Sunday, February 23, 2014

China Sunsine - Small market cap… Yet backed by top tier customers

I have taken a look at China Sunsine (“Sunsine”) around 4Q2012 but decided to give it a miss at that time due to weak operating business conditions. One savvy investor friend of mine recently suggested to me to take another look on Sunsine. Below is my short writeup / introduction on Sunsine.

Description of Sunsine

According to its annual report 2012 (“AR2012”), Sunsine is the largest producer of rubber accelerators in China and, probably, the world. It serves all the global top 10 tyre manufacturers such as Bridgestone, Michelin etc and top local tire companies such as Hangzhou Zhongce, GITI Tire etc. In fact, out of the top 75 tyre manufacturers in the world, about 55% are Sunsine's customers.

Please refer to Sunsine’s website http://www.chinasunsine.com/index.php?option=com_content&task=view&id=17&Itemid=34 for an overview of their products.

Investment merits

Likely turnaround play

With reference to Table 1, Sunsine has been reporting improving results for the past three quarters. In fact, 9MFY13 net profit was RMB59.2m which was 85% higher than the entire FY12 net profit of RMB32.0m. In its latest 3QFY13 press release, Mr Xu Cheng Qiu, Executive Chairman said that they are confident of the Group’s growth and outlook for the next 12 months. This is the strongest statement among the past few quarters.

Table 1: Sunsine’s quarterly results since 1QFY12


3QFY13
2QFY13
1QFY13
4QFY12
3QFY12
2QFY12
1QFY12
Revenue (RMB m)
440.3
426.5
384.0
361.0
368.9
363.3
324.0
Gross Profit
(RMB m)
84.4
79.3
56.0
51.1
62.4
72.7
57.5
Net Profit
(RMB m)
27.1
20.5
11.7
-0.9
5.7
11.2
15.9
Source: Company & Ernest’s compilations

FY14F results may be better due to

Firstly, Sunsine’s 4,000 ton DPG plant (accelerator) at Weifang has started commercial production in Sep 2013. Secondly, Phase 1 of 10,000 ton insoluble sulphur is likely to be completed in end 2013. These should contribute in 2014. Thirdly, any increase in average selling price, or sales volume, or reduction in raw material costs in 2014 is likely to bode well for Sunsine too.

Dividend yield of approximate 4%

Company has been giving dividend per share of $0.01 for the past four consecutive years, even in years with poor performance. Hence it is likely to continue this practice. At Friday’s closing price of $0.255, this represents a dividend yield of around 3.9%. Sunsine expects to report 4QFY13F results on 26 Feb 14.

Decent valuations

Sunsine trades at 0.7x P/BV and annualised 2013F PE of around 7.5x. Net asset value per share is around $0.350.

Investment risks

Illiquidity

With reference to Figure 1 below, the top twenty shareholders have about 83.5% of Sunsine’s outstanding shares. Thus, there is little free float which results in its illiquidity. Average 30D and 100D volume amount to 1.19m shares and 422K shares respectively. This is not a liquid company where investors can enter or exit quickly.

Figure 1: Top twenty shareholders hold about 83.5% of company’s shares


Source: Company’s AR2012

S chip risk

This is a Chinese company helmed by Chinese management hence the usual S chip risk applies.

No analyst coverage

According to Bloomberg, there is currently no rated analyst coverage on this stock. It is reasonable to say that the investment community is not familiar with Sunsine. In addition, its small market capitalization of S$119m precludes some funds from taking a position in them.

Exposed to the vagaries of the automotive industry cycle

As Sunsine’s products are used mainly by the tyre manufacturers, Sunsine is exposed to the vagaries of the automotive industry cycle in China. China auto sales rose 13.9% in 2013 vis-à-vis 4.3% in 2012. According to a China Association of Automobile Manufacturers (“CAAM”) estimate released in January, they expect the auto sales to grow at the same pace in 2014. However, it is noteworthy that car sales in China inched up 6% in January 2014 compared to January 2013.

Margins dependent on raw material cost

Most of its cost of sales came from direct raw material costs, namely Aniline. According to Sunsine’s AR2012, ceteris paribus, every 10% increase in the prices for Aniline would have the effect of decreasing the net profit by RMB24.3m in FY12. As such, raw material costs do play a significant aspect in Sunsine’s profitability.

