20090105 Regional
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View 20090105 Regional as PDF for free.
More details
- Words: 34,322
- Pages: 61
Regional
Morning Pack DBS Group Research . Equity
Spotlight on (SP) Cosco Corporation: Profit Warning FULLY VALUED S$0.925 COS SP; Price Target: 12-month S$0.76 (Prev S$0.80) Cosco dropped a bombshell, indicating that 2008 profits would be lower than 2007, due to provisions for doubtful debts, cost overun and potential penalties for delays. We cut our forecasts by 20% to 30% on lower sales and margin assumptions, maintained Fully Valued.
05 January 2009
The "Pulse of Asia" Conference 6th~ 8th January, 2009
Updates & Results SINGAPORE
(SP) ST Engineering: Holding Fort BUY (upgrade from HOLD) S$2.46; STE SP; Price Target: 12-month S$2.80
Equity Strategy 20: Fire sale
We upgrade ST Engineering to BUY with a target price of S$2.80. Amidst the worsening global economic outlook, STE has sustained its reputation of being a defensive counter, with a slew of new contract wins in recent months across different segments. In spite of possible slowdowns in its Aerospace and Marine segments, we are positive on the stock given 1) its ability to boost growth through M&A, 2) a relatively secure dividend yield of 7%, 3) record orderbook of S$10b and 4) cash and cash equivalents of S$1b.
Cosco Corporation: – See Spotlight
(MK) AMMB Holdings: Inflexion point BUY; RM2.51; AMM MK; Price Target: 12-month RM2.90 AMMB seem to have reached an inflexion point in terms of valuation. It hit its trough P/BV multiple of 0.7x in Nov-08, the lowest since 1999. We believe there is still no premium attributed to AMMB for ANZ’s presence in terms of management and expertise. Buy AMMB with a target price of RM2.90, which implies 1.0x CY09 BV. (HK) China Telecom: Negatives reflected, upsides remain BUY; HK$3.07; 728 HK; Price Target: 12-Month HK$3.70 The acquisition of the CDMA business should help China Telecom to mitigate lower fixed-line business, and cement growth momentum in the broadband business. With an expected turnaround in the CDMA business, the company should resume double-digit earnings growth in two to three years’ time.
Small/Mid Cap Strategy: Survival of the fittest
ST Engineering: – See Spotlight MALAYSIA AMMB Holdings: – See Spotlight HONG KONG China Telecom: – See Spotlight Parkson: Recent momentum slows HOLD (downgrade from BUY); HK$8.63; 3368 HK; Price Target: 12m HK$9.60 (Prev HK$12.55) TVB: Gloomy outlook HOLD; HK$25.20; 511 HK; Price Target: 12-Month HK$26.04 (Prev HK$39.04) THAILAND True Corp.: The subscription ratio set at 1 old to 2.22 new shares HOLD; Bt1.79 TRUE TB; Price Target: 12-month Bt1.90 (prev Bt1.69)
Singapore Research Team – 6533 9688 [email protected] www.dbsvickers.com “In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.”
“Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.”
Regional
Morning Pack Key Indices
DBSV Roadshow & Event Calendar* Analyst Roadshows / Events Topic
Date
Location
DBSV Analyst
Pulse of Asia Conference - 1H09
6-9 Jan 2009
SPORE
-
Singapore Strategy
12-16 Jan 2009
UK
JC
Singapore Strategy
19-23 Jan 2009
US
JC
*To register your interest in the above events, please contact your DBSV Sales representative.
Indices Asia HSCEI Index Hang Seng HSCCI Index STI KOSPI KLCI MXFEJ index JCI Index PCOMP Taiex SET Nikkei 225 U.S./Others Dow Jones S&P NASDAQ FTSE 100
Closed as at 02.01.09
% chg vs previous close
YTD (%)
QTD (%)
MTD (%)
8,314 15,043 3,442 1,830 1,157 894 278 1,355 1,873 4,591 450 8,860
5.4 4.6 4.5 3.9 2.9 2.0 1.8 1.1 0.6 0.0 0.7 1.3
5.4 4.6 4.5 3.9 2.9 2.0 1.8 0.0 0.0 0.0 0.0 0.0
5.4 4.6 4.5 3.9 2.9 2.0 1.8 0.0 0.0 0.0 0.0 0.0
5.4 4.6 4.5 3.9 2.9 2.0 1.8 0.0 0.0 0.0 0.0 0.0
9,035 932 1,632 4,562
2.9 3.2 3.5 2.9
2.9 3.2 3.5 2.9
2.9 3.2 3.5 2.9
2.9 3.2 3.5 2.9
Market Data EPS Gth (%) 08F 09F 0.2 (5.5) 6.6 (9.0) (11.3) 3.9 28.2 4.7 3.1 (0.3) (8.7) 0.9 2.7 2.7
Singapore Malaysia HK HSI HK HSCCI (Red) HK HSCEI (H) Thailand Indonesia
PE (x) 08F 8.9 10.5 10.9 10.4 11.7 8.0 11.1
09F 9.4 11.5 10.5 9.9 11.7 7.9 10.7
Source: DBS Vickers Commodity Indicators Commodities
Latest Closing
Previous Closing
Crude Oil Nickel Spot Coal Spot Tin Steel Copper Gold Spot
USD/barrel USD/mt USD/mt USD/mt RMB/mt USD/lb USD/t. oz
46 13,110 80 11,625 3,696 322 883
45 11,609 10,700 3,678 317 875
Soybean Oil Spot Soybean Spot Sugar Spot Rice Wheat Spot Palm Oil Spot (CIF R) Palm Oil Spot (FOB Msia) Crude Oil Brent Spot Corn Spot Rubber Spot
USD/pound USD/bushel USD/pound USD/cwt USD/bushel USD/mt RM/mt USD/barrel USD/bushel SGD/gram
31.95 9.59 12.81 15.12 4.79 540 1,630 49 3.83 205
31.67 9.60 12.75 15.25 4.80 535 1,570 48 3.75 202
Source: Bloomberg
Page 2
YTD % chng 3.9%
Crude Oil
12.9%
Nickel Spot
-11.2%
Coal Spot 8.6%
Tin
-16.8%
Steel 0.0%
Copper
0.1%
Gold Spot
0.9%
Soybean Oil Spot
-0.1%
Soybean Spot
0.5%
Sugar Spot
-0.9%
Rice
-0.4%
Wheat Spot
-45.7%
Palm Oil Spot (CIF R) Palm Oil Spot (FOB M sia)
-47.5%
Crude Oil Brent Spot
17.0%
Corn Spot
2.3%
Rubber Spot
1.5% -100%
-50%
0%
50%
100%
150%
DBS Vickers Securities
Corporate Access Event DBS Group Research . Equity
December 2008
DBS Vickers Securities will be hosting Asia Corporate Access Events in Singapore on January 6th ~ 8th, 2009.
Meet with representatives from companies listed in Singapore, Hong Kong/China, Malaysia, Korea, Thailand and Indonesia. The meetings may be one-on-one or group presentations, to give you further insight into the companies’ operations, directions and prospects.
The long term fundamentals of Asia support a favorable environment for Asian equities.
The "Pulse of Asia" Conference The Fullerton Singapore th th 6 ~ 8 January, 2009
For further information and registration, please contact your sales representative or: DBS Vickers Securities (Spore) Fax: 65 6534 4533
Participating Companies*: Tuesday, 6 January 2009 SINGAPORE: Ascott Residence Trust • Capitaland Limited • DBS Group Holdings • Ezra Holdings • Fraser & Neave • Hyflux Ltd • Mermaid Maritime • Olam International • SembCorp Industries • SembCorp Marine • ST Engineering • Singapore Exchange • Starhub • Strait Asia Resources
Thursday, 8 January 2009 MALAYSIA: AMMB Holdings • KNM Group • YTL Power THAILAND: Bangkok Bank • Central Pattana • Quality House • Thai Oil • Thai Union Frozen INDONESIA: Adaro Energy • Indo Tambangraya Megah
Wednesday, 7 January 2009 CHINA: China Hongxing Sports • China XLX Fertiliser • Cosco Corporation • Midas • Sihuan Pharmaceutical Holdings • Synear Food • Yanlord Group HONG KONG: AMVIG • China Pharmaceutical Group • China Telecom Corp • China Yurun Food • Hengan International Group • Solargiga Energy KOREA: Halla Climate Control • NCSoft Corporation • POSCO • S-Oil * As at 19 December 2008. Subject to change
www.dbsvickers.com Refer to important disclosures at the end of this report
Regional Small/MidMarket Cap Strategy Focus Q4 2008 Singapore Country Assessment
Equity Strategy DBS Group Research . Equity
05 January 2009
Singapore Fire sale The market is oversold, and poised for a rebound on cheap valuations. But uncertainties continue to lurk amidst a tough operating environment, as recession hits and job cuts continue to rise. The bears will prevail in 2009, and we expect the STI to trade within a band of 1250 to 2100 as it base-builds towards a more convincing recovery in 2010. Poised for technical rebound off low valuations. Post the meltdown in October 2008, the market is cheap by all measures. At current levels of 1740, forward PE of 11x is close to the regional crisis low and dividend yields of 5.2% has surpassed previous lows of 3.5%. An expansionary budget to be unveiled in January 2009, coupled with optimism over Obama’s fiscal measures to boost the US economy are key catalysts for the rebound in the near term. But the bear market persists. The economy is not out of the woods yet, and bad news from the corporate sector will cap performance. We expect the STI to trade within a range of 1450 to 2180. The low end of the range reflects a P/B from the mean, which is -2 standard deviations. This is consistent with recession year valuations. Stick to survivors of the fittest with the tenacity to ride through this recession. These will be companies backed by relatively resilient earnings, strong cash flows, and cashed-up balance sheet. They are in a favourable position to acquire cheap assets as deflation runs its course into 2009. Our preferred picks are SMRT, SIA Engineering, SPH and ST Engineering. We would sell asset plays including property and shipping companies on the rebound, as the process of de-leveraging will lead to asset devaluation in 2009. Distressed valuation levels will spur M&A activities, potential candidates can be found among technology, oil and gas and S chips.
