Broadway Industrial Group

UOBKayhian on 22 Feb 2013

Valuations

·         Broadway is trading at 8.9x 2013F PE and 0.73x P/B with a dividend yield of 4.1%. Based on Bloomberg’s consensus (four brokers), the stock has a 12-month target price of S$0.27 and is set to report S$14.1m in net profit in 2013.

Key takeaways from results briefing

·         The group reported 2012 core net profit of S$8.4m (2011:  S$3.3m). This is below Bloomberg’s consensus of S$13.1m. We considered its unrealised mark-to-market forex gains to be part of the core profit as these are operational hedges for its functional currencies. Stripping out forex and exceptional gains, the group would have reported a net loss of S$5.8m against a profit of S$8.8m in 2011.

·         HDD revenue grew 16.6% in 2012 to S$399.8m, largely due to low-base effect as a result of theThailand floods in 2011. However, revenue growth has failed to match up with the excess capacity invested earlier in the year and that led to a depressed EBIT margin of -1.0%, vs 2.0% in 2011. The group is shifting the excess capacity to other business segments but only expects profitability to return in 2H13.  

·         The form plastics business reported a 13.7% yoy growth in sales due to a growth in protective packaging and automotive components segments. Management is looking to achieve double-digit growth for the segment by securing new customers and projects in the automotive and consumer electronics segments.

Our view

·         The HDD sector remains in the doldrums due to falling demand as consumers shift their preference towards smartphones and tablets over PCs. Research firm Gartner reported worldwide PC shipments had declined to 90.3m units in 4Q12 as the sector suffered from a shift in consumer habits and from a weak global economy. Seagate Technology had also provided a lower guidance for 3Q revenue due to muted demand for its HDD for the above reasons.

·         The silvering lining for Broadway is that it has seen some success in diversifying its income stream towards the form plastic segment. The segment now accounts for 28.1% of group revenue with a targeted double-digit growth and a healthy EBIT margin of 5.7%.  

Marco Polo Marine

DMG & Partners Research on 21 Feb 2013

CHAIRMAN Lee Wan Tang has raised stake to 59.52 per cent at the highest price in three years. With the one million additional shares purchased at $0.42 on Wednesday, Mr Lee now owns 202.8 million shares in Marco Polo Marine (MPM) or 59.52 per cent. The critical point is the purchase price - this is the highest that he has been willing to pay in the last three years. Prior purchases were made between $0.33 and $0.35, with the exception being the $0.395 purchase around the IPO period of its Indonesian associate PT BBR.

Indonesia's recently enforced cabotage law has forced out 20 per cent of the modern AHTS supply. The cabotage law was enforced for AHTS vessels after Dec 31, 2012. This has caused foreign operators to see their contracts cancelled and the vessels sent out of Indonesian waters. Our industry sources inform us that there are only about 30 modern AHTS vessels between 5,000bhp and 8,000bhp in size in the whole country. Of these 30, we are aware of at least six which have been forced out of the country.

MPM is the prime beneficiary of the cabotage law. With the supply suddenly shrunk by 20 per cent, charter rates have spiked about 20 per cent higher than regional rates. MPM's four AHTS vessels in Indonesia are now reaping the benefits of high charter rates, high margins, and high utilisation rates.

Top in class in terms of technical capabilities, MPM's AHTS vessels have sustained bollard pulls averaging 15 per cent above the norm. This ensures that their vessels are always preferred, ahead of others when competing for charters. Their shipyard also recently outfitted a DP-3 vessel, which is an impressive achievement for a small shipyard. We count fewer than a dozen shipyards in Singapore which can outfit DP-3 vessels.

Maintain conviction "buy", it's likely to double in 2-3 years. We value MPM at nine times FY2013 EPS estimate, yielding a target price of $0.61 which is 43.5 per cent above Wednesday's close. Looking further ahead, the earnings forecast of $30.3 million translates into an EPS of 8.91 cents, which at the same nine times multiple would yield a target price of $0.80.

The stock is currently trading at extremely attractive levels - 6.2 times FY2013 EPS estimate and one time P/B. Peers in the oil & gas industry are trading at eight times to 20 times PE. At the very least, we expect the stock to revert to book value every year, which at 15 per cent ROE implies at least a decent 15 per cent return annually.

BUY

Genting Singapore

OCBC on 22 Feb 2013

Genting Singapore (GS) reported FY12 revenue down 9% at S$2948.1m, or 4.6% shy of our forecast, mainly due to lower gaming business volume. Net profit came in around S$677.7m, down 34%, and was 4.4% shy of our estimate. GS declared a final dividend of S$0.01/share, unchanged from last year. Going forward, GS is also slightly more upbeat about RWS’ performance this year, citing the more positive global economic outlook. Besides the VIP segment, GS intends to focus on the mass market by targeting visitors from Malaysia and Indonesia. It adds that it is well placed to capitalize on investment opportunities in related leisure/gaming business, after raising some S$3b from perpetual securities last year; but did not give specific targets. While our DCF-based fair value improves from S$1.33 to S$1.52, we maintain our HOLD rating on valuation grounds. But an accretive acquisition could provide the catalyst for a re-rating.

FY12 results mostly in line
Genting Singapore (GS) reported FY12 revenue down 9% at S$2948.1m, or 4.6% shy of our forecast, mainly due to lower gaming business volume. Net profit came in around S$677.7m, down 34%, and was 4.4% shy of our estimate. Adjusted EBITDA was down 19% at S$1361.5m, affected by higher impairment loss on trade receivable and higher operating costs incurred for the opening of MLP (Marine Life Park). GS declared a final dividend of S$0.01/share, unchanged from last year.

Recovery in VIP gaming business
For the quarter, we understand this was led by a recovery in its VIP gaming business, which management said “went up very significantly QoQ” and rolling chip volume was as much as in 1Q11 – one of the highest since it opened. While this also resulted in higher account receivable to nearly S$1.0b, management said it was also consistent with the volume of business. GS added that it is comfortable with receivables going up to S$1.1-1.2b. 

Outlook slightly more upbeat
Going forward, GS is also slightly more upbeat about RWS’ performance this year, citing the more positive global economic outlook. Besides the VIP segment, GS intends to focus on the mass market by targeting visitors from Malaysia and Indonesia. Recall that it had recently won a land tender in Jurong where it intends to build 500-room hotel to cater to the family-oriented visitors. It adds that it is well placed to capitalize on investment opportunities in related leisure/gaming business, after raising some S$3b from perpetual securities last year; but did not give specific targets. 

Maintain HOLD with higher S$1.52 fair value
As results were mostly in line, we are keeping our FY13 forecasts largely unchanged. While our DCF-based fair value improves from S$1.33 to S$1.52, we maintain our HOLD rating on valuation grounds. But an accretive acquisition could provide the catalyst for a re-rating.

