Monday, March 30, 2015

Resources Prima Group – What attracts me to take a closer look

Resources Prima Group (“RPG”) has been on the restricted “online list” for a few brokerage houses such as CIMB Securities, OCBC Securities and UOB Kayhian (i.e. clients are not able to trade online but have to call their broker to execute). This restriction is typically for more speculative stocks. So what attracts me to take a closer look and do a writeup?

First glance - What attracts me…

1.     Chart formation seems positive

I have pointed out in my article dated 23 Mar 2015 “Selective stocks may have some small near term technical rebound” http://www.sharesinv.com/articles/2015/03/23/selective-stocks-may-have-small-near-term-technical-rebound/ that RPG seemed to be building a base. RPG closed at $0.083 on 20 Mar, Fri and was trading around $0.082 – 0.084 on 23 Mar, Mon. It closed at $0.082 on 23 Mar.

Since 23 Mar, RPG jumped 23% to close at $0.101 on volume expansion. Based on Chart 1 below, RPG surged 11% & 10% with 10.7m & 14.6m shares traded on 26 Mar & 27 Mar respectively. The volumes transacted were significantly above its 30D & 100D average volume of 3.6m & 12.8m shares.

Based on my personal observation, RPG’s has completed its base formation and it seems to be on the verge of a new uptrend. 21D exponential moving average (“EMA”) has turned up. Indicators such as RSI and MACD have formed bullish divergences and they seem to be strengthening. Although the RSI was a 15 month high (RSI closed at 57.7 last Fri), it is not overbought yet. Near term supports and resistances are at $0.097 / 0.094 / $0.090 and $0.109 – 0.111 / 0.122 / 0.136. The “bullish feel” of this chart will be negated if RPG falls below $0.090 on a sustained basis.

Chart 1: Base formation completed

Source: CIMB itrade complimentary chart (27 Mar 15)

2.     Negatives seem to have been largely priced in

Firstly, the price for thermal coal has slipped to a six year low. According to a Bloomberg article dated 24 Mar 2015, the prices for a coal-supply deal between Glencore Plc and Japanese utilities may be set at a six year low. The low coal prices have already prompted Glencore to plan to reduce its Australian output by 15m tons in 2015, equivalent to about one fifth of its production from Australia. Glencore also plans to trim output by shutting some mines in South Africa.
Notwithstanding that coal prices may have slipped to an approximate six year low, World Bank forecasts that coal prices are likely to hit bottom in 2015 and rebound thereafter (See Chart 2). Other renowned institutions such as IMF and Economist Intelligence Unit also predict that 2015 is likely to be the bottom for coal prices.

Chart 2: World Bank coal price forecast through 2020

Source: World Bank

Secondly, the massive 70% RPG’s share price drop from an intraday high of $0.265 on 4 Dec 2014 to $0.079 on 18 Mar 2015, coupled with a three week long base formation should have exhausted the selling. Coupled with the online trading curbs by various brokerage houses and the current bearish news on coal, it should be quite safe to assume that most sellers have already exited. It is likely to be an “under owned” stock for both retailers and institutions / funds. UOB Kayhian is the only brokerage house which is covering RPG with a target price of $0.295.

Thirdly, RPG has incurred a few one off expenses in 9MFY15 results such as the following.

a)     Professional fees of US$1m under Admin Fees in 3QFY15 incurred in relation to completion of the reverse takeover;

b)    The immediate recognition of the entire historical depreciation costs of US$11m which should otherwise have been amortised over a few years;

c)     Arranger fee of US$15.7m & goodwill of US$45.9m written off in 3QFY15F in relation to the reverse takeover;

According to management, the above are one off expenses and are not expected to be incurred in future. In other words, going forward, ceteris paribas, RPG’s financials are likely to be better without the above non recurring expenses.

Company description

RPG (formerly known as Sky One Holdings Limited) was listed on SGX Catalist Board on 14 November 2014 via a reverse takeover. RPG is a mine owner and primarily engages in the business of coal mining and coal exploration operations in East Kalimantan, Indonesia. Additionally, RPG also owns and provides coal mining facilities such as coal hauling road, coal stockpiles, coal crushers, coal conveyor system, jetty and barge loading facilities to third party mine owners. RPG is 54.67% controlled by Madrone Enterprises Limited, a company which is 100% owned by the family of Executive Chairman and CEO Mr Agus Sugiono.



