Asset Backed Commercial Papers (ABCP) panic
Press headlines have been highlighting that DBS has more direct exposure to
collateralised debt obligations (CDOs) than previously declared, but that it is comfortable
with its holding. We understand that these headlines stemmed from a broker’s report that
DBS might be having much higher CDO exposure than it previous stated. This may be
true but overstates the severity of its exposure. DBS previously announced that it had
US$850m (S$1.3bn) of direct CDO exposure and US$1.7bn worth of structured products
(involving CDOs backed by AA or AAA-rated collateral) distributed to customers. Press
reports now cite its direct exposure at S$2.4bn, rather than S$1.3bn.
Comments
Asset-backed commercial papers are the main issue. Singapore banks have been
coming clean with their connections with CDO exposure, no matter how low the risk. We
believe the issue here is contingent liability risk from their current indirect exposure to
managed CDO portfolios. DBS announced that within the original US$1.7bn CDOs
distributed, there is a S$1.1bn portion sitting in a conduit, managed by itself. These
S$1.1bn CDOs are funded by asset-backed commercial papers and these commercial
papers are renewable every three months. The concern here is, in an ultra-risk-averse
environment, these commercial papers may not be renewed. In such an event, DBS has a
commitment clause whereby it will undertake to provide liquidity, in essence taking back
the risk (and returns) from third parties. DBS’s direct CDO exposure would then rise from
S$1.3bn to S$2.4bn, theoretically.
Is DBS the only one doing this? Checks with the three banks indicate that both DBS
and UOB have existing asset-backed commercial paper programmes while OCBC does
not. OCBC. For UOB, its programme (S$770m of asset-backed commercial papers and
S$115m of subordinated bond funding a SPE named Archer I) is invested in bonds and
other commercial papers, not CDOs. Also, UOB does not have liquidity backing clauses.
This leaves DBS the only bank with CDO exposure from such programmes.
Does this mean a higher risk profile from these ‘additional’ S$1.1bn CDOs? Our
view is not really. The profile of the CDOs in this tranche strikes us as being particularly
low-risk. About 98% of the CDOs in this tranche are AAA-rated and the remaining 2%,
AA-rated. Also, 97% are corporate bonds while 3% are asset-backed CDOs. The low-risk
nature of these asset-backed commercial papers suggests that these were underwritten
to generate fee income, rather than make incremental spreads. Hence, we believe that
the ‘new’ S$1.1bn of contingent liabilities that DBS is tagged with is not a big a concern.
Investors should rather focus on the banks’ direct exposure to asset-back securities and
non-investment grade CDOs. On asset-backed CDO exposure, DBS and OCBC have
about S$270m-280m worth each. On non-investment grade CDOs, DBS has S$700m of
exposure while OCBC has S$370m. On all counts, UOB is clearly the bank with the least
CDOs and best defensive qualities. In any contagion from sub-prime, UOB would be the
bank of refuge. On the other hand, we had already known that DBS was the most
exposed Singapore bank, before this panic over asset-backed commercial papers. DBS
has not become riskier simply because of its disclosed contingent liabilities.
Maintain Outperform. The concerted efforts by the Fed and US banks in flooding the
market with liquidity should avert a system-wide credit crunch, in our view. That, however,
does not mean that we would see zero CDO-related credit losses from Singapore banks
or that the US would escape a recession. We would probably see CDO-related credit
losses for Singapore banks in the next few quarters, but not to the scale of S$282m (the
entire asset-backed CDO book) for DBS.
If the US tips into a recession, Singapore is at risk of a downdraft, though the construction
build-out in Asia should provide Asian banks with some respite. In the current
environment, we see fees at risk for DBS but any earnings gap could plausibly be filled by
higher credit spreads, higher corporate loan demand and higher treasury earnings
(triggered by volatilities in money markets.) Concerns with DBS have already been
reflected in its share price, in our opinion. The share price is down 12.2% MTD, vs. -4.9%
for OCBC and -8.4% for UOB. We maintain our Outperform rating with an unchanged
target price of S$27.00, based on 2.1x CY07 P/BV.
Mapletree Acquires Warehouses from Union Steel
Mapletree Logistics Trust is acquiring four warehouse properties in Singapore from
listed Union Steel Holdings for $36.8 million. Mapletree, through its trustee, HSBC
Institutional Trust Services (Singapore), has signed a put and call option for the
properties, it said in a statement yesterday. The four properties are located at Pioneer
Road North, Neythal Road, Tuas Avenue 8 and Tuas View Square. Union Steel Pte Ltd
will lease back the Pioneer Road North and Neythal Road warehouses, while YLS Steel
Pte Ltd will lease the two Tuas warehouses. Both the lessees are wholly-owned
subsidiaries of Union Steel Holdings. The lease tenure for all the properties is six years,
with an option to extend for a further six years. (BT)
listed Union Steel Holdings for $36.8 million. Mapletree, through its trustee, HSBC
Institutional Trust Services (Singapore), has signed a put and call option for the
properties, it said in a statement yesterday. The four properties are located at Pioneer
Road North, Neythal Road, Tuas Avenue 8 and Tuas View Square. Union Steel Pte Ltd
will lease back the Pioneer Road North and Neythal Road warehouses, while YLS Steel
Pte Ltd will lease the two Tuas warehouses. Both the lessees are wholly-owned
subsidiaries of Union Steel Holdings. The lease tenure for all the properties is six years,
with an option to extend for a further six years. (BT)
Lion Teck Chiang Posts Stellar FY07 Results
FY07 results above expectations. Lion Teck Chiang (LTC) released a
strong set of results last Friday, with improved contributions from its property
and steel divisions. Revenue grew 48% YoY to S$135.5m, while profit
attributable to shareholders surged 198.3% YoY to S$12.6m. This exceeds
our revenue forecast of S$120m and net profit forecast of S$7.3m by 12.9%
and 72.6%, respectively. EPS jumped from S$0.0269 in FY06 to S$0.0803
in FY07. NAV increased 20% YoY to S$0.8605. In line with its strong results,
LTC has also proposed a first and final dividend of S$0.015 per share,
equivalent to 3 times the amount declared in FY06.
Strong contributions from key divisions. Turnover for LTC's steel division
increased 18% or S$13.4m YoY to S$88.1m, due to the pick-up in the
local construction industry. Steel delivered increased 16.6% YoY with Trading
volume up 6.4% and Fabrication increased 28.5%. As average selling prices
and costs were stable relative to FY06, the increase in gross profit of 10.8%
YoY, was due to higher volume. Sales for Property Development jumped
close to 3 times YoY to S$42m and operating profit increased S$10.1m,
owing to the strong demand of the property market in Singapore. LTC
launched and sold all 7 units of detached houses at Wilkinson Road in
FY07 and recognized the total sales value for this project in FY07.
Positive outlook for construction and property sectors. While
international prices of steel have not stabilized and have increased towards
the end of FY07, the demand for steel is expected to improve in line with
the growing construction sector. With Singapore residential property market
demand expected to remain fairly strong, management expects its next
detached housing project at Branksome Road to attract firm interest at
attractive prices. This project is expected to be launched in FY08.