Hyflux

OCBC on 22 Feb 2013

Hyflux Ltd posted FY12 revenue of S$682.4m, up 42%, and was also some 16% above our forecast, but reported net profit of S$61.0m (+15%) was around 5% below our estimate; this is likely due to higher-than-expected recognition from its TuaSpring Desalination Project (TDP), which is now substantially completed. Hyflux has declared a final dividend of S$0.025/share, versus S$0.021 last year; this brings the total dividend for the year to S$0.032, versus S$0.0277 in FY11. Going forward, Hyflux is slightly more upbeat about its prospects, citing the still-strong global demand for water infrastructure projects. Order book already stands at S$2.9b (as of end-2012); and management believes that growth in the O&M portion will provide a steady and recurring revenue stream; it further expects the O&M revenue to capture the full impact of its current portfolio by FY16. For now, we will maintain our HOLD rating and S$1.44 fair value on the stock; but we do see room for re-rating should it win another substantial contract. 

 

Strong revenue growth in FY12
Hyflux Ltd posted FY12 revenue of S$682.4m, up 42%, and was also some 16% above our forecast, likely aided by higher-than-expected recognition from its TuaSpring Desalination Project (TDP), which is now substantially completed. Reported net profit climbed 15% to S$61.0m, but was around 5% below our estimate, again for the same reason (Asia ex-China projects generally have lower margins). Note that net margin for FY12 came in around 9% versus 12% in FY11. Hyflux has declared a final dividend of S$0.025/share, versus S$0.021 last year; this brings the total dividend for the year to S$0.032, versus S$0.0277 in FY11.

Order book stands at S$2.9b
Going forward, Hyflux is slightly more upbeat about its prospects, citing the still-strong global demand for water infrastructure projects. Management believes that it is well positioned to expand its BOT and EPC portfolio while growing that of its O&M further. Recall that it had recently signed the water purchase agreement (WPA) to deliver desalinated water to the Dahej Special Economic Zone in Gujarat, India. Management expects the WPA to have positive material financial impact if the financial close is concluded by end FY13. It adds that TDP is scheduled to start operating in 2H13 for a period of 25 years; it is also in the process of securing non-recourse project financing for it. Currently, its order book stands at S$2.9b (as of end-2012), and management believes that growth in the O&M portion will provide a steady and recurring revenue stream; it further expects the O&M revenue to capture the full impact of its current portfolio by FY16.

Maintain HOLD 
For now, we will maintain our HOLD rating and S$1.44 fair value on the stock; but we do see room for re-rating should it win another substantial contract.

Sheng Siong Group

OCBC on 22 Feb 2013

Sheng Siong Group’s (SSG) FY12 results met our expectations with revenue increasing 10.2% YoY To S$637.3m while prudent cost management ensured an improvement in core operating profit margin by 0.3 ppt to 6.2%. In addition, core PATMI rose 14.8% YoY to S$31.3m. Management also declared a final dividend of 1.75 S cents (versus 1.77 S cents in FY11), and committed to extend its 90% PAT payout policy for another two years. We are positive on the outlook for SSG in FY13 on the back of i) full-year contributions from the eight new stores, ii) margin stability, and iii) defensive consumer spending in the face of continued economic uncertainty. Therefore, we reverse our previously conservative assumptions and raise our fair value to S$0.69 from S$0.58 previously. Upgrade to BUY.

FY12 closes on a good note
Sheng Siong Group’s (SSG) FY12 results met our expectations with revenue and net profit coming within 2% of our estimates. Top-line grew 10.2% YoY to S$637.3m while prudent cost management ensured an improvement in core operating profit margin by 0.3 ppt to 6.2% (excluding one-off gain of S$10.4m from the sale of its Marsiling warehouse). Management also declared a final dividend of 1.75 S cents (versus 1.77 S cents in FY11), and committed to extend its 90% PAT payout policy for another two years.

Outlook positive for SSG
The Group will enjoy full-year contributions from the eight new stores opened in FY12 so top-line growth should start at a healthy base. In addition, consumer sentiment remains tentative with the lingering economic uncertainty, and this has featured in the recent retail sales data where dining out has declined on a YoY basis. With this trend likely to persist in the coming quarters, we expect spending at supermarket chains like SSG to benefit. 

Expansion target remains; cost management to continue
Management retains its 10% retail space growth target, which we feel is achievable. With ongoing estate rejuvenations plans for older estates such as Hougang, rental opportunities will present themselves. In terms of wage pressures, SSG has managed it admirably well thus far so we expect gradual cost increases to keep pace with revenue growth. 

Valuation raised; upgrade to BUY
In light of the possible turn in consumer sentiment, we reverse our previously conservative assumptions and raise our FY13/14F projections to incorporate greater consumer spending, store openings. Our fair value increases to S$0.69 from S$0.58 previously. Upgrade to BUY.

COSCO Corp

OCBC on 22 Feb 2013

COSCO Corp (S’pore) reported a decent set of results that were within ours and the street’s expectations. FY12 revenue decreased 10% to S$3.7b, while PATMI fell 24% to S$106m. The declines largely reflected the general weakness in the shipbuilding environment and COSCO’s initial expansion into the offshore segment. While the group’s margins appear to have stabilized, its cash generation remains weak. Against the backdrop of an uncertain operating environment, the rising net gearing ratio is also another concern. Rolling forward to FY13F, we raise our fair value estimate to S$0.90 (on 1.5x P/B). Maintain HOLD.

FY12 results within expectations
COSCO Corp (S’pore) reported a decent set of results that were within ours and the street’s expectations. FY12 revenue decreased 10% to S$3.7b, while PATMI fell 24% to S$106m. The declines largely reflected the general weakness in the shipbuilding environment and COSCO’s initial expansion into the offshore segment. The group’s order-book improved to USD6.1bn, up from USD5.7b as of last quarter-end. 

Margins appear to have stabilized…
In 4Q12, COSCO wrote back S$17.6m of provisions for its contracts. This represents the third consecutive quarter of write-backs after an eight-quarter trend of making provision for expected losses. This implies improved execution for its shipbuilding and offshore projects. Its margins also appear to have stabilized. Excluding the provisions and write-back of provisions, the group’s gross margin was 12.2% for FY12, slightly lower than 12.8% in the previous year. 

But cash generation remains weak
However, the group’s cash generation capability remains weak. Despite a 10% decline in revenue in FY12, cash outflow in operating activities ballooned to S$580m from just S$52m a year ago. The main culprit was its trade and other receivables. This is largely because payment schedules for the recent contracts are more back-loaded (typically 20/80), resulting in the shipyard having to fund most of the shipbuilding costs upfront, before collecting back the amounts owed on vessel delivery dates. 