Janice Chua . (65) 6398 7954 . [email protected] Page 1 www.dbsvickers.com Refer to important disclosures at the end of this report
Market Focus Equity Strategy
Market Data Index
Close
Chng Net
-1 mth%
-3 mth
-6 mth
-12 mth
12 Dec 08
1m
(%)
(%)
(%)
(%)
High
Low
1,740
(44)
(2.4)
(32.3)
(42.4)
(50.7)
3531
1474
342
(27)
(7.3)
(40.7)
(55.0)
(61.7)
908
299
FTSE Small Cap
291
(15)
(4.8)
(38.4)
(54.9)
(66.5)
867
257
FTSE Financials
424
(11)
(2.4)
(35.7)
(45.3)
(53.5)
913
375
FTSE Real Estate
345
(21)
(5.8)
(39.9)
(53.7)
(61.4)
895
316
FTSE Re Hold & Dev
353
(2)
(0.5)
(35.6)
(51.6)
(61.0)
905
308
FTSE Re Invest Trust
332
(59)
(15.1)
(47.1)
(57.2)
(61.9)
890
309
FTSE Oil & Gas
247
4
1.7
(47.6)
(65.5)
(73.6)
935
168
FSSTI FTSE Mid Cap
52 week
FTSE Basic Materials
222
1
0.5
(33.6)
(64.2)
(73.9)
851
181
FTSE Industrials
340
(44)
(11.6)
(39.6)
(53.7)
(61.6)
885
286
FTSE Consumer Goods
353
12
3.5
(30.8)
(52.6)
(62.9)
988
249
FTSE Healthcare FTSE Consumer Services FTSE Telecommunication
370
(66)
(15.2)
(38.5)
(53.0)
(58.2)
969
335
520
(18)
(3.3)
(27.3)
(34.0)
(44.7)
941
458
634
43
7.2
(25.2)
(30.2)
(36.0)
1022
493
FTSE Utilities
282
(43)
(13.3)
(38.6)
(55.8)
(74.8)
1117
217
FTSE Technology
357
(45)
(11.2)
(36.9)
(53.1)
(61.6)
934
332
FTSE China
187
2
1.3
(33.5)
(57.5)
(76.6)
799
136
Transactions: Volume (bn) Value (S$bn)
YTD 328 369
Source: Bloomberg
MARKET REVIEW Plunge in equities in October. The current global financial crisis is the worst of its kind since the Great Depression. The past few months saw government bail outs for companies like Freddie Mac, Fannie Mae and AIG; the collapse of investment bank Lehman Brothers; the sale of Merrill Lynch to Bank of America, the conversion of Goldman Sachs and Morgan Stanley into commercial banks and the failure of more European banks. October was the most volatile month YTD. Major global indices registered steep falls, amid concern that economic stimulus measures would fail to stop a global slowdown and hurt corporate earnings. The fall would have been worse if not for the concerted effort by central banks to cut interest rates, provide government guarantees and ownership of banks and to adopt other stimulatory measures.
Page 2
Unprecendated efforts by Central Banks and government efforts to stabilize the financial systems and equity markets. While the financial crisis is the worst since the Great Depression, the markets were comforted by unprecedented interventions by central banks and governments to restore stability to the financial systems. Fiscal stimulus packages from the US$800bn by US Fed to unfreeze credit markets, US$326bn to rescue Citigroup, China’s US$586bn economic stimulus package are measures aimed at boosting these major economies. In addition, central banks around the world embarked on easier monetary policies and unleashed aggressive interest rate cuts.
Market Focus Equity Strategy
Oil & Gas sector was the worst performing sector, and plunged by 52%, on the back of the steep drop in oil prices, poor SPC results and concerns over the balance sheet strength of offshore vessels owners. Oil prices fell more than 70% from the peak of US$150/bbl to US$42/bbl currently.
asset devaluation in the face of de-leveraging in the global financial markets. Defensive sectors outperformed : Telecoms, Consumer Goods, Consumer Services(benefiting from lower oil prices) outperformed the market.
Asset plays were hammered. Shipping, Property and REITs were not spared from the sell-down, as investors bet on Index Key Events DC charge raised from 50% to 70%
3,900 3,800
Inflation fears, more subprime related write-off, concerns about slowdown in US economy
3,700 3,600 China Market falls 9% in a single day on 27 Feb
3,500 3,400 3,300 3,200 3,100
Continued optimism in the property sector, construction recovery, RTOs, small caps outperform blue chips
3,000 2,900 2,800 2,700 2,600
Liquidity led rally triggered by positive news
2,500 2,400
Subprime & credit market crisis; caution about property
Fed cut discount rate by 50pbs to 5.75%
Led by O&M and energy stocks as oil price and precious metals rallied; S-chips on QDII
US recession fear, margin squeezed by escalating oil and commodity prices; further writedown Speculation of in CDO assets US rate cut
Inflation concerns; slowdown in global economies; more financial institutions collapsed
Rebound on hopes that credit crisis has eased Surprised 75pbs rate cut by Fed to 3.5% Near-collapse of Bear Stearns; Fed cut discount rate
2,300
US bailout Freddie Mac and Fannie Mae; fall in oil prices Collapse of Lehman Brothers; US bailout AIG Collapse of Fed’s bailout plan, failure of European banks
2,200 2,100
Obama wins presidency; China's US$586bn stimulus package
Rescue efforts by Fed and European central banks, including government guarantee and ownership of banks
2,000 1,900 1,800 1,700
Central banks cut interest rates to boost bank lending and economic growth
1,600
D ec -0 8
N ov -0 8
O ct -0 8
S ep -0 8
A ug -0 8
Ju l-0 8
Ju n08
M ay -0 8
A pr -0 8
M ar -0 8
Fe b08
Ja n08
D ec -0 7
N ov -0 7
O ct -0 7
S ep -0 7
A ug -0 7
Ju l-0 7
Ju n07
M ay -0 7
A pr -0 7
M ar -0 7
Fe b07
Ja n07
D ec -0 6
1,500
Source: DBS Vickers
Sector Performance (Sorted in Descending Order on 3 months Performance) Sector Consumer Goods Telecommunications Consumer Services Basic Materials DBSV Universe Financials Health Care Industrials Real Estate Technology REITS Oil & Gas
1 Mth Ago (%) 4 7 -3 2 -2 0 -19 -9 -3 -14 -15 -3
3 Mth Ago (%) -19 -24 -25 -32 -33 -33 -34 -39 -40 -45 -46 -52
6 Mth Ago (%) -46 -29 -27 -65 -45 -39 -53 -54 -56 -60 -57 -69
1 yr Ago (%) -51 -35 -36 -69 -53 -47 -59 -64 -67 -69 -62 -75
Source: DBS Vickers
Page 3
Market Focus Equity Strategy
external environment, domestic demand will be weakened by the weak labour market, delays in mega construction projects and uncertainties in the financial sector.
GROWTH YTD, earnings cut by 20%(08F) and 33%(09F). Since the start of the year, we have cut earnings by 20% for 2008 and 33% for 2009. The biggest cut in earnings came from the technology sector due to a weakening demand outlook from the US, amidst disappointing NODX for several quarters. Oil and gas were de-rated due to execution issues among the offshore vessel owners and charterers which suffered from forex losses(Jaya) and execution problems at Swiber. In addition, SPC earnings were cut due to an expected decline in refining margins. Real estate earnings were not spared. We halved earnings by 27% for 2009 on expectation that developers will push back earnings recognition of presold units, coupled with delay in construction of projects, while the quiet property market would lead to reduced unit sales. Banks earnings were cut due to expectations of lower fee based income. We also raised provision charges given the propect of a deterioration in asset values and quality of loan books. Earnings dropped by 40% during past regional crises. In 1998 and 2001 during the regional crisis and dotcom bust, Singapore’s earnings declined by between 40% to 50%, mainly due to increases in banks’ provisions and mark to market losses at property companies, and losses at technology companies in 2001. Technology company losses will feature less prominently in this cycle, given that profits have shrunk over the past few years of contraction and forms a small portion of our coverage now. Banks’ provisions hit a high of 2.3% in 1998, compared to current provision levels of 0.4%. While we have increased our provisions to 0.5% to 0.6% over the next two years, this is a far cry from 1998’s levels, particularly if asset values were to decline significantly next year. Net earnings decline of –21% and –6% for 2008 and 2009 respectively : DBS Economist has cut Singapore’s GDP growth forecast for 2009 to –0.6%. Singapore is the first economy to fall into a ‘technical recession’ with three quarters of negative sequential growth. In 2008, Singapore’s GDP growth was weaker than expected at +1.5% vs consensus estimates of +2.5%. This reflects its vulnerability as a small and open economy. The Singapore government has revised down Singapore’s GDP forecast to a range of –2% to +1% for 2009. Downside risk to global growth is high, and will be a drag to Singapore’s GDP growth, particularly exports of electronics and pharmaceuticals. In addition to the hostile
Page 4
Earnings downgrades to continue. Against this backdrop, we expect earnings downgrades to continue for the next few quarters. The biggest risk lies in property and bank earnings, as provisions and write downs take centrestage due to asset devaluation. Our forecasts currently shows a 15% growth in real estate earnings in 2009 from pre-sold units in 2006/2007. Downside risk for property companies will come in the form of provisions in the event of defaults by speculators who purchased properties on deferred payment scheme or mark to market losses on investment properties and land bank. Property write-downs could push earnings decline to –15% for STI companies. Assuming property companies take the decision to write-down the value of assets of its commercial and development properties in 2009, this will push 2009 net earnings growth from -8% to -15% for STI stocks and – 28% for DBS’ universe of stocks. Spore GDP Growth vs Earnings growth % 50 40 30 20 10 0 -10 -20
Earnings growth
-30
GDP growth
-40 -50 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F 09F
Source: Datastream, Bloomberg 2008 & 2009 earnings growth forecast from bottom up of STI stocks using Bloomberg consensus
Market Focus Equity Strategy
Earnings Estimates by Sector
Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Real Estate REITS Technology Telecommunications Grand Total Ex Property & Reits
Earnings Growth % 2007 2008 2009 22.9 47.2 31.4 23.5 89.8 -23.4 22.3 -20.8 -4.6 21.1 -1.5 -7.1 35.3 -0.4 8.8 40.0 -1.1 -7.7 56.6 -19.3 2.6 47.7 -7.9 14.7 40.8 40.3 -0.1 67.5 -53.7 -105.8 2.5 -12.0 2.7 26.0 0.3 -5.4 23.0 -0.1 -8.2
STI DBSV Forecast Float Factor Avg STI Consensus Float Factor Avg
37.7 37.7
-17.7 -20.8
-8.3 -5.9
CAGR 07-09 39.1 20.6 -13.1 -4.3 4.1 -4.5 -9.0 2.8 18.4 nm -4.9 -2.6 -2.6 -13.2 -13.7
PATMI S$m 2007 2008 321 473 1,883 3,574 3,179 2,518 6,871 6,770 141 140 4,926 4,873 749 604 3,138 2,891 872 1,224 729 338 4,197 3,692 27,007 27,097 22,997 22,983
2009 622 2,738 2,402 6,288 153 4,496 620 3,316 1,223 -20 3,793 25,631 21,092
2007 7.5 12.8 8.3 8.3 14.0 7.4 3.3 8.1 11.9 4.2 10.9 8.7 8.3
PE (x) 2008 5.1 6.7 10.5 8.4 14.1 7.5 4.1 8.8 8.5 9.2 12.4 8.7 8.3
2009 3.9 8.8 11.0 9.1 12.9 8.2 4.0 7.6 8.5 -157.7 12.1 9.2 8.8
35,032 35,032
24,067 23,785
7.2 7.2
9.0 9.1
9.8 9.7
26,436 25,082
Source: DBS Vickers
LIQUIDITY
Cash levels proxy for emerging markets, international equity and global equity funds
USD – SGD Money Market Yield Trands %pa
4.00
%pa
6.00
24
5.50
3.50
5.00
3.00
20
% 1994: Tequila debt crisis 1997/98 Asia financial crisis
4.50
2.50
4.00 3.50
2.00 1.50
3M SGD SOR 12M SGD SOR
1.00
12M USD Libor (RHS)
3.00 2.50 2.00
0.50
1.50
Sep-06 Dec-06 Mar-07 Jun-07
Oct-07 Jan-08
Apr-08 Aug-08 Nov-08
(%)
3,500
35.0 30.0
3,000
25.0 STI Index (LHS)
15.0
1,500
10.0
1,000
5.0 Money Suppy y-o-y growth (RHS)
0.0
0 1999
-5.0 2000
2001
2002
2003
Source: Bloomberg, DBS Vickers
2004
8 4
2005
Emerging markets Global equity
International equity
Source: Datastream
20.0
2,000
500
2001 Nasdaq bubble
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Index
2,500
12
0
Money Supply y-o-y growth vs STI 4,000
16
2007
2008
M1 growth heading south, expect SIBOR to remain low. M1 growth continues to head southwards, reflecting an outflow of liquidity. SIBOR spiked up in October 2008 at the peak of the US financial crisis but retreated on government intervention. SIBOR rates are expected to stay low at <1% for 3 month SIBOR, due to low Fed Funds rate and easier monetary policies globally.
