain put on ice; the Madrid and Barcelona flagship stores in hindsight proved inopportune in timing), while continuing with a fairly respectable dividend payout (payout ratio unchanged YoY but DPS naturally trimmed), and even entertain the option of M&A. Even on North America, there seems little pressure at this point to rein in the annual US$40 mn loss budget œ the North America strategy is obviously being reviewed now in light of management changes there and a new incoming President of North America (identified but yet to be named in public), and CEO Heinz Krogner admitted that Esprit‘s next operational challenge is to find a formula to establish itself in new markets faster. However, North America is still in investment mode for Esprit, and while it is unhappy about the —loss to growth ratio“, its agenda there is to explore a way to grow faster the next three years at the same US$40 mn p.a. loss budget, rather than saving some of that US$40 mn œ as management still believes it can afford that investment comfortably.
Finally, on whether a new strategic shareholder is forthcoming (the press has been mentioning the Gunter Herz-controlled Mayfair GmbH [not listed]), Esprit management‘s stance remains that 1) it does not need cash (we add: unless it identifies a sizeable use of cash like an M&A), 2) it is not worried about any new shareholder interfering with Esprit‘s operations or directions as it does not see itself as an underperforming or pressured business, and 3) as a publicly listed company, management cannot choose its shareholders who bought and sold on the open market. It is futile to conjecture at this point except monitoring developments, and if Mayfair indeed purchases some shares, we take it as an endorsement that someone also thinks Esprit‘s current single-digit P/E undervalues the stock.
On M&A, management seems to have again begun to warm up to such an option compared to five months ago: this probably reflects a degree of management comfort that the measures required to combat this downturn are either in place or put in motion, hence freeing up senior management attention, and meanwhile some possible distress sale opportunity as the downturn progresses.
On whether a new strategic shareholder may be forthcoming, management‘s stance remains that: 1) it does not need cash (we add: unless it identifies a sizeable use of cash, like M&A), 2) it is not worried about any new shareholder interfering with its operations or direction, as it does not see itself as an underperforming or pressured business and 3) as a publicly listed company, management cannot choose its shareholders who bought and sold on the open market.
Admittedly, these results were nothing to write home about but what also stood out was what CEO Heinz Krogner called the —inner strength“ of Esprit even amid the tough trading environment: group SSS was +6.3% in constant currency, led by a remarkable +6.9% in Europe (against peers‘ performance of -2% to -6% and well ahead of the ~+2% we were expecting). With what seems only a relatively modest sacrifice in retail G.M., the only explanation for this performance must be: 1) Esprit‘s loyal customers and Esprit‘s —intense“ customer nurture programme to bring repeat business and a higher conversion rate amid pressured footfall across the industry, 2) the desirability of Esprit‘s products in its core markets (its currentrevenue growth challenge is more a function of its wholesale channels and currency translation, not a broken product) and 3) its diversified product-price repertoire, which continues to give it the opportunity to pick up down-trading from higher-end brands œ its women‘s Esprit Collection division, at +6.7% YoY in HKD terms, was the second fastest growing line, second to edc men at +28% YoY (but about half the scale). Esprit women casual was flat.
We believe management has a good grasp of its core competencies, and hence its tactical response to this downturn has been to: 1) quickly streamline on product offering to focus on strong sellers (elimination of peripheral products is expected to yield a significant reduction in production and attendant savings, plus better merchandising accuracy and focus), 2) focus on delivering better quality products and price-value proposition. We believe these have already begun to produce results (witness its SSS). Longer-haul, its ongoing efficiency optimisation includes a new distribution centre in Germany, which it believes will reduce processing costs per unit, and investing in an advanced retail IT system that it expects to enhance its stock control and save on mark- downs. With a still very cashed-up balance sheet (HK$3.8 bn cash, even after paying an earlier HK$4 bn dividend, zero debt), Esprit has the luxury to continue to invest in more sophisticated back-end and new stores (retail space is budgeted to grow 12% YoY this year, of which 10.9% was already booked in 1H FY œ although Esprit is definitely becoming more careful on committing: focusing only on strong core markets and eschewing the heavy upfront investments from entering new markets: further expansion in Spain put on ice; the Madrid and Barcelona flagship stores in hindsight proved inopportune in timing), while continuing with a fairly respectable dividend payout (payout ratio unchanged YoY but DPS naturally trimmed), and even entertain the option of M&A. Even on North America, there seems little pressure at this point to rein in the annual US$40 mn loss budget œ the North America strategy is obviously being reviewed now in light of management changes there and a new incoming President of North America (identified but yet to be named in public), and CEO Heinz Krogner admitted that Esprit‘s next operational challenge is to find a formula to establish itself in new markets faster. However, North America is still in investment mode for Esprit, and while it is unhappy about the —loss to growth ratio“, its agenda there is to explore a way to grow faster the next three years at the same US$40 mn p.a. loss budget, rather than saving some of that US$40 mn œ as management still believes it can afford that investment comfortably.
