Midas - Full speed ahead

Midas has this morning announced a Rmb70 mn contract to supply extrusion profiles for high-speed trains. This marks its fifth contract win in two weeks, with an aggregate of Rmb845 mn of orders, raising its current order book to S$240 mn based on our estimates and securing almost 90%/30% of FY10E/11E revenue forecasts.

With the Ministry of Railways likely accelerating further purchases of bulk quantities of high-speed trains to support China’s plans to increase this number (from 200) to 1,000 in 2010, we believe that the risks to our order book estimates for Midas lie on the upside.

Thus, with the third extrusion line already boosting capacities from 1Q10E, we are factoring in contributions from a fourth extrusion line by end-FY10E. This, coupled with more optimistic utilisation assumptions, raises our FY10/11E earnings estimates by 4-12%.

Consequently, with increased earnings visibility on the back of these new contract wins, we roll over our SOTP-based valuation to FY10E. Thus, our target price rises to S$1.05 (from S$0.80) and we reiterate OUTPERFORM.

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China Shipbuilding - Valuation No Longer Cheap

Valuation no Longer cheap; current premium unsustainable: Although global shipbuilding industry experienced zero new orders in May, shipbuilding stocks delivered a mixed performance. From May 6 to June 11, Japanese shipbuilding stocks gained 39%, followed by Chinese names’ 26% advance while Koreanpeers lost 11%. Such performance is contrary to the fundamentals, given Japan is continuously losing market share to China and Korea. We understood the market might play a sector rotation strategy and temporarily prefer laggard performers with weak fundamentals but cheap valuations. However, after the strong gain in May, Chinese shipbuilding stocks are now trading at 2.4x 09e P/B and 1.8x 10e P/B, which is no longer cheap and even higher than Hyundai Heavy and Samsung Heavy. We see such a valuation premium as unsustainable and expect downside risk at current level.
Stimulus cannot heal all wounds: On June 4, China released the detailed shipbuilding stimulus plan. Without incremental positive measures, the detailed plan reiterate government’s stance to protect order book via offering buy-side financing or purchasing aborted vessel. However, we don’t think the stimulus package can heal all wounds as the total contract value of China’s backlog exceeded US$140bn, or 20% of China’s incremental loan in 2008. Even considering that an aborted vessel can be purchased at a 40% discount to the contract price, it is still difficult to find sufficient capital to protect all the backlog. Our backlog allocation analysis on page 2 suggests that nearly 50% of the orders are placed in state-owned shipyards, which should be the priority during government rescue.

Containership price underperformed again in May: New-building price of containership experienced bigger correction than any other vessel segment in May (Exhibit 7 on page 4). We recommend investors take profits on Yangzijiang, as in comparison to the other shipyards, it is more likely to face negative headwinds with a larger new-building price correction.

Sun Hung Kai Properties - just waiting for the right opportunity

Since 1984, the Hong Kong housing market and SHKP have endured six crises of varying magnitudes. Through the Joint Declaration of the 1980s, the Asian Crisis of the 1990s and SARS in this decade, SHKP has emerged bigger and stronger each time. SHKP’s share price has risen 1,978% since 1984, outperforming the 486% rise in physical home prices and the Hang Seng Index’s 922% gain.

SHKP’s strong balance sheet and prudent financial management allowed it not only to weather each crisis but to exploit the market’s weakness in picking up new projects that ultimately became the firm and Hong Kong’s trophy assets, in our view. The 1980s brought New Town Plaza, the 1990s brought IFC, while the 2000s brought the ICC complex.

We believe this recent crisis is no different. The challenges presented by the near-term economic outlook should also present attractive opportunities and we believe SHKP will be ready to move.


Over the past seven months, SHKP has already started to build up its war chest with some HK$20bn of presales. In addition to providing cash for potential acquisitions, the presales have also helped SHKP to substantially lock in more than 90% of FY09F earnings and some 23% of FY10F earnings.

In the next 12 months, SHKP pipeline of new launches remains strong. Projects such as, Yoho Midtown in Yuen Long, Aria in Ngau Chi Wan, Tuen Mun Town Lot 465 and Kwu Tung in Sheung Shui could bring in another HK$17bn of sales proceeds.

The one missing ingredient now is the opportunity to replenish its landbank either via farmland conversion or a public land auction. Back in March 2009, SHKP had stated that the government land premium offers still remain too high and expected that a better opportunity may be available in 6-12 months time. This narrow window should now be approaching, in our view. Success in locking in reasonable land costs now for some of SHKP’s 24mn sf farmland should help sow the seeds for future growth.

SHKP has one of the strongest balance sheets among the Hong Kong developers. SHKP’s gearing is only 19%, while its interest cover is 9.1x. Even excluding any development income, SHKP’s recurrent EBIT comes to HK$6.5bn. SHKP has been very prudent with its debt profile. Of its gross debt of HK$47bn (against gross assets of HK$302bn), SHKP only has a 4% maturing by December 2009F and a 14% maturing by December 2010F.

SHKP is currently trading at a 30% discount to its end-FY10F NAV of HK$128.20. The 25% gap to SHKP’s historical average discount of 5% makes it the most undervalued developer among the HK developers, by our estimates. Our HK$121.80 price target is based on mid-cycle discount of 5% against SHKP’s end-FY10F NAV. Historically through the cycles, SHKP has traded at an average 10% discount during downcycles, a 5% discount during mid-cycles and a 3% premium during upcycles.