Maintain BUY, with fair value estimate of S$0.80. In view of the still
resilient residential property market in Singapore and the expected continued
strong demand for steel from the construction industry, we expect LTC to
continue to do well in FY08. We are maintaining our previous BUY rating
with a fair value estimate of S$0.80, using a 10% discount to RNAV. This
implies a potential upside of 38% against LTC's closing share price of
S$0.58.(Selena Leong)
strong set of results last Friday, with improved contributions from its property
and steel divisions. Revenue grew 48% YoY to S$135.5m, while profit
attributable to shareholders surged 198.3% YoY to S$12.6m. This exceeds
our revenue forecast of S$120m and net profit forecast of S$7.3m by 12.9%
and 72.6%, respectively. EPS jumped from S$0.0269 in FY06 to S$0.0803
in FY07. NAV increased 20% YoY to S$0.8605. In line with its strong results,
LTC has also proposed a first and final dividend of S$0.015 per share,
equivalent to 3 times the amount declared in FY06.
Strong contributions from key divisions. Turnover for LTC's steel division
increased 18% or S$13.4m YoY to S$88.1m, due to the pick-up in the
local construction industry. Steel delivered increased 16.6% YoY with Trading
volume up 6.4% and Fabrication increased 28.5%. As average selling prices
and costs were stable relative to FY06, the increase in gross profit of 10.8%
YoY, was due to higher volume. Sales for Property Development jumped
close to 3 times YoY to S$42m and operating profit increased S$10.1m,
owing to the strong demand of the property market in Singapore. LTC
launched and sold all 7 units of detached houses at Wilkinson Road in
FY07 and recognized the total sales value for this project in FY07.
Positive outlook for construction and property sectors. While
international prices of steel have not stabilized and have increased towards
the end of FY07, the demand for steel is expected to improve in line with
the growing construction sector. With Singapore residential property market
demand expected to remain fairly strong, management expects its next
detached housing project at Branksome Road to attract firm interest at
attractive prices. This project is expected to be launched in FY08.
Maintain BUY, with fair value estimate of S$0.80. In view of the still
resilient residential property market in Singapore and the expected continued
strong demand for steel from the construction industry, we expect LTC to
continue to do well in FY08. We are maintaining our previous BUY rating
with a fair value estimate of S$0.80, using a 10% discount to RNAV. This
implies a potential upside of 38% against LTC's closing share price of
S$0.58.(Selena Leong)
Gems TV a Bargain
Broadly in line. Reported FY07 net profit came in at US$7.6m, 5% below market
consensus and 10% below our target. However, taking into account one-time charges
relating to IPO expenses of US$662K and allowances for obsolescence of US$540K,
normalised net profit was US$8.8m. The key reasons for the weak results were cost
explosion in the US, competitive pricing in the UK, expanded personnel costs and set-up
costs in Japan and China. The discrepancy between our numbers and reported net profit
stemmed mainly from our lower SG&A assumptions.
Better-than-expected margins. FY07 gross margin (ex-shipping) was 42% better than
our 40% estimate. Sales from both the US and UK were stronger than our forecasts by
13% and 5% respectively. Including shipping revenue, gross margin was 46%, 200bp
higher. Despite a 31% yoy increase in COGS due to higher outsourced production and
gold prices, GEMS managed to keep its gross margins above 40%, in line with its target.
Bottom line to catch up. The favourable topline had not yet translated into bottom-line
strength given the rapid rise in costs associated with the overseas expansion. However,
we note that GEMS is not even a year into its US expansion. Sales for its first full festive
season in the UK were also overwhelming. In our view, net profit has bottomed and is
about to turn around, although not in FY08 as costs should continue to rise due to new
operations in Japan and China. We would look beyond FY08 for genuine growth given
that the revenue/cost mismatch should be settled and each market would make full-year
contributions.
Reiterate Outperform. We maintain our EPS forecasts and S$1.32 target price, based
on 15x CY09 P/E and 7x CY09 EV/EBITDA. GEMS is trading at merely 6x CY09 P/E,
compared to its peer group’s 12x, while offering a FY07-09 EPS CAGR of 98% vs.
peers’ 23%. The company also paid a gross dividend per share of 1.50 US cts in FY07,
suggesting a 3.9% yield (vs. peers’ 1.0% average). We see a great bargain here.
consensus and 10% below our target. However, taking into account one-time charges
relating to IPO expenses of US$662K and allowances for obsolescence of US$540K,
normalised net profit was US$8.8m. The key reasons for the weak results were cost
explosion in the US, competitive pricing in the UK, expanded personnel costs and set-up
costs in Japan and China. The discrepancy between our numbers and reported net profit
stemmed mainly from our lower SG&A assumptions.
Better-than-expected margins. FY07 gross margin (ex-shipping) was 42% better than
our 40% estimate. Sales from both the US and UK were stronger than our forecasts by
13% and 5% respectively. Including shipping revenue, gross margin was 46%, 200bp
higher. Despite a 31% yoy increase in COGS due to higher outsourced production and
gold prices, GEMS managed to keep its gross margins above 40%, in line with its target.
Bottom line to catch up. The favourable topline had not yet translated into bottom-line
strength given the rapid rise in costs associated with the overseas expansion. However,
we note that GEMS is not even a year into its US expansion. Sales for its first full festive
season in the UK were also overwhelming. In our view, net profit has bottomed and is
about to turn around, although not in FY08 as costs should continue to rise due to new
operations in Japan and China. We would look beyond FY08 for genuine growth given
that the revenue/cost mismatch should be settled and each market would make full-year
contributions.
Reiterate Outperform. We maintain our EPS forecasts and S$1.32 target price, based
on 15x CY09 P/E and 7x CY09 EV/EBITDA. GEMS is trading at merely 6x CY09 P/E,
compared to its peer group’s 12x, while offering a FY07-09 EPS CAGR of 98% vs.
peers’ 23%. The company also paid a gross dividend per share of 1.50 US cts in FY07,
suggesting a 3.9% yield (vs. peers’ 1.0% average). We see a great bargain here.
Temasek Raises Stake in Standard Chartered
Temasek Holdings has raised its stake in Standard Chartered plc (Stanchart), with the
development pushing the bank's shares higher in early trading in London yesterday. The
increase to just over 15% is Temasek's second in a month, after it raised is stake from
13% to 14% earlier in August. The stake is valued at about £216.2 million (S$656
million), based on the bank's market capitalisation as of Tuesday's close. Stanchart
shares rose 2.4% in early London trading yesterday, hitting highs of around 1,585 pence
before easing, reviving talk the bank could be the object of takeover interest from either
Temasek or rival Barclays, analysts say.
Temasek's move underscores the increasing appetite of so-called sovereign wealth
funds, which control an estimated US$2.5 trillion, more than all the world's hedge funds
combined. Stephen Jen, London-based global head of currency research at Morgan
Stanley, estimates the funds, which invest currency reserves in foreign assets and other
investments, may expand to US$12 trillion by 2015. Temasek and state-owned China
Development Bank will contribute about US$11.2 billion in UK lender Barclays plc's
revised bid for ABN Amro Holdings NV in the largest financial- services takeover. (BT)
development pushing the bank's shares higher in early trading in London yesterday. The
increase to just over 15% is Temasek's second in a month, after it raised is stake from
13% to 14% earlier in August. The stake is valued at about £216.2 million (S$656
million), based on the bank's market capitalisation as of Tuesday's close. Stanchart
shares rose 2.4% in early London trading yesterday, hitting highs of around 1,585 pence
before easing, reviving talk the bank could be the object of takeover interest from either
Temasek or rival Barclays, analysts say.
