Tat Hong Holdings

Kim Eng on 14 Aug 2012

Results beating expectations. Tat Hong kicked off its FY13 financial year with a set of good results, beating market and our forecast. 1Q revenue came in at SGD215.3m, up 36% yoy. Gross profit increased by 51% to SGD84.5m. Net profit tripled to SGD16.7m. The strong 1Q performance can be attributed to robust growth in highest-margin Crane Rental sector, higher utilization rate and turnaround in China business, which are exactly what we expected to see.

Sector performance. Crane Rental sector, which is the highest margin sector, performed very strongly with 64% increase in revenue. Tower crane, which suffered from local shareholder issue last year, posted the second strongest performance with 28% yoy increase in revenue. Distribution sector also registered a 27% increase in revenue while General Equipment Rental revenue increased marginally by 9% yoy.

Other key operational stats. 1) Gross margin improved to 39.2% in 1QFY13 from 35.3% last year. 1Q figure has already exceeded our FY forecast of 38.1%. 2) Utilization rate continued to improve. Crawler crane utilization rate stood at 74% in 1QFY13 vs our forecast of 73%; tower crane utilization rate improved to 69% vs our forecast of 67%.

Turnaround in China still at early stage. We start to see the signal of turning around in China. Both revenue and gross profit saw strong growth momentum in 1Q (+28% in revenue and +50% in gross profit), thanks to expansion in fleet size and recovery in utilization rate. We hold the view that China is not going to stop its investments in infrastructure no matter China economy will hard landing or not. Tat Hong is well positioned to benefit from this infrastructure boom.

Strong BUY maintained. 1Q results reaffirmed our view that Tat Hong is on a strong footing to ride on infrastructure boom across Asia. We are very confident to see more improvement in its profit margin, utilization rate as well as further turnaround in its China business. BUY maintained with target price of SGD1.41.