Other developments

There were two announcements in Dec 2013. Firstly, Sunsine announced on 17 Dec 2013 that they have formed a new subsidiary called Shanxian Sunsine Hotel Management Co., Ltd to make a strategic long term investment in the hospitality sector in Heze City. Management emphasised that they do not intend to manage the Property on their own and will appoint a suitable hotel management company to manage this investment.

Secondly, Sunsine announced on 30 Dec 2013 that they have formed a new subsidiary called Shanxian Guangshun Heating Co., Ltd to set up a centralised heating company (“CHC”) to produce steam for internal usage and to supply to all the companies in the Shanxian Chemical Industrial Zone (“SCIZ”) at market rate (It is noteworthy that users of steam pay the charges upfront before usage). For the electricity which is the by product from steam generation, the State Grid will purchase it from the CHC. Sunsine’s decision to set up the CHC arises because the Local Government has indicated to Shandong Sunsine (Shandong Sunsine accounts of more than 50% of the total consumption by all companies in the SCIZ) that either it sets up and operates the CHC, or provides financial assistance and/or guarantee to any third party which undertakes the operation of the CHC. Thus, after a feasibility study, management believes that it is in the best interest for the company to set up the CHC on their own. Personally, pending more information from the company, this seems to be an interesting cash flow generating investment over the medium term.

Management will provide more details on the above developments in due course. For more details, please view the above announcements on SGX website.

Sunsine’s chart analysis

Sunsine has appreciated about 49% from $0.205 on 23 Dec 2013 to an intraday high of $0.305 on 22 Jan 2014 on the back of an increased in volume. The recent profit taking which saw it drop to a low of $0.225 on 13 Feb 2014 was accompanied with low volume. It closed last Friday at $0.255.

The trend seems to be up as evidenced from the rising moving averages. In addition, the moving averages have made golden crosses in Jan 2014 which further support the uptrend observation.

Supports and resistances are as follows

Supports: $0.245 / 0.235 / 0.225 – 0.230

Resistances: $0.265 / 0.275 – 0.285 / 0.305



Chart 1: Seems to be on an uptrend


Source: CIMB chart as of 21 Feb 2014

Conclusion – This is just an introduction

Sunsine seems to be on the cusp of a recovery based on its results from the preceding three quarters, coupled with decent valuations (NAV / share is $0.350) and dividend yields amounting to around 4%. Nevertheless, this is an S chip which is subject to S chip risk, fluctuations in raw material prices and the vagaries of the automotive industry cycle in China. Readers who are interested should take a look at their website http://www.chinasunsine.com/ and their AR2012 http://infopub.sgx.com/FileOpen/China%20Sunsine%20AR2012.ashx?App=Prospectus&FileID=15126 for more information.

China Sunsine reports 4QFY13F results on 26 Feb. A results briefing will be held on 27 Feb.

P.S: I have sent a short email to clients to summarise the gist of the above writeup a few days ago.


Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, January 20, 2014

ISOTeam – Defensive & recurring business

It had been a while since I last posted a company writeup on my blog (the previous one was Nam Cheong in late Nov 2013). I had been doing some regular informal email writeups to my clients but due to time constraints, I was not able to do a formal writeup and post on my blog. Finally, I managed to set aside some time to do a writeup on this company below.
 
Description of ISOTeam
 
ISOTeam has a 15 year track record in Repair & Redecoration works (“R&R”) and Addition & Alteration works (“A&A). It has undertaken over 200 R&R and A&A projects involving more than 1,500 buildings. See Figure 1 on the description of its business segments below.
 
Figure 1: ISOTeam business model
 
Source: Company Annual Report FY13 (financial year ends in June)
 
What’s so interesting on ISOTeam?
 
1.     Recurring business (i.e. R&R) comprises approx 50% of revenue and gross profit
 
Based on Figure 2 below, ISOTeam’s R&R segment comprises of approx 50% of FY12 & FY13 revenue and gross profit. This is comforting to investors as this segment is recurring in nature. It is also supported by government regulations. Unless the Commissioner of Buildings approves otherwise, the exterior walls of buildings are mandated to be repainted at intervals of not more than five years. This creates recurring demand for ISOTeam’s R&R business segment.
 