Finally, on whether a new strategic shareholder is forthcoming (the press has been mentioning the Gunter Herz-controlled Mayfair GmbH [not listed]), Esprit management‘s stance remains that 1) it does not need cash (we add: unless it identifies a sizeable use of cash like an M&A), 2) it is not worried about any new shareholder interfering with Esprit‘s operations or directions as it does not see itself as an underperforming or pressured business, and 3) as a publicly listed company, management cannot choose its shareholders who bought and sold on the open market. It is futile to conjecture at this point except monitoring developments, and if Mayfair indeed purchases some shares, we take it as an endorsement that someone also thinks Esprit‘s current single-digit P/E undervalues the stock.
Lenovo - Posts operating loss; needs extensive restructuring
Lenovo posted an operating loss in Dec-08 quarter at -2.7%, due to FX volatility and increasing low-price products. It booked profit only in China, while other regions recorded an operating loss.
Lenovo announced management team changes and restructuring plans to cut costs and focus on low-price products. However, we are concerned about its high-cost structure and expect negative operating margin in the next three quarters. We expect Lenovo to lose US$187 mn in 4Q FY09 due to US$120 mn restructuring costs.
Lenovo still has US$1.8 bn in cash. However, its cash position will suffer due to continuous negative profit and additional cash needed for operations. Intangible assets worth US$1.86 bn is another concern, although Lenovo claimed there was no need to revise numbers currently.
We maintain our negative view on Lenovo. The concern on decreasing cash position and huge intangible assets will mean further pressure on its share price. It has indicated for the first time that it will increase outsourcing on consumer/low-price models to bring down costs, which may benefit Taiwan‘s manufacturers.
Lenovo announced management team changes and restructuring plans to cut costs and focus on low-price products. However, we are concerned about its high-cost structure and expect negative operating margin in the next three quarters. We expect Lenovo to lose US$187 mn in 4Q FY09 due to US$120 mn restructuring costs.
Lenovo still has US$1.8 bn in cash. However, its cash position will suffer due to continuous negative profit and additional cash needed for operations. Intangible assets worth US$1.86 bn is another concern, although Lenovo claimed there was no need to revise numbers currently.
We maintain our negative view on Lenovo. The concern on decreasing cash position and huge intangible assets will mean further pressure on its share price. It has indicated for the first time that it will increase outsourcing on consumer/low-price models to bring down costs, which may benefit Taiwan‘s manufacturers.
China Shipyards : Cosco Yangzijiang - Sell into strength
We believe that share prices for SGX-listed Chinese shipyards were up recently on the false impression that new orders will pick up upon the Ministry of Communication’s (MOC) initiative to eliminate 17% VAT on vessels built by Chinese yards and ordered by Chinese shipowner. In our opinion, this demand-side stimulus does not resolve the supply-side issues plaguing the shipbuilding industry in China, namely increasing difficulties to get funds for new purchases due to falling collateral values, and oversupply of vessels to pressure freight rates at below breakeven levels. We see the recent share price run-up as an opportunity to sell into strength. Maintain CAUTIOUS on the Chinese shipyards.
Share prices up on old news? Our on-the-ground checks confirmed that the elimination of 17% VAT on vessels built by Chinese yards and ordered by Chinese shipowner has been implemented since 1 January 2009, and is part of the Chinese government's initiative (in November 2008) to eliminate VAT for new capex for all Chinese companies. Hence, the market talk that the Ministry of Communication is considering eliminating the 17% VAT on vessels built by Chinese yards and ordered by Chinese shipowner is just a catch-all extension to this earlier initiative for shipowners' vessel transactions. In our opinion, this VAT cut was mis-intepreted by the equity market as turnaround for Chinese shipyards' fortunes, including Cosco Corp and Yangzijiang.
Supply-side factors are hard to overcome. We believe that this demand-side stimulus will have limited impact on new orders, due to tighter credit lending as collateral values plunge, and operating losses even at the rebounded freight levels. Instead, these unresolved supply-side problems will result in more order delays/cancellations, and create an overhang on the share prices for Cosco Corp (20% order delays/cancellations to-date, vs. our expectation of 40%) and Yangzijiang (zero order delay/cancellation to-date, vs. our expectation of 15%).
