China Precision - A Fair But Not Compelling Offer

China Precision’s Chairman and major shareholder Zhang Zhongliang who owns 66.24% of the company is proposing to take the company private at 28 cents a share, valuing the company at S$102.259mln.

This is at a 19% premium to its last traded price, 180% premium to its low reached in Jan’09, but at 2 cents discount to its IPO price of 30 cents (June’06) and 44% discount to its all time high of 50 cents hit shortly after the IPO.

This translates to a trailing PE of 8x, price to sales of 0.7x and price to book of 1x. Its 4-year historical average PE range from low of 4x to high of 10x, price to sales 0.4-1.1x and price to book 0.5-1.5x, hence the offer price values the stock roughly in-between the historical average valuation range.

An additional 9.7% of shareholders (Zhang Hongman, the treasury manager of the company, Lu Hong, the HR director, Zhang Qing Lin, director and GM of the company, Lou Yiliang is close business associate of the Chairman) have given irrevocable undetaking to vote in favour of the offer, giving the offeror a stake of 75.94%. There are no institutional shareholders with more than 5% of the company. (China Precision has not been a well-traded stock with average daily vol of about 150,000 share in the last 6 months).

An EGM will be held for shareholders to vote on the proposed privatisation offer and having already achieved the minimum 75% approval needed, the delisting proposal would be put through if not 10% or more shareholders vote against it.

We view the offer price as fair compared to Elec and Eltek’s which valued the stock at only 0.6x price to book (resulting in the independent advisers rendering the offer as too low), but not as compelling as Sihuan’s offer (the last privatisation offer) which valued the company close to its all time high share price and valuations (price to book of 3x, price to sales of 3.6x and PE of 9x).

This should be positive for other S-chips given that the offer price was done at 19% premium to its last traded price and 8x PE, 0.7x price to sales and 1x price to book is double that of the lows it hit and about in line with the average historical trading average.

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China Automation is the largest provider of safety and critical control systems

China Automation expects its railway signalling and petrochemical system businesses to continue growing at 40-50% and 20-30% per annum, respectively, on rising demand in the next few years. It expects to win a few contracts, with confidence in the contract for Beijing metro, which will be announced in 2H09.

China Automation is the largest provider of safety and critical control systems in China, specialising in the petrochemical and railway signalling industries. The company’s business development hinges on the fast-growing Chinese railway industry. It foresees rising penetration given growing consciousness for railway safety. Management expects the railway signalling business to continue growing at 40-50% per annum in the next few years. Management expects city metro to offer exciting growth opportunities. Contract sizes for metro-line stations of Rmb200-350 mn are much larger than those for nationwide railway projects. Over 30 cities are planning to construct 85 city metro lines. Management expects the company to win a few contracts, with confidence in the contract for Beijing metro, which will be announced in 2H09. As the demand for safety and critical control system from the petrochemical industry is increasing rapidly, China Automation expects its petrochemical system business to continue growing at 20-30% per annum in the next few years.

Abterra - Right place, Right time

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

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

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

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

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

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

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

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

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

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

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

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

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

S-Chips - Who could be next?

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

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

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

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

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

Four China-based firms issue profit warnings

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

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

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

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

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

S-Shares or S-Chips - Strength from within

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

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

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

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

Tsit Wing Int'l Holdings Ltd: Proposes voluntary delisting

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

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

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

China Sportswear - Valuation gap should narrow

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

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

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

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

China Sunsine Chemical - Margin pressure

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

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

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

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

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

Sinotel Technologies – Sales up 24.0%, PAT up 17.7%

Revenue in 1Q09 increased by RMB18.7m or 24.0% to RMB96.6m compared to 1Q08. This was mainly due to the increase in contribution from the Emergency Mobile Communication (EMCS) and sales of 3G cards.

Overall gross profit for 1Q09 was 41.2%, a marginal decrease of 0.9ppt compared to 1Q08.

General and admin expenses for 1Q09 increased by RMB1.4m or 25.0% to RMB7.2m due mainly to the increase in depreciation of RMB3.3m, arising from the fixed assets additions in the third and fourth quarters last year.