Page 5
Market Focus Equity Strategy
Fund redemptions have yet to hit crisis levels. On the flip side, we expect more room for fund redemptions, using past history as a guide. Although cash levels have risen over the past two quarters, it has yet to hit peak levels seen during 1994 and 1998 crisis levels. USD to weaken in 2009 vs SGD. In October 2008, MAS shifted to a neutral exchange policy or zero appreciation for its SGD (NEER), in response to weak economic conditions both in Singapore and globally . DBS believes the US$ appreciation over the past quarter is not sustainable as it did not appreciate on its own merits, but due to deleveraging triggered by the US financial crisis turning global and hitting the economies. With central banks working together to rescue the world’s financial system, DBS expects the unwinding of yen carry trades to complete its course and the shortage of US$ liquidity to ease. DBS has lowered its forecasts for US$ vs S$ to 1.44 for end 2009, and expects it to range between 1.45 to 1.50 in 1H09 and below 1.45 in 2H09.
VALUATION Cheap by any measure post the sell-down. Post the meltdown in October 2008, the market is cheap by all measures. At current levels of 1740, forward PE of 11x is close to the regional crisis low. Dividend yields of 5.2% surpasses regional crisis levels of 3.5%, partly due to corporates raising its dividend payout ratio in recent years vs the crisis years. However, we would expect corporates to conserve cash given tight liquidity, and putting yields under downward pressure.
into deeper recession of –2% next year, property prices plunged by 50% and we peg STI components’ valuation to 1998 levels. Forward PE
D
(%)
25 23 21 19 17 15 13 11 9 7 5
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Datastream, DBS
P/BV
D 3
(x)
2.5
2
1.5
Market traded at price to book of 0.9x to 1.5x during previous recession cycle – trading range of 1450 to 2180 on STI. Currently STI is trading at price to book of close to 1x. We note that the market trades within an average range and standard deviation of –2 during recession years, implying a trading band of 1450 to 2180 on the STI. Bottom up STI target cut to 2100(base case). The cut in earnings and target prices over the past quarter resulted in a lower bottom up target for the STI from 2960 to 2100, providing an upside of 21%. Bear target of 1250 on the downside. pegged to regional crisis valuations. We have attempted to shock our targets deriving a bear target of 1250, assuming Singapore goes
Page 6
1
0.5 93
95
97
Source: Datastream, DBS
99
01
03
05
07
Market Focus Equity Strategy
Dividend Yield 6 (%) 5
But the bear will continue to claw in 2009. While a bear market rally is imminent to correct the oversold positions, we have yet to hit the inflexion point for a market bottom. The slew of bad news from the corporate world is unlikely to recede, as the ill-effects of a recession works itself through the economy. In the chart below, equities led the sell-down before GDP growth turned down in recession periods in 1984, 1998 and 2002. Post the meltdown in equities, the markets undergo a period of base-building lasting four to eight quarters, as the market struggles to find a bottom before the economy bottoms. A recovery in equities has typically been precipitated by a recovery in GDP growth.
4 3 2 1
Market bottoms when GDP bottoms 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Datastream, DBS
yo y%
yo y%
15
10
120 100
GDP grow th
80 60
5
40
OUTLOOK
20
0
Near term rebound likely as markets were oversold. Market poised for near term rebound. We believe valuations have overshot on the downside, with valuations close to 1998’s levels post the meltdown in October 2008. Bad news is being well absorbed by the market as the market searches for signs of stability in the financial market on the back of concerted efforts by governments and central governments using both fiscal and monetary policies and injection of liquidity. Optimism will be spurred by the swearing-in ceremony of US President Elect, Obama on the back of his plan to pump prime the economy via the infrastructure sector. At a cost of US$500m, it is expected to create 2.5m jobs.
0 -20
-5
-40
STI (R) -10
-60 80 82 84 86
88 90 92 94 96
98 00 02 04 06 08
Source: Datastream, DBS
Quarterly GDP performance 20.0
15.0
10.0 QoQ
Closer to home, expectations of an expansionary budget in Singapore on January 22, 2009 will underpin the market. This follows the recent unveiling of a S$2.3bn stimulus package for small and medium enterprises to gain access to credit in this downturn, which will reduce default rates. The budget could throw up surprises in the form of tax cuts, and cost cutting measures for corporates, bringing forward construction projects worth S$4.7bn and direct handouts to households and consumers.
5.0 YoY 0.0
-5.0
-10.0 1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
Source: DBS
Page 7
Market Focus Equity Strategy
In Singapore, previous recessions have lasted between 4 to 6 quarters. With looming prospects of a global recession and Singapore’s vulnerability to external demand weakness, DBS economist expects 1H09 to be weak, and GDP to hit its trough in 1Q09, before it starts to recover in 4Q09. We would look for a market bottom in 1Q09, in line with the GDP at its trough, and a dismal corporate reporting season in February which could trigger downside risks for the market. However, confidence needs to be restored, and we expect the market to be range bound between 1250 and 2100 during the base building period next year. We expect a sustainable recovery only from 2010, with the upcoming completion of integrated resorts in Marina and Sentosa, and with the economy on firmer footing for recovery. Risks : The risks triggering STI to our bear target of 1250 will come from : a) failure of central banks and government efforts to stabiise the financial system. News of any collapse of major banks or industries in US, Europe or Asia will cause jitters to the market, particularly after the injection of liquidity by central banks. b) asset deflation is more severe than projected. We expect a decline of 40% in high end property prices and 20% for mass market properties. A sharper than expected fall or bankruptcy in the property sector will trigger another round of sell-offs. c) banks remain cautious, the effects of the credit crunch continues to cripple the expansion of industries requiring high capex - specifically oil and gas, shipyards, environmental sector, shipping and property sectors. d) worse than expected job losses and economic recession. We expect unemployment rate to hit 3.6% next year, similar to 1998 levels and GDP growth of –0.6% vs Ministry of Trade and Industry’s guidance of –1% to +2% for 2009. A sharper than expected decline in these areas will be negative for the market
Page 8
STRATEGY Themes : A) Go for stocks with earnings resilience during recession We would pick stocks with earnings resilience, as the economy struggles through the recession. As we are still in the early phase of the recessionary cycle, we would pick stocks with resilient earnings – mainly land transport companies, media services and telecoms companies. Our preferred picks are SMRT and Comfort Delgro, beneficiaries of the switch to public transport, as evidenced by a rise in ridership, while M1 is the cheapest telco play. Singpost’s revenues were maintained during previous recessions (1998 and 2003) while SPH is the monopolistic player in newspaper advertising in Singapore. B) Sell asset plays on strength. The process of de-leveraging has yet to complete its course, and asset deflation has just started to unwind. We would take the opportunity in a bear market rally to sell on strength stocks in the property, shipping and hotel sectors. Property stocks have been sold down to distressed levels, trading at prices close to its 1998 valuation levels, hovering at price to RNAV of 0.5x. The sector, while cheap, provides no catalyst for re-rating as yet, as we expect more downside to prices of properties. Anecdotal evidence indicated that prices for high end properties have declined by 20% from its peak, vs our expectations of a 40% decline. Shipping stocks are hit by a plunge in freight rates, overcapacity issues and aggressive expansion plans which will stress its balance sheet. Hotel plays are capped by drops in tourist arrivals since June 2008, amidst new capacity coming on-stream from 2009 once Marina Sands is completed by end-09. C) Survival of the fittest – stress testing the balance sheet
Contrary to market perception, net debt to equity ratio of STI companies at 23% currently is higher than the regional crisis levels of 1997 to 1999. In early 2000, companies, particularly Temasek-linked entities, were shifting towards optimizing their capital structure and efficient capital management, leading to higher dividend payouts. As such, net debt ratios shot up to 50% in 2002, in tandem with a rise in dividend payout ratio to 80% and a fall in corporate earnings. Subsequent years of economic boom led to a period of build up in cash flows, and decline in net debt.
