Fortune Reits

OCBC on 30 Mar 2012

For the first two months of 2012, HK retail sales climbed by 15.2% YoY to HK$77.0b. Jan sales had been up 14.9% YoY while Feb sales were even more bullish with an increase of 15.7% YoY despite Chinese New Year falling in Jan instead of Feb this year. The continuing growth in sales, coming on the back of a 25% jump in 2011 vs. 2010, should continue to support an increase in average retail rents. We believe that rents will grow given that the economies of HK and mainland China continue to expand. China is also currently maintaining its tariffs on luxury imports into the mainland, thus helping to support prime retail rents in HK and the cascade effect on suburban retail mall owners like Fortune. We maintain our BUY rating and HK$4.88 fair value.

Retail sales grow
Provisional statistics for Feb retail sales in HK were released yesterday. We note that the retail sales figure for Feb (+15.7% YoY to HK$33.8b) grew faster than that for Jan (+14.9% YoY to HK$43.2b), which is encouraging especially since Chinese New Year fell in Jan instead of Feb this year. On a combined basis, for the first two months of 2012, HK retail sales climbed by 15.2% YoY. Adjusting for inflation, the volume of sales climbed 9.5% YoY. An official commented that going forward, improved incomes and good inbound tourism should still be positive for the retail business in the near term. 

Expanding China and HK economies
We note that Bloomberg’s consensus estimates for real GDP growth for China and HK in 2012 are still highly encouraging at 8.3% and 3.0% respectively. For 2014, the figures are even better at 8.4% and 4.5%. In HK, the unemployment rate is forecasted to increase only slightly from 3.46% in 2011 to 3.6% for this year.

Import tariffs in Mainland China aid HK
In 2011, there were 42m tourists to HK, which has a population of only 7m. 28m of the tourists were from the mainland. Mainland China’s import tariffs on luxury goods, of up to 30-60%, are considered a reason for the strong retail sales growth and high rents at prime locations in HK, which help support suburban retail rents, benefiting players like Fortune REIT. Earlier this month, a former deputy Minister of Commerce said that there will be two rounds of cuts to the tariffs this year, but the Ministry of Finance has defended the current rates. While the tariffs remain as they are, HK is still a beneficiary.

Maintain BUY 
Fortune is trading at a P/B of 0.5x and an est. FY12 dividend yield of 7.2%. We maintain our BUY rating and a HK$4.88 fair value estimate. 

Oil and Gas Sector

OCBC on 30 Mar 2012

Newswires such as Bloomberg and Reuters have reported that France is in talks with the US and Britain on a possible release of strategic oil reserves to push fuel prices lower. Of note is the fact that 2012 will be an election year for both the US and France, and politicians may have to placate voters’ concerns about rising fuel prices. However, a coordinated international effort is required to have an impact on the oil markets, and even if this is achieved, we only expect a temporary downward pressure on oil prices unless a more fundamental driver (e.g. low fuel demand due to poor economic health in major consuming countries) emerges. Meanwhile, we maintain our Overweight rating on the broader sector, with Keppel Corporation [BUY, FV: S$12.27], STX OSV [BUY, FV: S$2.25] and Ezion Holdings [BUY, FV: S$1.05] as our preferred picks.

Releasing strategic oil reserves in an election year?
Quoting French ministers, newswires such as Bloomberg and Reuters have reported that France is in talks with the US and Britain on a possible release of strategic oil reserves to push fuel prices lower. This is hardly a surprise considering that oil consuming markets have been bemoaning the continued rise in energy prices. Of note is the fact that 2012 will be an election year for both the US and France, and politicians may have to placate voters’ concerns about rising fuel prices. 

But coordinated action is required
Oil reserve releases are usually coordinated by the International Energy Agency (IEA), and currently there are obstacles to such a concerted effort as 1) the head of IEA has questioned the need for a coordinated IEA release, and 2) support also has to be garnered from oil producing countries as it is possible that they may reduce production. 

Merely a stopgap measure
Even if most of the international community does agree to cooperate, the issue of geopolitical tension in the Middle East has to be resolved. The flood of liquidity by central banks will also support prices of scarce resources such as oil. Stripping out effects of inflation, oil prices are still set to rise over the longer term, due to the fundamental reason that the era of easy oil is over. Many existing oil fields are in decline, and new discoveries are mainly in places where resources are difficult to extract, be it in physical, economic or political terms.

Positive outlook for oil and gas industry
Hence, as much as share prices of oil and gas related stocks are correlated to movements in oil price, we are not overly concerned with this latest piece of news, unless a more fundamental driver (e.g. low fuel demand due to deterioration in economic health in major consuming countries) emerges. Meanwhile, we maintain our Overweight rating on the broader sector, with Keppel Corporation [BUY, FV: S$12.27], STX OSV [BUY, FV: S$2.25] and Ezion Holdings [BUY, FV: S$1.05] as our preferred picks. 

Hengyang Petrochemical Logistics

Uobkayhian on 30 Mar 2012

Investment Highlights

· Hengyang Petrochemical Logistics (Hengyang)transports and stores liquid petrochemical products such as phenol and ethylene for blue-chip customers including BP, BASF, Shell and Sinopec. The group operates in the Yangtze River Delta, and has facilities in Deqiao and Jiangyin.

· Deqiao expected to boost revenue in 2012. We expect the newly completed Deqiao facility to boost 2012 revenue by up to 40%. The Deqiao facility contributed two months of revenue in 2011.

· Secured prime locations for expansion.Hengyang recently secured three sites at Wuhan,Chongqing and Yueyang to expand its petrochemical storage capacity, which are upstream to its current facilities. These facilities will be located within chemical and industrial parks near the operations of its existing customers.

· Capex of Rmb500m-600m. We expect the group to expend Rmb500m-600m (S$100m-120m) on its expansion plans, with Rmb200m-300m (S$40m-60m) to be used on the first phase of the Chongqing andWuhan projects which will be completed by end-12.

· Completed S$8.2m rights issue. Hengyangrecently raised net proceeds of S$8.2m in a rights issue in February. The rights issue will increase the number of shares by 56m, or 40% of the group’s pre-rights share base. Hengyang has already utilised more than half of its net proceeds for the Wuhan and Yueyang projects.

Our View

· Risk of future fund raising. Although we estimateHengyang’s post-rights net gearing is at a low 15%, we believe bank borrowings may not be sufficient to fund the group’s expansion plans. In our view, the group may embark on another round of equity fund raising in the future.


Valuation

· Discount to peers. Hengyang is trading at a trailing 12-month PE of 13.3x, at a 53% discount to its tank terminal peers’ average of 28.3x.

Hengyang Petrochemical Logistics

OCBC on 29 Mar 2012

We visited Hengyang Petrochemical Logistics’ port and storage facilities at Deqiao and Jiangyin along the Yangtze River in China. We anticipate that revenue could increase by ~38% in 2012 with a full-year contribution from the Deqiao facility, which came into operation in Nov 2011. In addition, the company has won coveted logistics sites at Chongqing and Wuhan. In 2012, it expects to complete the first phases of these sites and a site in Yueyang. Hengyang will need to raise additional funding for these sites. We have NO RATING on Hengyang. Although it does not currently offer dividends, it is trading at a historical P/E of 13x, which is lower than its peer group’s average of 22x. According to Bloomberg, there is no target price available for this stock.

Servicing oil majors.
We visited Hengyang’s port and storage facilities at Deqiao and Jiangyin. Listed on Catalist since Oct 2009, Hengyang is chiefly engaged in the storage and transportation of liquid petrochemical products in the Yangtze River Delta. At the mouth of the Yangtze sits Shanghai, the nexus of petrochemical logistics in China. Hengyang clients include BP, Shell, BASF, Sinopec, CNPC and CNOOC. Hengyang believes that there are few peers where it operates with as impressive a list of clients. With the Deqiao facility operating since Nov last year, we anticipate that revenue could increase by ~RMB33.5m in 2012, representing a ~38% YoY increase from 2011 revenue of RMB89.0m, given that RMB$6.7m of revenue in 2011 was due to the two-month contribution from Deqiao.