The bank facilities available to the Group as at 31 March 2009 were RMB65m, of which RMB33.7 m was utilized.

There are some positive developments for Sinotel during 1Q09, particularly (1) rapidly growing telecommunication industry in China, (2) swelling order book and (3) new credit facilities secured. China’s telecommunication industry is undergoing a rapid expansion and upgrading activities since the official issuance of 3G license in January 2009. As the industry is in its growth stage, there are a lot of business opportunities for Sinotel. The capex for wireless network enhancements in China is estimated to be RMB33-50 billion. Its order book, currently standing at RMB390m, is expected to swell. In addition, the new credit facilities secured by Sinotel recently ease our concern over lack of capital to finance its growth plan. On valuation front, we peg at 4x PER FY09 (previous 3x) to derive a target price of S$0.330. Maintain BUY.

Pine Agritech - Weak Demand To Weigh Heavily On Performance

As warned by management on 4 May ’09, the company swung into the red (-RMB22.6mln) in 1Q ‘09 versus profit of RMB70.16mln last year and profit of RMB8mln in 4Q ‘08. Sales plunged 57% yoy and 16% qoq to RMB190mln. The weak set of results reflect lower export as well as domestic demand due to the global financial crisis.

Looking ahead, management remains very cautious as the slow down in the domestic market will continue to weigh heavily on its performance while overseas demand will also remain weak due to the on-going global financial crisis. Selling prices will remain under pressure and management will be very vigilent on cost control measures.

Fortunately the company has cash of RMB2.619bln (up from RMB2.394bln last year) against debts of RMB1.973bln, giving a net cash position of RMB646mln. Shareholders funds total RMB1.81bln.

At 14.5 cents a share, market cap is S$435mln, trailing PE is 24x, price to sales is 1.8x and price to book is 1.2x. Since mid-2008 the stock has been stuck between mid single digits and mid-high teen levels and with the stock coming close to the upper end of the range coupled with management’s very cautious remarks we would be looking to sell it on further strength.

China Merchant Hldgs (Pacific): Good Value with Attractive Yield

The company’s results were in line with expectations, with earnings decreasing 22% yoy to HK$63.0m, due to weak property market in New Zealand. The property development business continued to make an operating loss of HK$6.5m in 1Q09. However, toll roads, as the company’s key business, saw steady growth, with PBT from toll roads up 12% yoy to HK$58.2m in 1Q09, accounting for 87.5% of total Group PBT, backed by 7.6% increase in toll revenue. CMH’s balance sheet remained healthy as well, with net cash of HK$721m or S$0.24/share by end of 1Q09.

Looking ahead, the property market in New Zealand is expected to remain weak for the rest of the year, whereas the business outlook for toll roads in China remains relatively positive. In the meantime, CMH continues to be in the process of looking for acquisition opportunities, to improve its road portfolio.

Maintain BUY. Target Price S$0.64, unchanged based on 7% target yield, which we believe is achievable considering toll roads defensive earnings profile and the management’s commitment to >50% dividend payout. The counter is currently trading at c. 6x FY09 P/E, well below the peer average of around 12x FY09 P/E, and offers an attractive prospective yield of 9.3%. The stock has good value at the current price, but the management needs to deliver on acquisitions in order for the stock to re-rate.

S-chips – to bet or not to bet?

• Many S-chips have seen their share price decimated with the sell down in the equity market. The poor performance by S-Chips was also due to accounting irregularities at some S-chips. The latest hit was Oriental Century’s announcement that there were irregularities in its cash balance.

• Until ‘cash rich’ S-chips takes meaningful measures such as declaring dividends, major shareholder making substantial purchase of their shares and possibly privatization exercises, investor confidence is unlikely to return any time soon.


• Our quick check with S-chips under our coverage also revealed that Epure and Raffles Education’s major shareholders had pledged their shares for financing. This in itself is not an issue but there could be negative repercussions for investors if the major shareholders are not prudent in managing their finances.

• For investors who want to act on their view that the market is undervaluing S-chips and have faith in the reported numbers, we highlight some good pickings.