Run up in share prices present an opportunity to sell out of Chinese shipyards. The global oversupply of dry bulk carriers in 2009 is imminent, given the general reluctance of shipowners to cancel orders since 4Q08. Maintain FULLY VALUED ratings on Cosco Corp (Fair value is S$0.76) and Yangzijiang (Fair value is S$0.34).
Share prices up on old news? Our on-the-ground checks confirmed that the elimination of 17% VAT on vessels built by Chinese yards and ordered by Chinese shipowner has been implemented since 1 January 2009, and is part of the Chinese government's initiative (in November 2008) to eliminate VAT for new capex for all Chinese companies. Hence, the market talk that the Ministry of Communication is considering eliminating the 17% VAT on vessels built by Chinese yards and ordered by Chinese shipowner is just a catch-all extension to this earlier initiative for shipowners' vessel transactions. In our opinion, this VAT cut was mis-intepreted by the equity market as turnaround for Chinese shipyards' fortunes, including Cosco Corp and Yangzijiang.
Supply-side factors are hard to overcome. We believe that this demand-side stimulus will have limited impact on new orders, due to tighter credit lending as collateral values plunge, and operating losses even at the rebounded freight levels. Instead, these unresolved supply-side problems will result in more order delays/cancellations, and create an overhang on the share prices for Cosco Corp (20% order delays/cancellations to-date, vs. our expectation of 40%) and Yangzijiang (zero order delay/cancellation to-date, vs. our expectation of 15%).
Run up in share prices present an opportunity to sell out of Chinese shipyards. The global oversupply of dry bulk carriers in 2009 is imminent, given the general reluctance of shipowners to cancel orders since 4Q08. Maintain FULLY VALUED ratings on Cosco Corp (Fair value is S$0.76) and Yangzijiang (Fair value is S$0.34).
Raffles Education: Back to basics
2Q09 net profit was within expectations. Revenue grew 38% y-o-y on higher fees, students and acquisitions. The expected c.S$100m installment for OUC (Oriental University City) has been deferred and should ease concerns on short-term funding. Management continues to look to set up new schools to generate organic growth. Maintain Buy.
2Q09 net profit $27m (+60%y-o-y). Headline net profit was S$27m (+60% y-o-y) on revenue of $54m (+38% y-o-y) were in line with our expectations. The higher revenue was from higher school fees, student enrollment and contribution from new acquisitions (Wanbo, Shaanxi and OUC). Included in the income was a $6.3m gain from sale of land. Student numbers was at 33,873 up by c.58% y-o-y due to acquisitions but dipped slightly q-o-q by 1% due to graduation of students under third-party degree that has been ceased.
OUC installment deferred. Management shared that they have obtained agreement from the seller to defer the installments (c.S$100m) by a year. As such, there is no urgency for the payment of the installment in Feb as originally understood. Management expects to pay down part of its bank loans from its operating cashflow generated.
Organic growth focus. They are looking at adding 3 private colleges in China (Yunnan, Langfang and Tianjin), 2 in India and 1 in Jarkarta. While it will be relatively slow versus acquisitions, initial investment is minimal and contribution should progressively grow to be like those in its current network.
Maintain Buy. We continue to see the Group’s business positively in the current climate given that education business is counter-cyclical. Maintain Buy, TP unchanged at $0.80 (based on 18x FY09F EPS). A 1cent dividend in scrip was declared.
2Q09 net profit $27m (+60%y-o-y). Headline net profit was S$27m (+60% y-o-y) on revenue of $54m (+38% y-o-y) were in line with our expectations. The higher revenue was from higher school fees, student enrollment and contribution from new acquisitions (Wanbo, Shaanxi and OUC). Included in the income was a $6.3m gain from sale of land. Student numbers was at 33,873 up by c.58% y-o-y due to acquisitions but dipped slightly q-o-q by 1% due to graduation of students under third-party degree that has been ceased.
OUC installment deferred. Management shared that they have obtained agreement from the seller to defer the installments (c.S$100m) by a year. As such, there is no urgency for the payment of the installment in Feb as originally understood. Management expects to pay down part of its bank loans from its operating cashflow generated.
Organic growth focus. They are looking at adding 3 private colleges in China (Yunnan, Langfang and Tianjin), 2 in India and 1 in Jarkarta. While it will be relatively slow versus acquisitions, initial investment is minimal and contribution should progressively grow to be like those in its current network.
Maintain Buy. We continue to see the Group’s business positively in the current climate given that education business is counter-cyclical. Maintain Buy, TP unchanged at $0.80 (based on 18x FY09F EPS). A 1cent dividend in scrip was declared.