Prime locations.
Hengyang won coveted petrochemical logistics sites along the Yangtze River at Chongqing and Wuhan. The Wuhan site is in a large industrial zone which has been designated as a petrochemical park. The Chongqing site is at the Chongqing Chemical Park in Changshou district. These sites are its current priority. Hengyang is also developing a site at Yueyang. The three sites are upstream of where the Hengyang currently operates. The company will need to raise additional funds for the projects. It expects to spend RMB500m on the Chongqing and Wuhan projects combined, with RMB200-300m on the first phases that they are aiming to complete in 2012. The company recently raised S$16.8m in a S$0.30 rights issue this year.

Undervalued compared to peers.
Hengyang currently does not offer dividends. However, it appears undervalued with its historical P/E of 13x, versus a median P/E of 22x among peers listed in Singapore and China. 

Not Rated.
We have NO RATING on Hengyang. According to Bloomberg, there is no target price available for this stock. 

Singapore Small Caps and Mid Caps

DBS Group Research on 29 March 2012

Singapore small caps and mid caps have had a good run since hitting a low in December. Since the start of the year, the FTSE ST Small Cap Index and the FTSE ST Mid Cap Index have outperformed the Straits Times Index (STI), up 18.1 per cent and 19.0 per cent, respectively, versus a gain of 14.1 per cent for the benchmark STI.

Despite this rally, small and mid caps continue to trade at a 20 per cent discount to large caps, probably due to the sector's mediocre profit growth of just 9 per cent. At current levels, small and mid cap valuations are now back to their historical mean.

Looking ahead, we believe that only companies with stronger fundamentals, that is, above-par earnings or enjoying better than market growth, will continue to head higher.

Sustained high oil prices will encourage oil companies to increase their exploration and production budgets, spurring more offshore activity and, in turn, demand for offshore and marine (O&M) services and vessels. We therefore see significant scope for earnings upgrades within O&M on the back of rising utilisation and day rates. Stock picks include Ezion Holdings ('buy', target price S$1.25) for high earnings visibility and solid execution. CH Offshore ('buy', TP S$0.50) and ASL Marine ('buy', TP S$0.78) are turnarounds, expected to benefit from the improving charter market and a rebound in orders for offshore support vessels.

Maintain focus on earnings turnaround, profit upside, company specific re-rating catalysts. As we are no longer in a 'rising tide market', the only stocks to see a further uplift will be those expecting a turnaround in fortunes, sustained profit growth or upside to current forecasts.

Our turnaround picks are Venture Corp ('buy', TP S$9.60) for a continuation of the tech rebound, China Minzhong ('buy', TP S$1.45) for better harvest in the near term, and Tiger Airways ('buy', TP S$1.01) for its stronger operational efficiencies.

We also see potential earnings upside for Sound Global ('buy', TP S$0.86), Luye Pharma Group (not rated, TP S$1.21), ARA Asset Management ('buy', TP S$1.74) and Biosensors International ('buy', TP S$1.68).

DBS Group

Kim Eng on 30 Mar 2012

Earnings risk. With Singapore, Hong Kong and Greater China accounting for about 86% of 2011 pretax, DBS’s earnings are susceptible to a slowdown in China and the global economies, while corporate/treasury exposure (81% of earnings, vs. 65% for OCBC and 66% for UOB) add to the volatility. Valuations reflect the low prospective ROE of 10.3% that we are projecting, with downside risk, in our view. Strong fundamentals notwithstanding, our Sell call is maintained, with an unchanged TP of RM11.50 (2012 P/BV of 0.9x).

Results filtering through. Just over a year into the job and CEO Piyush Gupta’s initiatives are beginning to deliver results, with enhancement to the group’s cash management and trade financing capabilities. Moreover, treasury operations are more client-driven than before. Other areas of focus moving forward would be in strengthening its regional SME presence as well as increasing regional contributions. Cross-selling opportunities will have to be stepped up if normalised ROE targets of 12-13% are to be achieved.

Loan growth and NIM expectations. Low-teens loan growth is still the guidance this year (our forecast: 10.7%), with extra attention to be paid to the shipping, SME and property markets. NIMs are expected to be stable, for corporates have been willing to pay a little more premium for stable funding, while housing rates appear to have stabilised for now. USD funding cost however is still rising, while funding costs are also still high for the group’s Hong Kong operations.

More than ample liquidity. S$ liquidity is abundant and POSB provides it with access to a sizeable pool of low-cost CASA, so much so that the bank has decided to price itself out of the fixed deposit market. As for USD liquidity, MNCs are a source of funding while DBS’ market share of the active S$:USD swap market is about 20-25%.

40% of NPLs still performing. There are no signs at this juncture of any stress in the loan book. The specific loan to a European shipper that was classified as an NPL in 4Q11 is still performing at this stage, as is 40% of the group’s total NPLs.

Cache Logistics Trust

Kim Eng on 30 Mar 2012

Background: Cache Logistics Trust (CLT) is the fourth-largest industrial REIT in Singapore and a niche logistics player. Its portfolio of ramp-up warehouses is mainly on master leases to either its sponsor CWT Ltd or CWT’s privately-held parent, C&P Holdings. CLT offers a competitive distribution per unit yield of 8.4% based on consensus estimates, and its balance sheet is relatively stronger than its peers.

Recent development: In a private placement concluded on 22 March 2012, 60m new shares were placed at $0.985 per share (only a 5% discount to its VWAP). The private placement was about 1.24x subscribed and saw strong participation from Asian and European investors with the majority of demand from Asia.

Proactive capital management. The private placement raised net proceeds of $57.1m, of which $36m would be used to finance the proposed acquisition of 21 Changi North Way, a warehouse facility and $20.5m to partially repay existing debt. CLT’s gearing is expected to decrease from 29.6% as at December last year to 26.1% after the deployment of the proceeds. With the purchase of 21 Changi North Way, CLT will have 11 assets under management – 10 in Singapore and one in Shanghai.

Positioned for growth. CLT is the capital recycling platform for CWT and C&P. Based on our estimates, the warehouse properties that CWT owns in Singapore and overseas are worth about $439m. Assuming a target gearing ratio of 40%, CLT has debt headroom of about $170m for more acquisitions. The existing properties under the right of first refusal (ROFR) granted to CLT involve 13 properties in Singapore and China. With a combined GFA of 2.8m sq ft, they form a sizeable pipeline for acquisition. In addition, CLT is mulling third‐party acquisitions in the Asia Pacific.

Genting Singapore

DBS on 28 March 2012


WE came back positive on Resorts World Sentosa's (RWS) new offerings after a recent site visit with a group of clients. We found the Maritime Experiential Museum educational and the Transformer ride an exciting addition to Universal Studios (USS). Despite being a weekday just after the school holidays, the crowd was healthy; we understand USS visitor arrivals in December peaked at 27,000 per day versus a Q3 2011 average of 9,000.


Hotel occupancy was high with room rates from S$480 onwards. We were impressed with the spacious rooms at 172-room Equarius Hotel and 22 beach villas (complete with private jacuzzis and pavilions!) at the serene Western Zone, which should appeal to higher-end VIP patrons and compete with Marina Bay Sands. Construction for remaining 13 villas, marine life park and water theme park is in advanced stages, on track for completion in Q2-Q4 2012, while USS could see a new ride in Q3 2012.