Will net gearing continue to rise?
COSCO’s net gearing (net debt against shareholder’s equity) increased to 1.0x as of end-2012 (end-2011: 0.4x). As the group continues construction in 2013 on the low-margin and back-loaded contracts secured in 2010-2012, its debt level may continue to rise incrementally going forward. Meanwhile, management acknowledged that the business and operating conditions in 2013 may be even more difficult and challenging. Rolling forward to FY13F, we raise our fair value estimate to S$0.90 (on 1.5x P/B). Maintain HOLD.

Sembcorp Marine

OCBC on 22 Feb 2013

Sembcorp Marine (SMM) reported a 38.1% YoY rise in revenue to S$1.38b and a 27.0% fall in net profit to S$167.1m in 4Q12, bringing full year revenue and net profit to S$4.43b and S$538.5m, respectively. Excluding one-off items such as foreign exchange losses and disposal gains, core net profit of S$562m was in line with our expectations. Operating margin fell from 14.1% in 3Q12 to 10.8% in 4Q12, mainly due to lower margins from new design rigs, and a higher proportion of procurement in the business mix. The group is seeing healthy enquiries for semi-submersible rigs and even drillships. SMM has secured new orders worth S$900m YTD, accounting for 20.3% of our full year estimate. Net order book is also strong at S$13.6b with deliveries till 2019. Maintain BUY with S$5.84 fair value estimate, based on 16x blended FY13/14F earnings.

FY12 results in line
Sembcorp Marine (SMM) reported a 38.1% YoY rise in revenue to S$1.38b and a 27.0% fall in net profit to S$167.1m in 4Q12, bringing full year revenue and net profit to S$4.43b and S$538.5m, respectively. Excluding one-off items such as foreign exchange losses and disposal gains, core net profit of S$562m was in line with our expectations. Operating margin fell from 14.1% in 3Q12 to 10.8% in 4Q12, mainly due to lower margins from new design rigs in the last quarter (first drillship achieved initial recognition with more than 20% completion), as well as higher proportion of procurement in the business mix (procurement generally has lower margins than engineering and construction). We also understand that management was also conservative in the profit recognition of the jack-up rig for Noble that was affected in last year’s accident. 

Striving to increase productivity
With respect to potentially higher labour costs in the future, the group has embarked on initiatives to increase productivity such as improving processes with the help of mechanization. Management is also looking at ways to outsource certain work to its regional yards. Finally, SMM will also have the opportunity to re-align certain processes at its new integrated yard at Tuas, which should achieve full commercial operations by 2H13. Ship repair, conversion and offshore capacity is expected to nearly double from the current 1.9m dwt. 

Enquiries for harsh environment semis and… drillships
The group is seeing healthy enquiries for harsh environment rigs, especially semi-submersibles. Encouragingly, SMM is also receiving enquiries for drillships, and we think that the enquiries may be for orders outside of Brazil. Should such an order materialize, it would reflect well on SMM’s efforts to widen its product range. The group has secured new orders worth S$900m YTD, accounting for 20.3% of our full year estimate. Net order book is also strong at S$13.6b with deliveries till 2019. Maintain BUY with S$5.84 fair value estimate, based on 16x blended FY13/14F earnings.

Ezion Holdings

OCBC on 21 Feb 2013

Ezion Holdings (Ezion) reported a 91.8% YoY rise in revenue to US$52.3m and a 95.7% increase in net profit to US$20.5m in 4Q12, bringing full year revenue and net profit to US$158.7m and US$78.8m, respectively. FY12 revenue and net profit were in line with our expectations, with the latter 5% higher than our full year estimate, but 22% higher than the street’s forecast. With Ezion’s growing balance sheet, we expect the group to pursue a higher gearing in the future for funding of additional contracts. We adjust our earnings estimates to account for Ezion’s recent contract win (18 Feb 2013), and based on blended FY13/14F core earnings, our fair value estimate rises from S$2.05 to S$2.33 (PER of 12x remains unchanged). Maintain BUY.

FY12 results in line with our expectations
Ezion Holdings (Ezion) reported a 91.8% YoY rise in revenue to US$52.3m and a 95.7% increase in net profit to US$20.5m in 4Q12, bringing full year revenue and net profit to US$158.7m and US$78.8m, respectively. FY12 revenue and net profit were in line with our expectations, accounting for 100% and 105% of our full year estimates, respectively. However, FY12 net profit was 22% higher than the street’s US$64.3m forecast. 

Contributions from additional assets and QCLNG
Higher turnover was mainly due to higher chartering revenue from the deployment of additional units of service rigs and liftboats, as well contributions from offshore logistic support vessel services with the commencement of the Queensland Curtis LNG (QCLNG) project. We understand that QCLNG accounted for ~14% of 4Q12’s revenue. Overall operating margin was stable at 33.1% in 4Q12 vs 4Q11’s 33.9%. 

Expecting more leverage with stronger balance sheet
With Ezion’s growing balance sheet, we expect the group to pursue a higher gearing in the future for funding of additional contracts. Net gearing stood at 0.76x as at 31 Dec 2013. There is a possibility that net gearing may hit 1.0x in mid FY13, after which we expect it to come off. 

Increase fair value to S$2.33
More assets will be deployed this year, and higher contributions are also expected from Australia with the commencement of two other major LNG projects as well (Gordon LNG, Australia Pacific LNG). Looking ahead, we expect the group to clinch more contracts, due to the still buoyant outlook. We adjust our earnings estimates to account for Ezion’s recent contract win (18 Feb 2013), and based on blended FY13/14F core earnings, our fair value estimate rises from S$2.05 to S$2.33 (PER of 12x remains unchanged). Maintain BUY.

Roxy-Pacific Holdings

OCBC on 21 Feb 2013

The group announced 4Q12 PATMI of S$23.3m, up 96% YoY mostly due to S$11.2m of fair-value gains on investment properties. Excluding one-time gains, we estimate core 4Q12 PATMI at S$13.9m which cumulates to full year earnings of S$48.9m - in line with our FY12 estimates. A final cash dividend of 0.92 S-cents is proposed. Though we see the shares to be fairly priced currently, a re-rating could come through if management shows active and accretive capital redeployment ahead, particularly with an anticipated cash capital in excess of S$200m flowing back into the balance sheet over FY13. Maintain HOLD with an increased fair value estimate of S$0.61 (25% discount to RNAV), versus S$0.54 previously. 

 

FY12 earnings in line
The group announced 4Q12 PATMI of S$23.3m, up 96% YoY mostly due to S$11.2m of fair-value gains on investment properties. Excluding one-time gains, we estimate core 4Q12 PATMI at S$13.9m which cumulates to full year earnings of S$48.9m - in line with our FY12 estimates. Topline for the quarter came in at S$56.2m, also up 33% YoY as the pace of revenue recognition from property developments increased, particularly at major projects Spottiswoode 18 and Space@Kovan. A final cash dividend of 0.92 S-cents is proposed. 