Company developments to watch out for

Major catalyst – Potential award of the 2nd IPPKH permit

RPG currently has a “borrow-use” permit to mine 309 ha out of its total mining concession area of 1,933ha. Based on RPG’s 19 Jan 2015 press release, RPG has submitted an application to secure the “borrow-use” permit to mine the remaining 1,624 ha of total mining concession area. This, if approved, should have a positive impact to its reserves and future earnings. UOB Kayhian estimates that the award may be given to RPG by June 2015.

Cost reduction measures

In their 3QFY15 press release, RPG mentioned that it has commenced a cost reduction programme covering areas such as waste mining rates; heavy equipment requirements and fuel supply arrangements. In my opinion, as the rates with their waste mining operator, PT Cipta Kridatama (“CK”) were last adjusted and reduced in July 2013 (i.e. almost approaching two years), there is scope for reduction in 2015. It is noteworthy that waste mining costs comprised approximately 45% of the cost of goods sold.

Sales volume ramp up

With reference to Chart 3 below, sales volume surged 59% from 0.82MT in 9MFY14 to 1.30MT in 9MFY15. Barring unforeseen circumstances, it is likely that company will further ramp up its sales volume in FY16F, albeit at a slower pace (on a percentage basis).

Chart 3: RPG’s sale volume since FY13

Source: Company (Year ends in Mar)

Contracts from coal logistics kicking in FY16F

According to the company, RPG leases its excess capacity in its coal logistics facilities, such as crushers, conveyors, stockpile, jetty etc to nearby concession owners. This business segment is lucrative and likely enjoys good margins.

Till date, RPG has signed contracts with five concession owners. RPG priced such contracts on a “use per basis” and by distance and tonnage. One concession owner already started to lease RPG’s logistics facilities which contributed to RPG’s 9MFY15 facility usage revenue of around US$1.7m. Barring unforeseen circumstances, it is likely that three other concession owners may start to lease RPG’s logistics facilities in FY16F.



Possibility of M&A

Besides organic growth, company is also looking to accelerate growth through acquisitions, joint ventures and/or strategic alliances. Acquisitions are particularly interesting as the current depressed prices offer an opportunity to make acquisitions at attractive prices.  Company is interested in projects that are located near their existing mine in order to achieve synergies and also for ease of management. 

As of 9MFY15, RPG only has US$1.9m of debt. Thus, there seems to be scope for the company to take on more debt to finance the above inorganic growth.

*Some noteworthy points

Concentration risk

RPG has concentration risk on a couple of aspects. Firstly, it only has one mine thus any problems in the mine will have an adverse impact on RPG. Secondly, due to its current small sales volume, it only has one customer, namely PT Anugerah Bara Kemilau (“ABK”). It is noteworthy that RPG signed the offtake agreement with ABK in Jun 2013 and this agreement will expire on Jun 2015. According to RPG, ABK has offered a 2 year extension at RPG’s option.

Notwithstanding the above, management is cognizant of the customer concentration risk and plans to diversify its customer base when they further ramp up their production.

Dependent on coal price

Any drop in coal price due to an increase in supply or a drop in demand may have an adverse impact on RPG’s operations.

Regulatory risks in Indonesia

RPG’s Rinjani mine is in Indonesia. Any adverse change in regulations may affect their approval for the “borrow-use” permit for the remaining 1,624 ha of total mining concession area and their existing business.

*For the full range of risks, readers should download Skyone’s circular to its shareholders (available on SGX) and the UOB Kayhian analyst reports.

Conclusion

This is just a brief introduction on RPG. Readers should be cognizant of RPG’s volatile share price, concentration risk and its dependence on coal price. However, the bullish chart formation, and my view that most negatives have been priced into the share price, coupled with the aforementioned company developments should make it an interesting stock to keep it on the watchlist.

P.S. Readers should refer to the company website http://resourcesprima.com.sg/ for more information and can email me at crclk@yahoo.com.sg for the UOB Kayhian rated research reports. I can also forward the above writeup in pdf form (which includes the charts as I am unable to attach the charts herein.)




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, March 1, 2015

ISOTeam – surged 55% since my last writeup, any more upside?

With reference to my introductory writeup on ISOTeam dated 17 Jan 2014 (see article http://www.sharesinv.com/articles/2014/01/21/isoteam-%E2%80%93-defensive-recurring-business/), ISOTeam has soared 51% from $0.390 on 17 Jan 2014 to $0.590 on 27 Feb 2015. Inclusive of the dividend of S$0.01 / share payable on 14 Nov 2014, ISOTeam has appreciated a total of 55%.