While it is still early to assess the positive impact, we estimate every one per cent increase in rolling chip from junkets could boost Genting Singapore's earnings by up to 0.45 per cent (assuming 1.5-1.6 per cent of rolling chip junket commission, similar to Genting Malaysia). Even if junkets cannibalise the entire Malaysian direct VIP segment (assuming 25 per cent of VIP volume) - which is highly unlikely - rolling chip would need to increase by 14 per cent to make up for the lower margin.

We understand that the two approved junkets currently operate in Malaysia, hence Genting Singapore can leverage on the Genting Group's long-standing relationship. We do not discount the possibility of some cannibalisation of Genting Malaysia's high-roller business, which will be to the group's advantage, given Singapore's lower VIP gaming and corporate taxes.

Even after the recent re-rating, Genting Singapore is still trading at an undemanding 9.6 times FY2013 enterprise value/Ebitda multiple versus big-cap Macau peers' 12.0 times. There could be upside to our and street's estimates from junket operations and potential ventures outside Singapore worth US$1.5 billion-US$10 billion. (Competition for new markets will be intense, but Genting Singapore can leverage on its strong balance sheet, healthy operating cash flows, strong track record and global reach.) Reiterate 'buy' with TP of S$2.06.
BUY

STX OSV

OCBC on 29 Mar 2012

Last week, STX OSV announced that it has secured two contracts worth a total of NOK1.2bn (USD200m). As these contracts already form part of our total contract win projections for FY12F (NOK13bn), we are not making changes to our forward estimates. Of noteworthy was the contract win for an Offshore Subsea Construction Vessel for DOF, which features an innovative moon pool design developed by STX OSV. We think this is further testament to the group’s ability to stay ahead of the curve for product development and garner customers’ orders. Meanwhile, we are optimistic on the OSV market given the improving industry fundamentals. Maintain BUY with fair value estimate of S$2.25.

Contract wins worth USD200m 
Last week, STX OSV announced that it has secured two contracts worth a total of NOK1.2bn (USD200m). The contracts were for the construction of (i) one Subsea Support Vessel for Island Offshore (NOK500m) and (ii) one Offshore Subsea Construction Vessel (OSCV) for DOF (NOK650m). As these contracts already form part of our total contract win projections for FY12F (NOK13bn), we are not making changes to our forward estimates.

Market acceptance of new design
The second contract – OSCV for DOF – will feature an innovative moon pool design recently developed by STX OSV. This follows the completion of a three-year R&D program between STX OSV, Marintek (Norwegian Marine Technology Research Institute) and DOF, focusing on safe design and operation of moon pools. Compared to vessels with conventional moon pool design, the new OSCV can operate in wider range of weather conditions in a safer manner. What is also significant about this contract is that it is secured under relatively difficult operating environment – a further testament to its ability to stay ahead of the curve in terms of product development and gaining customers’ orders.

Positive outlook
As mentioned in our sector report (“A busy first quarter in 2012” dated 21 Mar 2012), the outlook for the oil and gas industry is generally positive. The rig market is bolstered by increasing fleet size, rising day rates and higher utilization. We also expect demand for offshore vessels (i.e. PSV, AHTS and OSCV) to catch up. In this aspect, we believe that STX OSV is well-positioned. First, the recent oil discoveries in North Sea should lead to increasing demand for high-spec offshore vessels capable of operating in harsh environment. Secondly, its new yard in Brazil (operational in 2014) will provide it with the shipbuilding capacity to meet the strict local content requirements. Maintain BUY with unchanged fair value estimate of S$2.25.

OSIM

OCBC on 29 Mar 2012


We believe that further downside risks have emerged for OSIM International (OSIM) since our last update on 8 Feb 2012. This stems from increasing signs of easing growth in OSIM’s key addressable markets, including China, Malaysia and Taiwan. In our opinion, lower economic growth could manifest into softer demand for OSIM's high-end products, which are largely discretionary in nature. To mitigate this, management would continue its innovation drive to introduce novel products with fresh concepts and better functionality, while focusing on improving its productivity per store and man. We maintain our HOLD rating and S$1.35 fair value estimate given limited upside potential.

Macro weakness presents downside risks…
We believe that further downside risks have emerged for OSIM International (OSIM) since our last update on 8 Feb 2012. This stems from increasing signs of easing growth in OSIM’s key addressable markets. The Chinese government recently cut its 2012 GDP growth target to 7.5%. While China’s retail sales of consumer goods grew 14.7% YoY for the combined months of Jan to Feb 2012, this represented a slowdown as compared to the average 17.1% monthly YoY growth recorded in 2011. Meanwhile, Malaysia also revised its economic growth forecast downwards to 4%-5% for 2012, citing weakness in the global economy. Taiwan, another key market for OSIM, highlighted that consumer confidence remains lacklustre, although private consumption is still expected to increase by 2.7% in 2012. We opine that lower economic growth in these markets could manifest into softer demand for OSIM's high-end products, which are largely discretionary in nature.

But partly mitigated by its continuing innovation drive
OSIM’s strategic focus for 2012 would be to continue its innovation drive and actively maximise value from its stores and staff. The latter includes the rationalisation of non-performing outlets. Management has earmarked a pipeline of new innovative products to be launched in a bid to enhance its product offerings. We reckon that the rollout of novel products with new concepts, better functionality and endorsed by renowned celebrities could ‘freshen’ consumer interest and help to mitigate the impact of a slowing economy.

Maintain HOLD
Notwithstanding the softer macroeconomic backdrop, we opine that margin expansion for OSIM could possibly emanate from the following factors in FY12: 1) narrowing losses for RichLife, 2) absence of a one-off tax provision amounting to S$2.8m which occurred in 3Q11, 3) higher productivity per store and man and 4) increased contribution from its 35% stake in TWG Tea which is accounted for by equity accounting. We maintain our projections and S$1.35 fair value estimate. Reiterate HOLD given limited upside potential. 

Valuetronics

Kim Eng on 29 Mar 2012


Background: Valuetronics is a smallish but innovative electronics manufacturing services (EMS) company, focused on OEM (80-85% of sales) and ODM (10-15%). Its management is based in Hong Kong and it has two factories in Guangdong Province in China (Huizhou City and Daya Bay). It also has a new licensing arm where it has taken on on design and manufacturing rights for certain of major customer Whirlpool’s product categories.

What makes it different: Valuetronics’ differentiating factor is its focus on green technology products (e.g. energy-saving LED lighting solutions for Philips) as well as customers with strong brands (e.g. Whirlpool – home comfort aids such as air purifiers, KitchenAid – high-end cooking appliances, and Graco – digital baby monitors).

Licensing business doing well despite poor economic conditions. A year from its inception, Valuetronics is seeing significant growth from its newest revenue stream – brand licensing. 9M12 revenue from licensing of $57m (3% of revenue) has already exceeded full year revenue of $33m in 2011 (1% of revenue). Valuetronics started with just one product in 2011 – an air purifier for Whirlpool. In 2012, it added two more products – an electric fan and a consumer heater. The main demand comes from major retailers in North America, and has been steadily growing despite the sluggishness of the US economy and lower consumer spending.

9M12 profit down but revenue, cashflow improved. Net profit fell 1% in 9M12 reflecting the impact of higher manufacturing challenges in the PRC, namely pricing pressure, Renminbi appreciation, higher labour costs and inflation. However, 9M12 revenue rose 23%, driven by strong growth by one of its OEM customers that outpaced the overall slowdown in demand from the category. Also, free cashflow improved and turned around on the back of lower working capital requirements.

10% dividend yield at 4x earnings. Valuetronics declared 14 HK cents/share in dividends in 2011, about 40% of its earnings. At current levels, this works out to almost 10% yield. Assuming flat earnings and the same payout ratio, dividend yield appears to be attractive for a cheap stock (just 4x price to earnings) with a decent business.

Shareholders recently sold shares. However, there may be an sentimental overhang as two major shareholders and directors of the company recently sold 26m shares at $0.24.