Major launches to come ahead 
The group continues to execute well on launched projects which are now mostly sold out. Progress billings from already sold units now stand at S$861.7m which would underpin earnings from FY13-16. We expect management to launch remaining projects in its land-bank, including major projects Jade Towers, Westvale Condominium and Sophia Mansions, by 3Q13.

Hotel enhancement to complete by May 13
The hotel segment (Grand Mercure Roxy) continues to put up firm numbers, with bouyant Average Room Rates increasing 6% YoY to S$199.9 in FY12 and driving REVPAR up 1% to S$179.7. Average Occupany Rates (AOR), however, fell 4.7 ppt to to 89.9% in FY12 as the group conducted asset enhancements, which is expected to end in May 13.

Fair value estimate raised to S$0.61
Roxy has delivered an impressive return on equity (ROE) in excess of 20% over the last three years due to management’s dual core competencies: 1) finding and allocating capital to accretive acquisitions, and 2) executing expediently to achieve high sell-through rates. Though we see the shares to be fairly priced currently, a re-rating could come through if management shows active and accretive capital redeployment ahead, particularly with an anticipated cash capital in excess of S$200m flowing back into the balance sheet over FY13. Maintain HOLD with an increased fair value estimate of S$0.61 (25% discount to RNAV), versus S$0.54 previously.

Genting Singapore

Kim Eng on 22 Feb 2013

The worst is over; upgrade to BUY. We upgrade Genting Singapore (GENS) to BUY with a higher TP of SGD1.67 (+24%). While GENS delivered results that were within expectations, VIP volumes at Resorts World Sentosa (RWS) positively surprised. Going forward, VIP volumes may positively surprise again as Singapore is now a CNY hub with Industrial and Commercial Bank of China (ICBC) as the clearing bank.

Within expectations. 4Q12 core net profit of SGD169.7m (-36% YoY, +27% QoQ) brought FY12 core net profit to SGD665.2m (-35% YoY) or 100% of our FY12 estimate. Final DPS of SGD0.01 (+0% YoY) was also within expectations. FY12 core net profit was down 35% YoY as full-year VIP volume eased 5% YoY to SGD60b, and on a lower VIP win rate of 3.1% (-30bps YoY).

But, VIP volumes beat our estimates. 4Q12 core net profit was down 36% YoY due to a lower VIP win rate of 3% (-90bps YoY), a higher percentage of VIP GGR provided at 8% (+4ppts YoY) and start-up losses at Marine Life Park. That said, 4Q12 VIP volume surged 56% YoY to SGD18.6b, its highest level. This is because Chinese VIPs, who account for >50% of VIP volume, returned after China’s economy improved (Chart 4) and politics stabilised.

Raising earnings estimates by 9-13%. We now assume that VIP volumes at both casinos will grow 10% p.a., from being flattish in FY13 and growing 8% p.a. thereafter previously (Table 1). We assume that RWS would still command 47% share of VIP volume going forward. The net impact is to raise our earnings estimates by 9-13%. Our new estimates imply 17% 3-year forward earnings CAGR.

Upgrade to BUY. As earnings have recovered QoQ, we believe that GENS should no longer trade at 11x 12M forward EV/EBITDA or -1SD to its historical mean, but rather at the historical mean 12M forward EV/EBITDA of 13x. Thus, we raise our TP from SGD1.35 to SGD1.67 (Table 2) and call from HOLD to BUY. GENS will likely benefit from more Chinese VIP volumes going forward, as Singapore is now a CNY hub, improving the convertibility of the CNY in Singapore.

Ezion Holdings

Kim Eng on 22 Feb 2013

Results within expectations, Maintain Buy. FY12 results were generally within expectations with revenue of USD158.7m (+48.4% YoY) and corresponding net profit of USD78.8m (+35.7% YoY). Excluding the USD13.4m one-time gain from disposal of assets, recurring net profit works out to USD65.4m, which is within our forecast of USD65.9m. Ezion also proposed final dividends of 0.10 SG cts/sh. Overall, this set of results is more of a non-event. Maintain Buy but our TP, which is pegged to 12x FY13F recurring earnings, is lowered to SGD2.26 due to adjustments in project schedule.

Some schedule changes. Some of its projects will be delayed but some has been brought forward. Notably, units 14 and 15 which were scheduled for 4Q12 and 1Q13 would now start in 2Q13. This would result in about 2-3 months of loss income opportunities of about USD6-7m, based on our estimate. However, units 20 and 21 (50% ownership) would be starting about a month earlier. In the offshore logistics support segment, the GLNG project is delayed till April while APLNG project is expected to start earlier. We adjusted our forecasts for the revised project schedule which resulted in a 2% fall and a 3% rise in FY13F and FY14F net profit forecasts respectively.

Gearing to trend up. Net gearing at FY12 stood at 0.76x. Management mentioned the intention to leverage more on its balance sheet for future projects. Net gearing level is expected to trend above 1.0x in FY13 if more projects were to come in. Once again, we believe that given the relatively secure operating cashflows, balance sheet risks are well under control.

Maintain Buy, still expecting contract flows to be strong. We remain positive on contract flows. After announcing 2 contracts YTD, we think that more would come in the next few months. Our FY13F/14F net profit numbers are adjusted by -2%/+3% due to rescheduling of project contributions. The stock remains a Buy.

CapitaLand

Kim Eng on 22 Feb 2013

No earnings surprise. For the first time since 2005, CapitaLand’s headline PATMI failed to cross the billion-dollar mark, as its FY12 PATMI came in at SGD930.3m, down 12% YoY. Excluding revaluation gains and impairments, core PATMI would have been SGD568.7m, which is a 1% YoY decline and largely in line with expectations. We remain positive on the stock and CapitaLand remains one of our top-picks in the Singapore developer space. Maintain BUY.

Significant contributions from CMA. CMA accounted for 33.5% of CapitaLand’s FY12 group EBIT of SGD2.0b, followed by its Singapore business division, which accounted for 25%. By geography, Singapore and China unsurprisingly accounted for 76.9% of the EBIT together, with Singapore alone accounting for 44.3%.

Positive sales momentum. In Singapore, CapitaLand achieved residential sales of SGD1.3b in 2013, marginally lower than the SGD1.35b achieved in 2011, despite selling fewer units (681 in 2012 vs 844 in 2011). As of 15 Feb 2013, the Group had already sold 395 units YTD, which is 58% of the units sold in the whole of last year. In China, its home sales improved by 116% YoY to 3,161 units in FY12. CapitaLand has ~4,000 units ready for launch in China this year, at an estimated value of RMB6b.

Focus on improving long-term ROE. A key message underlined by management was that its focus for FY13 is to improve long-term ROE on the back of its new organizational structure. The Group will stick to its core competencies under the four key businesses and deepen its presence in its key markets to reap economies of scale. In addition, its rationalization of its non-core businesses could lead to divestments this year. This is especially possible if more attractive bids are put in for Australand by its local competitors, such as GPT and Mirvac.