Having jumped significantly in the course of 13 months, the next question which naturally comes to mind is whether ISOTeam is overvalued. Let’s take a look at the company’s developments since my last writeup.

Record 1HFY15 results

ISOTeam released a sterling set of 1HFY15 results on 12 Feb 2015. 1HFY15 revenue and net profit rose 22% and 92% respectively to S$39.0m and S$4.1m respectively. Gross margins improved sharply from 16.8% in 1HFY14 to 22.1% in 1HFY15 due to better profit margin of R&R completed projects. Management believes that gross margins are likely to be around these levels in the near term. (See Table 1 below)

Table 1: ISOTeam’s financial highlights


Source: Company, financial year ends in June

2HFY15 results likely stronger than 1HFY15

Historically, 2HFY15 results contributed about 55% - 65% for the past two financial years. In addition, ISOTeam has completed four acquisitions in Jan 2015 which are likely to post their maiden contributions to their 2HFY15F results. According to UOB Kayhian, these four acquisitions have a total adjusted net profit of about S$1.5m/year at the time of acquisition.

Strong order books and positive outlook

As of 8 Jan 2015, ISOTeam has an order book of S$70.4m, to be progressively delivered over the next two years. It is currently the lowest tenderer for four other projects collectively worth a total of S$30.9m.

Positive outlook

Outlook continues to be bright as there seems to be more projects to be awarded. For example, according to a Straits Time article dated 10 Jan 2015, the Ministry of National Development (MND) will set aside $20m to upgrade another 9 private estates under its Estate Upgrading Programme (EUP). EUP includes landscaping, construction of ramps for wheel chair uses and enhancing parks and playgrounds etc.

According to another Straits Time article dated 11 Sep 2014, the government will expand its neighbourhood renewal program (“NRP”) to include HDB blocks built between 1990 and 1995. Previously, only HDB blocks built in and before 1989 are entitled for NRP. In other words, another 100,000 households in more than 1,300 blocks will benefit from the programme. There will also be more features included in the NRP such as block repainting and other repairs.
The above measures should bode well for ISOTeam’s business prospects.

Potential beneficiary of general election

Most market watchers are expecting our Singapore’s general election may be held around late 2015 to 1H2016. In view of the preparations to the general election, it is not unreasonable to assume that there may be more of the aforementioned projects (i.e. NRP, EUP, upgrading of hawker centers etc) to be rolled out in the near term which should benefit ISOTeam to a certain extent.

A greater following & emergence of anchor shareholders

ISOTeam has come a long way since my first writeup in Jan 2014. Besides UOB Kayhian, it has since attracted DMG coverage. In addition, it has been featured more frequently in the media with the latest media release dated 23 Feb 2015 (See http://business.asiaone.com/news/diy-expert-builds-successful-firm)

Besides a greater following from the media and analysts, some reputable names have emerged as substantial shareholders of ISOTeam after my writeup. For example, Nippon Paint (Singapore) has increased their stake from 2.6% to 5.9% in Dec 2014. It is noteworthy that ISOTeam is the exclusive applicator for Nippon Paint (Singapore).  (You may have read that Mr Goh Cheng Liang, founder of Nippon Paint South-East Asia Group (Nipsea), is Singapore’s richest man with a US$8.2b fortune, ahead of Mr Wee Cho Yaw, second richest man in Singapore with a US$6.9b fortune.)

Besides Nippon Paint (Singapore), Singapore Tong Teik (Private) Limited, a natural rubber trading company, founded in 1964 and based in Singapore, took a 6.4% stake in ISOTeam in May 2014. For those readers who have followed the news on UE E&C, a construction / property developer, they should be familiar with Singapore Tong Teik (Private) Limited which has acquired a significant stake in UE E&C. Thus, acquisition of a substantial stake in ISOTeam is likely to be in line with Singapore Tong Teik (Private) Limited’s long term business interests.

Synergistic acquisitions

ISOTeam has completed the following acquisitions in Jan 2015. With reference to Figure 1 below, through the four acquisitions, ISOTeam has gained access to 200 sets of gondolas, 200 sets of boom lift / scissors lifts and increased their painter headcount to 400 painters. In addition, ISOTeam also expanded their capabilities into specialist areas in landscaping and architectural coatings. As a result, this is likely to open doors to new clients and sectors.