Sembcorp Marine

Kim Eng on 29 Mar 2012

A class act. Despite a relative lull in new orders, Sembcorp Marine (SMM) is still in a prime position to benefit from the rig-building cycle upturn. In fact, it could have its strongest year ever for order wins. Based on the strength of its growth outlook and outstanding orderbook execution, we maintain our Buy call and raise our target price to $6.21.

A record year in the making. Judging by the enquiry levels it received and progress on negotiations, we believe that SMM should be able to secure US$3.5-4b in new order wins, with US$1.4b already secured YTD. The previous record year was 2008 with US$4.5b of new orders.

Petrobras orders potentially worth over US$4b. Furthermore, we have not yet factored in orders from Petrobras. Newswires have reported that the remaining five units for the overall drillship package could be awarded to SMM soon, at an estimated value of US$4b. Aside from drillships, SMM is also exposed to opportunities from Petrobras via orders for FPSOs, production modules and other support vessels.

Underlying market still firm. Recent rig orders may not have come nearly as thick and fast as that seen in the last cycle peak in 2007-08, but SMM believes that the current cycle is more orderly with fewer speculative players entering the market. This is also a similar situation on the credit side, with the more established banks traditionally involved in rig financing still prepared to fund reputable rig operators. Overall, SMM is seeing strong enquiries across the board for jack-ups, semisubmersibles and production assets.

Raising target price. SMM’s order backlog currently stands at around US$5.4b. Though we are forecasting lower earnings in FY12 due to the slowdown in orders in FY09 during the financial crisis and a lower margin assumption on more normalised pricing, our long-term outlook is still highly positive, as we see earnings strength resuming from FY13 onwards. Our SOTP-derived target price is raised to $6.21 from $5.58,
based on 17x FY13F PER. Maintain Buy.

Yongnam Holdings

UobKayhian on 28 Mar 2012

Investment Highlights

·          We re-iterate BUY on Yongnam Holdings (Yongnam) with a target price of S$0.40, pegged to the sector average PE of 8.3x 2012 earnings. Based on Bloomberg’s consensus earnings forecast from four brokers, Yongnam is set to report earnings of S$66.1m (+4.3% yoy) in 2012 with a 12-month target price of S$0.39.

·          Strong financial results and contract wins had failed to incite investor interest as Yongnam’s share price was stagnant in 1Q12. We recommend investors to accumulate the stock on weakness.

Our View

·          Yongnam reported a strong set of earnings for 2011, booking in NPAT of S$63.4m (+16.5% yoy) on revenue of S$332.7m (-0.7%). The company also declared higher-than-expected final dividend of 1.0 S cent for 2011. Yet, the stock barely budged.  

·          The company also announced that it has secured three contracts worth a total of S$52.1m for one specialist civil engineering and two structural steelworks contracts. Yongnam will provide steel strutting and construction decking works for the newUpper Changi station for Downtown Line 3, fabrication of steel components for jack-up structures in the offshore sector and structural steelworks for a business park development located at Portsdown Road/Fusionopolis Way. According to Yongnam, all three contracts are expected to have a positive impact on 2012 earnings. These contracts form 15% of our 2012 projected contract wins of S$350m. 

·          We expect stock outperformance would be driven by contract wins. According to the Building and Construction Authority (BCA), public sector construction demand is likely to contribute S$13b-15b in 2012, driven by institutional building projects as well as civil engineering contracts on the expansion of Kallang Paya Lebar Expressway (KPE)/Tampines Expressway (TPE) Interchange. Leveraging on its strong track record, we project contract win momentum will continue in 2012 due to Yongnam’s strong participation in major infrastructure projects such as MRT Downtown Line 3, Circle Line and Marina Coastal Expressway. The group had secured close to S$300m worth of civil engineering projects in 2011.

Hu An Cable

OCBC on 28 Mar 2012

We visited Hu An Cable’s factories in Yixing City, Jiangsu Province. Hu An Cable is one of the top 10 integrated cable and wire manufacturers in China. It is a proxy to China’s RMB5.3t investment in the power sector for 2011-2015. The group is building a factory to boost its capacity in mid- and high-end products. In addition, penetration into the high-end cables market will help to increase the group’s profitability. We DO NOT have a rating on Hu An Cable. Bloomberg’s consensus target price is S$0.26.

Infrastructure expansion in China.
Hu An Cable (Hu An) is one of the top 10 largest integrated cable manufacturers in China. Under the 12th Five Year Plan for China (2011-2015), RMB5.3t will be spent on capital expenditure in the power industry. This represents a 67.7% increase from the RMB3.16t that was earmarked for 2006-2010 under the 11th Five Year Plan. For 2011-2015, China will spend approximately RMB610b on power cables (+103% from the 11th plan), RMB500b on ultra-high voltage power cables (+2400%) and RMB521.6b on rural grid power cables (+38.5%). Urbanization in the form of 400m migrant workers becoming city-dwellers within the next 20 years will greatly boost electricity demand.

New factory for mid- & high-end cables manufacturing.
The company group to enter the high-end cables market to boost its profitability. It is building a factory with the capacity to manufacture mid- and high-end cables at a location close to its current factory in Yixing City, Jiangsu Province. The capital expenditure of RMB430m will be funded by internal cash, bank borrowings and IPO proceeds from the SGX listing. Two production lines for mid-voltage power cables and one production line for high-voltage power cables were installed as of Oct 2011. We believe that production will start sometime during the middle of this year.

Undervalued compared to peers.
Hu An appears inexpensive compared to its peers which are listed in China and Taiwan. It is trading at a P/E of 3.6x, P/B of 0.6x and offering a dividend yield of ~4.6%. In contrast, the overall medians for its peer group are as follows: P/E of 22.8x, P/B of 1.4x and dividend yield at 1.0%. We note that Hu An is also trading at an attractive estimated FY12 P/E of 3.1x.

Not Rated.
We DO NOT have a rating on Hu An Cable. Bloomberg’s consensus target price is S$0.26.

Weiye Holdings

OCBC on 28 Mar 2012

Weiye Holdings is a real estate developer focused on residential property development in two provinces in China: Henan and Hainan. On 3 Aug 2011, it completed its acquisition of Kyodo-allied Industries Ltd via a reverse takeover, and is currently listed on the SGX mainboard. We recently visited three pipeline projects in Hainan, and believe that Weiye’s property development businesses in Hainan would likely be a focal point for company’s plan for growth ahead. Management has a positive view on Hainan real estate, over the long term, for which they foresee a secular growth in demand as the uptrend in tourism and leisure consumption in China continues. Moreover, Weiye believes that they have an edge over competitors given that Weiye can leverage upon a large network of former clients in Henan - potential buyers of a vacation home in Hainan. We currently have NO RATING for Weiye Holdings.

A property developer in Henan and Hainan, China
Weiye Holdings is a real estate developer focused on residential property development in two provinces in China: Henan and Hainan. On 3 Aug 2011, it completed its acquisition of Kyodo-allied Industries Ltd via a reverse takeover, and is currently listed on the SGX mainboard.

First in Henan, then to Hainan
The company first established itself in Henan and has developed eight projects in the province with a total GFA over 407k sqm since 2001. In 2009, Weiye then expanded its operations to Hainan province on which management plans to base its next phase of growth. Its current pipeline consists of four projects in Hainan and two projects in Henan, making up a total GFA of over 1.2m sqm.

Visit to three Hainan projects
We visited three of Weiye’s projects in Hainan recently: Weiye Costa Rhine located in Wanning City, Weiye Oxygen Town in Tunchang County, and West International Plaza in Danzhou County. Construction for the first two projects is expected to complete by the end 2012, whereas West International Plaza is expected to complete by end 2013.