Figure 2: ISOTeam’s revenue and gross profit breakdowns

Source: Company FY13 Presentation Slides

Source: Company FY13 Presentation Slides

Source: Company FY13 Presentation Slides

2.     Strong order books amid regular contract wins

During their announcement of their FY13 results, ISOTeam mentioned that its order books as of 14 Aug 2013 stood at S$81.0m to be recognized over the next 24 months. This order book of S$81.0m took into account of their contract wins of S$10.9m which was announced on 14 Aug 2013. It is noteworthy that ISOTeam’s FY13 revenue was around S$48m. Hence this order book of S$81.0m to be recognized over the next 24 months provides some earnings visibility in the next two years. In addition, ISOTeam is the lowest bidder for several projects amounting to S$27.0m.

Subsequent to their FY13 results announcement, ISOTeam announced on 26 Oct 2013 that it has won S$19.0m new contracts. Since their IPO on 12 July 2013, they have announced ten contract wins amounting to S$29.9m.

3.     More growth opportunities ahead

Firstly, there is scope for growth in new markets, new customer networks, new related businesses etc as ISOTeam may embark on potential acquisitions, joint venture and / or strategic alliances. Secondly, ISOTeam plans to diversify into the private sector by establishing a private home renovation arm to provide retrofitting services to customers living in landed properties to cater to the various maintenance and property enhancement needs of these homeowners. For the above plans, based on its prospectus, ISOTeam has set aside S$2.5m of its IPO proceeds and has credit facilities of up to S$17.7m for potential business opportunities.

Thirdly, ISOTeam’s industry continues to be buoyed by government initiatives and regulations. For example, the National Environment Agency planned to construct ten new hawker centers by 2017. The Land Transport Authority aimed to construct 200 km of new sheltered linkways between 2014-2018. Also, land has been set aside to build 700,000 new homes by 2030 to cope with a target 6.9m population by then. Hence, ISOTeam’s industry continues to be underpinned by such government initiatives and regulations.

Fourthly, ISOTeam continues to gain entry in untapped sectors. According to its Annual Report 2013, ISOTeam became SKK’s exclusive applicator for JTC industrial projects, army camps and HDB industrial projects since August 2013. This is likely to open out a new chapter of growth for ISOTeam.

4.     Dividend stock in the making?

ISOTeam has distributed a $0.01 dividend per share for its FY13 equivalent to a dividend payout ratio of approximately 20%. Based on a UOB research report, they estimate that ISOTeam’s FY14F to be around S$6.3m. Assuming that ISOTeam’s dividend payout ratio remains the same, investors are likely to get $0.01 dividend per share which works out to be around 2.6% dividend yield. There may be scope of increasing the dividend payout ratio in the years ahead.

Risks

1.     Moratorium ends in January 2014

According to ISOTeam’s prospectus, the moratorium for ISOTeam’s substantial shareholders, namely, ADD Investment, David Ng, Anthony Koh and Danny Foo ends in January. This means that they are free to dispose a portion of their shares. Their total direct and indirect stake amounts to 79.4m shares or 67.6% of ISOTeam’s total outstanding shares. It is noteworthy that ISOTeam share price is up a whopping 77% since its IPO at $0.220 in July 2013. Potential investors should take note of this aspect especially in view of its illiquidity.

2.     Limited analyst coverage

Only UOB Kayhian covers ISOTeam with a target price of S$0.550. It is reasonable to say that most investors are still unfamiliar with ISOTeam. In addition, its small market capitalization of S$44m precludes some funds from taking a position in them.

3.     Illiquid and small market cap of S$44m

With reference to Figure 3 below, ISOTeam’s annual report 2013, the top twenty shareholders have about 89.6% of ISOTeam’s outstanding shares. Thus, there is little free float outside which results in its illiquidity. Average 30D and 100D volume amounts to 588,000 shares and 842,000 shares respectively. This is not a liquid company where investors can enter or exit quickly.

Figure 3: ISOTeam’s top 20 shareholders as at 23 Sep 2013

Source: Company Annual Report FY13

4.     Presence mainly in Spore - concentration risk

As ISOTeam’s business exposure is solely in Singapore with the bulk of its revenue coming from the government, any adverse changes in the government’s budget or policies on building maintenance and estate upgrading may affect ISOTeam.

ISOTeam chart analysis

Stock has consolidated for 9 trading days before it gapped up on 16 Jan 2014. It closed at $0.390 on last Friday. Supports and resistances are as follows

Supports: $0.365 - 0.375 / 0.345 – 0.355
 
Resistances: $0.395 – 0.400 / 0.410 - 0.415 / 0.440 – 0.450

Based on Chart 1 below, chart seems to be on an uptrend and looks set to break $0.395- 0.400. Key resistances are around 0.410 - 0.415 / 0.440 – 0.450.

