Celestial Nutrifood bond issue and Raffles Education share placement

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

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

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

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Celestial Nutrifoods - In dire need of cash

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

Celestial May Slip On Bond Repayment Troubles

Celestial Nutrifoods may slip after the soy-based food and drink maker warns it is not in position to meet upcoming convertible bond repayment. Company says in statement it has received notification from holders of its S$235 million convertible bond requiring redemption on June 12. Warns, "based on the funds currently available to the company outside the PRC and after considering its working capital requirements in the PRC, the company shall not be in a position to meet its payment obligations to the holders of the bonds." Creates uncertainty over how company will meet payment, may raise fear of rights issue, need to take on expensive debt. Pre-open quotes show selling interest down to S$0.21; shares closed +2.0% at S$0.26 yesterday.

CELESTIAL NUTRIFOODS LIMITED said it has on 23 May received notification from the holders of its Convertible Bonds, requiring the Company to redeem the Bonds held by them amounting to S$234,800,000. The due date for the redemption payment shall be on June 12, 2009. Based on the funds currently available to the Company outside the PRC and after considering its working capital requirements in the PRC, the Company shall not be in a position to meet its payment obligations to the holders of the Bonds on June 12, 2009, unless new funding in non-PRC currency drawable outside the PRC is in place by the due date. While the Company is not optimistic in its ability to obtain the said new funding by the due date, it shall, nevertheless, continue with its fund raising efforts, which have been in progress since early 2008. In the meantime, the Company will initiate discussions with the Bond holders in exploring various options to address its payment obligations to the Bond holders. As a result of the above, there are considerable uncertainties in its attempts to settle the obligations of its Bonds. Eventual settlement of its Bonds may result in additional borrowings and issuance of new shares or a combination of both which will have an impact on the interests of its existing shareholders.

Buy Sino-Env, Cosco, Celestial

Sino-Environment Technology (SINE SP; S$0.19) – BUY

• The stock has bottomed out temporary at its 52-week low of S$0.055. The current uptrend may persist provided it could penetrate above the rising resistance trend line at S$0.20.

• Indicators are progressing well. MACD is poised for a positive crossover while RSI also hooks up from the oversold territory. A successful breakout from its trend line resistance would result in gap-filling activities at S$0.295.

• Accumulate during technical pullbacks, possibly near its immediate support at S$0.15. Cut loss if prices fall below S$0.14 as next support is weaker at S$0.085 and S$0.05.

Sino-Environment Technology Group Ltd. offers industrial and municipal waste treatment services. The Company treats and manages industrial waste gas and industrial and municipal wastewater.

Celestial Nutrifoods (CENU SP; S$0.12) – BUY

• A base building formation was seen over the past one week. Follow through buying could soon challenge the S$0.145 resistance before rising to test the 23% FR level at S$0.17 (also the 30-day SMA).

• MACD continues to gain strength, suggesting further room on the upside. The RSI also bounces off from the oversold territory, which is a positive sign.

• The current upward rally is likely to continue but intermittent profit taking may cap gains. Only a breakout above S$0.17 would conclude its medium-term downward channel. Support is seen at S$0.10 and S$0.08.

Celestial NutriFoods Limited manufactures and sells soybean based food products such as soybean beverages, soy protein isolate and soybean oil. The company sells its products under Sun Moon Star brand name.

Cosco Corp (COS SP; S$0.82) – BUY

• Yesterday’s rally above its 30-day SMA is a bullish sign. Near term outlook turns positive with immediate resistance seen at its 38% and 50% FR levels at S$0.86 and S$0.92 (measuring from S$1.17 to S$0.67) respectively.

• Technical landscape has improved. MACD has confirmed its golden cross while RSI is rising towards the upper band of the neutral zone.

• Prefer lower entry points, possibly near the $S0.78 support. Cut loss however if prices fall below S$0.73, as it may retest the Oct-08 lows of S$0.605. Investors with greater risk appetite may join the buying bandwagon but stop loss is a must.

Cosco Corp (Singapore) Limited is an investment holding company. The Company owns and operates ships, and provides shipping agency, marine engineering, ship repair, and container depot services. Cosco also trades and invests in properties as well as provides property management and services.

S-Shares Results Review Summary and Outlook

In summary, two-thirds of the S-share companies under review saw their earnings rose for 2008, although most of the growth came during the first half of 2008.

Discretionary consumer companies saw significant demand slowdown in the second half of 2008, which became even more apparent in the 4th quarter. Companies either faced a slowing of revenue growth (like China Hongxing) or had to sacrifice lower margins (Hongguo and China Sports) to maintain sales growth via product discounts or by keeping ASPs low.

Meanwhile, the earnings outlook for discretionary consumer companies is fairly muted. We expect companies to continue spending on A&P to maintain their brand visibility, whilst also likely to embark on discounts either directly or indirectly to consumers to induce spending, which would pressure margins.

Consumer staple companies like Pacific Andes, China Fish, and Celestial NutriFoods were less affected. While companies under this segment also saw a slowdown in second half of 2008, impact was less significant. We still saw a 7% and 19% growth for China Fishery and Celestial NutriFoods respectively. Raffles Education continued to deliver robust growth largely on operating efficiency.

Going forward, we believe the impact of a slowdown in consumer sentiment will impact more on branded staple food like Celestial NutriFoods.

Shipyards like Cosco and Yangzijiang were hit by provisions. In view of the deteriorating conditions for shipping industry, the shipyards have prudently made higher provisions for doubtful debts and cost overrun in 4Q08. In line with its profit guidance, Cosco plunged into losses of S$24m in 4Q08, due mainly to provisions for inventory write-downs, doubtful debts and cost overrun at its shipbuilding division. Yangzijiang’s FY08 earnings fell short of our estimate by 5%, blames on a provision of RMB200m. Stripping this out, its bottomline would have come in 5% above our expectation.

Celestial Nutrifoods - High default risks

4Q core net profit of Rmb84.2m (-26% yoy) was below our expectations forming 74% of our estimate but in line with consensus. FY08 core net profit of Rmb408.4m formed 93% of our estimates. Main reason for divergence is lower-than-expected gross margins from higher-than-forecast soybean prices. There was no dividend declared for FY08. Sales remained stable while gross margins narrowed to 34.9% vs 37.6% in 4Q07 despite the fall in soybean prices. Core net margin fell to 15.7% from 27.6%. The company has moved from a net cash to a net debt position of Rmb414m, raising the risks of a default on the CB put date (June 09) unless they can find alternative financing. Our FY09-10 EPS estimates are lowered 3-16% on account of lower sales volumes and margins. Our target price is cut to S$0.08 is based on 0.11x P/B, from S$1.45 based on 8x CY10 P/E. Downgrade to Underperform from Outperform on high default risks.