Maintain BUY. We view the management’s commitment to improve ROE favourably and continue to like CapitaLand for its diversified business. Maintain BUY with slightly higher target price of SGD4.30, still pegged to a 20% discount to RNAV. FY12 dividend is 7 cts/share.

Sembcorp Marine

Kim Eng on 22 Feb 2013

Results below expectations. SMM reported FY12 revenue of SGD4.4b (+12% YoY) and corresponding net profit of SGD538m (-28% YoY). Net profit came in 5% below our forecast of SGD567m. We warned that there could be downside risk to dividends, which came true with lower dividends of 13 cts/sh for the full year. We cut FY13-15F forecasts by 4-6% on lower margin assumptions. We reduced our TP to SGD5.40 but maintain our Buy call as we still see long term positives. However, SMM could succumb to near-term sell-down from weak margins and there will be opportunity to accumulate at lower levels.

Margins disappointed. Margins moved against our expectations for a recovery in 4Q12. Operating margins for 4Q12 came in at 10.8% bringing FY12 operating margins down to 12.5%. Management emphasised that this was due to more conservative approach taken in accounting for the drillship and rigs in initial stages of recognition. Contingencies taken could be released at later stages when cost estimation becomes clearer. We infer that this could mean that margins may improve at later stages.

Margin recovery still promising but expectations lowered. SMM was evasive in giving clear margin guidance stating that it depends on product mix, business mix and stages of recognition. We believe that a recovery in margin is still promising, given the build-up in orderbook and from more favorable product mix. However, we are lowering our expectations, cutting our operating margin assumptions to 12.9%/13.3% (from 13.7%/13.5%) for FY13F/14F.

Brazil capex to be reviewed. SMM also mentioned that budgeted capex for Brazil yard is being reviewed due to reconfiguration for better efficiency. We figured that capex may go up, but SMM indicated that they will give clearer guidance when it is finalized.

Order win outlook remains good. Net orderbook currently stands at SGD13.6b with SGD900m in new contracts secured YTD. Order win outlook is still good, coming from replacement rig demand and higher spec rigs. We expect new contract wins of SGD5.2b per year for FY13F and FY14F. We remain positive on long-term prospects. Maintain Buy.

Chip Eng Seng

Phillip Securities Research on 20 Feb 2013

WE identified three drivers that could underpin its NAV growth for the next three years:

• Increased public housing construction to support construction demand.
• Residential projects under development are mostly fully / substantially sold, providing relatively secure earnings outlook. We estimate the net margins of these projects to range from 8 per cent to 33 per cent, which could translate into accretion of about S$0.51 per share.
• High selling price achieved at Alexandra Central strata-titled retail units will further boost accretion to NAV by about S$0.331 based on our estimates.

The business nature exposes the company to the risk of increase in labour costs and building materials costs that could affect its margins; further cooling measures for the property market could affect its future residential sales progress and prices. Its upcoming hotel business is very much dependent on tourist arrivals to Singapore.

Its NAV is S$0.6481 as of Q3 FY2012, and the current trading price implies P/B of 1.27 times. If we take into consideration the accretions from its projects under development, the NAV is set to grow to S$1.49 by end-2015 (before distribution of earnings as dividends). This value is reasonably safe to achieve in our view, given that its residential projects and the strata-titled retail units at Alexandra Central have substantially been sold.

These estimates have yet to factor in potential surplus to be generated from the other projects in its landbank, and the potential profits from its construction contracts worth S$645 million. Despite the strong share price performance in the past month, we believe that the stock valuation is still inexpensive, considering its high intrinsic value to be realised in the next three years.

We do not have a rating on Chip Eng Seng.

Venture Corporation

OCBC on 20 Feb 2013

Venture Corporation (VMS) is slated to release its 4Q12 results on 28 Feb after trading hours. We are projecting revenue to remain flat YoY at S$34.9m and PATMI to decline 8.1% YoY to S$633.2m. This is approximately 4.5% and 14.8% below the Bloomberg consensus estimates, respectively, due to lower operating margin assumption. However, a key highlight would be expectations for a first and final dividend of 55 S cents/share, which translates into an attractive yield of 6.5%. Looking ahead, conditions for VMS are likely to pick up gradually after the seasonally slow 1Q13, with stronger financial performance expected in 2H13 when contribution from new product launches gain traction. Maintain BUY, with an unchanged fair value estimate of S$9.22.

Projecting flat revenue and 8% YoY fall in 4Q12 PATMI
Venture Corporation (VMS) is slated to release its 4Q12 results on 28 Feb after trading hours. We are forecasting revenue to remain flat YoY at S$34.9m and PATMI to decline 8.1% YoY to S$633.2m. This is approximately 4.5% and 14.8% below the Bloomberg consensus estimates, respectively, due to lower operating margin assumption. We expect 4Q12 to include the maiden contribution from VMS’s agreement with Oclaro Inc. to transfer the latter’s manufacturing operations from Shenzhen to VMS’s Malaysia facility. During Oclaro’s recent 2QFY13 results, its management said that the first product from this business transfer had been fully qualified and shipped to the customer. Although encouraging, contribution to VMS is likely to be immaterial initially, in our view, as it takes time for production to be ramped up. However, should this transition turn out to be better-than-expected, we believe that it would enhance VMS’s reputation as a strategic partner for global tech firms and could lead to similar business opportunities with new and existing customers.

Near-term conditions still challenging, but outlook improving
Although there are still ongoing vagaries in the macroeconomic environment, there has been a general sense of improved economic sentiment recently. For example, China’s 4Q12 GDP growth of 7.9% YoY suggests that her economy is on the mend. Conditions for VMS are likely to pick up gradually after the seasonally slow 1Q13, with stronger financial performance expected in 2H13 when contribution from new product launches gain traction.

Reiterate BUY ahead of anticipated 55 S cents DPS declaration
VMS’s share price has performed well since we highlighted it as our top pick in our tech sector strategy report on 21 Dec 2012, appreciating 7.5%. This is higher than the STI’s 4.2% gain during the same period. We forecast VMS to declare a first and final dividend of 55 S cents/share during its 4Q12 results announcement, similar to FY11. This translates into a yield of 6.5% and we expect this to lend support to VMS’s share price in the near term. Maintain BUY, with an unchanged fair value estimate of S$9.22.