China Hongxing Sports Ltd - Sales healthy for now
China Hongxing is scheduled to announce its 4Q08 results in mid-Feb 09. We expect 4Q08 revenue to rise 37.1% yoy to Rmb916.6m and net profit of S$164.3m, up only 5% yoy due to flat gross margins and high operating expenses. Although 4Q08 revenue growth is expected to be healthy as orders were placed in 3Q08 amid the Olympics fever, we understand that order-value growth would probably slow down from Feb 09 onwards. Maintain Outperform, nevertheless, for its attractive value. Our target price stays S$0.40, still based on 8x CY10 P/E, at the lower end of its historical band. More than 70% of its share price is now backed by net cash.
China: The recovery may come earlier than expected
China’s GDP growth has declined for six consecutive quarters, from 13.8% y-o-y in Q2 2007 to only 6.8% in Q4 2008. While the decline was partly driven by softer growth in aggregate final demand, the steeper drops over the last two quarters were exaggerated by temporary factors such as inventory de-stocking. Since we expect these temporary factors to fade in Q2 and the government’s massive stimulus package to kick in, we have been forecasting V-shaped growth in 2009, rebounding from a bottom in Q1.
However, over the past few weeks, data flow and policy responses suggest to us that the trough may have been reached in Q4 2008. In other words, the recovery in GDP growth may have come earlier than we originally expected. First, inventory adjustment has moved faster than our expectations. Our survey of 500 Chinese firms in 60 cities conducted between December and early January shows that 60% of surveyed firms have cut inventories – for both raw materials and finished goods – to only one to two months of usage or sales, which was already below their reported normal inventory level of three to four months. Even if we factor in an unexpected slowdown in final sales that may prolong the usage of inventories, the need for massive inventory de-stocking is now quite low. In other words, while inventory de-stocking continues in Q1 2009, the magnitude of the de-stocking should be much smaller than that seen in Q4 2008. In fact, our survey suggests a high likelihood of re-stocking activity in late Q1, which may give an unexpected boost to demand for, and production of, raw materials. Recent rises in the domestic steel price – which is up 15-25% from the trough – may, in our opinion, be partly driven by such re-stocking activity.
Second, the government’s stimulus package may kick in earlier than expected. According to our conversations with local government officials and state-owned enterprises (SOEs), the central government in December already allocated RMB100bn – of the RMB4.0trn stimulus package – to designated industrial and social projects as seed money to gear up a total of RMB400bn spending by local governments and SOEs. The money is required to be used for new investment only, and must not be used to repay bank loans. The deadline for using these funds is March 31, 2009. Because of the time constraint, this RMB400bn package – equivalent to 10% of quarterly FAI – will most likely boost investment growth in Q1 2009 rather than in Q4 2008.
Third, the banks have also increased their lending ahead of expectations. In early November, the PBC removed bank lending quotas and changed its monetary policy stance from restrictive to accommodative. In December, bank lending growth surged, adding RMB772bn in a single month. We judge that this increased lending is also likely to boost economic activity much more in Q1 2009 than in Q4 2008.
Finally, anticipated reforms to the VAT regime may well have encouraged firms to postpone some of their fixed- asset investment (FAI) from Q4 2008 to Q1 2009. The government announced in November that, as of January 1, firms no longer need to pay 17% VAT on their machinery and equipment purchases. As a result, many firms may have postponed equipment investment into 2009, causing temporary weakness in FAI and industrial sales/production data in November and December 2008, but adding more strength to growth in Q1 2009. All these factors suggest economic activity will likely be stronger in Q1 than in Q4. We expect real GDP growth to rebound to 7.0% y-o-y in Q1, followed by 7.5% in Q2, 8.2% in Q3 and 9.2% in Q4, as the impact of the government’s stimulus package increases. We keep our full-year growth forecast at 8.0%, with risks to the upside.
However, over the past few weeks, data flow and policy responses suggest to us that the trough may have been reached in Q4 2008. In other words, the recovery in GDP growth may have come earlier than we originally expected. First, inventory adjustment has moved faster than our expectations. Our survey of 500 Chinese firms in 60 cities conducted between December and early January shows that 60% of surveyed firms have cut inventories – for both raw materials and finished goods – to only one to two months of usage or sales, which was already below their reported normal inventory level of three to four months. Even if we factor in an unexpected slowdown in final sales that may prolong the usage of inventories, the need for massive inventory de-stocking is now quite low. In other words, while inventory de-stocking continues in Q1 2009, the magnitude of the de-stocking should be much smaller than that seen in Q4 2008. In fact, our survey suggests a high likelihood of re-stocking activity in late Q1, which may give an unexpected boost to demand for, and production of, raw materials. Recent rises in the domestic steel price – which is up 15-25% from the trough – may, in our opinion, be partly driven by such re-stocking activity.
