Raffles Education – Humble valuations despite superior track record

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

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

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

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

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

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China Sunsine Chemical - Positive sign in volume growth

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

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

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

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

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

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

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

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

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

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

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