CapitaLand

OCBC on 20 Feb 2013

CAPL is taking a 51% stake, alongside Iskandar Waterfront Sdn Bhd (40%) and Temasek (9%), in a JV to acquire and develop a 71.4 acre freehold site in A2 Island, Danga Bay in Johor Bahru, Malaysia. This is the group’s first major Malaysian township development, which is envisioned to be a premier waterfront residential community. Total land cost for the project is RM811m (S$324m), payable over 4.5 years, and its gross development value is estimated at RM8.1b (S$3.2b). We estimate CAPL’s IRR for this project to be in the low to mid teens, and for this acquisition to accrete S$174m or S$0.04 per share to the group’s RNAV. Maintain BUY with a higher fair value estimate of S$4.29 (20% discount to RNAV), versus S$4.04 previously, as we incorporate this acquisition into our model and update for valuations of listed holdings.

51% stake in Danga Bay project in Johor Bahru Malaysia
CapitaLand (CAPL) is taking a 51% stake, alongside Iskandar Waterfront Sdn Bhd (40%) and Temasek (9%), in a JV to acquire and develop a 71.4 acre freehold site in A2 Island, Danga Bay in Johor Bahru (JB), Malaysia. This is the group’s first major Malaysian township development, which is envisioned to be a “premier waterfront residential community comprising high-rise and landed homes,” together with a “central waterfront hub with a marina, shopping mall, F&B outlet/restaurants, serviced residences, office and recreational facilities”. 

Estimated to accrete 4 S-cents a share to RNAV
Total GFA is anticipated to be ~11m sq ft, and the project would take place in phases over 10-12 years. On a 100% basis, total land cost is RM811m (S$324m), payable over 4.5 years, and its gross development value is estimated at RM8.1b (S$3.2b). We expect the JV to finance this project with 50%-70% debt, in line with CapitaLand’s general practice, and believe the first series of launches would likely begin in FY15. From our estimates, CAPL’s IRR for this project is likely in the low to mid teens, and this acquisition would accrete S$174m or S$0.04 per share to the group’s RNAV, using a WACC of 7.0%.

Signals of warmer ties between Singapore and Malaysia
We view this development to be a favorable one for CAPL and note the share price has reacted positively since initial headlines yesterday. In particular, this acquisition was in conjunction with the Prime Ministers of both Singapore and Malaysia announcing a high-speed railway between Singapore and Kuala Lumpur by 2020, and unveiling details of Marina One, another JV development located in Singapore involving entities from both countries. All three events signal at warmer ties between both countries, ahead of Malaysian elections to be held later this year. 

Maintain BUY with fair value estimate raised to S$4.29
Maintain BUY with a higher fair value estimate of S$4.29 (20% discount to RNAV), versus S$4.04 previously, as we incorporate this acquisition into our model and update for valuations of listed holdings.

Mapletree Greater China Commercial Trust

Kim Eng on 21 Feb 2013

Attractive Yields. Mapletree Greater China Commercial Trust (MGCCT) is slated for listing on 12 Mar 2013, with market cap of SGD2.3-2.5bn (Offering Price of SGD0.88-0.93 per unit). Its initial portfolio comprises the Festival Walk (NLA: 794k sqft; Valuation: SGD3.4bn; Avg NPI yield-on-cost: c.4.2%) in HK and Gateway Plaza (NLA: 1,146k sqft; Valuation: SGD1bn; Avg NPI yield-on-cost: c.4.9%) in Beijing, According to the preliminary prospectus, MGCCT is offering DPU yields of 5.6%-6% for FY3/14 and 6.1%-6.5% for FY3/15, to be paid semi-annually. This compares favorably with other listed Chinabased landlords such as CRCT (5.2% yield), Fortune REIT (5.1% yield) and PCRT (6% yield).

Strong cornerstone investors Interest. MGCCT has garnered strong support from 11 cornerstone investors that will subscribe for 953m units (36% total units). Notable names include AIA, CBRE Clarion, Columbia Wanger, Henderson, Morgan Stanley, Norges Bank, Asdew Acquisitions etc. We view this as a testament to MGCCT’s asset quality (best in class properties in strategic locations) and attractive yields. The Manager believes that Festival Walk will deliver stable and sustainable growth, supported by an established Hong   Kong retail market while Gateway Plaza offers significant rental growth upside, driven by robust supply and demand dynamics in the Beijing office market.

Fee structure promotes DPU growth – Alignment with Unitholders. We noted that the REIT manager will be paid a base management fee of 10% of distributable income, as opposed to the conventional 0.1%- 0.5% of AUM. Its performance fees is also pegged to the difference in DPU (25%) with the preceding FY, rather than a function of deposited property or gross revenue/NPI (if over a benchmark). We think MGCCT
has one of the most “equitable” management fees structures amongst S-REITs, which in the past tend to promote an asset growth bias rather than unitholders’ interest. Making fees contingent on actual performance such as relative share price performance or DPU will better align interests and decrease potential agency problems, in our view.

Expect strong take-up. Given the heightened investors’ interest in China’s growth story, we expect MGCCT to be priced at the high end of its offering price (SGD0.93). Our top concern is that MGCCT will be one of the highest-geared S-REITs (~43% aggregate leverage with SGD1.9bn gross borrowings; provisional credit rating of Baa1 from Moody’s) post-listing, and this may constrained its inorganic growth in the initial years. Nonetheless, we expect its favorable lease profile (WALE of 2.4 yrs by gross rental income) to drive organic growth via rental reversions in the next two years. From our estimates, the implied cap rate for MGCCT (based on FY3/14 NPI) is c4.3% and average borrowing cost stands at 2%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe yields can still be compressed by another 130bps from its forecasted FY3/14 DPU yield of 5.6%. We expect the share price to perform well and will advise investors to subscribe to its Public Offer (265m units) when it opens for application on 28 Feb.

China Minzhong

Kim Eng on 21 Feb 2013

Minzhong NDR post placement. We hosted a China Minzhong Non-deal road show after Minzhong’s share placement to Indofood. During the road show, management discussed in details the industrialized farming model, the potential synergies with Indofood, the use of the placement proceeds as well as dividends. We listed the questions which gained the most interest below: Some investors asked questions about this round of placement. According to the management, this deal roughly started since late December last year
when Indofood approached China Minzhong through some agent. After about two months discussion both parties managed to agree on the placement price of SGD0.915.

On the question why Indofood only acquired 14.95% of China Minzhong, management shared with investors that according to SGX rule, an EGM needs to be held before any entity buys more than 15% of a  company’s shares in the first block. Management also did not rule out the possibility that Indofood would buy more shares in the future.

In terms of potential synergies with Indofood, management indicated that the most direct impact on China Minzhong in the short term would be that Minzhong could potentially supply some dried vegetables such as carrot, chili and chives to Indofood as the raw materials for its instant noodle products. Note that Indofood is one of the biggest instant noodles producers in the world with annual outputs of around 15b packs. In the middle term, the likely cooperation between China Minzhong and Indofood includes Indofood leveraging on Minzhong’s experience in industrialised farming and farmland management to develop vegetable cultivation in Indonesia. Indofood has large area of farms and the cooperation for both sides on this front is quite encouraging. In the long term, Minzhong could help Indofood to penetrating into China market in the form of some JV.