Focal point ahead on execution in key growth market
From our discussions with management, we believe that Weiye’s property development businesses in Hainan would likely be a focal point for company’s plan for growth ahead. Management has a positive view on Hainan real estate, over the long term, for which they foresee a secular growth in demand as the uptrend in tourism and leisure consumption in China continues. Moreover, Weiye believes that they have an edge over competitors given that Weiye can leverage upon a large network of former clients in Henan who would be potential buyers of a vacation home in Hainan. The company also has sales agencies in other Chinese cities, such as Chengdu, which organize tours for interested buyers to visit their projects in Hainan. We currently have NO RATING for Weiye Holdings.

Swiber Holdings

OCBC on 28 Mar 2012


Swiber Holdings (Swiber) announced that it has secured a US$273m contract through a local collaboration with Dragados Offshore for offshore construction work in the Gulf of Mexico. The undisclosed customer is likely to be PEMEX, and work entails the procurement, transportation and installation of pipeline. As this is a new market for Swiber, it is prudent to factor in contingencies for the group. However, there are unlikely to be major hiccups as Swiber Conquest has a good track record of pipe-laying and the waters where it will be executing the work is relatively shallow. We increase our peg to 12x blended FY12/13F core earnings due to improved sentiment on the sector with regards to contract wins, such that our fair value estimate rises to S$0.75 (prev. S$0.61). Meanwhile, we expect more contract wins for Swiber but this also means more funds would be needed for working capital. Maintain HOLD due to limited upside potential.

US$273m contract for Gulf of Mexico
Swiber Holdings (Swiber) announced that it has secured a US$273m contract through a local collaboration with ACS subsidiary Dragados Offshore for offshore construction work in the Gulf of Mexico. The undisclosed customer is likely to be PEMEX, and work entails the procurement, transportation and installation of pipeline. The 77-km pipeline will link the Enlace Litoral platform in the Gulf of Mexico to the Dos Bocas oil terminal in Mexico’s Tabasco state, and is scheduled to be built over a period of one year, with work commencing immediately.

Swiber Conquest to lay pipeline
The project will be executed through a consortium group with Dragados and Swiber, and we understand from management that Swiber will be doing the bulk of the work. According to newswires, Swiber’s accommodation/pipelay barge Swiber Conquest will lay the pipeline, while Dragados Offshore will contribute the use of its shops in Tampico and logistics base in Ciudad del Carmen.

Estimating 15-18% gross margins
As the US Gulf of Mexico is a new market for Swiber, it is prudent to factor in contingencies for the group. However, there are unlikely to be major hiccups as Swiber Conquest has a good track record of pipe-laying and the waters where it will be executing the work is relatively shallow. Meanwhile we are estimating gross margins of about 15-18% for this project.

Working capital to support more contract wins
As the contract falls within our new order assumption of US$850m for this year, we maintain our earnings estimate but increase our peg to 12x blended FY12/13F core earnings due to improved sentiment on the sector with regards to contract wins, such that our fair value estimate rises to S$0.75 (prev. S$0.61). Looking ahead, we expect more contract wins for Swiber but this also means more funds would be needed for working capital. Maintain HOLD due to limited upside potential. 

Neptune Orient Lines

OCBC on 28 Mar 2012


Neptune Orient Lines (NOL) announced it has mandated four banks as joint lead managers in its issuance of S$-denominated perpetual capital securities. The size, pricing and distribution rate of this issue have not been finalised. NOL has the option to call the perpetual securities in full after five years. The issue will have semi-annual distributions and a step up of 1.5% p.a. in the distribution rate after 10 years. Distributions are cumulative and bear interest at the distribution rate. Since accounting standards dictate that these perpetual securities are treated as equity, this issue will improve NOL’s gearing ratio and lower its cost of borrowing. Also, NOL’s cash position will be strengthened further, positioning it well to navigate through the difficult environment the container shipping sector is currently facing. Thus, we maintain our fair value estimate of S$1.38/share and HOLD rating on NOL.

Details of the perpetual capital securities issue
Neptune Orient Lines (NOL) announced it has mandated four banks as joint lead managers in its issuance of S$-denominated perpetual capital securities. The size, pricing and distribution rate of this issue have not been finalised and will only be available after its currently ongoing meetings with investors. NOL has the option to call the perpetual securities in full and at par at the end of five years and every distribution date thereafter. The issue will have semi-annual distributions and, after a 10-year period, the distribution rate will see a step up of 1.5% p.a. NOL also has the discretion to defer distributions to perpetual security-holders. However, if NOL falls into arrear in the distributions to perpetual security-holders, it will be restricted from distributing dividends to ordinary shareholders. In addition, deferred distributions are cumulative and bear interest at the distribution rate. NOL said the proceeds of this issue will be primarily applied to its working capital needs.

Financial implications
The high 1.5% step up in the distribution rate after 10 years should be punitive to NOL if it does not call the perpetual securities back within 10 years. This shows the management’s intent and confidence to service the distributions and, eventually, call the securities. And since accounting standards dictate that these perpetual securities are treated as equity, instead of debt, this issue will improve NOL’s gearing ratio, without diluting shareholders’ interests. NOL’s cost of borrowing should also lower with the improved gearing ratio.

Maintain HOLD
NOL had previously said its expected delivery of 32 vessels over the next three years is fully covered by its existing credit lines, which are without attached gearing ratio covenants. With the proceeds from this issue of perpetual securities, NOL’s cash position will be strengthened further. This positions NOL well to navigate through the difficult environment the container shipping sector is currently facing, despite recent increases in freight rates. Thus, we maintain our fair value estimate of S$1.38/share and HOLD rating on NOL.

Parkson Retail Asia

Kim Eng on 28 Mar 2012


Background: Parkson Retail Asia (PRA SP) is one of the largest department store operators in ASEAN, with
53 stores in Malaysia and eight each in Vietnam and Indonesia. Most are under the Parkson brand, which
is a highly recognised brand in its operating markets.

Recent IPO at $0.94 per share: PRA was listed on the Singapore Exchange in November last year and is controlled by Parkson Hldg Bhd (PKS MK), which is listed on Bursa Malaysia. Its sister company, Parkson
Retail Group (3368 HK), is listed on the Hong Kong Stock Exchange and operates 52 department stores
in China.


Emerging market play. PRA is envisaged as the ASEAN emerging market arm of Parkson Hldg, with plans to expand its presence in the Indonesian and Vietnamese markets. It is also exploring plans in Thailand, Cambodia and Myanmar. Department stores are highly popular in the emerging markets and experienced operators are able to provide a range of products to suit local conditions.

Asset-light model. PRA rents its space from mall owners and mostly operates department stores whose sizes range from 8,000 sq m to 10,000 sq m. The bulk of its revenue comes from subleases to concessionaire retailers, with about 20% from direct sales. The concessionary model lowers operating risk as cost is borne by retailers. Parkson stores are primarily targeted at the middle-to-upper income segment, with fashion and cosmetics making up more than 80% of sales.

Blazing same store sales growth. Net profit for 1HFY Jun12 grew by 29% YoY to $27m, which was ahead of consensus. The increase was driven by very strong same store sales growth (SSSG) in Malaysia (12%), Vietnam (16%) and Indonesia (10%), testifying to the growing consumption power of emerging markets. Management aims to maintain similar SSSG while rolling out a further 12 stores over the next two years. Consensus estimates are for net profit to grow at 27% CAGR over the next three years.

Frasers Commercial Trust

Kim Eng on 28 Mar 2012

Catalysts abound. Frasers Commercial Trust (FCOT) is an office REIT backed by a strong sponsor and offers income stability through long-term master lease agreements. In our view, the positive rental reversion for its two key assets, China Square Central (CSC) and Central Park (CP), and the unlocking of value through a sale or redevelopment of KeyPoint are positive catalysts for the REIT.