Second, the government’s stimulus package may kick in earlier than expected. According to our conversations with local government officials and state-owned enterprises (SOEs), the central government in December already allocated RMB100bn – of the RMB4.0trn stimulus package – to designated industrial and social projects as seed money to gear up a total of RMB400bn spending by local governments and SOEs. The money is required to be used for new investment only, and must not be used to repay bank loans. The deadline for using these funds is March 31, 2009. Because of the time constraint, this RMB400bn package – equivalent to 10% of quarterly FAI – will most likely boost investment growth in Q1 2009 rather than in Q4 2008.
Third, the banks have also increased their lending ahead of expectations. In early November, the PBC removed bank lending quotas and changed its monetary policy stance from restrictive to accommodative. In December, bank lending growth surged, adding RMB772bn in a single month. We judge that this increased lending is also likely to boost economic activity much more in Q1 2009 than in Q4 2008.
Finally, anticipated reforms to the VAT regime may well have encouraged firms to postpone some of their fixed- asset investment (FAI) from Q4 2008 to Q1 2009. The government announced in November that, as of January 1, firms no longer need to pay 17% VAT on their machinery and equipment purchases. As a result, many firms may have postponed equipment investment into 2009, causing temporary weakness in FAI and industrial sales/production data in November and December 2008, but adding more strength to growth in Q1 2009. All these factors suggest economic activity will likely be stronger in Q1 than in Q4. We expect real GDP growth to rebound to 7.0% y-o-y in Q1, followed by 7.5% in Q2, 8.2% in Q3 and 9.2% in Q4, as the impact of the government’s stimulus package increases. We keep our full-year growth forecast at 8.0%, with risks to the upside.
Cosco - More delays and cancellations may come
Even though Cosco has announced a series of cancellations and delays, we expect more of them in the months ahead as its customers face a tight credit environment and at current BDIY rates the vessels they ordered will be operating at a loss. We do expect better execution as Cosco has now delivered its first vessel and several of the delayed vessels have been moved to the Dalian yard, which is the group’s most sophisticated yard. Outlook for Cosco’s businesses remains bleak. SELL.
Since the start of December Cosco has announced cancellations and delivery delays almost on a weekly basis. 4.5% of the company’s US$8.1B order book has been cancelled while deliveries have been delayed for 11% of the order book. In total we expect close to 20% of Cosco’s orders to get cancelled as a results of ship owner’s inability to obtain credit for the vessels they purchased and the fact that the new builds will be operating at a loss when they enter the market due to the still very low BDIY rates.
Cosco’s execution is improving. According to Clarkson Research the company has delivered its first vessel, a 57,000dwt bulk carrier, to China Cosco. This vessel was built at the Zhoushan yard, which is Cosco’s newest yard that was facing significant delays in the development. Cosco also moved construction for 6 bulk carriers from the Zhoushan yard to the Dalian yard, which is the company’s oldest and most advanced yard. Nevertheless, we still expect Cosco to make losses on its first few vessels due to cost overruns.
While Cosco has very diversified business segments, the outlook for each of them is negative. Cosco will suffer from order cancellations and margin pressures on its shipbuilding and offshore engineering businesses. The BDIY remains below break-even points for its shipping business. Ship repair revenues will drop as ship-owners won’t be paying premiums for fast turnarounds any more.
Cosco’s stock will remain under pressure until the company gives more details on its profit warning for its 2008 results and provides clarifications on the provision its will be taking for doubtful debts. Cosco is trading near the bottom of its PE and PB bands. However, we believe this is justified given the current risk in the company. SELL.
Since the start of December Cosco has announced cancellations and delivery delays almost on a weekly basis. 4.5% of the company’s US$8.1B order book has been cancelled while deliveries have been delayed for 11% of the order book. In total we expect close to 20% of Cosco’s orders to get cancelled as a results of ship owner’s inability to obtain credit for the vessels they purchased and the fact that the new builds will be operating at a loss when they enter the market due to the still very low BDIY rates.
Cosco’s execution is improving. According to Clarkson Research the company has delivered its first vessel, a 57,000dwt bulk carrier, to China Cosco. This vessel was built at the Zhoushan yard, which is Cosco’s newest yard that was facing significant delays in the development. Cosco also moved construction for 6 bulk carriers from the Zhoushan yard to the Dalian yard, which is the company’s oldest and most advanced yard. Nevertheless, we still expect Cosco to make losses on its first few vessels due to cost overruns.