Figure 1: Four *acquisitions completed in Jan 2015


Source: Company
* In the latest announcement dated 27 Feb 2015, Accom, Accom International and Rong Shun have been renamed as ISOTeam C&P Pte. Ltd, ISOTeam Access Pte. Ltd and ISO-Landscape Pte. Ltd.

Online handyman service portal rollout in 3Q CY2015

ISOTeam is rolling out their online handyman service portal in 3Q CY2015 which should provide a one stop solution portal for plumbing, air conditioning, general repairs, tile works etc. This is a step forward to their vision of being a complete building and maintenance team.

Besides the usual risks which you can find in my previous writeup and ISOTeam’s prospectus, here are some of the risks which I deem to be more likely and noteworthy.

Risks


Illiquidity is still an issue

Based on its latest annual report 2014 which did not take into account of the recent placement and share issuance, the top 20 shareholders have about 90.4% of ISOTeam’s outstanding shares. Ave 30D and 100D volume amounted to around 285,000 and 212,000 shares respectively. This is not a liquid company where investors can enter or exit quickly.

Rising costs

Rising costs, attributed mainly to labour costs, are likely to rise in the medium to long term as our labour market is likely to be tight. However, in the recently announced budget, the foreign workers’ levies will be held off to next year. This eases rising costs in the short term. Notwithstanding the rising labour costs in the medium to long term, ISOTeam should be able to maintain their gross margins at around 21% due in part to their recent acquisitions and economies of scale. Furthermore, their R&R projects are typically short term in nature around 9-14 months where they should not be too adversely impacted by rising labour costs.

Seemingly high valuations vs. their construction counterparts

ISOTeam trades at an annualised FY15F PE of around 9.6x. This seems pretty high vis-à-vis some of the construction companies. However, ISOTeam’s core business is in building refurbishment and upgrading whereas some of their construction peers focus more on new build construction. Thus, this is not an “apple to apple” comparison. Furthermore, the business demand for building refurbishment and upgrading is also different from new build construction.

According to UOB Kayhian’s estimates, after accounting for the recent acquisitions and placement, ISOTeam is likely to have a strong net cash position of around S$13-15m. Stripping out the net cash position of S$13m, ISOTeam trades at an annualised FY15F PE of around 8.1x.

It is noteworthy that ISOTeam’s financial year end is in June, thus FY15F ends in June 2015. In addition, if ISOTeam continues to register earnings growth in FY16, coupled with a full year contribution of its aforementioned acquisitions (i.e. Accom etc), its PE should trend lower over time.

Technical outlook

ISOTeam with the last closing price of S$0.590, is near to its record intraday high of S$0.605 on 18 Feb. Based on Chart 1 below, ISOTeam exhibits a clear uptrend as depicted by its rising exponential moving averages. It has spent the month of February consolidating its gains between S$0.565 – 0.605. Any breakout to the upside / downside with volume expansion has an eventual measured technical target of S$0.645 / 0.525 respectively. As the prevailing trend is up, the probability of an eventual upside breakout outweighs that of a downside break.

Supports: $0.575 / 0.565 / 0.55 – 0.555

Resistances: $0.605 – 0.610 / 0.645 – 0.650


Chart 1: ISOTeam – consolidating after its strong gains


Source: CIMB chart as of 27 Feb 15

Conclusion

Although ISOTeam has appreciated 55% since my last writeup, its defensive and recurring business (mentioned in my previous writeup), potential record FY15F results, more contract wins and analyst coverage may be some of the possible catalysts for its share price.  Nevertheless, its lack of liquidity, seemingly high valuations relative to construction companies and sharp share price performance over the course of 13 months may be some noteworthy factors for readers to consider.

*Due to some technical errors, I am not able to post the images of Table 1, Figure 1 and Chart 1 on my blog. U can email me at crclk@yahoo.com.sg for the complete pdf writeup.

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.

Saturday, February 14, 2015

GSS Energy – unique and interesting business model

Pursuant to my writeup on GSS Energy (formerly known as Giken Sakata) on 1 Oct 2014 (see writeup here http://www.sharesinv.com/articles/2014/10/06/giken-potential-oil/), GSS Energy has weakened from $0.315 to a low of $0.245 in mid January before closing at $0.270 on 27 January 2015. This was down 14% as compared to 1 October 2014. To put into perspective, Rex and RH Petrogas have fallen about 33% and 44% respectively over the same period.