Market Focus Equity Strategy
Net debt to equity – STI companies
Although net debt ratio of STI companies at 23% is low, 65% of companies under our coverage are in net debt positions. We would pick blue chips with prudent management and efficient capital management. Faced with deterioriating demand outlook and tight credit, companies with a strong balance sheets have the tenacity to ride out this recession. Small caps are more vulnerable and we would prefer blue chips with strong cash flow, net cash positions, and sustainable dividend payout ratios.
60%
50%
40%
30%
20%
10%
0% 1996
1997 1998
1999
2000 2001
2002
2003 2004
2005
2006 2007
2008
Net Debt / Equity
Source: Bloomberg, DBS Vickers
Dividend payout and yield – STI companies 100
6.0%
We have also included Z-scores in our screen. The Altman Zscore is a measurement of the financial health of a company. The lower the score, the higher the chance of bankruptcy. The high scoring companies are in a better position to weather the current crisis and to acquire assets during testing times. Our preferred picks are SIA Engineering – cash generative and strong visibility to revenue streams, ST Engineering which is in a position to acquire assets, backed by its net cash of >S$1bn, and SPH, which enjoys a monopolistic position in advertising revenue in Singapore.
90 5.0%
80 70
4.0%
60 50
3.0%
40 2.0%
30 20
1.0%
10 0
0.0% 1996
1997
1998
1999
2000
2001
2002
Div Payout Ratio (LHS)
2003
2004
2005
2006
2007
2008
Div Yld (RHS)
Source: Bloomberg, DBS Vickers
Page 9
Market Focus Equity Strategy
Survivors of the fittest Free op. CFPS
PE
Price /BV
Net
(Scts)
(x)
(x)
Div Yld
Mkt
Price
Target
Cap
(S$) 12Dec
Price
%
(S$)
Upside
Rcmd
08F
08F
09F
08F
08F
6.4
9.2
0.9
8.6
9.1
Net Cash/ Gearing Mkt
(%)
(x)
Cap
Z-
09F
08F
(%)
9.1
9.1
cash
30
2.47
1.9
9.8
9.3
cash
20
4.90
Company Big Cap (>S$1bn)
(S$m)
Singapore Airlines SIA Engineering
13,09 9 2,199
11.04
14.00
27%
Buy
2.04
2.50
23%
Buy
220.6 3 3.10
SembCorp Marine Venture Corporation
3,459
1.67
1.90
14%
Hold
23.34
7.3
7.0
1.8
9.6
10.1
cash
18
2.30
1,168
4.26
6.40
50%
Buy
57.40
3.9
6.0
0.6
11.7
11.7
cash
17
3.98
ST Engineering
6,895
2.30
2.80
22%
Hold
22.58
14.0
13.4
4.2
7.1
7.4
cash
11
1.61
SPH
5,047
3.17
4.25
34%
Buy
25.40
10.8
10.4
2.4
8.6
8.8
cash
6
3.28
SMRT
2,396
1.58
1.82
15%
Buy
11.25
15.9
14.6
3.5
4.9
5.1
0.00
0
2.23
score
Source: DBS Vickers
Looking ahead, we believe large takeovers running to the tunes of billions are less likely given tighter credits but smaller Low valuations can trigger industry deals are still possible: 1) robust companies could buy consolidations/privatization/ M&A. The credit crunch and competitors weakened by the tight credit market to enlarge financial crisis has resulted in a sharp reduction in the sector their own market share; 2) strategic buyers could take M&A activity for 2008 and possibly into 2009. But, the massive advantage of either a strong balance sheet (cash/credit decline in equities’ has also beaten down valuations to levels capacity) or relatively stronger equity position to acquire lowcompelling enough to draw potential buyers. priced companies distressed by a combination of declining revenue and rising borrowing costs; and 3) major shareholders We have witnessed a flurry of corporate takeovers and could privatize undervalued companies which have been privatizations year to date. Most offers are struck with indiscriminately sold down with the market. respectable premiums over market prices. D) M&A potential on distressed valuation
Singapore M&A year-to-date Date announced
Takeover target
Acquirer
7-Jun-08
Unisteel
KKR
21-Jul-08
Bright World Precision Datacraft Asia
22-Jul-08 25-Aug-08 15-Sep-08 6-Nov-08 02-Dec-08
China Hldgs Acquisition Dimension Data Hldgs Singapore Computer SingTel Sys SP Chemicals Ltd SP Chemicals Holdings Ltd ETLA Eletrotech Singapore Food Industries
Singapore Airline Terminal Svcs
Source: Bloomberg, Company data, DBSV
Page 10
Offer Price (S$) S$1.95
Size of Deal
Hist. P/BV (x) 6.1
EV/ EBITDA Hist. (x) PE (x)
Fwd PE (x)
S$785m
Premium to last Px (%) 14.5
10.6
17.7
16.3
S$0.70 0.75 US$ 1.33
S$300m
77.8
2.3x-2.5x
7.7x-8.2x
8.9x-9.5x
9.5x-10.2x
US$276 m 33.0
3.0
5.5
19
S$ 1.50
S$139.7m 12.0
2.0
5.9
13.1
13.7
S$0.73
S$400m
1.70
6.0x
7.0x
1.40
Share swap S$30.05m 22.0
0.8
3.0
7.4
S$0.93
3.1
7.4x
15.5
18.7
S$334.5m 4.50%
Market Focus Equity Strategy
Within tech, we think Chartered and Hi-P are potential M&A targets whereas Creative would be a prime candidate for privatization to extract cash. Chartered is an attractive takeover target given record low valuation of only 0.2x P/B. With an enterprise value of S$2b, a potential buyer would be getting Chartered’s wafer fabs -one 300mm fab and five 200mm - at a price far below replacement cost. Today, a leading-edge 300mm fab like Chartered’s Fab 7 already costs more than US$2b. Word on the street has rumoured both TSMC and UMC to be interested buyers.
10.7 Scts per Swissco share. This implies that the equity market is ignoring the breakup value of Swissco, and valuing its core offshore vessel chartering business at a mere 3.4x FY08 PE. Its core earnings are expected to be driven by the expected delivery of 10 new vessels by end 2008, and supported by the sustained high day charter rates for offshore vessels. Furthermore, Swissco’s balance sheet is expected to strengthen going forward on the back of reduced capex commitments post 2008, and strong positive operating cash flows stemming from its chartering income.
Hi-P, on the other hand, would be a strategic fit for bigger electronic manufacturing companies such as Flextronics, Jabil or even Venture.
As for KS Energy, a new substantial shareholder in the form of Dubai Transport Company LLC (“DTC”) emerged in late July 2008. Also known as Dutco Group, DTC is a private UAE-based conglomerated involved in construction of freight services to oil and gas. We note that it has been increasing its stake in KS Energy steadily over the past few months, and most recently, acquiring another 6.7m shares in KS Energy, at a price range of c. S$0.60 – 1.00, bringing its total stake to 13.1%.
As for Creative, the stock is trading below cash of US$3.14 per share as at end of Sep 08. A potential buyer can extract cash by firstly shutting down the loss-making retail business; then paying off debts with the company’s cash and last but not least, monetizing Creative’s rich library of intellectual properties. In the industrial space, Swissco International and KS Energy are our picks as possible M&A candidates. Swissco, a charterer of offshore and out-of-port limit vessels is currently trading at an attractive valuation of 0.4x forward P/B. It also holds a 9% stake in Swiber Holdings, which at current market price, is worth c.
China Sports is a likely privatisation candidate, having a net cash position of S$127.5m vs. the current free float of a mere S$38.6m. The share is currently trading at c. S$0.16, considerably lower than the net cash per share of c. S$0.19. However, the operating environment remains tough, amidst falling demand and rising competition from listed players.
Potential M & A targets Company
FYE
Mkt Cap
Price (S$)
(S$m)
12-Dec
PE (x)
P/BV (x)
EV/EBITDA
Net gearing
Free cashflow
Rcmd
08F
09F
08F
09F
08F
(%)
(S$m)
470 325 262
0.185 Hold 3.80 Fully Valued 0.295 Buy
nm nm 2.9x
nm nm 3.5x
0.2 0.6 0.5
0.3 0.7 0.4
3.4 6.6 1.3
56.4 cash cash
-279.5 126.2 15.1
Dec Dec
365 80
1.05 Fully Valued 0.405 Buy
8.0x 4.9x
7.3x 4.6x
1.0 0.4
0.9 0.4
8.1 nm
121.2 2.6
-124.2 -39.9
Dec
104
0.155
2.3x
2.3x
0.6
0.5
nm
cash
18.4
Semiconductor CSM Creative Technology Hi-P
Dec Jun Dec
Industrials KS Energy Swissco International S-chip China Sports
Hold
Source: Bloomberg, DBS Vickers
Page 11
Market Focus Equity Strategy
Sector recommendation and stocks for Singapore SECTOR
REMARKS
Banks & Finance
We believe that most of the bad news has been priced in. We have removed the 100bps risk premium attributed to banks when we downgraded the sector in Oct-08 as (1) we believe the financial sector is stabilising – credit default spreads has come off, (2) we believe asset quality would not be as bad as the Asian Financial crisis and (3) banks are well capitalised, with room to raise further capital, if necessary. We upgraded Singapore banks to Neutral (from Cautious) and revised our calls. OCBC is upgraded to a Buy (from Hold) while UOB is upgraded to a Hold (from Fully Valued).