Positive rental reversion a boon. When the existing master lease agreement for CSC expires on 29 March 2012, FCOT will take over direct management of the property. CSC will likely experience an immediate lift to its net property income as the positive rental reversion kicks in – 53% of total gross rental income expiring in FY Sep12F with the average passing rent at $6 psf vs current market rent at $6.3-8.0 psf. The completion of the Telok Ayer MRT station next year should also boost CSC’s signing rents this year and next.


Potential asset sale to unlock value. FCOT has been granted an outline planning permission (OPP) for the redevelopment of KeyPoint, which could be rezoned from commercial to mixed commercial and residential use. In our view, FCOT could sell the asset and use the proceeds to purchase its sponsor’s pipeline of assets, redeem the convertible perpetual preferred units (5.5% coupon), and/or reduce its debt. We would prefer FCOT to refrain from redeveloping KeyPoint to preempt the risk of reducing the building’s attractiveness as an instrument for stable income. KeyPoint could possibly be sold for $1,200-1,300 psf, above its purchase price of $1,186 psf.


Trading at steep discount to book. FCOT trades at a steep 40% discount to its NAV and offers an attractive DPU yield of 7.7% based on consensus. It does not have any major debt refinancing risk until FY Sep13, when S$500m Singapore-denominated loan and S$120m JPY loan are due. Its gearing level is not excessively high at 36.8%. The average borrowing rate of 4% could be reduced upon the successful refinancing of its AUD loan next year.

World Precision Machinery

OCBC on 27 Mar 2012


We visited World Precision Machinery’s operations in Danyang City, Jiangsu Province last week. World Precision is China’s third largest metal stamping machine player by market share. With Phase 1 of its factory in Shenyang scheduled for completion in 2H12, the company will continue the shift of its product mix towards high-performance machines. The company will be a beneficiary of China’s 12th Five Year Plan (2012-2017), under which the high-end machinery and equipment industry is one of seven strategic industries identified. Management is optimistic about its long-term prospects. We DO NOT have a rating on World Precision Machinery.

Shifting more to high-end machinery.
World Precision’s high-performance and high-tonnage stamping machines are mainly used to produce auto parts and fetch an average gross profit margin of above 35%, compared to the gross profit margin of around 25% for conventional stamping machines. For FY11, 68% of revenue was from high-performance and high-tonnage machines. World Precision is building a factory in Shenyang to service the Bohai Rim. The first phase is due to be completed in 2H2012. We estimate that production may begin early next year.

Support for local high-end machinery.
The high-end machinery and equipment industry is one of the seven strategic industries targeted under China’s 12th Five Year Plan (2012-2017). The government will provide tax incentives and other subsidies to the industry. The government projects that high-end machinery will account for more than 30% of the machinery market by sales value. In addition, for 2012, government officials can only purchase local-brand cars. Over RMB60b is estimated to have been spent by the government on foreign-brand cars in 2010. This measure is positive for World Precision, which supplies machines to automobile components manufacturers. In FY11, 34% of the company’s sales were to automobile components manufacturers, making this the singular most important customer sales segment.

Growth in key downstream industries.
The next biggest customer group is home appliance components manufacturers, which accounted for 32% of FY11 sales. The growing disposable incomes of rural residents and rapid urbanization are increasing the demand for home appliances. The government has a rural subsidiary program in place till Jan 2013 which provides a 13% rebate on the purchase price of home appliances. Another important downstream industry that is growing is the railway industry. In Feb 2012, it was announced that China will construct 6,366 km of new railways in 2012, including 3,500 km of high-speed lines.

Not Rated.
We DO NOT have a rating on World Precision Machinery. Bloomberg’s consensus target price for the stock is S$0.78.

Hiap Hoe

DMG & PARTNERS RESEARCH 26 March 2012

EARLY last week, we released an update on Hiap Hoe Ltd, a developer that has built up a low-cost landbank in the prime residential districts and is in the midst of developing a 421,000 square feet gross floor area joint venture commercial site at Zhongshan Park along Balestier Road. Hiap Hoe has chalked up $400 million of progress billings that would be recognised over the next two to three years. We have worked out an RNAV/share of $1.22 for the stock and set a target price of 61 cents.

Interestingly, two days after our report, the local media highlighted a family feud between the founder of Hiap Hoe Ltd, Teo Guan Seng, and his children from various marriages. Mr Teo apparently wants to wind up the privately held company, Hiap Hoe Holdings, that holds a 70 per cent stake in publicly listed Hiap Hoe Ltd and Superbowl Ltd and distribute its assets to shareholders. This has led the media to speculate on possible takeover plays for the two companies and Hiap Hoe's stock price shot up to a high of 53 cents before settling at 51 cents last Friday. Without knowing the exact shareholding held by the individual family members of Hiap Hoe Holdings and pending further development, it is premature to speculate on any takeover plays, in our view. We continue to see value in the stock and maintain our 'buy' recommendation.
BUY

Mermaid Maritime

CIMB RESEARCH on 26 March 2012

NO changes to our EPS estimates or target price, still at 0.7x CY2012 P/BV. We met newly appointed CEO Bruce Gemmell, CFO Siriwan Chamnannarongsak and the subsea operational team, who outlined initiatives to turn around the subsea business.

Improvement in utilisation day rates and margins are reflective of the work done so far. We expect subsea to make further headway with plans to integrate the three subsea business units into one. This enables the group to more effectively deploy personnel and assets across markets to maintain utilisation.

Earnings risks are on the upside, as we have conservatively projected a 68 per cent utilisation rate for FY2012 - comparable to the 69 per cent in FY2011. Average projected day rates are also lower at about US$48,000 as compared to the US$52,000 achieved in FY2011.

We expect much stronger drilling contributions in H2 FY2012. That will be the first time both tender rigs, MTR-1 and MTR-2, will be gainfully employed. We expect MTR-2 to extend its contract with Chevron Indonesia ending in April 2012. Further, we expect contracts for its newbuild jack-ups by H2, which could re-rate Mermaid's share price, in our view.

We recommend investors buy ahead of a strong H2. Downside risks are limited with the stock trading at 0.5x CY2012 P/BV.

In addition, CY2012 EV/Ebitda of 3x highlights its strong operating cash flow generation and implies a cash payback of three years.
OUTPERFORM

Starhub

OCBC on 27 Mar 2012

StarHub has announced the pricing for the UEFA Euro 2012 football tournament which will start from 8 Jun to 2 Jul; all viewers (regardless of whether they are from StarHub or SingTel) will be able to purchase the Pay-Per-View pack, with an early bird discounted price of S$58.85 before 30 Apr, instead of S$69.55. The Euro 2012 event is also the first test of the new cross-carriage mandate of exclusive content. But with the steeper pricing, we believe that StarHub is likely to just break even at best. And following the recent run-up since its 4Q11 results announcement, there is limited upside from here to our unchanged S$3.10 fair value. Hence from a valuation ground, we downgrade it to HOLD.

Steeper Euro 2012 pricing
StarHub has announced the pricing for the UEFA Euro 2012 football tournament which will start from 8 Jun to 2 Jul and jointly hosted by Poland and Ukraine. Starting from 27 Mar, all viewers (regardless of whether they are from StarHub or SingTel) will be able to purchase the Pay-Per-View pack, with an early bird discounted price of S$58.85 before 30 Apr, instead of S$69.55. We note that the pricing is a lot steeper than what it charged for the same tournament four years ago. Back then, sports group subscribers paid S$10-20 (before GST) while non-sports group subscribers paid S$50.

Higher content cost likely reason for hike
One reason behind the steeper price could be due to rising content cost – according to media reports, the pricing for broadcast rights for the 2012 event has more than doubled the 2008 event. For example, Vietnam was reported as paying some US$5m for the latest rights, as opposed to US$2m in 2008. As such, we are not surprised by the higher pricing announced by StarHub.

