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

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

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

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

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Raffles Education - Exposure to China’s new liberal youth

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

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

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

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

Midas - Placement to drive new capacities and earnings

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

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

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

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