Neutral
Consumer Goods
Neutral
For plantation, we expect palm oil prices to stay weak at RM1,520/MT next year, lower than most market expectations of between RM1,600 and RM1,900. We expect current record inventory of 2.1m MT in Malaysia to continue to rise, as Chinese import volumes weaken and slower GDP growths in Asia become more apparent. For pure planters, earnings are to drop significantly over the next three quarters, and we believe this has not been factored in current lofty multiples. For integrateds, we still like Wilmar for its ability to consistently hedge its costs and sales, although we recommend investors to wait for a reasonable entry level, as China’s palm and soybean import volume growth may decelerate due to current global economic weakness. We maintain neutral on downstream consumer goods. We expect discretionary spending to be affected as consumers cut back on spending amid slowing growth and job losses. Nonetheless, consumer staples should be less affected given that these are essential items. Also, with easing oil and commodity prices, these should be positive for consumer staple companies though there will be a lagged effect for lower prices to trickle down. Our top pick for the sector is China Fishery Group given exposure in the upstream fishing operations. Valuations are relatively undemanding at 3.6x and 3.1x FY08F and FY09F. Though gearing is relatively high at 0.93x, 75% of its debt have maturity of more than one year (largely comprising of its senior notes due 2013).
Page 12
STOCK SELECTION OCBC
China Fishery Group
Market Focus Equity Strategy
Sector recommendation and stocks for Singapore SECTOR
REMARKS
STOCK SELECTION
Consumer Services
While not spared from the market tumble in Oct, consumer services emerged as the best performing segment with a 22% decline versus 35% for the broader market. We maintain our positive view of the consumer services sector. We believe ridership for land transport will be relatively resilient despite the economic gloom, hence our preference for it. Retreating oil price is positive for SMRT and ComfortDelGro as energy and fuel costs accounts for 11% - 40% of companies revenue. With oil price retreating to around US$45/bbl, we estimate that SMRT’s fuel and electricity costs will be significantly lower. Their current 6-months contract till Mar 09 is 30% higher from previous. Top picks are SMRT, ComfortDelgro and SPH.
SMRT, ComfortDelgro, SPH
Positive
Industrials
Cautious
Shipyard. We maintain our cautious view on the shipyard sector as we reckon more news flow on order cancellations / delays to plague the sector going forward. Shipbuilders like Cosco and Yangzijiang are seeing heightened risk of cancellation in view of the plunge in freight rates and tight credit lines. The global credit crunch has extended its grasp to rigbuilding sectors as well, with three of Keppel Corp’s customers requesting for contract renegotiations. We have Hold recommendation on Sembcorp Marine (S$1.90), and Fully Valued for Cosco (S$0.80), Keppel Corp (S$3.58) and Yangzijiang (S$0.34). For these stocks to re-rate, we need to see a turning in the macro environment and recovery rebound in oil prices or BDI.
Hyflux, Epure International, SIA Engineering
Shipping. We maintain our cautious stance on dry bulk shipping. We see the general reluctance of listed companies to cancel orders as reinforcing the cyclical downturn in 2009, which will be worse than the Asian Crisis. We expect most dry bulk carriers to be making losses, except for some of the fully depreciated vessels. Secondhand prices are also expected to plunge 80%. We have Hold recommendations on Mercator (S$0.13), and Fully Valued for STX Pan Ocean (S$6.70). We recommend investors to sell into strength should the BDI stage an expected technical rebound in late 1Q to 2Q09. Oil & Gas
Neutral
We are neutral on the oil and gas sector in Singapore, preferring the operators to builders. The lower breakeven level for production projects would continue to create jobs for oil service and equipment providers, supported by most oil majors and national oil companies' current decision to maintain 2009 capex. We prefer Ezra and Swiber to KS Energy for their more attractive valuations, and believe that capex funding risk on the former two companies is misplaced. We are cautious on Jaya, given its huge newbuild program of 56 speculative vessels, while preferring ASL Marine due to its more resilient repair and chartering businesses.
ASL Marine, Ezra
Page 13
Market Focus Equity Strategy
Sector recommendation and stocks for Singapore SECTOR
REMARKS
STOCK SELECTION
Property
Our cautious stance on developers remains. Much of the expected bad news like asset writedowns, negative job creation and distressed sales have yet to materialise. These factors should continue to weigh down the sector in coming months, hampering sector outperformance. We would look to reenter the sector only upon seeing key inflexion points in the form of the worst of the bad news. These include the worst in job loss data and the weakest residential sales in the secondary market, historical precursors to an uptick in property stocks. We favour residential over office given the time needed to digest the huge impending supply coming on-stream. Our top buys are companies with strong balance sheets that we believe would be more resilient. Our top big-cap pick is City Dev (lower risk of asset writedown); our top mid-cap pick is Wheelock Properties (net cash, does not offer DPS). Avoid companies that are relatively more highly geared and with a greater exposure to the high-end residential market, where higher default risk may lie. Top sells are SC Global and Ho Bee.
City Devt, Wheelock
Lowering our call on Sreits to neutral. In addition to slower earnings growth, continued headwinds from refinancing concerns due to the tight credit market and prospect of balance sheet deleveraging due to asset value deflation would hamper share price outperformance. The sector is currently offering historically high average DPU yield of 15.5%, indicating that a measure of these risks have been reflected into the share price. Our strategy would be to remain highly selective, preferring reits with low gearing and little refinancing issues such as Parkway Life reit.
Parkway Life Reit
We maintain Cautious on tech stocks as newsflow will remain bearish, leading to more earnings downgrades on the street, near term. Throughout FY09, the industry would see falling utilization, inventory correction, higher working capital requirement and continued earnings revision as long as the market remains entrenched in a recession. Margins will also remain depressed, as competition and pricing pressures negate the strengthening USD and falling material costs. But, industry consolidation or privatization could be a catalyst. We think Chartered and Hi-P are potential buys given their integration potential. We think Creative would be a privatization candidate to extract cash.
Venture
Cautious
Reits
Neutral
Technology
Cautious
Avoid small caps. Top pick is Venture.
Telecom
Neutral
Page 14
Ground checks indicate that competition in the sector is easing, as operators are reducing handset subsidies. However, subscriber growth is under pressure as immigrantion led population growth is bound to recede with economic recession in Singapore. Current sector valuation of 12.4x FY09F PER for 4.4% FY08-FY10 EPS CAGR do not appear attractive compared to market's 9.4x PER for –0.3% growth. We would like to stress that sector earnings are less volatile and dividend yield of 5-10% limits the downside. SingTel and StarHub have challenges ahead in the medium term from National Broadband Network (NBN) with M1 as the only beneficiary. M1 is our top pick in the sector and is trading at 8.5x FY09 PER and 10% dividend yield.
M1
Market Focus Equity Strategy
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 31 Dec 2008
3.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
4.
Compensation for investment banking services: a)
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the SPH,Hyflux,, ASL Marine, City Development, Parkway Life REIT.
b)
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Page 15
Market Focus Equity Strategy
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 16
Regional Small/MidMarket Cap Strategy Focus Q4 2008 Singapore Country Assessment
Small/Mid Cap Strategy DBS Group Research . Equity
05 January 2009
Singapore Survival of the fittest We see the bear market rally that started in 4Q08 extending into 1Q 09. Our 1Q strategy focuses on companies with strong balance sheets that give them the ability to ride out the recession. Markets managed to find a short-term low in 4Q08 as investors bet that 1) the frozen credit markets may start to thaw following recent aggressive measures by central banks to inject liquidity, 2) valuation has fallen to previous crisis troughs, the recent stock market correction has priced in weak FY08 earnings and poor economic data and 3) global efforts to pump prime economies could shorten the global recession Still, we remain mindful of the current credit crunch on small and medium size companies. With earnings downgrades still an on-going process, our stock selection adds focus on companies with strong balance sheets that should enable them to weather and emerge from the current crisis as stronger entities. We take a positive view of recent plans to review capital expenditure by Ezra as well as its improved charter rates that are backed by long-term contracts. We also like ASL Marine’s good earnings visibility and net cash position in FY09. Among S-chips, we view the Chinese government’s initiatives to shift its weight from exports to domestic consumption as positive for China Hongxing, which is backed by 17Scts net cash per share. We also pick water treatment company, Epure for its more defensive business model and good net cash position. Our final pick is Raffles Medical in light of the defensive nature of the healthcare sector, the company’s strong operating cashflow and net cash position.
Yeo Kee Yan (65) 6398 7955 [email protected] Ling Lee Keng (65) 6398 7970 [email protected] Page 1 www.dbsvickers.com Refer to important disclosures at the end of this report
Market Focus Small/Mid Cap Strategy
Market Data 52-Week Indices FSSTI FTSE Mid Cap FTSE Small Cap Transactions: STI (bn) FTSE Mid Cap (bn) FTSE Small Cap (bn)
Closed 12 Dec 08 1,740 342 291
Chng Net -1 mth (44) (27) (15)
-1 mth (%) -3 mth (%) (2.4) (7.3) (4.8)
(32.3) (40.7) (38.4)
-6 mth (%)
-12 mth (%)
(42.4) (55.0) (54.9)
(50.7) (61.7) (66.5)
High
Low
3531 908 867
1474 299 257
YTD* 63.3 43.6 58.0
Source: Bloomberg * Start 10 Jan 08
PERFORMANCE REVIEW Relative Performance - Small cap picks vs FSTS & FSTM Last quarter, in particular October, saw global equity indices experience the worst fall in recent history, with the impact of the global credit crisis deepening spurring the collapse of more financial institutions. Concerted efforts by global central banks to cut interest rates and to roll out economic stimulus packages managed to prevent the market from free falling. However, sentiment remained cautious.
1.2 1.0 0.8 0.6 0.4 0.2
Small cap stocks were hit harder, as a result of a flight to quality. Against this backdrop, our small cap stock picks were not spared. Our small cap portfolio fell 32.7% Q-o-Q on a price-weighted basis, vs 38.4% and 40.7% drop in the FS Small Cap Index (FSTS) and FS Mid Cap Index (FSTM) respectively. Among our four picks, both Ezra and Celestial underperformed the FSTS and FSTM most of the time. Ezra was hit by falling oil prices and concerns about funding for its high capex needs while margins for Celestial were affected by high raw materials. High dividend yield stocks Parkway Life REIT and Pan United Corp, outperformed the market during the 3-month period.