First test of cross-carriage mandate
The Euro 2012 event will also be the first test of the new cross-carriage mandate of exclusive content, where SingTel mio TV subscribers will also be able to purchase the pack at the same price (subject to a one-off connection fee of S$10.70). StarHub will be able to sell the content into more households beyond its 545k subscribers; SingTel has some 353k mio TV customers although we estimate that 50% may already own a StarHub setup box.

Downgrade to HOLD
With the steeper pricing, we believe that StarHub is likely to just break even at best. And following the recent run-up since its 4Q11 results announcement, there is limited upside from here to our unchanged S$3.10 fair value. Hence from a valuation ground, we downgrade it to HOLD. 

Mapletree Logistics Trust

OCBC on 27 Mar 2012


Mapletree Logistics Trust (MLT) announced last Friday evening that it had entered into separate Sale and Purchase agreements to acquire two cold storage warehouses in South Korea for an aggregate purchase price of KRW63.5b (~S$71.3m). We note that both acquisitions are expected to be DPU-accretive, with initial NPI yields of 9.5-9.9%. Funding for the investments is expected to come from the proceeds raised from the recent issuance of its S$350m perpetual securities. In addition, MLT’s aggregate leverage post all acquisitions announced to date is likely to reach ~39%. We now factor in the two acquisitions into our forecasts. This raises our FY13-14F revenue and distributable income by 2.4-3.9%. Our RNAV-based fair value, however, remains at S$1.20. Maintain BUY on MLT.

Acquisition of two quality warehouses in South Korea
Mapletree Logistics Trust (MLT) announced last Friday evening that it had entered into separate Sale and Purchase agreements to acquire two cold storage warehouses in South Korea, namely Jungbu Cold Warehouse (JCW) and Dooil Cold Warehouse (DCW), for an aggregate purchase price of KRW63.5b (~S$71.3m). This marks MLT’s maiden entry into South Korea’s growing cold storage warehouse market. The two assets, which have a total GFA of 38,800 sqm, are each equipped with over 20 cold chambers that offer temperature control ranging from -5°C to -40°C, and are located in Gyeonggi-do, the largest logistics cluster in the country.

Attractive NPI yields and lease terms
We note that each of the properties will be leased back to the respective vendors for a term of 10 years. The lease terms also incorporate a built-in rental escalation of 3% per annum. Altogether, this provides strong and regular cash flows, as well as organic growth to MLT. In addition, both acquisitions are expected to be DPU-accretive, according to management. Specifically, JCW is expected to generate an initial NPI yield of 9.5%, while DCW a yield of 9.9%. These returns are significantly higher than the implied NPI yield of 8.2% for its existing South Korea portfolio of dry warehouses, due to the value-adding building specifications of acquisition assets.

Leverage likely to reach 39% post acquisition
We understand that the acquisitions are expected to complete by Apr 2012. Funding for the investments is expected to come from the proceeds raised from the recent issuance of its S$350m perpetual securities. In addition, MLT’s aggregate leverage post all acquisitions announced to date is likely to reach ~39%. We now factor in the two acquisitions into our forecasts. This raises our FY13-14F revenue and distributable income by 2.4-3.9%. Our RNAV-based fair value, however, remains at S$1.20. Maintain BUY on MLT.

World Precision Machinery Limited

Kim Eng on 27 Mar 2012


Background: World Precision Machinery is a manufacturer of stamping machines and related components. It produces both standard and customised stamping machines to suit the needs of a variety of industries, including automotive, electronics and white goods.

Recent development: The group recently announced that it has added three leading manufacturers of auto parts and home appliances to its clientele, including a major auto parts supplier to Hyundai Motor Group. We note that the total value of the contracts secured is about RMB11.1m, giving a welcome boost to the group’s outstanding orderbook of RMB200.0m (with delivery stretching over the next 3-9 months).

High demand for locally made auto parts. High-end stamping machines are generally employed in the auto parts sector to generate better margins. According to management, World Precision will supply high-performance and high-tonnage stamping machines to its newly acquired clients. Its two production plants in Danyang City, Jiangsu Province, are built on the high-performance/high-tonnage and CNC-based technologies, positioning them to ride the growing demand arising from import replacement.

Room for margins to improve. We also understand that the machines used to produce auto parts can typically fetch a higher gross profit margin of above 35%, compared to an average of about 25% for conventional stamping machines. We therefore expect the group’s profit margin to improve along with a positive shift in its product mix going forward.

Capacity expansion to capture growth. To capture the ever-increasing demand from the Bohai Rim area, World Precision is building another high-performance/high-tonnage and CNC-based production plant in Shenyang City, Liaoning Province. This will also allow it to stay close to the supply of raw materials. The new facility is estimated to have an annual production output value of RMB300m for Phase 1 and will serve as a key earnings driver in 2013. Construction is expected to complete by 2H12.

Order momentum picking up. Management said that the group’s contract wins so far have caused order momentum to pick up after a lull following the Chinese New Year holiday in January. Based on consensus estimates, the counter trades at an attractive 5x FY12 PER, with support from a decent dividend yield of about 5%.

Starhub

Kim Eng 27 Mar 2012

Still a star performer. StarHub has outperformed its two peers, up 5% since early this year. We are among the most bullish brokers on StarHub with the second-highest target price of $3.27. In our view, it is still a good story for 2012, with potential catalysts from lower subscriber acquisition costs as Android devices appear to be gaining ground. In addition, we expect the new Vodafone roaming alliance to boost ARPUs. Maintain Buy on attractive yield of 6-7%.

Android gaining ground. We are seeing more Android smartphone users these days. StarHub confirmed that non-Apple handset sales have risen in the last few months. As they break even faster than iPhones, this should have a positive impact on subscriber acquisition costs. It remains to be seen whether this trend will last but we are hopeful as iPhones appear to have lost some lustre.

Vodafone roaming alliance should boost ARPUs. StarHub’s new exclusive roaming agreement with Vodafone should help boost its corporate business, given that many multinational corporations have global enterprise arrangements with Vodafone. Typically, ARPU is higher for corporate accounts as executives tend to roam more and use more data services on their mobile phones than consumers.

Yield attractive even without capital management. Capital management is unlikely until year-end, as StarHub is still determining the impact the raised mobile coverage requirements will have on capex, especially the one on outdoor coverage (>99% including any open spaces vs >95% excluding open spaces). Nevertheless, we believe the new requirements will not add substantially to existing capex.

Not going crazy over BPL. StarHub is unlikely to participate in the bid for the 2013-16 seasons for the Barclays Premier League if the price escalates beyond its liking.

Buyback sustained despite higher share price. For the 2011 mandate year, StarHub repurchased 2.1m shares, above 2010’s 2m shares, although average cost was 10% higher at $2.87 (up to $2.91). Since the share buyback is another way to enhance shareholder value, other than paying good dividends, the highest average cost is a firm endorsement of the stock’s value despite the outperformance.

Genting Singapore

OCBC on 26 Mar 2012


The Casino Regulatory Authority (CRA) has approved junket licenses for two operators to work with Resorts World Sentosa (RWS). The CRA has rejected 12 other applications. These junkets, or international market agents (IMAs), can extend credit to high-rollers or organize trips for them to play at RWS in exchange for commissions. We believe that the move is generally positive for Genting Singapore (GS), as it will bring a new source of high net-worth players into its casino here. Secondly, the move should also lead to an improvement in GS’ credit risk. However, we believe it is still early days to revise our numbers as it may still need a while to get the junket operations running at full steam. Hence we maintain our BUY rating and S$2.02 fair value.

Two IMA licenses issued
The Casino Regulatory Authority (CRA) has approved junket licenses for two operators to work with Resorts World Sentosa (RWS). The CRA has rejected 12 other applications. The one-year licenses were issued to two Malaysian IMAs (international market agents) – Huang Yu Kiung and Low Chong Aun; and they can only bring in international high rollers. Meanwhile, the licenses can be revoked if the two fail to remain suitable. CRA also has the power to suspend the IMA license at any time.