Chart 1: Consolidated for 9 trading days before gapping up on 16 Jan 2014


Source: CIMB chart as of 17 Jan 2014

Conclusion – 1HFY14F results, potential contract wins or M&A may be re-rating catalysts

ISOTeam generated an adjusted FY13 net profit (less off the disposal gains of S$4.2m and add back S$1.1m in non recurring IPO expenses) of around S$3.9m. UOB estimates its FY14F net profit to be around S$6.3m. If this materializes, it would be a 62% increase in core profits. At S$6.3m, ISOTeam would be trading at around 7.3x FY14F PE. Any potential M&As or higher than expected contract wins may further boost ISOTeam’s profitability.

Lastly, this is just an introduction to ISOTeam...

For readers who are interested, they should take a look at the company website http://isoteam.com.sg/ In addition, as I am not able to reproduce some figures on my blog, readers who are interested can drop me an email at crclk@yahoo.com.sg so that I can send them my writeup.

This is an abridged version which I had sent to my clients a couple of days ago.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, November 11, 2013

Nam Cheong – will it breakout from its all time high?




October is indeed a month to forget, especially for those who have bought the infamous trio just before they crashed. Within a few sessions, the trio, namely Asiasons, Blumont and LionGold lost an approximate S$8.7b in market value. As a result of such colossal drop in their share prices, it inevitably caused collateral damage to other small to mid cap stocks. However, there are exceptions. An example is Nam Cheong which is trading at the upper end of its five month trading range $0.260-0.295

Chart observations

With reference to Chart 1 below, it is evident that Nam Cheong is on the verge of (once again) challenging the six times tested resistance of $0.295. It has been trading within the range of $0.260 – 0.295 for more than five months. The moving averages (21D, 50D, 100D & 200D EMA) are moving higher with golden crosses. Indicators such as OBV are trending higher towards its all time high. ADX has turned higher since 21 Oct and was around 29 last Friday which was indicative of a trend.

Chart 1: Nam Cheong approaches all time high


Source: CIMB itrade complimentary chart (8 Nov 13)

Results to be out on 12 Nov morning

Besides the technical aspect, one factor which may increase the odds of a successful breakout is its upcoming 3QFY13 results release. According to a DMG report dated 8 Nov 2013, Nam Cheong will report results on 12 Nov, Tuesday morning. DMG expects Nam Cheong to post a record quarterly profit in 3QFY13. DBS Vickers postulates that there may be potential positive earnings surprise in 3Q / 2HFY13.

Average analyst target is around $0.360

Based on Figure 1 below, average analyst target price polled by Bloomberg is around $0.360. This represents a potential capital appreciation of around 24%. However, it is noteworthy that some analysts are valuing Nam Cheong based on blended FY13-FY14F earnings. Hence as we approach 2014, it is likely that the analysts may raise the target price by rolling forward their valuations based on FY14F earnings. In addition, it is likely that FY14F earnings are higher than that of FY13F earnings as Nam Cheong has increased their shipbuilding program from 19 vessels in 2013 to 28 vessels in 2014.  Readers can refer to the analyst reports on Nam Cheong http://www.namcheong.com.my/investor-relations/research.cfm, SGX announcements and my writeup appended here http://www.sharesinv.com/articles/2013/07/22/nam-cheong-%E2%80%93-likely-beneficiary-of-malaysia%E2%80%99s-oil-and-gas-capex-plans/ for more information.

Figure 1: Analysts’ target prices for Nam Cheong


Source: Bloomberg (11 Nov 13)

Conclusion – 3Q results may be the impetus for breakout

If Nam Cheong can break its six times tested resistance $0.295 with volume expansion, an eventual technical target price is around $0.330. However, this is an eventual technical target which may or may not be reached in the near term. It is noteworthy that Nam Cheong’s upcoming 3Q results may provide the impetus for it to move higher.

P.S: Do note that chart reading is subjective in nature and different people may have different interpretations on the same chart.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, October 21, 2013

Sembmarine - potential multi month breakout of base formation

With reference to Chart 1, Sembmarine may be in the process of breaking out a multi month base formation, as it has breached 4.60-4.61 with volume expansion.