Temasek's move underscores the increasing appetite of so-called sovereign wealth
funds, which control an estimated US$2.5 trillion, more than all the world's hedge funds
combined. Stephen Jen, London-based global head of currency research at Morgan
Stanley, estimates the funds, which invest currency reserves in foreign assets and other
investments, may expand to US$12 trillion by 2015. Temasek and state-owned China
Development Bank will contribute about US$11.2 billion in UK lender Barclays plc's
revised bid for ABN Amro Holdings NV in the largest financial- services takeover. (BT)
PowerSeraya Undergoes Makeover
PowerSeraya Limited, which supplies about a third of Singapore's energy needs, is now
venturing into steam, water, oil and gas as it transforms its business from pure power
generation into one that qualifies it as a full-fledged energy company. PowerSeraya
plans to diversify largely on the strength of an 800-megawatt Co-Generation Combined
Cycle Plant (CCP) on Jurong Island that will produce power and steam simultaneously.
Not only will this thermal-efficient plant reduce the company's carbon footprint
significantly and make it eligible to apply for carbon credits, but it will also make
PowerSeraya the largest Co-Generation CCP steam supplier in Singapore.
PowerSeraya has also set up a new physical oil trading company - PetroSeraya - which
will open new sources of revenue and address market volatility caused by oil price
fluctuation. (BT)
venturing into steam, water, oil and gas as it transforms its business from pure power
generation into one that qualifies it as a full-fledged energy company. PowerSeraya
plans to diversify largely on the strength of an 800-megawatt Co-Generation Combined
Cycle Plant (CCP) on Jurong Island that will produce power and steam simultaneously.
Not only will this thermal-efficient plant reduce the company's carbon footprint
significantly and make it eligible to apply for carbon credits, but it will also make
PowerSeraya the largest Co-Generation CCP steam supplier in Singapore.
PowerSeraya has also set up a new physical oil trading company - PetroSeraya - which
will open new sources of revenue and address market volatility caused by oil price
fluctuation. (BT)
No Damage to Pacific Andes' Peru Operations
Based on the announcements released this morning, Pacific Andes Holdings’
(PAH) subsidiary China Fishery Group (CFG) has further clarified that its
operation in Peru was not affected by the recent earthquake. This was
partly due to the fact that this is now the fishing moratorium period in Peru,
which lasts till Nov 2007, and fishing of Peruvian Anchovy is not permitted
in the North and Central Fishing zones during this period. We have a BUY
rating on PAH with fair value estimate of S$0.965. (Carmen Lee)
(PAH) subsidiary China Fishery Group (CFG) has further clarified that its
operation in Peru was not affected by the recent earthquake. This was
partly due to the fact that this is now the fishing moratorium period in Peru,
which lasts till Nov 2007, and fishing of Peruvian Anchovy is not permitted
in the North and Central Fishing zones during this period. We have a BUY
rating on PAH with fair value estimate of S$0.965. (Carmen Lee)
Pacific Andes Holding: Growth Still on Track
Strong set of 1Q results. Pacific Andes Holdings (PAH) posted a strong
set of 1QFY08 results. Revenue rose 43% YoY to HK$2,138m, while net
profit surged 43% YoY to HK$96.8m. This is not surprising considering
that its subsidiary, SGX-listed China Fishery Group (CFG) also unveiled
yet another set of spectacular results. CFG saw a strong 233% YoY jump
in 2QFY07 revenue to US$110.5m, while net profit climbed up 77% YoY to
US$20.2m. PAH saw improvements from both its fishing and frozen fish
trading divisions. For CFG, the improvement came from two new Vessel
Operating Agreements (VOAs) which came into effect from early 2007.
This effectively grew its fleet from 14 to 23 vessels. Overall, the fishing
division contributed HK$861.9m or 40.3% to total group revenue, while the
frozen fish division contributed HK$1,275.8m or 59.7% to group revenue.
Strong demand from China to underpin growth. Overall, we expect its
performance for the rest of FY08 to remain strong, and this will continue to
come from the strong consumption pattern from its key PRC market. This
will benefit both its fishing and fishmeal segments. As seen from the recent
results, the PRC market accounted for about 78% of group revenue.
On the lookout for more acquisitions. Management also highlighted
that it is continuously on the lookout for more VOAs or other complementary
businesses to grow its operations, especially in Peru. This is an extension
of its recent spate of acquisitions in Peru, which now comprises of 31
purse seiners, 6 fishmeal plants and 1 canning plant in Peru. With the
recent restructuring, which led to the increase in PAH’s effective stake in
CFG from 28.8% to 63.9%, we believe this will give PAH better access to
grow CFG’s still expanding operation.
PAH stays as a BUY. While PAH and its affiliates are adding on to their
operations in the past few months, these have proven to be earnings
accretive. Despite the recent market volatility, we believe that demand for
fish products will remain strong in China. In addition, since 2001, PAH has
been delivering strong double-digit earnings growth, with growth rates of
50%-71% in the last 3 years. As the 1Q results are fairly in line with our
expectations, we are maintaining our FY08 estimates. We are also retaining
our BUY rating and our fair value estimate of 96.5 cents (adjusted for the
recent 1-for-1 rights issue). (Carmen Lee)
set of 1QFY08 results. Revenue rose 43% YoY to HK$2,138m, while net
profit surged 43% YoY to HK$96.8m. This is not surprising considering
that its subsidiary, SGX-listed China Fishery Group (CFG) also unveiled
yet another set of spectacular results. CFG saw a strong 233% YoY jump
in 2QFY07 revenue to US$110.5m, while net profit climbed up 77% YoY to
US$20.2m. PAH saw improvements from both its fishing and frozen fish
trading divisions. For CFG, the improvement came from two new Vessel
Operating Agreements (VOAs) which came into effect from early 2007.
This effectively grew its fleet from 14 to 23 vessels. Overall, the fishing
division contributed HK$861.9m or 40.3% to total group revenue, while the
frozen fish division contributed HK$1,275.8m or 59.7% to group revenue.
Strong demand from China to underpin growth. Overall, we expect its
performance for the rest of FY08 to remain strong, and this will continue to
come from the strong consumption pattern from its key PRC market. This
will benefit both its fishing and fishmeal segments. As seen from the recent
results, the PRC market accounted for about 78% of group revenue.
On the lookout for more acquisitions. Management also highlighted
that it is continuously on the lookout for more VOAs or other complementary
businesses to grow its operations, especially in Peru. This is an extension
of its recent spate of acquisitions in Peru, which now comprises of 31
purse seiners, 6 fishmeal plants and 1 canning plant in Peru. With the
recent restructuring, which led to the increase in PAH’s effective stake in
CFG from 28.8% to 63.9%, we believe this will give PAH better access to
grow CFG’s still expanding operation.