Big hurdle cleared
While the CRA has only issued two licenses, we note that the move should lay rest to earlier concerns that the regulator is not keen to have junket operators in the Singapore gaming market. Indeed, Business Times reported that the CRA is currently evaluating other applications and conducting the necessary probity checks. We also understand that Marina Bays Sands (MBS) has not endorsed any junket license applications, suggesting that if the other junket operators are approved, GS could continue to maintain a significant lead-time over its rival.

Positive for GS
We believe that the move is generally positive for Genting Singapore (GS), as it will bring a new source of high net-worth players into its casino here. Secondly, the move should also lead to an improvement in GS’ credit risk as the two IMAs can also extend credit to their own high rollers. On the flipside, ongoing amendments to the Casino Control Act could mean more extensive financial reporting and credit assessments by IMAs and the new rules would mean RWS would need to exercise greater diligence over the IMAs.

Maintain BUY with S$2.02 fair value.
However, we believe it is still early days to revise our numbers as it may still need a while to get the junket operations running at full steam. Hence we maintain our BUY rating and S$2.02 fair value.

Genting Hong Kong

Kim Eng on 26 Mar 2012

Record profit confirms turnaround. Genting Hong Kong (GenHK) reported FY11 revenue of US$515.5m (+28.9% YoY) with a record net profit of US$182.2m (+120.5% YoY). The results met our expectations and were far ahead of consensus. They confirmed the company’s turnaround on all fronts. Norwegian Cruise Line (NCL) delivered a record EBITDA of US$506.0m. Resorts World Manila (RWM) performed well in its second year of operation with Travellers International posting EBITDA of US$214.4m, more than double last year’s US$102.0m. Reiterate Buy with the target price raised to US$0.53.

Asian cruise strategy a success. GenHK has been fine-tuning its Asian cruise strategy and its fleet rationalisation has produced positive results. What came as a pleasant surprise was the 42.6% improvement in gaming revenue as a result of these actions. We believe that the routes to Hong Kong and Taiwan have spawned this increase.

NCL bookings on the rise again. Net yield for NCL inched up by 3% to US$173.4 for FY11. The company will also take delivery of two new vessels in 1H13 and 1H14, which would add about 15% each to its existing capacity. This should lift EBITDA to US$677m in FY14F, based on our forecast. The Costa Concordia cruise ship incident had had only a short-lived adverse impact on the industry and we understand that booking trends have picked up after a negative knee-jerk reaction.

Positive factors bode well for Manila gaming business. Average daily visitors to RWM reached 19,500 last year, from about 12,700 the previous year. Travellers thus saw an 85.3% YoY surge in revenue for FY11. Moreover, key macro data in the Philippines are positive, with January 2012 tourist arrivals hitting above 400,000 for the first time. We understand that most VIPs currently are locals and there should be ample room to build up on overseas VIP volume. Ongoing developments in RWM should drive visitor volume upwards.

Reiterate Buy, raise target price to US$0.53. We raise our SOTP-based target price to US$0.53 as we increase our EBITDA forecasts for Star Cruises and NCL by 13% and 2%, respectively. Reiterate Buy.

Genting Singapore

Kim Eng on 26 Mar 2012

Some good news for a change. Two junket licences have been awarded for operation at the Resorts World Sentosa (RWS) only. Our rudimentary calculations indicate that they may bolster Genting Singapore’s (GENS) earnings by 18-26%. We leave our earnings estimates unchanged for now but the licences are definitely a positive development. Maintain Buy and DCF-based target price of $2.10.

Two “junkets” approved. Last Thursday night, the Casino Regulatory Authority awarded two International Market Agents (IMAs) licences, a euphemism for junket licences. They are Huang Yu Kiung and Low Chong Aun, sponsored and authorised to operate at RWS only. The licences will be valid for one year and the IMAs can operate immediately. They are not allowed to target Singaporeans.

Scenario analysis (1): +26% to earnings? Our rudimentary calculations reveal encouraging results. The Macau junket VIP GGR is worth US$21-22b p.a.. Assuming very conservatively that RWS captures just 5% of this market, some US$1b or S$1.3b will accrue to it. Assuming 24% EBITDA margin on gross revenue, the two new IMAs will add S$310m to GENS’ EBITDA or S$260m to net profit.

Scenario analysis (2): +18% to earnings? We understand that there are more than 190 licensed junkets in Macau of which the top 40 account for some 80% of VIP GGR. Assuming 60 are active junkets, another rudimentary calculation reveals that each junket controls US$350m of VIP GGR. With two IMAs at RWS, RWS stands to capture US$700m or S$900m. Assuming 24% EBITDA margin again, the two new IMAs will add S$220m to GENS’ EBITDA or S$180m to net profit.

Maintain Buy and DCF-based TP of $2.10. We leave our earnings forecasts unchanged for now as it is difficult to quantify the IMAs’ exact impact. Under our scenario 1 analysis (+26% to earnings), our 2012 net profit forecast will surge to $1.3b and DCF-based TP to $2.62. Other re-rating catalysts will be the establishment of Singapore as a renminbi trading hub, thereby facilitating junket operations, and GENS obtaining a Japanese casino licence.

STX OSV

Kim Eng on 26 Mar 2012

The stock is up 54.3% YTD to $1.79 from $1.165. It has been advancing aggressively over the past few months, breaking above the key moving averages. The price action looks positive on both the medium- and short-term time frame with DMI positively placed. ADX trendline is reading at 45.8, suggesting that the strength of the trend is in place. Immediate resistance of $1.82 (52-week high) will be tested. Sustained trading above this level will pave the way to the $2.05 area.

OKP Holdings

UOBKayhian on 23 Mar 2012

Investment Highlights

• OKP is currently trading at 6.8x FY11 earnings, a 22% discount to its peers. Based on Bloomberg’s consensus earnings forecast from five brokers, OKP is set to report flat earnings growth to S$26.5m (mean estimate) in 2012 with a 12-month target price of S$0.82.
• We view that OKP should be trading at S$0.74/per share, pegged to 3-year historical average PE of 8.6x on consensus EPS of 8.6 S cents, giving us an upside of 21%.  

Our View

• We expect construction demand to remain strong for the next three years. According to the Building and Construction Authority (BCA), public sector construction demand is likely to contribute S$13b-15b in 2012, driven by institutional building projects and civil engineering contracts. The Public Utilities Board (PUB) has also announced that they will spend about S$750m over the next five years to carry out 20 projects to improveSingapore’s drainage system.
• OKP’s S$323.9m orderbook to provide earnings sustainability through to 2015, with the most recent Design and Build (D&B) contract win of S$75.3m from the Land and Transport Authority (LTA), for the expansion of the Central Expressway (CTE), Tampines Expressway (TPE) and Seletar Expressway (SLE) Interchange. D&B projects tend to achieve higher gross profit margins due to costs savings, better project management and tighter cost controls.
• With its strong track record, OKP is set to secure more contracts from LTA and PUB. Last year, it had secured a total of seven from these two statutory boards worth S$152.0m, including two D&B and projects from LTA and four projects from PUB. As highlighted above, with PUB’s S$750m earmarked for 20 drainage improvement projects over the next five years, we believe OKP can benefit in future infrastructure project tenders.
• Formidable war chest of S$91m could lead to more property construction project. OKP is currently undertaking a S$83.5m contract in a 50:50 JV with Soilbuild for the construction ofAngullia Park condominium, awarded by its 14.2% substantial shareholder China Sonangol (CS). With CS securing Amber Towers in the Katong area for S$161m, we expect OKP to tender for the construction of this residential project as well. The site can be redeveloped into a high-rise condominium with a gross floor area (GFA) of 145,813 sqf. We estimate that this contract size could range from S$35.0m-43.5m if we take construction cost to be S$250-300 psf.