0.0 Sep-08
Oct-08 Celestial Parkway Life REIT
Nov-08
Ezra FSTS
Pan United FSTM
Source: Bloomberg, DBS Vickers
STI vs FS Mid and Small Cap 4,000
STI
FTSE Small and mid Cap
1000 900
3,500
800 700
3,000
600 2,500
500 400
2,000
300 1,500 J an-08
200 Mar-08
FS STI
Source: Bloomberg, DBS Vickers
Page 2
J un-08
FTSE Small Cap
Aug-08
Nov -08
FTSE Mid Cap
Market Focus Small/Mid Cap Strategy
Average daily turnover volume eased from above 1.2bn to around the 1bn mark shortly after the market recovered from its low in end October as sentiment remained cautious. Turnover for mid cap stocks accounted for an average of 20% of total volume in 4Q08 while small cap stocks accounted for an average of 17% during the same period.
FTSE Volume Traded (mil shares) 3,000
m
50% 45% 40%
2,500
35% 30%
2,000
25% 20%
1,500
15% 10%
1,000
5% 500 J an-08
0% Mar-08
J un-08
Sep-08
Nov-08
Total V olume (LHS) FTSE Small Cap V ol vs Tot V ol % (RHS) FTSE Mid Cap V ol vs Tot V ol % (RHS)
Source: Bloomberg, DBS Vickers
GROWTH AND VALUATION Growth and Valuation – Large Caps vs Small / Mid Caps
Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Real Estate REITS Technology Telecommunications Large Caps
2007 22.5 19.9 8.1 8.4 15.3 7.5 2.3 10.5 10.5 3.7 10.9 9.2
PE (x) 2008F 6.1 7.7 10.3 8.5 15.7 7.8 4.9 9.8 9.1 19.2 12.4 9.2
2009F 3.3 11.6 10.9 9.2 14.8 8.6 5.1 9.3 9.3 (7.7) 12.1 10.1
2007 -41% 2% 21% 20% 35% 35% 79% 48% 27% 34% 3% 21%
Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Real Estate REITS Technology Telecommunications Small / Mid Caps DBSV Universe Small Cap Ex Pty & Fin
5.2 4.8 14.3 4.5 11.8 7.0 5.6 4.8 13.7 5.0 6.0 6.3 8.7 6.0
4.6 4.3 14.0 4.0 11.3 6.0 3.6 6.7 7.9 5.8 6.3 5.9 8.7 5.3
4.4 4.1 12.4 3.7 9.9 5.8 3.4 5.0 7.7 7.5 7.8 5.5 9.2 5.2
47% 61% 99% 128% 36% 99% 24% 48% 64% 169% -10% 63% 26% 70%
-32% -34%
-36% -42%
-46% -48%
Small vs Large Caps Small Caps Ex Pty v Large Caps
Earnings Growth (%) 2008F 267% 159% -22% -2% -3% -3% -54% 8% 15% -81% -12% -1% 13% 12% 2% 10% 4% 17% 54% -29% 74% -13% -5% 6% 0% 14%
2009F 86% -34% -5% -7% 6% -9% -4% 5% -2% -350% 3% -8% 4% 4% 13% 9% 14% 2% 7% 34% 2% -23% -19% 9% -5% 2%
Source: DBS Vickers
Page 3
Market Focus Small/Mid Cap Strategy
Market de-rated further in 4Q08. Our small/mid caps FY08 and FY09 PE declined to 6.0x and 5.5x as at end 4Q08 from 7.9x and 6.2x respectively when compared to the previous quarter. Small/mid caps continue to trade at much lower valuation multiples compared to large caps, which are trading at 9.5x FY08 and 10.2x FY09. Further earnings downgrades reduced growth to 6% FY08 and 9% FY09, much lower than the 10% FY08 and 29% FY09 during 3Q. Nevertheless, the revised earnings growth for small/mid caps are still much better than zero growth for large caps in FY08 and negative 7% growth in FY09. Oil & Gas and Financials the worst hit. Oil & Gas, REITs and Real Estate were the worst hit sectors in 4Q08. Oil & Gas sector eased 52.8% on a 3-mth basis on the back of more than 50% fall in oil prices and concerns of order cancellations. Stocks like Jaya, Swiber and ASL Marine were among the top 20 most oversold stocks. REITS and Shipping Trusts were hit by fears about re-financing issues arisingamid the current credit crisis. 35% of the most oversold stocks featured here are Shipping Trusts and REITS. Basic Materials’ performance was skewed by Midas (beneficiary of stimulus
package) and SP Chemicals (takeover offer). Healthcare was generally more defensive in the down market.
Small/Mid Cap Sector Performance (Sorted in ascending order on 3-month performance)
Oil & Gas REITS
Chng 1m
Chng 3m
Chng 6m
Chng 12m
-3.5
-53.2
-72.3
-77.7
-11.8
-47.2
-59.5
-65.9
Real Estate
-3.0
-47.0
-63.5
-76.9
Industrials
-6.9
-43.4
-56.4
-64.8
Total
-4.5
-41.9
-58.9
-69.6
-11.3
-40.1
-60.3
-67.8
-9.5
-39.7
-48.6
-47.9 -61.5
Financials Telecommunications Technology
-12.3
-38.2
-51.5
Consumer Services
8.5
-33.8
-54.4
-61.0
Consumer Goods
1.7
-32.1
-54.8
-67.3
Health Care
6.6
-30.0
-44.1
-49.4
Basic Materials
0.7
-9.0
-44.4
-66.2
Source: DBS Vickers
Small/Mid Cap 20 most oversold stocks in the past 3 months Pric e/ Company
Mkt Cap (S$m)
Pric e (S$)
T arget Pric e
%
12- Dec
(S$)
Upside
Rc md
08F
0.23 0.10 0.31 US$0.52 0.63 0.34
-22% -3% 30% 271% 59% 60%
FV FV H B H B
Div Y ld
BV (x )
(%)
09F
08F
08F
3M
6M
12M
1.5x 4.2x 6.3x 3.3x 5.4x 5.0x
2.7x 6.3x 8.0x 3.8x 5.8x 4.2x
0.5x 0.3x 0.2x 0.3x 0.3x 0.9x
44.1% 6.7% 24.5% 30.6% 32.2% 0.0%
(73) (64) (64) (63) (62) (61)
(82) (78) (71) (66) (65) (58)
(83) (88) (73) (67) (69) (70)
PE ( x )
Share Pric e Perf ormanc e ( % )
J ay a Hldgs Asia Env ironment F rasers Commercial Trust Pacific Shipping Trust Rickmers Maritime Epure International
227 0.30 45 0.11 171 0.24 119 US$ 0.14 145 0.40 271 0.21
Bany an Tree Swiber Hldgs Mapletree Logistics Trust CSE Global ASL Marine F irst Ship Lease
305 231 611 204 133 253
0.40 0.55 0.32 0.40 0.44 0.51
0.37 1.00 0.57 0.80 0.84 1.65
-8% 83% 82% 100% 91% 227%
FV B B B B B
12.8x 3.3x 4.6x 4.0x 2.6x 25.4x
14.2x 2.2x 5.9x 4.0x 2.5x 93.7x
0.5x 0.6x 0.4x 1.3x 0.6x 0.4x
3.1% 0.0% 22.4% 11.3% 9.1% 33.9%
(60) (59) (57) (56) (55) (54)
(74) (79) (65) (63) (63) (58)
(78) (84) (71) (68) (71) (61)
China Sky Chemical F ibre Silv erlake Axis Asia Enterprises
232 112 49
0.29 0.10 0.18
25% 30% -43%
(54) (53) (53)
(68) (70) (57)
(85) (82) (62)
47% 105%
1.9x nm nm
7.3% 18.6% 18.8%
0.04 0.19
2.1x 2.5x 2.1x 8.2x nm
0.3x 1.6x 0.4x
33 470
H FV FV FV H
2.3x 6.6x
Global Testing Corp CSM
0.35 0.13 0.10 0.05 0.38
0.2x 0.2x
0.0% 0.0%
(53) (53)
(65) (77)
(81) (82)
Tat Hong Suntec REIT K-Reit
296 999 392
0.60 0.65 0.60
0.75 0.88 0.93
26% 35% 55%
B H H
3.3x 8.8x 18.4x
3.9x 7.4x 20.1x
0.8x 0.3x 0.2x
9.8% 15.8% 16.7%
(52) (51) (51)
(71) (58) (58)
(81) (62) (72)
Source: DBS Vickers
Page 4
Market Focus Small/Mid Cap Strategy
susceptible to the economic slowdown compared to highend consumables. Hongxing offers good value at current value as stock is backed by 17Scts net cash per share and offering 16.5% EPS CAGR over FY09 and FY10.
STRATEGY/THEMES AND STOCK PICKS A Bear market rally Just as bull markets consolidate for breathers, so do counter-trend rallies interrupt bear markets.
(2) Beneficiary of China’s massive USD583bil stimulus plan. The recently announced stimulus package include plans for environmental protection that could be beneficial for waste and water treatment companies. Our second pick is leading water and wastewater treatment company Epure. The company has a strong net cash of 14cts/share, and is in a strong financial position which enables it to finance BOT projects and future working capital through internally generated funds. Current valuation is compelling at 4.7x FY09 PER.
As stocks reeled from a massive sell off across the board during 4Q08, there is optimism that stock prices have touched a temporary floor following the US government’s efforts to save big corporations such as Citigroup and US auto manufacturers, global government’s concerted efforts to pump prime their respective economies and unfreeze credit markets (e.g. the USD 700bil bailout plan, China’s USD583bil economic stimulus and Singapore’s SGD2.3bil stimulus plan to encourage bank to give credit). Going ahead, investors can look forward to year-end window dressing activities and Singapore’s budget scheduled on January 22nd. , US President elect Obama’s pledge to revive the economy and create jobs should continue to see bargain hunting on minor dips ahead of his swearing in ceremony on January 20th next year.
(3) Rebound in oil price lifts oversold O&M stocks Oil price has fallen nearly 70% since peaking out at USD147pbl. Our average oil price assumption for 2009 is USD60pbl, which is about 40% higher compared to current price. Our technical analyst sees strong support for oil price at USD38-40pbl. Our picks are Ezra and ASL Marine. We view Ezra’s recent announcement to review its orders for 5 multi-functional support vessels positively as it signals a preference towards cash conservation, thus improving on its current net debt position even as growth continues to be underpinned by long-term charter contracts. ASL Marine’s strong balance sheet and good earnings visibility from its large shipbuilding order book coupled with sustained strong demand for ship repair and chartering services justifies the company as our next pick in the O&M sector. ASL also offers an attractive dividend yield of c. 11%.