PAH stays as a BUY. While PAH and its affiliates are adding on to their
operations in the past few months, these have proven to be earnings
accretive. Despite the recent market volatility, we believe that demand for
fish products will remain strong in China. In addition, since 2001, PAH has
been delivering strong double-digit earnings growth, with growth rates of
50%-71% in the last 3 years. As the 1Q results are fairly in line with our
expectations, we are maintaining our FY08 estimates. We are also retaining
our BUY rating and our fair value estimate of 96.5 cents (adjusted for the
recent 1-for-1 rights issue). (Carmen Lee)
China Fishery Fishmeal Operations
• Net profit was slightly below expectations. Net profit of Rmb20.2m
(+76.6%yoy) was slightly below our expectations and consensus estimates. 1H07 net
profit of Rmb50.6m makes up 47.6% of our old CY07 estimate and 43.7% of
consensus’. The company also declared an interim dividend of S$0.039,
equivalent to approximately 40% of 1H07 net profit. While the 1H07 top line of
Rmb232.4m was in line with our expectations, accounting for 59.9% of our old
CY07 revenue estimate, gross margin disappointed.
• Gross margin disappointed due to fishmeal operations. The overall gross margin
declined to 31.1% from 40.2% in 2Q06 and 34.8% in 1Q07. While we had already
factored in a lower gross margin due to the different fee structure of the 4th VOA which
is on a more expensive daily charter compared to the other 3 prepaid VOAs, the
unsatisfactory performance of the fishmeal operations led to lower than expected
margins. The recent floods and blue ear disease outbreaks in China led to lower
fishmeal demand from pig farming and aquaculture, causing fishmeal price to weaken
approximately 9% to US$1,000/ton compared to our assumption of US$1,100/ton. Also,
progress on the expansion of the company’s purse seine fishing fleet has been slow,
resulting in higher input costs and lower margins for the fishmeal operations as the
current fleet can only provide approximately 60% of the fishmeal input requirements
compared to our earlier assumption of 85%.
• Trimming CY07-09 estimates. While we do not expect the situation in China to persist,
we prefer to be more conservative in our assumptions of fishmeal prices, and we also
note that the company has not be able to add to its purse seine fishing fleet due to the
current firm prices of purse seine fishing vessels. In addition, the management has
indicated that one of the supertrawlers undergoing elongation may only be ready for
deployment in mid-08 instead of beginning 2008. Hence, we have reduced our CY07-
CY09 estimates by 7% to 10%.
• Maintain Outperform, lowered target price to S$2.80 (from S$3.10). We remain
bullish on the company’s rosy prospects, and are confident that the management will be
able to improve the profitability of the fishmeal operations. However, in line with our
reduced estimates, we lower our target price to S$2.80 from S$3.10, still based on
13.0x CY08 P/E. Maintain Outperform.
(+76.6%yoy) was slightly below our expectations and consensus estimates. 1H07 net
profit of Rmb50.6m makes up 47.6% of our old CY07 estimate and 43.7% of
consensus’. The company also declared an interim dividend of S$0.039,
equivalent to approximately 40% of 1H07 net profit. While the 1H07 top line of
Rmb232.4m was in line with our expectations, accounting for 59.9% of our old
CY07 revenue estimate, gross margin disappointed.
• Gross margin disappointed due to fishmeal operations. The overall gross margin
declined to 31.1% from 40.2% in 2Q06 and 34.8% in 1Q07. While we had already
factored in a lower gross margin due to the different fee structure of the 4th VOA which
is on a more expensive daily charter compared to the other 3 prepaid VOAs, the
unsatisfactory performance of the fishmeal operations led to lower than expected
margins. The recent floods and blue ear disease outbreaks in China led to lower
fishmeal demand from pig farming and aquaculture, causing fishmeal price to weaken
approximately 9% to US$1,000/ton compared to our assumption of US$1,100/ton. Also,
progress on the expansion of the company’s purse seine fishing fleet has been slow,
resulting in higher input costs and lower margins for the fishmeal operations as the
current fleet can only provide approximately 60% of the fishmeal input requirements
compared to our earlier assumption of 85%.
• Trimming CY07-09 estimates. While we do not expect the situation in China to persist,
we prefer to be more conservative in our assumptions of fishmeal prices, and we also
note that the company has not be able to add to its purse seine fishing fleet due to the
current firm prices of purse seine fishing vessels. In addition, the management has
indicated that one of the supertrawlers undergoing elongation may only be ready for
deployment in mid-08 instead of beginning 2008. Hence, we have reduced our CY07-
CY09 estimates by 7% to 10%.
• Maintain Outperform, lowered target price to S$2.80 (from S$3.10). We remain
bullish on the company’s rosy prospects, and are confident that the management will be
able to improve the profitability of the fishmeal operations. However, in line with our
reduced estimates, we lower our target price to S$2.80 from S$3.10, still based on
13.0x CY08 P/E. Maintain Outperform.
Valuetronics Growth On-Track
1QFY08 results in line with expectations
Valuetronics reported a decent set of 1QFY08 results with 13% YoY net profit growth to HK$20m, which is on target to meet our full year estimates of HK$85.2m. Revenue grew 11% YoY to HK$186.3m underpinned by increased demand from Valuetronics’ major customer, Philips and newly acquired NASDAQ-listed customer, Transact. Although gross margin slipped to 21.6% due to changes in its product mix (this is still above management’s guidance of 18-20%), operating leverage kicked in expanding operating margin to 12.3% from 11.9% in 1Q07.
Higher inventory level not a concern
Inventory level was up from HK$69.2m to HK$90.9m as Valuetronics prepares to meet growing customer demand in 2QFY08. Cash and cash equivalent rose slightly by HK$4m to HK$180.5m.
Customer and capacity ramp to drive FY09 earnings
Construction of a second manufacturing facility in Daya Bay, Guangdong Province, PRC will be completed in the last quarter of 2007 and boost production capacity by 30%. Major customers Philips, Dymo, Transact, Aerus, and Home Depot will dovetail the expansion capacity as they introduce new products and outsource more manufacturing services to Valuetronics. Consequently, we expect strong order book momentum to continue with a 17% growth in FY08 and 25% in FY09 implying a EPS CAGR of 21% over FY07-FY09F.
Reiterate Buy given compelling valuations
We are reiterating a Buy on Valuetronics given its compelling valuation of 2.1x ex-cash FY09 PE (4.5x FY09 PE). Despite a strong cash position representing 37% of market capitalisation, superior annualised ROE of 33% and a premier client portfolio, Valuetronics trades at a steep 56% discount to local ODM/OEM peers. In addition, Investors can also look forward to an attractive dividend yield of 5.3% in FY08. In view of the recent market sell-off, we are scaling back our target price to $0.43 based on 7x FY09 PE (from 8x previously), to be on par with peers’ valuation. This still gives the stock a very healthy 59% upside potential. Key risks include exposure to the cyclical electronics industry and a slowdown in orders from key customers
Valuetronics reported a decent set of 1QFY08 results with 13% YoY net profit growth to HK$20m, which is on target to meet our full year estimates of HK$85.2m. Revenue grew 11% YoY to HK$186.3m underpinned by increased demand from Valuetronics’ major customer, Philips and newly acquired NASDAQ-listed customer, Transact. Although gross margin slipped to 21.6% due to changes in its product mix (this is still above management’s guidance of 18-20%), operating leverage kicked in expanding operating margin to 12.3% from 11.9% in 1Q07.