While Cosco has very diversified business segments, the outlook for each of them is negative. Cosco will suffer from order cancellations and margin pressures on its shipbuilding and offshore engineering businesses. The BDIY remains below break-even points for its shipping business. Ship repair revenues will drop as ship-owners won’t be paying premiums for fast turnarounds any more.
Cosco’s stock will remain under pressure until the company gives more details on its profit warning for its 2008 results and provides clarifications on the provision its will be taking for doubtful debts. Cosco is trading near the bottom of its PE and PB bands. However, we believe this is justified given the current risk in the company. SELL.
Raffles Ed - Buy rating with a price target of S$0.81
Raffles Education is one of the key stock picks in Simon Smiles’ Q-Series®: Asian Structural Themes report, published on 4 February 2009. We believe the education sector would benefit from rapid economic and consumption growth, because spending patterns would evolve from basic consumption, to goods and services associated with a ‘better life’.
China’s one-child policy coupled with rapid urbanisation has led to a generation of single-child families with the capacity to spend a significant portion of income on education. This will drive demand for Raffles Education’s (REC) services, in our view. The company’s China footprint spans several first- and second-tier cities, where it is able to offer courses with different price points and content to cater to local demand.
We believe potential catalysts for re-rating are: 1) the good take-up rate for its scrip dividend scheme, we estimate a 60% take-up rate could potentially save S$55m for internal use; 2) divestment of the Raffles Institute in Mumbai could unlock S$10- 20m in value; 3) scope for earnings updates if two OUC colleges are transferred faster than expected; and 4) traction in opening new colleges and Sino-foreign ventures.
Our DDM-based price target assumes 11.9% COE and 5% terminal growth.
China’s one-child policy coupled with rapid urbanisation has led to a generation of single-child families with the capacity to spend a significant portion of income on education. This will drive demand for Raffles Education’s (REC) services, in our view. The company’s China footprint spans several first- and second-tier cities, where it is able to offer courses with different price points and content to cater to local demand.
We believe potential catalysts for re-rating are: 1) the good take-up rate for its scrip dividend scheme, we estimate a 60% take-up rate could potentially save S$55m for internal use; 2) divestment of the Raffles Institute in Mumbai could unlock S$10- 20m in value; 3) scope for earnings updates if two OUC colleges are transferred faster than expected; and 4) traction in opening new colleges and Sino-foreign ventures.
Our DDM-based price target assumes 11.9% COE and 5% terminal growth.
China Green's share price shed 13%
China Green's share price shed 13% over the last two weeks after it reported a set of disappointing 1HFY09 results that were dragged by slower Japanese sales and a higher tax rate. However sales to Japan have picked up as customers regained confidence in its products, generating some 20% yoy growth in the 2HFY09. This is encouraging as it vouches for the group's high product quality. Although corn milk sales have yet to recover, the group has already developed a new vegetable juice product to be launched in the upcoming weeks, reflecting the flexibility it enjoys given its well developed upstream business. Upgrade to OUTPERFORM with an unchanged SOP derived target price of HK$6.12, which works out to 7.7x CY10 P/E.