Chart 1: Sembmarine - potential multi month breakout
  

Source: CIMB itrade complimentary chart (18 Oct 13)

Chart observations

1.      Chart seems to be forming a giant 6 month bottom formation. In addition, it seems to have broken from the downtrend since Apr 2011. This line is significant as it has 5 – 6 anchor points. Supports around 4.59 – 4.61 / 4.55-4.56 / 4.52. Resistances around 4.65 – 4.66 / 4.71 / 4.78.

Chart 2: Sembmarine – Broke the downtrend since Apr 2011

Source: CIMB itrade complimentary chart (18 Oct 13)

2.      Analysts are slowly becoming more positive on Singapore rig builders. The recent positive newsflow and analysts reports on Keppel Corp are likely to bode well for rig builders and to a certain extent Sembmarine. Ave analyst target is $5.00. Estimated dividend yield is around 2.9%.

3.      Volume seems to be picking up. OBV has risen to more than a six month high.

4.      All the moving averages are turning upwards, indicative of interest in the stock.

5.      There are heavy sell queues from $4.62-4.65 amounting to 1-2m shares in total with comparatively very thin buy queues.  Despite the thin buy queue, the price is quite stable. In fact, the large sell queue gives me comfort that there may be smart money accumulating Sembmarine on weakness. Why do I say that? If the sellers do have that many shares, they are likely to be professionals and are unlikely to place so many shares on each level. This would deter the potential buyers away. (P.S: Although I cannot quantify this point and it is most likely not 100% accurate, it seems to be pretty accurate for stocks such as Guocoleisure, Ezion, Nam Cheong, Sino Grandness, China Animal, etc. They seem to be a prelude of some upwards movement (though it may take some time to materialise. Readers of my writeup are likely to have taken note of this point which I frequently raised. )

6.      Sembmarine has breached $4.60-4.61 with volume expansion. An eventual technical upside target is around $4.96-5.00. This is an eventual target which may take months to reach.

P.S: Lastly, I would want to emphasise that chart reading is very subjective. FYI, I have previously emailed clients on 25 Sep to ask them to take a look at Sembmarine’s chart and subsequently two emails to alert them on 11 Oct and 17 Oct that a breakout may be likely in the near term.


Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Tuesday, October 8, 2013

Sino Grandness – Asdew, Fidelity and CEO up stake. What gives?

Since my writeup in Oct 2012 where Sino Grandness (“SFGI”) was trading at $0.23 (post split basis), it has more than tripled to an intraday high of $0.800 on 28 May 2013 before retracing to the current price of $0.640. In addition to share purchases made by Asdew and SGFI’s CEO Mr Huang, Fidelity is the latest institution to become a substantial shareholder of SFGI. It seems like there has been quite a lot of interest in SFGI. Let’s take a look at SFGI’s recent and potential developments.

1HFY13 results – Good momentum

1HFY13 revenue and net profit jumped 29% and 24% y/y to RMB972m and RMB174m respectively. (See Table 1 below for the elaboration on the results)

Table 1: SFGI 1HFY13 result snapshot

Source: Company (*Technical issue, Im not able to put it here)

2HFY13 results – Likely better

2HFY13F is likely to be better than 1HFY13 as

a) The indicative orders won for their Garden Fresh juices and Grandness canned products in their Chengdu trade fair in Mar 2013 are likely to flow through to 2HFY13;

b) The additional new distributors secured in North-eastern and North-western provinces are likely to have a gradual positive impact in 2HFY13 and beyond;

c) The contributions from the recently added distribution channels (eg. Hongqi in Sichuan province and Meiyijia in Guangdong province) which were announced on 12 Aug 2013 are likely to gradually kick in 2HFY13 and beyond.



Recent shareholder purchases bolster confidence

There have been several purchases in the last two months. In late August 2013, CEO Mr Huang bought a total of 100,000 shares at an approximate average price of S$0.525-0.550 which raised his stake to about 40.1%. Asdew Acquisitions Pte Ltd also bought 1.756m shares at an approximate price of $0.532.

Besides Asdew, Fidelity also raised its stake in SFGI to 5.06% by acquiring 490,000 shares at an approximate price of $0.657 on 30 Sep 2013.


Company has been busy on the investor relation front. In late Aug, due to a short seller report on China Minzhong which indirectly caused SFGI’s share price to plummet to an intraday low of around $0.500, company expediently came to Singapore to reassure investors. In early Sep, company gave a presentation at a DMG conference in Singapore.  Last week, SFGI just organized a trade fair in Hubei Province, together with an analyst plant tour at their Hubei plant.