Despite near-term positives, we remain mindful of the ongoing credit crisis and the vulnerability of small companies. As banks impose stricter lending criterions, we prefer to stay away from companies with high gearing and poor operating cash flows. Focus on strong balance sheet Thus, in addition to attractive PE valuations, we think a strong balance sheet is a must. Our additional criterions are companies with net cash (or slight net debt), an Altman’s Z-score (a formula for predicting bankruptcy, the lower the score, the higher chance of bankruptcy) of at least 2.0 and good operating cash flows. There should be no sharp increase in debtor’s turnover days.
(4) Healthcare sector as defensive Our final pick is Raffles Medical. Besides the defensive nature of its business, the company boasts of a strong operating cash flow and has a strong net cash position that should increase from S$9mil as of Sept08 to S$16mil by end 2008. Its healthy balance sheet will see it through this period of uncertainty. It is trading at its historical low valuation of c. 10x PE
(1) Beneficiary of China’s focus on domestic consumption China Hongxing is expected to benefit from the Chinese government’s initiatives to focus on domestic consumption. Its sportswear products, which cater to mid-to-low end consumers in 2nd and 3rd tier cities in China, are less . 1Q09 Small/Mid Cap Stock Picks FYE Company
Mkt
Price
Target
Cap
(S$)
Price
%
(S$m)
12-Dec
(S$)
Upside
Rcmd
08E
EV/EBITDA
P/BV
Div Yld
ROE
(x)
(x)
(%)
(%)
6m
09F
08E
08E
08E
08E
($000s)
PE (x)
Val/Day
ASL Marine
Jun
133
0.44
0.84
91
Buy
2.6
2.5
2.0
0.6
9.1
31
253
China Hongxing
Dec
533
0.21
0.33
56
Buy
5.0
4.3
1.0
0.6
4.0
13
6,719
Epure International
Dec
271
0.21
0.34
60
Buy
5.0
4.2
1.5
0.9
0.0
20
469
Ezra Holdings
Aug
404
0.69
1.25
81
Buy
5.0
4.5
4.6
0.7
26.1
55
4,545
Raffles Medical
Dec
334
0.645
0.76
17
Buy
11.6
10.1
7.5
1.5
3.9
14
226
Source: DBS Vickers
Page 5
Market Focus Small/Mid Cap Strategy
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 31 Dec 2008
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, beneficially own a total of 1% or more of any class of common equity securities of the Pacific Shipping Trust as of 5 Jan 2008
3.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of Pacific Shipping Trust as of 5 Jan 2009.
4.
Compensation for investment banking services:
Page 6
i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the ASL Marine,Parkway Life REIT,Pacific Shipping Trust, Mapletree Logistics Trust, Silverlake Axis
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any
Market Focus Small/Mid Cap Strategy
investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 7
Singapore Company Focus
Cosco Corporation Bloomberg: COS SP
|
Reuters: COSC.SI
DBS Group Research . Equity
5 Jan 2009
FULLY VALUED S$0.925
Profit Warning
Price Target : 12-month S$ 0.76 (Prev S$ 0.80) Reason for Report : Profit warning Potential Catalyst: New contract wins, smooth execution
Cosco dropped a bombshell, indicating that 2008 profits would be lower than 2007, due to provisions for doubtful debts, cost overun and potential penalties for delays. We cut our forecasts by 20% to 30% on lower sales and margin assumptions, maintained Fully Valued.
STI : 1,829.71
Analyst Janice Chua +65 6398 7954 [email protected]
Could plunge into losses in 4Q08. As the group has achieved net profits of S$326.5 up to 9months in 2008, this implies that 4Q08 net profit is likely to be a loss or at best, profits of less than S$10m vs consesnus expectations of S$96m.
Price Relative S$
R e la t iv e In d e x
8 .5 0
790
7 .5 0
690
6 .5 0
590
5 .5 0
490
4 .5 0 390
3 .5 0
290
2 .5 0
190
1 .5 0 0 .5 0 2004
2005
2006
C o s c o C o r p o r a t io n ( L H S )
90 2008
2007
R e la t iv e S T I IN D E X ( R H S )
Forecasts and Valuation FY Dec (S$ m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A
2008F
2009F
2010F
2,262 576 498 337 337 15.0 15.0 80 15.5 7.0 42.0 6.2 6.2 5.0 2.7 7.6 2.2 CASH 41.8
3,469 535 442 292 292 13.1 13.1 (13) 13.5 7.3 48.1 7.1 7.1 5.1 4.1 7.9 1.9 CASH 29.0
4,391 635 504 275 275 12.3 12.3 (6) 12.7 8.2 53.1 7.5 7.5 5.1 4.1 8.9 1.7 CASH 24.3
3,996 657 503 264 264 11.8 11.8 (4) 12.2 9.2 56.6 7.8 7.8 5.0 4.4 10.0 1.6 0.0 21.5
(29.2) 17.8
(21.8) 15.7
(16.8) 14.8
Earnings Rev (%): Consensus EPS (S cts):
ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: Cosco Corp's core businesses include ship repair, shipbuilding, offshore and marine engineering, dry bulk shipping and shipping agency.
www.dbsvickers.com Refer to important disclosures at the end of this report ed: YM / sa: JC
Hit by provisions for debts, cost over-run and penalties. Earnings were hit by :(1) Provisions for doubtful debts – includes provision for S$19m due for repair works on three Russian vessels which defaulted, and MPF which went into bankruptcy. Delays in payment will rise as shipowners are losing money due to the plunge in freight rates; (2) Cost overrun for shipbuilding and offshore marine projects due to weak execution, higher steel prices, sub-contracting cost, and additional development cost at Zhoushan. The group provided for the 30% drop in steel prices over the past quarter for its stockpile; (3) Potential penalties for delivery delays - it completed only one 57K bulk carrier in 2008 vs ten originally scheduled. Clients push back vessel deliveries Cosco has rescheduled the delivery of seven bulk carriers, from 2009/2010 to 2011/2012, on request from its clients. With shipowners operating at a loss, we expect more cancellations, rescheduling, and bad debts. Net profits forecasts cut by 20% to 30%. We cut our sales estimates and now expect cancellations and delays affecting 40% of its order book (from 15% previously). Including provisions and cut in margin assumptions, the net impact is a 20% to 30% cut in earnings forecasts. Maintained Fully Valued, target price cut to 76cts based on 4x its shipbuilding profits and 8x its shiprepair profits. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders China Ocean Shipping (%) SembCorp Marine (%) Free Float (%) Avg. Daily Vol.(‘000)
2,239 2,071 / 1,421 53.4 5.0 41.7 31,863
Company Focus Cosco Corporation
Income Statement (S$ m) FY Dec
Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Effective Tax Rate (%)
Balance Sheet (S$ m) 2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
2,262 (1,652) 610 (115) 495 0 1 3 0 498 (20) (142) 0 337 337 576
3,469 (2,868) 601 (181) 420 0 1 22 0 442 (47) (103) 0 292 292 535
4,391 (3,738) 653 (154) 500 0 1 4 0 504 (71) (158) 0 275 275 635
3,996 (3,353) 643 (137) 506 0 1 (4) 0 503 (74) (164) 0 264 264 657
Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
1,479 2 55 1,083 486 828 35 3,967
1,814 3 55 532 578 771 46 3,797
2,129 3 55 276 798 1,098 1 4,360
2,429 4 55 123 799 999 1 4,409
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
112 2,446 65 42 940 363 3,967
112 2,037 65 42 1,076 466 3,797
112 2,330 65 42 1,188 624 4,360
112 2,135 65 42 1,268 788 4,409
86.1 61.1 67.6 63.9 3.9
53.4 (7.1) (15.2) (13.1) 10.6
26.6 18.6 19.0 (6.0) 14.2
(9.0) 3.3 1.3 (3.8) 14.8
Non-Cash Wkg. Capital Net Cash/(Debt)
(1,097) 906
(642) 355
(433) 100
(336) (54)
2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
498 81 (23) (1) 1,007 24 1,586 (462) 0 0 1 14 (447) (119) (230) 27 (13) (334) 805
442 115 (20) (1) (482) 0 56 (250) (200) 0 0 0 (450) (157) 0 0 0 (157) (551)
504 135 (47) (1) (234) 0 357 (250) (200) 0 0 0 (450) (163) 0 0 0 (163) (255)
503 150 (71) (1) (100) 0 481 (250) (200) 0 0 0 (450) (184) 0 0 0 (184) (154)
27.0 21.9 14.9 41.8 11.5 33.3 46.5 NM 0.8 88.4 342.3 79.9 1.0 0.7 CASH 262.0 40.5 25.9 50.2
17.3 12.1 8.4 29.0 7.5 22.9 55.7 NM 0.9 84.1 287.9 70.6 0.9 0.6 CASH 141.6 15.9 24.0 (8.7)
14.9 11.4 6.3 24.3 6.7 22.6 67.1 NM 1.1 77.7 208.8 69.7 0.9 0.6 CASH 141.6 4.5 26.4 4.8
16.1 12.7 6.6 21.5 6.0 20.0 78.0 124.5 0.9 95.8 238.9 91.0 0.9 0.5 0.0 141.6 (2.4) 25.9 10.3
Cash Flow Statement (S$ m) FY Dec
Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
Rates & Ratio
Quarterly / Interim Income Statement (S$ m) FY Dec
1Q2008
2Q2008
3Q2008
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
847 (664) 182 (36) 146 0 0 3 (2) 148 9 (40) 117 118 170
718 (517) 201 (55) 145 0 0 3 0 149 (21) (44) 84 84 173
1,047 (802) 245 (38) 208 0 0 10 0 218 (22) (67) 129 129 235
988 (786) 202 (27) 175 0 0 7 0 183 (24) (45) 114 114 203
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
54.8 1.9 2.3 19.2 21.5 17.3 13.8
(15.2) 1.5 (0.5) (28.0) 28.0 20.3 11.7
45.9 35.9 42.8 53.4 23.4 19.8 12.3
(5.7) (13.4) (15.6) (11.5) 20.4 17.7 11.5
Page 2
FY Dec
Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Asset Turnover (x) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N. Cash/(Debt)PS (S cts) Opg CFPS (S cts) Free CFPS (S cts) Segmental Breakdown
4Q2007
Source: Company, DBS Vickers
FY Dec
FY Dec
2007A
2008F
2009F
2010F
Revenues (S$ m) Charter Shipping agency Ship repair and marine
208 22 2,032
253 22 3,193
139 23 4,229
111 24 3,861
Others Total
0 2,262
0 3,469
0 4,391
0 3,996
Company Focus Cosco Corporation
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned company as of 31 Dec 2008.