温家宝：考虑采取新措施提振经济
中国总理温家宝周六表示，中国国内银行业处在稳健的经营状态，这就为政府推出提振实体经济的刺激计划提供了支持，中国新闻网(China News Service)报导。 报导援引温家宝的话称，这与部分西方国家的情形截然不同，这些国家的政府不得不动用大量资金来填补银行系统的窟窿。
温家宝向中国银行股份有限公司(Bank of China Ltd.)伦敦分行管理人士发表了上述讲话。伦敦是此次温家宝出访欧洲行程中的一站。 报导引述温家宝的话称，中国的银行资产质量比较好，流动性充裕，处在一种比较稳健、健康的经营状态，这就对中国政府应对金融危机起了巨大的支撑作用。
报导称，温家宝敦促国内银行加强监管，不能向产能过剩项目放贷，使今天的贷款不至于日后变成新的坏帐。 温家宝警告全球银行的问题正从投资银行向商业银行蔓延，金融危机的走势还不明朗。
报导援引温家宝的话称，在海外一线的金融工作者应密切关注国际金融动向，分析金 融危机的走势以及其可能给中国带来的影响。 中国新闻社网站周末时另一篇报导称，中国总理温家宝表示中国是否继续购买美国国 债将取决于中国的需要。 报导援引温家宝的话称，中国的外汇储备这些年增长很快。中国实行外汇储备的多元 化，购买美国债券是其中一个重要部分。
温家宝周六在伦敦会见四十八家集团俱乐部(The 48 Group Club)代表时表示，中国是否会继续购买美国国债以及购买的规模将取决于外汇安全和保值的要求。四十八家集 团俱乐部是致力于积极促进中英关系的独立商业组织。 与此同时，温家宝还重申了周四在欧盟(European Commission)布鲁塞尔总部新闻发布 会上的观点，称中国的汇率政策是正确的，也是符合中国国情的。
温家宝周六表示，维持人民币汇率稳定不仅有利于中国，也有利于世界经济。 温家宝还重申，中国政府并不追求贸易顺差，也不倡导贸易保护主义。 此外，英国《金融时报》(Financial Times)网站周日报导，中国国务院总理温家宝称，中国正考虑在去年年底宣布的5,850亿美元刺激方案的基础上采取新措施来提振经济。
温家宝在专访中表示，中国将使人民币稳定在一个均衡、合理的水平上。他指出，若人民币汇率出现巨大波动，将是一个大灾难。 温家宝向该报称，中国希望维持其所持美元资产的价值，但同时也需要把外汇储备用 于国内的发展。 温家宝称，国际货币基金组织(International Monetary Fund)和世界银行(World Bank)需要进行改革。这两个组织均希望中国能够出资应对当前这场经济危机。 温家宝表示，中国一直都希望能够扩大在这两个机构的影响力以及投票权。
温家宝向中国银行股份有限公司(Bank of China Ltd.)伦敦分行管理人士发表了上述讲话。伦敦是此次温家宝出访欧洲行程中的一站。 报导引述温家宝的话称，中国的银行资产质量比较好，流动性充裕，处在一种比较稳健、健康的经营状态，这就对中国政府应对金融危机起了巨大的支撑作用。
报导称，温家宝敦促国内银行加强监管，不能向产能过剩项目放贷，使今天的贷款不至于日后变成新的坏帐。 温家宝警告全球银行的问题正从投资银行向商业银行蔓延，金融危机的走势还不明朗。
报导援引温家宝的话称，在海外一线的金融工作者应密切关注国际金融动向，分析金 融危机的走势以及其可能给中国带来的影响。 中国新闻社网站周末时另一篇报导称，中国总理温家宝表示中国是否继续购买美国国 债将取决于中国的需要。 报导援引温家宝的话称，中国的外汇储备这些年增长很快。中国实行外汇储备的多元 化，购买美国债券是其中一个重要部分。
温家宝周六在伦敦会见四十八家集团俱乐部(The 48 Group Club)代表时表示，中国是否会继续购买美国国债以及购买的规模将取决于外汇安全和保值的要求。四十八家集 团俱乐部是致力于积极促进中英关系的独立商业组织。 与此同时，温家宝还重申了周四在欧盟(European Commission)布鲁塞尔总部新闻发布 会上的观点，称中国的汇率政策是正确的，也是符合中国国情的。
温家宝周六表示，维持人民币汇率稳定不仅有利于中国，也有利于世界经济。 温家宝还重申，中国政府并不追求贸易顺差，也不倡导贸易保护主义。 此外，英国《金融时报》(Financial Times)网站周日报导，中国国务院总理温家宝称，中国正考虑在去年年底宣布的5,850亿美元刺激方案的基础上采取新措施来提振经济。
温家宝在专访中表示，中国将使人民币稳定在一个均衡、合理的水平上。他指出，若人民币汇率出现巨大波动，将是一个大灾难。 温家宝向该报称，中国希望维持其所持美元资产的价值，但同时也需要把外汇储备用 于国内的发展。 温家宝称，国际货币基金组织(International Monetary Fund)和世界银行(World Bank)需要进行改革。这两个组织均希望中国能够出资应对当前这场经济危机。 温家宝表示，中国一直都希望能够扩大在这两个机构的影响力以及投票权。
Hang Lung Properties - profit decline on slow property sales
Hang Lung Properties (HLP) is scheduled to announce its FY09 interim results on 10 February. We expect its underlying net profit to drop by 74% YoY to HK$991m, given the drop in property sales.
In contrast to the strong sales of about HK$6bn at the Long Beach and Harbourside last year, HLP has sold only a handful of its inventory at Aquamarine during 1H09, leading to a significant drop in gross profit from property sales. We forecast a gross profit of only HK$4m from property sales for 1H FY09, compared with the gross profit of over HK$3.3bn for the same period last year.
We forecast rental at Plaza 66 and The Grand Gateway to have continued to record strong double-digit growth for 1H09, increasing by 28% YoY to HK$862m, of which about 9% will have come from appreciation of the Renminbi. While such momentum is likely to slow down in 2H09, given that the malls are getting more mature and we think Renminbi appreciation will slow, we expect rental income from mainland China to pick up again when new projects start contributing towards FY10 earnings.
