China Milk Technical BUY

On 18th March, China Milk issued a statement to assure shareholders that the Company's cash position as set out in its 2008 Annual Report and the unaudited financial results of the third quarter and nine months ended 31 December 2008 is accurate as stated.

This morning, China Milk took a further step forward in allaying investors’ fears by announcing that it was inviting convertible bond holders to tender their bonds to the Company in return for cash. The offer opens at 9.00am Singapore time on 31st March and will close at 11.59pm on 1st April unless extended.

The zero coupon bonds amounting to US$150m are due in 2012 and China Milk is redeeming a maximum of US$40m worth of bonds. As at end December 2008, China Milk had cash of RMB1,964.7m and the convertible bond liability was RMB1,004.5m.

On the charts, China Milk looks technically attractive. The stock has recovered from its Mar lows of S$0.20 and is now testing to break above the 30- day SMA. We see opportunities to accumulate as the congestion phase over the past one week suggests that a base building formation is in the making.

Although MACD is still negative, it has broken out of its downward channel, which is a sign of recovery. In addition, RSI is still rising towards the upper band of the neutral zone.

There is a minor resistance at its 30-day SMA (S$0.31). Next upside target is at S$0.335 and S$0.35. Immediate support is at S$0.28. Cut losses if it breaks below S$0.26.

Sponsored Links

Sihuan Pharmaceutical - Gaining from divestment

• Sihuan Pharmaceutical (Sihuan) is selling its 45% stake in Beijing Purenhong Pharmaceutical (Purenhong) for Rmb101.7m, resulting in a divestment gain of about Rmb38m, by our estimates.

• We are positive on the divestment, as we believe it would allow Sihuan to focus on its core operations, and also free up cash to support its organic growth and new acquisitions. Sihuan acquired the 45% stake in Purenhong, the largest privately-owned pharmaceutical-product distribution company in Beijing, for Rmb50.7m in May 2008. The selling price of Rmb101.7m is pegged at 7.3x the FY08 net profit for Purenhong, based on our estimates.

• As mentioned in our previous report (A tale of two pharmaceutical companies, published on 24 June 2008), we believe the acquisition was strategic but not core. The acquisition of Purenhong was to help Sihuan consolidate its strong presence in Beijing, but this should be maintained after the divestment, as Sihuan intends to continue selling products through Purenhong in Beijing.

• In addition, there is a difference between the selling methods employed by the two companies. Sihuan sells to distributors on cash terms, and avoids carrying receivables from hospitals. Purenhong, on the other hand, sells to hospitals on credit terms, and its demand for cash and working capital increases as sales rise. Sihuan would have to inject cash continually into Purenhong to fund its growth, in our view.

• We have revised up our earnings forecast for FY09 by 9.1% to factor in the divestment gain, and revised down our earnings forecasts for FY10 and FY11 by 2-3% to factor in the loss of the associated-company contribution from Purenhong. We estimate that Sihuan should have a war chest of more than Rmb400m following the divestment.

• Our six-month target price of S$0.93 is based on a peer-average PER of about 7.5x on our 12-month earnings forecast (excluding one-off items) to 2Q FY09.Catalysts and action

• We maintain our 1 (Buy) rating for Sihuan, and expect continued positive news flow to lift the performance of its share price.

Midas Holdings - Forming a pedestal for growth

Clearing hurdles. We visited Midas Holdings (Midas) and its 32.5% owned associate, Nanjing Puzhen Railway Transport (NPRT) in China. At NPRT, we were updated on the investment plans of the Chinese government to utilise rail transport building as one of the measures to pump prime the economy. While these investments plans are "industry talk" and yet to be concretised (in terms of actual size and timing), our initial survey of NPRT's capacity expansion (500 cars/year by end 2009) invokes our confidence that it is primed to capture a sizable portion of the market. Midas' 3rd lineexpansion is also making good progress while its current capacity is strongly utilised (~80%), frequently operating on three shifts. Concurrently, Midas has started downstream operations with strong interests displayed by all three train manufacturers to engage this service. It has embarked on small projects as a testbed for bigger contracts in the future.

Competition. Management acknowledges that there are companies keen to get in on the act in view of the proposed massive investment by the PRC government. However, we do not think more licenses will be issued by the three main train manufacturers to control quality for critical structures like train bodies. Case in point is that Midas continues to command ~80% of the aluminium (Al) profile market for train cars in the PRC despite the presence of four other competitors. A couple have even been operating even before Midas. However, when the magnitude of the orders gets overwhelming in the next few years, there could be possibilities of new Al profile suppliers.

Setting up for success. Rise in core earnings for Al profiles will likely be marginal but could spring surprises if utilisation improves and margins edge up if better margined back-to-back contracts are signed. We iterate that NPRT will drive earnings with delivery of 30-35% of its 768 train car order book this year. NPRT is pursuing four more projects that could add up to 400 cars to its order book. Economies of scale will accelerate and we should see better contributions.

Maintain BUY. We maintain our BUY call with fair value of S$0.63 based on 14x FY09F PER. 2010 will see earnings kicker from its 3rd line, bigger and better-margin NPRT contributions and margin enhancers from its complementary downstream activities. In the meantime, Midas is likely to trade in tandem with sentiments of S-chips and share price catalysts could come from contract wins.