At the time of doing this writeup, GSS Energy has been suspended from trading due to its proposed restructuring by way of a scheme of arrangement. It will resume trading under the name of GSS Energy Limited. It closed at $0.270 on 27 January 2015 before the suspension.

As one of GSS Energy’s main businesses is oil production, the >50% slump in oil price has led many investors to reconsider its business prospects.

Impact on oil price slump manageable

GSS Energy sells their oil to Pertamina and the selling price is fixed for a year, subject to an annual review by Pertamina. According to management, if Pertamina wishes to change the selling price, it also has to change the USD/IDR FX rate. In other words, Pertamina can either keep the selling price unchanged, or change both the selling price as well as the USD/IDR FX rate.

USD/IDR has appreciated approximately 41% from USD/IDR 9,000 (their last contracted rate) to 12,700. Thus, the favourable move in USD/IDR is likely to mitigate the possible fall in their selling price to some extent.

Senergy report on three oil fields – a near term catalyst

Senergy is likely to release the valuation report on GSS Energy’s three fields (Kawengan, Trembul and Gabus) in 1Q 2015. For their first two fields, namely D&W and Tunggul oil fields, Senergy valued them on the best scenario net present value of US$195m, or S$263m based on a 10% discount rate. (See Table 1 below)

Table 1: Projected net present value of D&W and Tungkul fields using a 10% discount rate

Source: Senergy report dated 26 May 14

Kawengan, Trembul and Gabus fields have at least 161 oil wells vs the 131 wells from the D&W and Tungkul fields. In addition, according to management, Trembul and Gabus fields have deeper oil wells than the other fields, providing greater potential for the production of oil. Thus, it is likely that the three fields should fetch a higher valuation (notwithstanding the drop in the oil price) than D&W and Tunggul oil fields.

With both valuation reports on GSS Energy’s five fields, this should shed some light on its reserves valuation and reflect the stark difference between reserves valuation and its market capitalization currently valued at S$128m as of 27 Jan 2015.



Takes delivery of three more rigs this year

As of end Nov 2014, GSS Energy produced about 1,070 barrels of oil per day. According to DMG report dated Jan 2015, GSS Energy has one land rig in operation and is expected to take delivery of three land rigs in 2015. This should increase their oil production in the months ahead.

Precision engineering business performed well in 2014

Giken’s FY14 revenue from its precision engineering business dropped 46% from S$126.8m in FY13 to S$69.0m in FY14. However, net profit soared 475% from S$446K in FY13 to S$2.1m in FY14. According to their FY14 results press release, management is positive on its contract manufacturing business which should bode well for their FY15F results.

1HFY15F and FY15F results likely to be strong

Besides the positive outlook on GSS Energy’s precision engineering business, there will be maiden contribution from its oil business in 1HFY15F results onwards. Ceteris paribus, FY15F should be a better year for GSS.

Valuation

After my writeup on GSS Energy on 1 Oct 2014, DMG Securities and Religare have initiated coverage with target prices of $0.650 and $0.510 respectively (See Table 1 below). Personally, it would be good if Senergy release the valuation report on the other three fields. This would serve as an alternative independent valuation yard stick for the investors.

Table 1: GSS analysts’ target price


Source: Bloomberg 11 Feb 2015

Giken’s chart analysis

Based on Chart 1 below, GSS Energy has been entrenched in a downtrend since Jun 2014. It has to breach the strong resistance around $0.290 – 0.300 with volume expansion for the chart to turn positive.
Near term supports and resistances are at $0.260 – 0.265 / 0.245 & $0.280 / 0.290 - 0.300 respectively.

Chart 1: GSS entrenched in a strong downtrend


Source: CIMB chart as of 11 Feb 2015

Conclusion – Unique business model, less affected by swings in oil price

In a nutshell, although one of GSS Energy business segments (i.e. oil production) is the least favoured sector now, there is some merit in GSS Energy oil business model. It is noteworthy that the >50% slump in oil price may not affect GSS Energy to such a large extent. However, in order for GSS Energy share price to re-rate, it depends on the company’s FY15F results, Senergy’s report on its three fields and management’s communication of their unique business model to the investment community.