Investors were also keen on Minzhong’s industrialised farming model. Management explained to us that the industrialised farming could significantly reduce the company’s reliance on labor and increase the yield. Facing the continuously rising labor cost, this business model could potentially give Minzhong certain competitive advantage.

Most of the investors were keen on the dividends policy of the company. The management suggested that they were planning some dividends in FY6/13 but the amount were not decided yet.

Remain positive. We continue to like China Minzhong for its prosperous growth outlook and undemanding valuation. The dividends payment will be the biggest catalyst for the share price. At current low PE multiple, even a small payout ratio could give an attractive dividends yield. Maintain BUY with target price SGD1.36, pegged to 5x FY6/14 PER.

Tiger Airways

DBS Group Research, Feb 19

TIGER Airways reported a good start to CY2013, with its January operating statistics continuing the positive momentum from recent months, validating our view on an upcoming turnaround.

Overall, passenger carriage grew 34 per cent y-o-y to 1,013m p-km with a 9ppt improvement in load factor to 84 per cent.

Tiger Singapore registered a 23 per cent y-o-y growth in passenger carriage last month, to 722m p-km, with a 10ppt improvement in load factor to 84 per cent.

The carrier continues to utilise its fleet much more efficiently than a year ago, when under-utilisation of its fleet in the wake of the Australian suspension caused a dip in load factors and earnings. We believe that its Singapore operations are now well on track to remain solidly profitable at the operating level in Q1 FY2013.

Tiger Australia, meanwhile, registered a 108 per cent y-o-y increase in passenger carriage to 281m p-km, with a high load factor of 87 per cent, compared to 84 per cent a year ago.

Even more impressive is the m-o-m growth of 9 per cent in traffic last month, given that December is traditionally the peak traffic month, and there was some disruption in air traffic in late January from Cyclone Oswald.

The encouraging data from Tiger Australia shows that the brand continues to regain acceptance Down Under. Tiger Australia will add new routes to Coffs Harbour and Alice Springs in the coming months to expand its offerings.

Based on the operating statistics, we believe that both cubs remain on a solid footing for earnings improvements in the coming quarters; Tiger Airways remains on course to return to full profitability this calendar year.

Clearance from the Australian competition watchdog for the Virgin-Tiger Australia deal - the decision is expected on March 6 - to proceed could be a key positive catalyst in the near term. Maintain "buy" with $0.95 target price.

BUY

Singapore Telecos

OCBC on 19 Feb 2013

Out of the three telcos, M1’s 4Q12 results were slightly below our forecast while the other two were mostly in line. But M1 also surprised with a special dividend of S$0.017/share on top of its final dividend of S$0.063. StarHub declared a quarterly dividend of S$0.05 as guided. Both M1 and StarHub expect to see earnings growth in 2013; but both are also guiding for higher capex targets, likely for the ongoing 4G roll-out and also more data capacity to meet growing usage trend. SingTel has kept its previous guidance, but note that its year-end is in Mar. For now, we maintain our OVERWEIGHT on the sector. But as the telcos have already done quite well YTD, further capital appreciation may be limited, although dividend yields are still relatively attractive. M1 remains our top pick.

M1 below, rest mostly inline 
Out of the three telcos, M1’s 4Q12 results were slightly below our forecast while the other two were mostly in line. Nevertheless, we note that M1 not only managed to post a recovery in its EBITDA margin, but also was the highest among the three. As M1 had earlier guided, the recovery was due to the upfront expensing of its smartphone subsidy. M1 also surprised with a special dividend of S$0.017/share on top of its final dividend of S$0.063. StarHub declared a quarterly dividend of S$0.05 as guided.

Review of Singapore mobile operations
Core post-paid mobile subscribers grew by another healthy 2.0% QoQ to 4.3m in Dec quarter, led by SingTel with 2.5%, StarHub 1.7% and M1 1.6%. Monthly ARPUs were also quite stable; and all three telcos expect to see uplifts this year as more users switch over to the new tiered pricing plans with less generous data bundles; this aided by the introduction of more LTE-enabled smartphones. 

Most expecting higher capex this year
For 2013, M1 expects to see a moderate earnings growth as it continues to benefit from the upfront expensing of smartphone subsidies; also expects to maintain a dividend payout of at least 80% of underlying profit. For StarHub, it expects single digit revenue growth and an EBITDA margin of 31%; no change to its quarterly S$0.05/share dividend guidance. But both telcos have started to guide for higher capex this year, which they continue to roll-out their 4G networks and also to cater for the growing data usage pattern. Lastly, SingTel has kept its previous guidance, but note that its year-end is in Mar. 

Maintain OVERWEIGHT 
For now, we maintain our OVERWEIGHT on the sector. But as the telcos have already done quite well YTD, further capital appreciation may be limited, although dividend yields are still relatively attractive. M1 remains our top pick.

Starhill Global REIT

OCBC on 20 Feb 2013

Starhill Global REIT (SGREIT) announced that the rent review process relating to Toshin master lease at Ngee Ann City has been completed on last Thursday and that it has been awarded a 10.0% increase in base rent. Assuming the accumulated rental arrears owing as a result of the rental increase from 8 Jun 2011 to 31 Dec 2012 were paid in FY12 (after deducting expenses), management estimates an increase of 0.19 S cent or 4.3% in its FY12 DPU. SGREIT intends to distribute substantially the net arrears received from Toshin in 1Q13, on top of the regular distributable income generated for the quarter. We also understand that the new rate will serve as the base rent for the next lease renewal exercise in Jun. Management expects the renewal rent to be determined before the commencement of the lease period. We believe further upside in rent is still possible. However, we choose to incorporate only the new rate and distribution for now. This raises our fair value from S$0.95 to S$0.98. Maintain BUY.

10% rent increase for Toshin master lease
Starhill Global REIT (SGREIT) announced that the rent review process relating to Toshin master lease at Ngee Ann City has been completed on last Thursday and that it has been awarded a 10.0% increase in base rent. The new rate was based on the average of three market rental valuations undertaken by independent licensed valuers, in accordance with the Court of Appeal’s directions, and will be retrospectively applied for the term commencing 8 Jun 2011.

Impact on SGREIT’s DPU
Toshin is the master tenant occupying all the retail areas except level 5 of Ngee Ann City. For Dec 2012, Toshin lease contributed to 85.3% of the property’s gross rent and 18.8% of SGREIT’s portfolio gross rent. Assuming the accumulated rental arrears owing as a result of the rental increase from 8 Jun 2011 to 31 Dec 2012 were paid in FY12 (after deducting expenses), management estimates the net rental arrears to be ~S$3.8m. This works out to an estimated increase of 0.19 S cent or 4.3% in its FY12 DPU. SGREIT intends to distribute substantially the net arrears received from Toshin in 1Q13, on top of the regular distributable income generated for the quarter. This is in line with our view as per our 5 Feb report that SGREIT may possibly get a boost in its DPU should the outcome from the rent review turns out to be favourable.