Higher inventory level not a concern
Inventory level was up from HK$69.2m to HK$90.9m as Valuetronics prepares to meet growing customer demand in 2QFY08. Cash and cash equivalent rose slightly by HK$4m to HK$180.5m.
Customer and capacity ramp to drive FY09 earnings
Construction of a second manufacturing facility in Daya Bay, Guangdong Province, PRC will be completed in the last quarter of 2007 and boost production capacity by 30%. Major customers Philips, Dymo, Transact, Aerus, and Home Depot will dovetail the expansion capacity as they introduce new products and outsource more manufacturing services to Valuetronics. Consequently, we expect strong order book momentum to continue with a 17% growth in FY08 and 25% in FY09 implying a EPS CAGR of 21% over FY07-FY09F.
Reiterate Buy given compelling valuations
We are reiterating a Buy on Valuetronics given its compelling valuation of 2.1x ex-cash FY09 PE (4.5x FY09 PE). Despite a strong cash position representing 37% of market capitalisation, superior annualised ROE of 33% and a premier client portfolio, Valuetronics trades at a steep 56% discount to local ODM/OEM peers. In addition, Investors can also look forward to an attractive dividend yield of 5.3% in FY08. In view of the recent market sell-off, we are scaling back our target price to $0.43 based on 7x FY09 PE (from 8x previously), to be on par with peers’ valuation. This still gives the stock a very healthy 59% upside potential. Key risks include exposure to the cyclical electronics industry and a slowdown in orders from key customers
Singtel Guidance Tweaked
SingTel’s underlying net profit rose 15.3% YOY to $868m as revenue increased 10.5% to $3,567m. Underlying net profit when annualized,is in line with consensus estimate of $3,575m and our forecast of $3,518m. Singapore’s business performed strongly; with operational EBITDA increasing 7.3% to $507m YOY while Optus’s operational EBITDA was flat. SingTel’s share of associate earnings surged 31.7% to $652m. Management tweaked its guidance for the Singapore’s business, from low single-digit level growth in revenue to single-digit growth.
Surprisingly good showing from the Singapore’s business
Better performance from the Data and Internet business and theMobile Communications business propelled Singapore’s business operational EBITDA. SingTel is benefiting from 2 trends in the Singapore market: 1) increasing demand for corporate data services as business activity picksup and 2) an increasingly higher usage of mobile data services. High additions in prepaid and postpaid mobile subscribers also contributed to the better performance and indicate that SingTel is competing more successfully in the local market.
Associates continue to power growth
Amongst the associates, Telkomsel and Bharti are the growth engines, accounting for 44% and 32% of pre-tax associate earnings respectively. Telkomsel and Bharti continued to expand their subscriber base rapidly, at 46% and 85% YOY respectively. In line with higher associate earnings this year, management expects cash dividends from associates to increase.
Strong cash flow generation
SingTel’s ability to generate strong free cash flow is another investment merit. Free cash flow for 1Q08 was $556m, up 21% YOY. Dividendsfrom associates accounted for $96.5m while Singapore’s business, a cash cow, contributed $344m.
SOTP target price of $3.71, Downgrade to HOLD
We are changing our valuation approach from discounted cash flow (DCF)to sum-of-the–parts (SOTP) and have arrived at a target price of $3.71. Downgrade to HOLD.
Surprisingly good showing from the Singapore’s business
Better performance from the Data and Internet business and theMobile Communications business propelled Singapore’s business operational EBITDA. SingTel is benefiting from 2 trends in the Singapore market: 1) increasing demand for corporate data services as business activity picksup and 2) an increasingly higher usage of mobile data services. High additions in prepaid and postpaid mobile subscribers also contributed to the better performance and indicate that SingTel is competing more successfully in the local market.
Associates continue to power growth
Amongst the associates, Telkomsel and Bharti are the growth engines, accounting for 44% and 32% of pre-tax associate earnings respectively. Telkomsel and Bharti continued to expand their subscriber base rapidly, at 46% and 85% YOY respectively. In line with higher associate earnings this year, management expects cash dividends from associates to increase.
Strong cash flow generation
SingTel’s ability to generate strong free cash flow is another investment merit. Free cash flow for 1Q08 was $556m, up 21% YOY. Dividendsfrom associates accounted for $96.5m while Singapore’s business, a cash cow, contributed $344m.
SOTP target price of $3.71, Downgrade to HOLD
We are changing our valuation approach from discounted cash flow (DCF)to sum-of-the–parts (SOTP) and have arrived at a target price of $3.71. Downgrade to HOLD.
OCBC Growing Fast and Furious
Outperform once again
OCBC delivered core earnings of S$518m (+65% Y/Y, 1.6% Q/Q) which beat market expectations. Earnings growth was broad based led by higher net interest income, better interest margins and fee income. Overseas contributions recorded a robust growth of 32% Y/Y, constituting 34.5% of OCBC’s pretax earnings. Its cost ratio increased from 34.7% to 39% in line with higher staff and promotional costs. Strong recoveries in non-performing assets continued into 2Q07. The group declared an interim net DPS of 14 cents.
Lending business riding on construction boom and growing deposits
Net interest income surged due to faster loans growth and improvement in net interest margin (NIM). Gross loans rose by 12.4%, which was led by building and construction loans (+13.4% Q/Q). Housing loans growth remained muted at 0.46% Q/Q. The vast improvement of the NIM from 2% to 2.13% was a positive surprise, which resulted from escalating growth in lower cost deposits (+14% Q/Q, +21% Y/Y). Malaysia and Indonesia recorded strong loans growth of 10.8% Y/Y and 38% Y/Y, respectively. The strong performance of Bank NISP in Indonesia was also evident with an outstanding NIM improvement from 4.4% in 1Q07 to 5.47% in 2Q07.
Champion in non-interest income
OCBC’s non-interest income continued its robust growth of 50% Y/Y, but declined by 3% Q/Q due to lower trading gains. Fee income improved in all product segments, in particular, wealth management (+38% Q/Q) and loan-related products (+42% Q/Q). With regards to OCBC’s S$650m CDO investments, the group highlighted that risk exposure is minimal and do not foresee significant impairments. CDO exposure to Great Eastern is small at merely 0.4% of its S$38bn asset size. Although Lion Capital has S$1.5bn in CDOs with subprime exposure out of AUM in amount of S$32bn, risks are borne by CDO investors with no leverage employed.
Strong roadmap to head sustainable growth
Strategic initiatives to penetrate into the mass consumer market such as full-service Sunday banking, branch transformation, supermarket banking with FairPrice Plus provide enhanced service and accessibility to clients. We believe these efforts will continue to build on OCBC’s low-cost deposit base, which bodes well for its NIM. Within its overseas markets, the management remains upbeat that Malaysia and Indonesia can sustain double-digit loans growth on the back of branch network expansions and improved infrastructure panels. The group has commenced local incorporation in China and aims to build China as a major growth engine in the long term. It aims to open two new branches per year and more sub-branches, focusing on Greater Shanghai, Pearl River Delta and Sichuan regions.
Improvement in fundamentals reflected in premium rating. Maintain Hold.