Readers who are interested should take a look at their website for more information. You can also email me at crclk@yahoo.com.sg  for the analyst reports on GSS. 


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, December 22, 2014

QT Vascular – an overlooked potential health care play?

In one of the articles by Channelnewsasia dated 18 Dec 2014, it was reported that the general healthcare sector has performed well this year and prospects likely remain bright next year. The healthcare index, as measured by the SGX Healthcare Index, registered a year to date return of approximately 9-10% vs the 2% from STI. Factors such as the aging demographics and rising demand for quality healthcare etc. continue to bode well for the overall healthcare sector.

One of the stocks which has underperformed on a year to date basis is QT Vascular. Average analyst target is $0.665. Its price chart seems to be in the midst of a base formation, hence I decide to take a closer look in this stock.

Description of QT Vascular

QT Vascular’s value proposition to its customers is that’s its products (i.e. balloon catheters) are less invasive for the treatment of vascular disease without the use of permanent implants (stents). QT Vascular manufactures and sells two types of balloon catheters. They are used to treat either peripheral artery diseases or coronary artery diseases. The catheters are marketed under the Glider and Chocolate brands.

Readers can refer to the company website http://www.qtvascular.com/ for more information.

Investment merits

Industry prospects remain sanguine

According to QT Vascular’s prospectus, the market size for peripheral vascular devices is estimated to grow at a compound annual growth rate of 7.1% from US$4.8b in 2011 to US$7.8b in 2018. The coronary market is arguably larger than the peripheral market. With the aging population and change in healthcare coverage and amount spent etc, these factors are likely to underpin the demand for QT Vascular’s products.

4QFY14F results may be strong

4QFY14F results are likely to be buoyed by the ramp up of GliderXtreme PTA products in Asia as new shipment orders of Glider products from China and Japan in 4Q14 are expected to contribute to top-line growth. Secondly, QT Vascular announced on 15 Oct 2014 that it has signed distribution agreements for the sales of its Chocolate PTA® balloon catheter in Italy, Austria, Turkey, and Australia. This should bode well for its results in 4QFY14F and beyond. Thirdly, QT Vascular’s existing products, such as Chocolate PTA continue to grow as a result of a 300% year on year increase in U.S. hospital accounts.

Approvals from regulators provide another catalyst

Firstly, QT Vascular has applied for CE marking approval for its Drug Coated Chocolate Touch in Jul 2014. This approval, if obtained, is expected to be in the next 12 – 18 months. Secondly, QT Vascular may also secure the approvals for its Chocolate PTA from China CFDA and Japan Shonin in 2015. Such approvals, if materialise, bode well for QT Vascular. See Table 1 for its product portfolio and approvals.

Table 1: Product portfolio and approvals

Possible takeover target

In QT Vascular’s industry, it is a norm where established medical companies acquire smaller groups for their new and upcoming products. With reference to Table 2, QT Vascular has more products than the other firms which were acquired in the past four years. It is noteworthy that CVingenuity and Lutonix have not generated any revenue at the time of their takeover. As QT Vascular progresses on their products development and sales, it is likely that it may be able to command a higher valuation due to lower business risk and better earnings visibility.

Table 2: Peers who have been sold in the past few years

Source: Company

In addition, I will like to highlight QT Vascular’s CEO Eitan Konstantino’s past work experiences (See Table 3). Among his career history, he was the Founder & President, AngioScore, Inc and CEO & COO, Advanced Stent Technologies which were both acquired. Thus, this may a sign of his inclination to develop the company and subsequently sell it off. Nevertheless, I hasten to add that this is just my own personal (gut feel) observation.  

Table 3: QT Vascular’s CEO Eitan’s past work history

Source: Company


Stepping up on investor communication

According to a CIMB 18 Nov 14 report, it was reported that management is aware that investors require timely information so that they can track the company’s performance better. Management will be making more timely updates to keep investors apprised of the company’s development.

Notwithstanding the above, there are multiple risks that readers have to be aware of. For a comprehensive list of the risk factors, readers can refer to pg 37 of QT Vascular’s prospectus. Below are just some risks (out of the many risks) which I highlight for your reference.

Risks


Loss making company since 2010

QT Vascular has been making losses since 2010 and it is likely that FY2015F may still be loss making. In an interview with the Edge in Sep 2014, management pointed out that company is focused on spending on research and development (“R&D”) so as to build up its pipeline of products. Management believes that such spending increases the intrinsic value of the company over time. In addition, management mentioned that QT Vascular can become profitable quickly if they reduce their R&D expenses and focus on distribution.