Maintain BUY
We also understand that the new rate will serve as the base rent for the next lease renewal exercise in Jun. As a recap, Toshin has on 18 Apr 2012 indicated its intention to exercise its option to renew the master lease for another 12 years starting 8 Jun 2013. Management expects the renewal rent to be determined before the commencement of the lease period. We believe further upside in rent is still possible. However, we choose to incorporate only the new rate and distribution for now. This raises our fair value from S$0.95 to S$0.98. Maintain BUY.

Sembcorp Marine

Kim Eng on 20 Feb 2013

Expecting a stronger fourth quarter. Sembcorp Marine (SMM) will release FY12 results after trading hours on 21 Feb 2013. Quarterly figures should turn out stronger QoQ after 3 preceding slow quarters due to timing issues. We forecast FY12F revenue of SGD4.5b (+13% YoY) and net profit of SGD567m (-25% YoY), which are higher than consensus. We expect final and special dividends of 15 cts/sh, bringing full-year dividends to 20 cts/sh. However, we think that there is risk on the downside for dividends given weaker earnings YoY. Maintain Buy with TP of SGD5.60.

Revenue recognition for first drillship. SMM is expected to achieve initial recognition for the first Sete Brasil drillship (at least SGD198m in revenue recognition) in 4Q12. This should contribute to our expectation of higher revenue for the quarter. We are unsure if SMM would disclose the specific margin for the drillship. Nevertheless, we believe that SMM would be conservative in assigning the associated cost at the initial stage. Initial margins could therefore be depressed and should not be misconstrued as eventual margins of the drillship projects.

Other rigs reaching initial recognition. We figure that up to 4 jackups and 2 semis are due to reach initial recognition stage within these 2 quarters. Some of the jackups would likely be recognised in 4Q12, providing further boost to the topline (but at more conservative margins). The semis would likely be recognised only in 1Q13.

Margin surprise from variation orders? We also expect some variation orders to be concluded at year-end and this could negate potentially lower margins or even result in positive margin surprise. We anticipate operating margins of about 15.3% in 4Q12, and overall FY12F operating margins would then be about 13.9%.

What to look out for? These include potential repercussion because of the tilted rig, order win expectations and forward margin guidance. SMM may be less willing to comment on the latter given previous ‘misunderstandings’ by the market. Risks from competition should once again be flagged. We maintain our positive view and reiterate Buy with SOTP-based TP of SGD5.60.

CapitaLand

Kim Eng on 20 Feb 2013

CapitaLand to take 51% stake in project. CapitaLand announced that together with Iskandar Waterfront Sdn Bhd (IWSB) and Temasek Holdings, it will acquire and develop a 3.1m-sq ft A2 Island at Danga Bay, within the Iskandar Region. CapitaLand, IWSB and Temasek will hold stakes of 51%, 40% and 9% in the project respectively.

Projected GDV estimated at SGD3.2b. The cost for the freehold land amounts to MYR811m (SGD324m), or MYR261 psf of land (SGD104 psf land). CapitaLand will lead in the refinement of the master-planning and the project development, which is envisaged to comprise a premier waterfront residential community (high-rise and landed), with a marina, shopping mall, F&B offerings, serviced residences, offices and recreational facilities, to be developed in phases over 10-12 years. With a total GFA of 11m sq ft, the project is estimated to generate a Gross Development Value of MYR8.1b (SGD3.2b).

Price appears attractive. In December 2012, HK-listed Chinese developer Country Garden Holdings had acquired 2.4m sq ft of land at Danga Bay for MYR900m, which works out to MYR376 psf of land, 44% higher than what CapitaLand’s consortium will be paying for A2 Island. Details at this point in time are sketchy given that it is a long-term project, but assuming net margins of 15%, we estimate the RNAV-accretion from the project at around 3 cents/share.

Leveraging on potential economies of scale. We expect CapitaLand to be able to reap some economies of scale, given that it is the project manager for the “Urban Wellness” project in Medini North, which is within the Nusajaya part of Iskandar Malaysia. The “Urban Wellness” project is a 50:50 joint venture between Singapore’s Temasek Holdings and Malaysia’s Khazanah Nasional.

Maintain BUY. We do not expect CapitaLand to significantly scale up its Malaysian exposure henceforth and China and Singapore are still expected to be the key markets going forward. Maintain BUY with target price unchanged at SGD4.27.

Ying Li International Real Estate

UOBKayhian on 19 Feb 2013

Valuation

·      Maintain BUY with a higher target price of S$0.65, pegged at a 21.8% discount to our RNAV of S$0.83/share, in line with the average discount for Chinese developers under our coverage. We raise our RNAV to S$0.83/share as we input a higher plot ratio for San Ya Wan in our forecast.

·      Although share price has gained 50% since our last report dated 20 Nov 12, we believe this run still has got legs.

Investment highlights

·      Revision of San Yan Wan’s (SYW) plot ratio could be the kicker. Currently, the land is zoned commercial with a plot ratio of 1.5x. In 2010, Ying Li’s original intention was to develop this 89,700sqm site into a commercial property with a GFA of 140,000sqm. However, since 2010, there have been a lot of redevelopments in the area with the government committed to develop the Liangjiang New Area (两江新区) to house a new city centre,Cuntan Bonded Port and an industrial base for airport electromechanical exports. In short, thisarea will be the new growth engine for westernChina.

·      Management has been tight-lipped on the SYW project as it is negotiating with the local government on the change of use of the property from commercial to residential with a subsequent upgrade on the plot ratio. Talks have been in place since 2010 and we believe a decision will be announced by this year. We conservatively upgrade the plot ratio from 1.6x to 3.2x in our earnings model. Our sensitivity analysis suggests that our RNAV will increase 3.6% if we input a higher plot ratio of 4x. 

·      Near-term catalyst will be the repayment of the S$200m convertible bonds (CB) due next month. As a recap, Ying Li issued the CB to finance the purchase of a plot of land for the Chongqing Financial Street project. The bond holders have a put option for the company to redeem. With the cash in hand, a S$100m loan facility by Standard Chartered Bank and trade receivables of Rmb278m, Ying Li has more than adequate cash to redeem this CB.

Earnings Review

·      Ying Li will announce 2012 results on 26 February. We expect revenue of Rmb651.5m and core profit of Rmb125.0m, excluding non-recurring property revaluation gains. This will be driven by strong sales of office units in the IFC and retail units in SYW. Ying Li remains focused on developing the retail mall in Ying Li International Plaza and with the retail malls from IFC and Future International, the group may launch these assets into a commercial REIT in 2014. This corporate action will be a medium-term catalyst for the stock price to re-rate towards our target price.