We raised our earnings estimates for FY07/08 by 5% and 3% respectively as we adjust for stronger net interest income, better than expected fee income and higher expenses. OCBC currently trades at 1.82x FY07 BPVS - above the sector average of 1.77x. OCBC’s premium valuation justifies its above industry earnings growth momentum. We derived a new target price of S$10, rolling on to 1.95x FY08 EPS (regional blended basis).
OCBC delivered core earnings of S$518m (+65% Y/Y, 1.6% Q/Q) which beat market expectations. Earnings growth was broad based led by higher net interest income, better interest margins and fee income. Overseas contributions recorded a robust growth of 32% Y/Y, constituting 34.5% of OCBC’s pretax earnings. Its cost ratio increased from 34.7% to 39% in line with higher staff and promotional costs. Strong recoveries in non-performing assets continued into 2Q07. The group declared an interim net DPS of 14 cents.
Lending business riding on construction boom and growing deposits
Net interest income surged due to faster loans growth and improvement in net interest margin (NIM). Gross loans rose by 12.4%, which was led by building and construction loans (+13.4% Q/Q). Housing loans growth remained muted at 0.46% Q/Q. The vast improvement of the NIM from 2% to 2.13% was a positive surprise, which resulted from escalating growth in lower cost deposits (+14% Q/Q, +21% Y/Y). Malaysia and Indonesia recorded strong loans growth of 10.8% Y/Y and 38% Y/Y, respectively. The strong performance of Bank NISP in Indonesia was also evident with an outstanding NIM improvement from 4.4% in 1Q07 to 5.47% in 2Q07.
Champion in non-interest income
OCBC’s non-interest income continued its robust growth of 50% Y/Y, but declined by 3% Q/Q due to lower trading gains. Fee income improved in all product segments, in particular, wealth management (+38% Q/Q) and loan-related products (+42% Q/Q). With regards to OCBC’s S$650m CDO investments, the group highlighted that risk exposure is minimal and do not foresee significant impairments. CDO exposure to Great Eastern is small at merely 0.4% of its S$38bn asset size. Although Lion Capital has S$1.5bn in CDOs with subprime exposure out of AUM in amount of S$32bn, risks are borne by CDO investors with no leverage employed.
Strong roadmap to head sustainable growth
Strategic initiatives to penetrate into the mass consumer market such as full-service Sunday banking, branch transformation, supermarket banking with FairPrice Plus provide enhanced service and accessibility to clients. We believe these efforts will continue to build on OCBC’s low-cost deposit base, which bodes well for its NIM. Within its overseas markets, the management remains upbeat that Malaysia and Indonesia can sustain double-digit loans growth on the back of branch network expansions and improved infrastructure panels. The group has commenced local incorporation in China and aims to build China as a major growth engine in the long term. It aims to open two new branches per year and more sub-branches, focusing on Greater Shanghai, Pearl River Delta and Sichuan regions.
Improvement in fundamentals reflected in premium rating. Maintain Hold.
We raised our earnings estimates for FY07/08 by 5% and 3% respectively as we adjust for stronger net interest income, better than expected fee income and higher expenses. OCBC currently trades at 1.82x FY07 BPVS - above the sector average of 1.77x. OCBC’s premium valuation justifies its above industry earnings growth momentum. We derived a new target price of S$10, rolling on to 1.95x FY08 EPS (regional blended basis).
Valuetronics Still Offers Good Value
• Within expectations. 1QFY08 net profit of HK$20m (+13% yoy) was fairly in line our
expectations, representing about 23% of our full-year forecast. 1QFY06 and 1QFY07
profits also accounted for 23-24% of the company’s full-year profits.
• Sales grew 11% yoy, as weakness in the ODM business (-12% yoy to HK$51m) was
more than compensated by stronger sales to OEM customers (+24% yoy). The
weakness in ODM stemmed largely from the lack of new model introductions by
KitchenAid. Strength in the OEM segment came from greater orders from existing
customers such as Philips and Dymo.
• EBITDA margins improved 10bp yoy, reflecting a better sales mix and greater
economies of scale as lower gross margins were offset by a lower opex ratio. Together
with higher interest income and forex gains, pretax and net profits grew 15% and 13%
yoy respectively, slightly ahead of the topline growth.
• Solid balance sheet to support healthy dividend payments. Valuetronics ended
the quarter with HK$196m of net cash, up from HK$188m as at end-Mar 07. It
continued to generate positive free cash flow during the quarter on the back of higher
profits, controlled capex and stable cash cycle days.
• Growth momentum to continue. Growth drivers for FY08 are expected to come
from: 1) greater contributions from the Philips group of companies as Valuetronics
previously serviced only Philips Zhuhai (mainly shaver products) and Philips Hong
Kong (power chargers and rechargeable packs for multimedia products). It has
expanded its services to Philips Holland (shavers and home appliance products),
Philips USA (ultra-sonic toothbrushes), and Philips Singapore (iron products); 2)
greater allocations from Dymo and a relatively new customer, Transact; and 3)
contributions from chain stores in the US for ODM products. The only weak spot is
KitchenAid, as business is not expected to pick up due to the lack of new product
launches in FY08.
• Forecasts and Outperform maintained. We have kept our FY08-10 EPS forecasts
and target price of S$0.47 unchanged, still based on a conservative 8x CY08 P/E
despite high ROEs and a strong balance sheet to account for its small size and lack of
listing track record. At S$0.47, the stock is only valued at 5x EV/EBITDA. Maintain
Outperform.
expectations, representing about 23% of our full-year forecast. 1QFY06 and 1QFY07
profits also accounted for 23-24% of the company’s full-year profits.
• Sales grew 11% yoy, as weakness in the ODM business (-12% yoy to HK$51m) was
more than compensated by stronger sales to OEM customers (+24% yoy). The
weakness in ODM stemmed largely from the lack of new model introductions by
KitchenAid. Strength in the OEM segment came from greater orders from existing
customers such as Philips and Dymo.
• EBITDA margins improved 10bp yoy, reflecting a better sales mix and greater
economies of scale as lower gross margins were offset by a lower opex ratio. Together
with higher interest income and forex gains, pretax and net profits grew 15% and 13%
yoy respectively, slightly ahead of the topline growth.
• Solid balance sheet to support healthy dividend payments. Valuetronics ended
the quarter with HK$196m of net cash, up from HK$188m as at end-Mar 07. It
continued to generate positive free cash flow during the quarter on the back of higher
profits, controlled capex and stable cash cycle days.
• Growth momentum to continue. Growth drivers for FY08 are expected to come
from: 1) greater contributions from the Philips group of companies as Valuetronics
previously serviced only Philips Zhuhai (mainly shaver products) and Philips Hong
Kong (power chargers and rechargeable packs for multimedia products). It has
expanded its services to Philips Holland (shavers and home appliance products),
Philips USA (ultra-sonic toothbrushes), and Philips Singapore (iron products); 2)
greater allocations from Dymo and a relatively new customer, Transact; and 3)
contributions from chain stores in the US for ODM products. The only weak spot is
KitchenAid, as business is not expected to pick up due to the lack of new product
launches in FY08.
• Forecasts and Outperform maintained. We have kept our FY08-10 EPS forecasts
and target price of S$0.47 unchanged, still based on a conservative 8x CY08 P/E
despite high ROEs and a strong balance sheet to account for its small size and lack of
listing track record. At S$0.47, the stock is only valued at 5x EV/EBITDA. Maintain
Outperform.