Share moratorium

QT Vascular’s share moratorium ended in late Oct 2014 where the pre ipo investors, which own 77.4m shares, can sell a maximum of 50% of their shareholding. According to QT Vascular’s prospectus pg 76, these pre-ipo investors can sell the balance of their shares (if they wish) around 2Q2015. QT Vascular has dropped about 21% from $0.355 on 3 Nov to $0.280 on 19 Dec. It is likely that at least some of the pre-ipo investors have exited during this period.

Not familiar with QT Vascular’s products

I hasten to add that I am not fully familiar with QT Vascular’s products and the scientific data from trials which support the usage of its products.

Failure to obtain regulatory approval & / or obtain market acceptance

There is no guarantee that QT Vascular’s upcoming products will be able to obtain regulatory approval (e.g. FDA, CE Mark approval etc). Furthermore, after obtaining approval, market acceptance is not a done deal as QT Vascular will need to convince the hospitals and distributors to buy its products.

Limited operating history

QT Vascular has a limited operating history and does not have long-term data regarding the safety and efficacy of their products. Positive results from earlier trials may be negated by regulatory authorities or by later stage clinical trials.

Technical outlook

Based on Chart 1, the prevailing medium term trend for QT Vascular is down as depicted by the red line. However, for the past three weeks, QT Vascular seems to be in the midst of a base formation. A bullish double bottom formation will be formed if it can break the neckline at $0.295 with volume expansion. Measured technical target price is likely to be around $0.325. This formation is invalidated if it breaks $0.265 with volume expansion.  



Supports: $0.275 / 0.265

Resistances: $0.295 / 0.315

Chart 1: QT Vascular chart may be in the midst of base formation


Source: CIMB chart as of 19 Dec 14

Conclusion

QT Vascular seems to be a promising company with exciting products. Approvals from regulators, improved 4QFY14F and FY15F results and improved investor communication etc are likely to be some of the factors for re-rating. However, it is noteworthy that the lack of operating history, its loss making results since 2010, share moratorium and market acceptance are some of the factors to watch out for.

P.S: This is just an introduction to QT Vascular. Readers are encouraged to visit QT Vascular’s website http://www.qtvascular.com/ and refer to the analyst reports for more information.


Lastly, readers can email me at crclk@yahoo.com.sg for my pdf writeup, complete with charts and tables which i am unable to post here due to technical constraints.

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, December 8, 2014

Hi-P – a proxy to Apple and Xiaomi?

Hi-P recently caught my attention as it has been conducting several share buybacks in the past one month. Secondly, Hi-P’s chart formed a bullish double bottom formation with the breakout of the neckline at $0.690 on 24 Nov. Thirdly, Apple’s (Hi-P’s customer) market capitalisation hit US$700b on 25 Nov 2014 on optimism over iPhone 6 sales and new Apple products. Fourthly, an article dated 7 Nov 2014 on Financial Times reportedly cited that Xiaomi (Hi-P’s customer) is seeking to raise US$1.5 billion in new capital at a valuation set to exceed US$40 billion.  The above factors prompted me to take a closer look into Hi-P.

Description of Hi-P

Hi-P is an integrated contract manufacturer to customers in mobile phones, tablets, household & personal care appliances. It has 14 manufacturing plants globally located across five locations in China (Shanghai, Chengdu, Tianjin, Xiamen and Suzhou), and in Poland, Singapore and Thailand.

Readers can refer to the company website http://www.hi-p.com/ for more information.

Investment merits

4QFY14F results may be strong

Hi-P 3QFY14 net profit was S$10.8m, up 243% from S$3.1m a year ago. However, due to their weak 1HFY14, 9MFY14 registered a net loss of S$4.5m. Analysts are expecting that Hi-P’s FY14F net profit would be around S$12.3m – 12.5m. This suggested a strong turnaround in 4QFY14F net profit to be around S$17.0m, up 57% quarter on quarter (“qoq”).

Riding the coattails of Apple and Xiaomi

Although the smart phone industry is challenging where product life cycles are short, the entire industry is growing. According to Strategy Analytics, a total of 320.4m smartphones were shipped in 3Q2014, up 27% on a year on year comparison. Out of these 320.4m smartphones, Apple and Xiaomi shipped a total of 57.3m smartphones, up 47% from last year. This is likely to benefit Hi-P to some extent.