Potential upcoming events

Potential upcoming events include the appointment of investment bankers for their Garden Fresh IPO, calling for an Extraordinary General Meeting for shareholders to approve the spinoff, (first) roadshow to Europe to introduce SFGI to European funds and a seminar at Standard Chartered in late October. It is noteworthy that these events are tentative in nature (i.e. they may not materialize).

Noteworthy points on Garden Fresh IPO

There are some pertinent points on Garden Fresh’s planned IPO which are worth mentioning.

Firstly, China’s fruit juice industry has seen strong growth as corroborated by the growth momentum seen in some industry players such, as WangLaoJi and Huiyuan. For example, Huiyuan’s revenue has risen every year for ten consecutive years through 2012 to reach RMB4b.

Secondly, it is noteworthy that it has been some time since there is an IPO for a company which is a purely domestic (beverage) consumption play in China. Hence, there may be some pent up demand for stocks in such sectors.

Thirdly, Huiyuan’s results seem to be improving based on consensus estimates below. (See Table 2 below) This should bode well for the overall industry as Huiyuan can be considered to be one of the top players in the beverage industry.



Table 2: Analysts’ consensus estimates for Huiyuan


Source: Bloomberg (7 Oct 13)

Fourthly, Huiyuan’s price has seen a significant jump of around 78% since late July 2013. (See Table 3 below) This may be due to increased optimism on its business operations and a July 2013 bullish research report citing a target price of HKD7.40.

Table 3: Huiyuan’s price chart – 78% rally since late July 2013


Source: Bloomberg (7 Oct 13)

Last but not least, based on Table 2 above, Huiyuan’s estimated net profit for FY14F is around RMB317m and is trading at an estimated FY14F PE of around 30x. According to Kim Eng, Garden Fresh may achieve its net profit of RMB250m this year. Assuming FY14F is another growth year for Garden Fresh, their results may not be too far off Huiyuan. Consequently, Garden Fresh may be able to fetch a PE valuation (based on 2014 earnings) which may not be too far off from Huiyuan.

Conclusion – Waiting for more news on its IPO and 3QFY13F results

Average analyst target price stands at around S$0.905. SFGI closed -$0.045 to $0.640 yesterday. In order for the market to narrow the difference between SFGI’s current price and its average analyst target price, it is likely that we need to wait for more developments on its Garden Fresh IPO and its 3QFY13F results.



Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Sunday, July 21, 2013

Nam Cheong – Likely beneficiary of Malaysia’s oil and gas capex plans

It is common knowledge that Malaysia’s Petronas has sharply increased its 2012-2017 capex by approximately 70% to MYR300b over the previous five years. A likely beneficiary to this industry development is Nam Cheong Limited (“Nam Cheong”).

Description

According to an independent market research report by Pareto Securities Asia Pte Ltd., Nam Cheong is the largest shipbuilder of offshore support vessels (“OSVs”) in Malaysia and the 2nd largest player east of the Suez Canal. It has about 50-75% of the market share in Malaysia and 7% of the regional market share. It started ship building in 1968 and has more than two decades of track record in building OSVs. Since 2007, it has delivered more than 80 vessels. Examples of OSVs built are accommodation work barges, accommodation workboats, anchor handing tug supply (“AHTS”) vessels, Platform supply vessels (“PSVs”) and safety standby vessels (“SSVs”) etc.

Nam Cheong’s shipbuilding arm comprises more than 90% of its overall group revenue for the past three years. Its shipbuilding can be segregated into build to stock (builds ahead of firm orders) and build to order model (builds vessels with contracts secured).

Besides shipbuilding, it also has a ship chartering arm with a fleet of 13 vessels, namely two AHTS vessels, two landing crafts and nine SSVs.

Its headquarters is situated in Kuala Lumpur. Readers can read more about Nam Cheong on its company website: http://www.namcheong.com.my/our-business/shipbuilding.cfm

Investment merits

Bright industry outlook

According to various market research, notwithstanding the weak shipbuilding cycle, the OSV sector is a buoyant sector to be in, especially in Malaysia. It is common knowledge that Malaysia’s Petronas has sharply increased its 2012-2017 capex by approximately 70% to MYR300b over the previous five years. (See Figure 1) This would fuel developments in marginal and deepwater field developments and increased exploratory activities. Such activities should bode well for Malaysia OSV operators such as (Bumi Armada, Perdana Petroleum) and consequently to OSV builders such as Nam Cheong.