Celestial Nutrifoods Managing Margin Pressure
• Net profit in line with expectations. Net income of RMB98.5m (-8.3%yoy) was in line
with our estimates (1H07 net profit was 43% of old CY07 estimates compared to 45% in
CY06). Net income was affected by RMB17.3m in non-cash expenses related to the
CB. Excluding the CB related expenses, net income increased 37.5%yoy. Revenue
jumped 72%yoy to RMB422m driven by higher demand for the company’s products and
increased capacity utilization at the new Soybean Zone.
• Target capacity utilization is achievable. The capacity ramp up for the Soybean Zone
is proceeding smoothly with average capacity utilization of 62.6% in 2Q07 compared to
48.0% in 4Q06. We believe that the management’s target of 70% by the end of CY07
can be achieved.
• Gross margin declined. Gross margin declined to 38.9% compared to 47.6% in 2Q06
and 40.8% in 1Q07 as a result of a change in sales mix and an increase in raw material
costs. With the commencement of production of Soybean Zone, the contribution of
lower margin industrial protein products has increased, resulting in a decline in
contribution from the key health food and beverages segment to 57% from 85% in 2Q06.
Cost of soybeans has also increased by approximately 16%yoy to RMB2,597/ton.
Consequently, gross margin for the health food and beverage segment declined to
50.1% compared to 47.6% in 2Q06 and 52.2% in 1Q07, while gross margin for SPI
declined to 27.0% from 28.3% in 1Q07.
• Steps taken to mitigate margin pressure. In light of the increase in raw material
prices, the management has taken the following steps to mitigate the impact on margins,
1) increased ASP for certain products; 2) persuaded distributors to promote higher
margin products; 3) ramped up utilization rates to lower unit costs.
• Maintain Outperform, lowered target price to S$2.23 (from S$2.41). We remain
positive on the company’s prospects, and expect earnings to be driven by higher
capacity utilization and new products. However, due to continued margin pressure from
escalating raw material prices, we lower our CY07-09 estimates by 5% to 14%. We also
lower our target price to S$2.23, still based on 14.9x CY08 PE. Maintain Outperform.
with our estimates (1H07 net profit was 43% of old CY07 estimates compared to 45% in
CY06). Net income was affected by RMB17.3m in non-cash expenses related to the
CB. Excluding the CB related expenses, net income increased 37.5%yoy. Revenue
jumped 72%yoy to RMB422m driven by higher demand for the company’s products and
increased capacity utilization at the new Soybean Zone.
• Target capacity utilization is achievable. The capacity ramp up for the Soybean Zone
is proceeding smoothly with average capacity utilization of 62.6% in 2Q07 compared to
48.0% in 4Q06. We believe that the management’s target of 70% by the end of CY07
can be achieved.
• Gross margin declined. Gross margin declined to 38.9% compared to 47.6% in 2Q06
and 40.8% in 1Q07 as a result of a change in sales mix and an increase in raw material
costs. With the commencement of production of Soybean Zone, the contribution of
lower margin industrial protein products has increased, resulting in a decline in
contribution from the key health food and beverages segment to 57% from 85% in 2Q06.
Cost of soybeans has also increased by approximately 16%yoy to RMB2,597/ton.
Consequently, gross margin for the health food and beverage segment declined to
50.1% compared to 47.6% in 2Q06 and 52.2% in 1Q07, while gross margin for SPI
declined to 27.0% from 28.3% in 1Q07.
• Steps taken to mitigate margin pressure. In light of the increase in raw material
prices, the management has taken the following steps to mitigate the impact on margins,
1) increased ASP for certain products; 2) persuaded distributors to promote higher
margin products; 3) ramped up utilization rates to lower unit costs.
• Maintain Outperform, lowered target price to S$2.23 (from S$2.41). We remain
positive on the company’s prospects, and expect earnings to be driven by higher
capacity utilization and new products. However, due to continued margin pressure from
escalating raw material prices, we lower our CY07-09 estimates by 5% to 14%. We also
lower our target price to S$2.23, still based on 14.9x CY08 PE. Maintain Outperform.
Cosco Corporation The Real Deal
2Q07 net profit up 58%
Cosco Corporation (Cosco) shares have sharply risen by 42%over the past month on anticipation of earnings acceleration from its shipyard business. This set of results is a clear validation of this expectation. Cosco recorded S$80.4m in net profit for 2Q07, up 58% Y/Y and 91% Q/Q. Undoubtedly, Shipyard was the major contributor with a 106% Y/Y rise in turnover, driven by its strong order book and the progressive completion of major contracts, including several high-value offshore projects. Dry bulk shipping turnover grew by 21% Y/Y, boosted by firmer charter rates and despite having a smaller fleet as compared to a year earlier. Overall gross margin remained robust at 29.7%.
Higher scrap sales to become a regular feature
2Q07 earnings were also boosted by a miscellaneous gain of S$38.2m, up 185% over 1Q06. This arose primarily out of scrap metal sales from its shipyards. This was also ahead of our expectations and hence accounted for the variance versus our expectation of net profit of S$72m for the quarter. Scrap prices have remained buoyant in tandem with prices for raw materials inChina. Furthermore, scrap volume was higher due to a larger number of conversion jobs undertaken by Cosco’s shipyards. We therefore expect gains from scrap sales to be a regular feature in future earnings, particularly with Cosco undertaking even more complex and higher value-add conversions and repair jobs.
Marine the core competency, re-organisation likely
Undoubtedly, Cosco’s main earnings driver will continue to be the shipyards, as it converts on its current order book of some US$3.3bn (as of end July). We also believe that Cosco has the capacity to take on significantly more orders for newbuilds, conversion and offshore projects, as it continues to aggressively add capacity across its yards, especially its Zhoushan yard. We believe that Cosco will handle a significant proportion of its parents’ fleet renewal requirements, particularly for drybulkers and specialty ships. We also believe that a re-organisation within Cosco is imminent in order to rationaliseits bulk shipping business and focus on its core competency of marine services. We estimate that the sale of Cosco’s drybulk fleet could generate a surplus of around S$0.30per share amid the current robust second-hand ship market. A restructuring could also result in a transfer of a larger proportion of ownership of Cosco Shipyard Group from Cosco’s current 51% holding and will likely be earnings-accretive.
Raising target price to S$6.00
We are tweaking our earnings forecast for Cosco on the back of these outstanding results. We have raised our FY07 net profit forecast by 4% to S$305.7m, and have hiked our FY08 estimates by 7% to S$454.9m. We are hence raising our target price for Cosco from S$5.70 to S$6.00, based on our DCF valuation. Despite the already-impressive 43% earnings CAGR over the next threeyears, the bulk of our valuation comes from the company’s outstanding long-term prospects, rather than just short-term valuations. We maintain our BUY recommendation.
Cosco Corporation (Cosco) shares have sharply risen by 42%over the past month on anticipation of earnings acceleration from its shipyard business. This set of results is a clear validation of this expectation. Cosco recorded S$80.4m in net profit for 2Q07, up 58% Y/Y and 91% Q/Q. Undoubtedly, Shipyard was the major contributor with a 106% Y/Y rise in turnover, driven by its strong order book and the progressive completion of major contracts, including several high-value offshore projects. Dry bulk shipping turnover grew by 21% Y/Y, boosted by firmer charter rates and despite having a smaller fleet as compared to a year earlier. Overall gross margin remained robust at 29.7%.