In addition, Hi-P is one of the two approved suppliers for the stainless steel body frame for Xiaomi’s Mi4. According to UOB Kayhian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30% to the current yield of more than 60%. The successful ramp up is likely to gradually reverse the operating loss from manufacture of the stainless steel body frame for Xiaomi’s Mi4. Furthermore, it is likely to open more doors to new customers and business opportunities.

Other customers also gaining traction

Russian President Vladimir Putin gave China’s President Xi Jinping a dual-screen YotaPhone 2. What is significant is that Hi-P is the original design manufacturer (ODM) of YotaPhone 1 & YotaPhone 2. YotaPhone 2 was officially launched on 3 Dec in London. YotaPhone 2 will also be scheduled for launch in China & other Asian countries (in early 2015) and in 20 European countries by end 2015. If YotaPhone gains traction, this is likely to be another growth driver for Hi-P.

Share buybacks at increasingly higher prices

Hi-P has been doing several share buybacks since last month. Based on Table 1 below, total shares accumulated since last month amounted to 903,000 shares at an average price of $0.691 (including fees). The latest three purchases occurred in the last two weeks with average prices ranging from $0.702 – 0.714.



Table 1: Hi-P’s share buybacks since Nov 2014


Date
No of shares
Amt (S$)
*Ave Px (S$)
3-Dec-14
100,000
71,170
0.712
1-Dec-14
241,000
169,129
0.702
27-Nov-14
316,000
225,526
0.714
19-Nov-14
138,000
90,061
0.653
17-Nov-14
108,000
67,912
0.629





903,000
623,798
0.691
Source: SGX, Ernest’s compilations

Investment risks

Competition

Contract manufacturing industry is an industry with stiff competition where competitors compete on scale and cost. Hi-P has to constantly upgrade their manufacturing capabilities and increase efficiency and production yield in order to stay ahead of competition.

Smartphone industry - Fast changing industry

The smartphone industry is ever changing and customers’ preferences may change abruptly. Research In Motion’s (“RIM”) Blackberry smartphones was a case in point. It was very popular in mid / late 2000s before customers change their preferences to other smartphones. At that time, RIM comprised of around 25% of Hi-P’s revenue and as a result, Hi-P was affected by the dwindling demand for RIM’s blackberry smartphones.

Dependence on key customers / industries

In terms of revenue contribution, the smartphone segment contributed about 50-60% of Hi-P’s overall revenue for the past three years. Any adverse changes in the smartphone segment, especially to their large customers, will be negative to Hi-P.

Production yield for Xiaomi Mi-4 is key

According to UOB Kayhian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30% to the current yield of more than 60% which is probably at or near breakeven levels for Hi-P. In order for Hi-P to register strong profits in 2015F, Hi-P has to increase the production yield further.

There are also other risks such as raw material cost or manufacturing costs which may crimp Hi-P’s margins. In addition, based on Chart 1 below, it is evident that Hi-P’s share price is pretty volatile and may not be applicable to everybody.

Technical outlook

Based on Chart 1, Hi-P seemed to have formed a bullish double bottom formation with the breakout of the neckline at $0.690 on 24 Nov. Measured technical target price was S$0.765 which was attained on 4 Dec. All the EMAs (21D, 50D, 100D & 200D) are trending higher with 21D EMA forming golden crosses with the rest. Although there seems to be some profit taking at this time, the overall chart outlook seems bullish.

Supports: $0.690 – 0.700 / 0.680

Resistances: $0.720 / 0.760-0.765



Chart 1: Hi-P chart looks bullish after the double bottom formation, coupled with golden crosses (not able to attach here)


Source: CIMB chart as of 5 Dec 14

Conclusion

Hi-P seems to be on the verge of a turnaround, fuelled by the popularity of Apple and Xiaomi products. Analysts are pretty positive on Hi-P’s 4QFY14F results. Successful delivery of a good set of results in 4QFY14F and bullish guidance in FY15F are likely to be the factors for re-rating. However, it is noteworthy that the fast changing industry, Hi-P’s dependence on key customers, stiff competition and production yield for Xiaomi Mi4 are factors to watch out for.

P.S: This is just an introduction to Hi-P. Readers are encouraged to visit Hi-P’s website http://www.hi-p.com/ and refer to the analyst reports for more information.

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.