Figure 1: Petronas’ capex

Source: CIMB, Petronas

Secondly, according to Figure 2, there seems to be replacement demand for AHTS and PSVs. About 37% of the world’s AHTS is older than the usual lifespan of 25 years.

It is noteworthy that the majority of vessels built in the early days (1980s) were arguably small-to-medium sized vessels due to low technical capability, requirements and they are likely to be less fuel efficient. Vessel owners are showing increasing preference for younger and more fuel efficient vessels. Consequently, this fuels replacement demand for AHTS and PSVs.

Figure 2: Age profile of AHTS and PSV

Source: CIMB, Clarksons

Build to stock business model à higher margins

Part of Nam Cheong’s shipbuilding business model is its build to stock model. This essentially builds vessels in anticipation of orders, and sells the vessels at a premium due to the short time to delivery. This is the main reason why Nam Cheong can command enviable shipbuilding margins of 19-20% over the past three years as compared to high single digit margins for its peers which do not have a build to stock model.

Strong earnings visibility

Nam Cheong’s net shipbuilding order book amounted to MYR1.3b (FY12 group revenue was MYR877m), thus this lends some visibility to its FY13F and FY14F results. In addition, Nam Cheong’s sales momentum remains strong. It has sold 13 vessels year to date as compared to the record 21 vessels in FY2012. (FY2011: 13 vessels) Typically, according to CIMB research, revenues tend to lag vessel sales by 1-2 years.

Risks

Inherent risks in their build to stock model

As Nam Cheong builds its vessels ahead of firm orders for its build to stock model, there is a possibility that it may end up with unsold inventory. Being in the business for decades, it is cognizant of this risk and it builds vessels catering to the small medium OSV segment which is the largest market among OSVs. This should mitigate risk to a certain extent.

Lumpy revenue / net profits

For its build to stock model, all the work to date is recognised immediately in revenue and profits upon the signing of firm sale orders. Future progress on build to stock shipbuilding program is recognized on a percentage-of-completion method. Thus, it is apparent that quarterly results can swing depending on the timing of vessel sales.

Ave analyst TP: $0.350

According to Bloomberg, Nam Cheong trades at 8.6x FY13F PE vis-à-vis 7.8x FY13F PE for Vard Holdings. However, most analysts believe that Nam Cheong’s results are likely to be stronger in FY13F and FY14F as opposed to weak results from Vard Holdings.

To be balanced, I have also put in the various analyst target prices from Bloomberg. (See Figure 3). Ave analyst target price is around $0.350.

Figure 3: Ave analyst target price $0.350


Source: Bloomberg as on 18 Jul 13

Chart analysis

With reference to Chart 1, Nam Cheong has traded in a seven month range from $0.240 to 0.290 since 14 Dec 2012. It closed at $0.280 on last Friday. Day high and low were $0.280 and $0.270 respectively. Near term support and resistance are at $0.265-0.270 and $0.280 respectively. It is noteworthy that it has been testing $0.280 recently and it is likely that the more times it tests $0.280, the more likely it can breach past $0.280. The next resistance is seen at $0.290.
  
Having said the above, for stocks which trade within a range, it typically takes some good news (perhaps in the form of contract wins; good results etc) to propel them higher. If it breaches 0.290 with volume expansion, an eventual technical measured target price is around $0.340. Notwithstanding this, it is noteworthy that chart reading is subjective and may have different interpretations for different people.

Chart 1: Trading in a 7 month range 0.240-0.290


Source: CIMB itrade complimentary chart (19 Jul 13)

Conclusion

This is just an introduction to Nam Cheong. Readers who are keen to know more about Nam Cheong should visit the company website, read the company annual reports, latest financial results and announcements etc. There are also informative analyst reports which they can read to have a better idea on Nam Cheong. Readers can email me at crclk@yahoo.com.sg for the latest analyst reports and my writeup above complete with Figures 1 & 2 which i am unable to attach here.

P.S: I have mentioned this company informally to my clients in Sep 2012 (trading at $0.200); Dec 2012 ($0.240); Apr 2013 ($0.245) and recently Jul 2013 ($0.265). Finally, I have the time to sit down and do a writeup on this company on my blog.

Disclaimer

The information contained herein is the writer's personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.