Higher scrap sales to become a regular feature
2Q07 earnings were also boosted by a miscellaneous gain of S$38.2m, up 185% over 1Q06. This arose primarily out of scrap metal sales from its shipyards. This was also ahead of our expectations and hence accounted for the variance versus our expectation of net profit of S$72m for the quarter. Scrap prices have remained buoyant in tandem with prices for raw materials inChina. Furthermore, scrap volume was higher due to a larger number of conversion jobs undertaken by Cosco’s shipyards. We therefore expect gains from scrap sales to be a regular feature in future earnings, particularly with Cosco undertaking even more complex and higher value-add conversions and repair jobs.
Marine the core competency, re-organisation likely
Undoubtedly, Cosco’s main earnings driver will continue to be the shipyards, as it converts on its current order book of some US$3.3bn (as of end July). We also believe that Cosco has the capacity to take on significantly more orders for newbuilds, conversion and offshore projects, as it continues to aggressively add capacity across its yards, especially its Zhoushan yard. We believe that Cosco will handle a significant proportion of its parents’ fleet renewal requirements, particularly for drybulkers and specialty ships. We also believe that a re-organisation within Cosco is imminent in order to rationaliseits bulk shipping business and focus on its core competency of marine services. We estimate that the sale of Cosco’s drybulk fleet could generate a surplus of around S$0.30per share amid the current robust second-hand ship market. A restructuring could also result in a transfer of a larger proportion of ownership of Cosco Shipyard Group from Cosco’s current 51% holding and will likely be earnings-accretive.
Raising target price to S$6.00
We are tweaking our earnings forecast for Cosco on the back of these outstanding results. We have raised our FY07 net profit forecast by 4% to S$305.7m, and have hiked our FY08 estimates by 7% to S$454.9m. We are hence raising our target price for Cosco from S$5.70 to S$6.00, based on our DCF valuation. Despite the already-impressive 43% earnings CAGR over the next threeyears, the bulk of our valuation comes from the company’s outstanding long-term prospects, rather than just short-term valuations. We maintain our BUY recommendation.
AsiaPharm Group Ltd: Healthy Outlook for Drug Makers
Deeper integration to yield better results. Specialty pharmaceutical
manufacturer Asiapharm (APHM) is likely to release its 2Q07 results
between 13-14 Aug. Last quarter, APHM performed well despite going full
throttle to integrate its recent acquisitions. Revenue and net profit grew
39% YoY and 31% YoY, respectively. For 2Q07, we are expecting better
performance and forecast topline to surge 57% YoY to RMB122m and
bottomline to rise in tandem by 49% YoY to RMB32m due to better integration
with its 2006 acquisitions and improving market conditions in the pharma
industry.
2-year price cut reprieve. China's drug price regulator, the National
Development and Reform Commission (NDRC), has indicated that major
drug price cuts will be targeted to be implemented every 2 years from now
on unlike the last 4 years which saw 12 strong price cuts. All drug companies
including APHM were adversely affected in 2006. We see this 2-year reprieve
as a positive move by the NDRC to let the industry adapt and consolidate
after the flurry of harsh cuts (averaging 15-20%) implemented in the last
year.
Increased barriers to entry. On 10 Jul 07, the drug regulatory body (SFDA)
released more stringent drug registration rules to prevent low quality drugs
from coming into the market. APHM's Solid Success acquisition on 4 Jan
07 was timely as it obtained 3 key oncology products that are already
approved for sale. This gives APHM market exposure advantage against
other competitors seeking new drug approvals.
Seeing hidden value. Despite the difficult environment in 2006, China's
pharma industry profit rose 35% YoY to RMB18.4b. The long-term potential
of the Chinese pharma market is huge, given the large aging population,
ongoing healthcare system modernization and economic development. We
see FY07/08 as pivotal years for R&D focused pharmaceutical companies
like APHM where growth will be even more accentuated with the PRC
government pushing for greater healthcare coverage in China. The recent
market consolidation presents APHM with an attractive 38% potential upside
to our fair value estimate of S$0.92. Maintain BUY. (Kelly Chia)
manufacturer Asiapharm (APHM) is likely to release its 2Q07 results
between 13-14 Aug. Last quarter, APHM performed well despite going full
throttle to integrate its recent acquisitions. Revenue and net profit grew
39% YoY and 31% YoY, respectively. For 2Q07, we are expecting better
performance and forecast topline to surge 57% YoY to RMB122m and
bottomline to rise in tandem by 49% YoY to RMB32m due to better integration
with its 2006 acquisitions and improving market conditions in the pharma
industry.
2-year price cut reprieve. China's drug price regulator, the National
Development and Reform Commission (NDRC), has indicated that major
drug price cuts will be targeted to be implemented every 2 years from now
on unlike the last 4 years which saw 12 strong price cuts. All drug companies
including APHM were adversely affected in 2006. We see this 2-year reprieve
as a positive move by the NDRC to let the industry adapt and consolidate
after the flurry of harsh cuts (averaging 15-20%) implemented in the last
year.
Increased barriers to entry. On 10 Jul 07, the drug regulatory body (SFDA)
released more stringent drug registration rules to prevent low quality drugs
from coming into the market. APHM's Solid Success acquisition on 4 Jan
07 was timely as it obtained 3 key oncology products that are already
approved for sale. This gives APHM market exposure advantage against
other competitors seeking new drug approvals.
Seeing hidden value. Despite the difficult environment in 2006, China's
pharma industry profit rose 35% YoY to RMB18.4b. The long-term potential
of the Chinese pharma market is huge, given the large aging population,
ongoing healthcare system modernization and economic development. We
see FY07/08 as pivotal years for R&D focused pharmaceutical companies
like APHM where growth will be even more accentuated with the PRC
government pushing for greater healthcare coverage in China. The recent
market consolidation presents APHM with an attractive 38% potential upside
to our fair value estimate of S$0.92. Maintain BUY. (Kelly Chia)
Pacific Healthcare Investing in Radlink Asia
Pacific Healthcare Holdings and Kuwait Finance House Malaysia (KFHM), a wholly owned subsidiary of Islamic banking leader Kuwait Finance House (KFH), will jointly invest $7.26 million for a 30 per cent stake in Radlink Asia. KFHM will invest $4.36 million in Pacific Holdings' wholly owned Synergy Healthcare Investments, which had exercised an option to acquire a 30 per cent stake in Radlink for $7.26 million in March. Radlink is an independent provider of diagnostic imaging and radiography services in Singapore. KFHM's managing director K Salman Younis said demand for quality healthcare services is growing and the joint investment will complement KFHM's other healthcare investments. KFHM has a diversified portfolio of investments ranging from healthcare to education. KFH made an US$869 million profit in the first half of 2007 and has assets of US$27.94 billion. Pacific Healthcare Holdings, which was listed on the main board of the Singapore Exchange in 2005, is involved in a range of medical fields such as cardiology, cosmetic surgery and aesthetic medicine, obstetrics and gynaecology.