However, given the company’s low gearing and large cash surplus, we believe HLP can go on increasing its dividend in absolute terms.Valuation
With its shares trading at a PBR of 1.15x on our FY09 BVPS forecast, we believe HLP’s current valuation represents a significant premium to that of its peers, most of whom are trading in a PBR range of 0.3-0.6x, which suggests that the market has already factored in a premium on HLP for its strong financial position and the potential for China growth. We maintain our 3 (Hold) rating with a six-month target price of HK$18.4, based on a 15% discount to our FY09 NAV forecast of HK$21.6.Catalysts and action
While both the execution of HLP’s new projects in mainland China and the timing of inventory disposal hold the key to crystallising the value of the company’s assets, we do not think either will reach fruition in the near term.
In contrast to the strong sales of about HK$6bn at the Long Beach and Harbourside last year, HLP has sold only a handful of its inventory at Aquamarine during 1H09, leading to a significant drop in gross profit from property sales. We forecast a gross profit of only HK$4m from property sales for 1H FY09, compared with the gross profit of over HK$3.3bn for the same period last year.
We forecast rental at Plaza 66 and The Grand Gateway to have continued to record strong double-digit growth for 1H09, increasing by 28% YoY to HK$862m, of which about 9% will have come from appreciation of the Renminbi. While such momentum is likely to slow down in 2H09, given that the malls are getting more mature and we think Renminbi appreciation will slow, we expect rental income from mainland China to pick up again when new projects start contributing towards FY10 earnings.
However, given the company’s low gearing and large cash surplus, we believe HLP can go on increasing its dividend in absolute terms.Valuation
With its shares trading at a PBR of 1.15x on our FY09 BVPS forecast, we believe HLP’s current valuation represents a significant premium to that of its peers, most of whom are trading in a PBR range of 0.3-0.6x, which suggests that the market has already factored in a premium on HLP for its strong financial position and the potential for China growth. We maintain our 3 (Hold) rating with a six-month target price of HK$18.4, based on a 15% discount to our FY09 NAV forecast of HK$21.6.Catalysts and action
While both the execution of HLP’s new projects in mainland China and the timing of inventory disposal hold the key to crystallising the value of the company’s assets, we do not think either will reach fruition in the near term.
Midland - Prospects of a cyclical recovery remain intact; accumulate on weakness
Midland issued a profit warning on 23 January, cautioning that it would record a loss for FY08. We believe the main reason is an estimated HK$150m in additional provisions for bad debt related to commission income associated mainly with primary- market projects sold in 2H07-1H08.
However, Midland is in the midst of a notable downsizing exercise, with its branch and staff numbers falling by 20.4% and 30.2% from the peak in 1H08, to 460 and 5,767, respectively, at the end of December 2008. In our view, this, together with the recent pick-up in transaction volume, should underpin its prospects for a cyclical recovery from FY09.
We think Midland’s current valuation (trading at a PBR of 1.03x) is attractive, given that the stock has rarely traded below book value over the past five years (the average was 3.08x).
Stripping out its net cash of HK$1bn (HK$1.44/share), Midland is trading currently at a PER of 1x peak earnings and 3.5x average earnings since 1995. We maintain our 2 (Outperform) rating and have lowered our six-month target price to HK$3.30 (from HK$3.66), based on a target PER of 10x on our FY09 EPS forecast (equivalent to HK$2.58/share), plus a 50% discount to our estimate of its net cash per share (equivalent to HK$0.72/share) by the end of FY09.
However, Midland is in the midst of a notable downsizing exercise, with its branch and staff numbers falling by 20.4% and 30.2% from the peak in 1H08, to 460 and 5,767, respectively, at the end of December 2008. In our view, this, together with the recent pick-up in transaction volume, should underpin its prospects for a cyclical recovery from FY09.
We think Midland’s current valuation (trading at a PBR of 1.03x) is attractive, given that the stock has rarely traded below book value over the past five years (the average was 3.08x).
Stripping out its net cash of HK$1bn (HK$1.44/share), Midland is trading currently at a PER of 1x peak earnings and 3.5x average earnings since 1995. We maintain our 2 (Outperform) rating and have lowered our six-month target price to HK$3.30 (from HK$3.66), based on a target PER of 10x on our FY09 EPS forecast (equivalent to HK$2.58/share), plus a 50% discount to our estimate of its net cash per share (equivalent to HK$0.72/share) by the end of FY09.
Subscribe to:
Posts (Atom)