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
3.
Compensation for investment banking services: i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the mentioned company.
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Page 3
Company Focus Cosco Corporation
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 4
Singapore Company Focus
ST Engineering Bloomberg: STE SP
|
Reuters: STEG.SI
DBS Group Research . Equity
5 Jan 2009
BUY S$2.46 STI : 1,829.71
Holding Fort
Upgrade from HOLD Price Target : 12-month S$ 2.80 Reason for Report : Company Update Potential Catalyst: Announcement of acquisitions
We upgrade ST Engineering to BUY with a target price of S$2.80. Amidst the worsening global economic outlook, STE has sustained its reputation of being a defensive counter, with a slew of new contract wins in recent months across different segments. In spite of possible slowdowns in its Aerospace and Marine segments, we are positive on the stock given 1) its ability to boost growth through M&A, 2) a relatively secure dividend yield of 7%, 3) record orderbook of S$10b and 4) cash and cash equivalents of S$1b.
Analyst Janice Chua +65 6398 7954 [email protected] Suvro Sarkar +65 6398 7973 [email protected]
Price Relative S$
Robust orderbook of S$10b will drive revenues. Contract wins have been stable across the Group's subsidiaries in recent months, demonstrating the defensive nature of the Group's diversified earnings stream. It is also in line with our expectation that public spending in defence, transport, and infrastructure projects will mainly drive revenue growth over the next two years.
R e la t iv e In d e x
4 .3 0 208 188
3 .8 0
168 3 .3 0 148 128
2 .8 0
108 2 .3 0 88 1 .8 0 2004
2005
2006
S T E n g in e e r in g (L H S )
68 2008
2007
R e la t iv e S T I IN D E X (R H S )
Forecasts and Valuation FY Dec (S$ m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A
2008F
2009F
2010F
5,051 780 638 504 504 16.9 16.9 12 16.9 16.9 54.7 14.5 14.5 12.4 8.8 6.9 4.5 CASH 31.5
5,327 772 603 491 491 16.4 16.4 (3) 16.4 16.4 54.3 15.0 15.0 12.3 8.7 6.7 4.5 CASH 30.2
5,555 808 644 506 506 17.0 17.0 3 17.0 17.0 54.8 14.5 14.5 11.9 8.4 6.9 4.5 CASH 31.1
5,751 841 674 529 529 17.7 17.7 5 17.7 17.7 55.6 13.9 13.9 11.4 8.2 7.2 4.4 CASH 32.1
16.6
(0.8) 17.1
18.9
Earnings Rev (%): Consensus EPS (S cts):
ICB Industry : Industrials ICB Sector: Aerospace & Defense Principal Business: An integrated engineering group providing solutions and services in aerospace, electronics, land systems and marine sectors.
www.dbsvickers.com Refer to important disclosures at the end of this report ed: YM / sa: JC
US operations may recover faster than expected. Even though major US airlines have pared capacity in FY08, jet fuel prices have corrected significantly and airline industry losses, going forward, will be lower than previously expected. Hence, the demand for 3rd-party MRO work may recover earlier than projected. Upgrade to BUY, attractive dividend yield of 7%. The group is focused on enhancing value for shareholders and STE has been paying out 100% of its earnings as dividends since 2002. As a result, the Group has been able to generate very high ROEs in the range of 30%, while still retaining cash and cash equivalents of approximately S$1b at the end of 3Q08. We believe this strong cash holding will present potential growth upside – in the form of good acquisitions at distressed valuations. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Temasek Holdings Pte Ltd (%) Aberdeen Asset Management The Capital Group Companies Free Float (%) Avg. Daily Vol.(‘000)
2,999 7,377 / 5,060 50.3 8.1 7.0 34.6 5,250
Company Focus ST Engineering
Pace of order wins unaffected by global slowdown ST Engineering capped off the year 2008 with its first contract from a Singapore Integrated Resort – The Resorts World at Sentosa – to build an Integrated Security System, an IT Infrastructure System and a Carpark Guidance & Payment System. The contract is worth S$86m and will take STE’s outstanding orderbook at the end of FY08 to more than S$10b. Apart from this, STE has also been awarded contracts to supply the UK Defence Ministry with All Terrain Vehicles and 40mm ammunition (S$400m), build warships for the Thai Navy (S$200m) and build communication systems for the LTA (S$160m) – to name a few – in recent months.
Orderbook at the end of period 12.0
Competitive Strengths 10.0
8.0
9.7
9.6
9.9
10.0 9.5
9.2
9.3
9.5
1Q08
2Q08
3Q08
7.4
6.0
5.3
5.4
FY04
FY05
4.6 4.0
2.0
0.0
In all, STE won about S$1b worth of new orders each in 3Q08 and 4Q08, thereby demonstrating its resilient business model. Though FY07 remains the record year in terms of order wins – largely owing to the aircraft conversion orders from Fedex and Boeing/ ANA – FY08 order wins of S$2.7b is highly commendable in the face of a global meltdown. New order wins as announced 4500
3877
4000 3500 3000
2670
2603
2500 2000
1752
1781
2004
2005
1500 1000 500 0 2006
2007
2008
Source: Company
Record outstanding orderbook of S$10b provides for steady earnings visibility Over the last 8 quarters – since the jump in orderbook in 1Q07 from about S$7.4b to S$9.7b – the outstanding orderbook has remained largely stable, providing steady earnings visibility for forthcoming quarters. As evident from the last two quarters, we expect public spending in defence, transport, and infrastructure projects will mainly drive orderbook and revenue growth over the next two years. Management expects a year-end orderbook in excess of S$10b, which is the highest level ever.
Page 2
FY03
FY06
1Q07
2Q07
3Q07
4Q07
4Q08
Source: Company
US aerospace operations may recover faster than expected. IATA’s recent forecast for North American carriers paints a better picture than before, with 2009 industry losses expected to be lower than that in 2008. Carriers in this region were among the hardest hit by high fuel prices, but are now expected to post a loss of about US$4b in 2008, down from an earlier projection of US$6-7b of losses. An early 10-20% domestic capacity reduction has given the region’s carriers a head start in combating the recession-led fall in demand. The lack of hedging is also allowing North American carriers to now take full advantage of the significantly lower jet fuel prices. Hence, we believe the demand for 3rd party MRO works in the US may recover earlier than expected. Prototyping losses should be avoided in FY09 Pre-tax margins in the Aerospace segment in FY08 will be hit by high prototyping costs as the unit develops its Boeing 757 and 767 passenger-to-freighter (“PTF”) conversion capabilities. However, we believe that the PTF conversion program should start to contribute positively in FY09, as costs are incrementally lowered further along the learning curve, after another 3 units are delivered in 4Q08. Cash and cash equivalents of S$1b inspires confidence A strong balance sheet and excellent cash flows have helped the Group maintain a strong cash hoard of approximately S$1b, at the end of 3Q08. Only about S$100m of this constitutes investment assets, of which about S$70m is in the form of fixed income securities and only S$30m is exposed to the volatile equity markets. Hence, risks to the S$1b cash holding are relatively minimal.
Company Focus ST Engineering
What this implies – secure dividends, M&A The group is focused on enhancing value for shareholders and STE has been paying out 100% of its earnings as dividends since 2002. Despite this, the Group has been able to retain cash and cash equivalents of approximately S$1b at the end of 3Q08, while generating very high ROEs in the range of 30%. Thus, we forecast a relatively secure dividend yield of 7.2% for the full year of 2008 and 7.5% in FY09. The Group has historically made timely acquisitions like SAS Components and VT Halter Marine, as well as investments in JVs like STARCO and STATCO in China. Hence, we believe
that the current market environment provides the Group with an opportunity to provide further growth upside by pursuing good acquisitions at distressed valuations. Upgrade to BUY, unchanged target price of S$2.80. Debunking the conglomerate discount theory, investors have traditionally accorded ST Engineering a premium to the STI and our target price is based on 16x FY09 earnings, at the lower end of its forward PE valuation band. In light of potentially stable earnings, attractive dividend yield and potential growth upside through M&A; we upgrade the stock to BUY.
STE Forward PE Band (2001 – 2008) 4.5 4.0
24x
3.5
21x
3.0
18x
2.5
15x
2.0
12x
1.5 1.0 0.5 Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
0.0
Source: Bloomberg, DBS Vickers
Page 3
Company Focus ST Engineering
Appendix 1: List of major contracts secured in FY08 Date
Description of contract
Division
Date of Completion
Value (S$m)
12-Feb
2 PSVs for L&M Botruc Rental
Marine
2010
78
18-Feb
Maintenance of ATC system for CAAS
Electronics
2023
52
20-Feb
Extension of Flybe maintenance contract
Aerospace
2016
232 45
20-Feb
Delivery of mortar system for Middle East customer
Kinetics
2011
20-Feb
Supply of 40mm ammunition to UK MOD
Kinetics
2009
43
20-Feb
Outfitting of seismic vessel for Waveship
Marine
2H08
28 87
20-Feb
Engine maintenance contract with Comair
Aerospace
2016
24-Apr
Develop key systems for Thales ATC contract
Electronics
2012
37
7-May
Build AHTS for Ezra
Marine
2H09
26
30-May
Upgrade Derrick barge for Clough Java Offshore
Marine
1H09
29
5-Jun
Guangzhou Metrro Line contract
Electronics
Oct-10
18
16-Jun
Provide taxi management system in Sharjah
Electronics
Oct-09
12
18-Jul
Build an Ice-Class Diving Support Vessel
Marine
2H10
128
7-Aug
Renewed component supply contract with Polish Airlines
Aerospace
2011
19
1-Sep
Half height platform doors for MRT stations for LTA
Electronics
2012
112
16-Sep
Provide RSAF with aircraft and training
Aerospace
2032
105
23-Sep
Heavy maintenance works for SIA leased fleet
Aerospace
2016
-
29-Sep
Phase II of Egyptian Navy FMC contract
Marine
2012
577
16-Oct
Deliver 8600 rugged testers for US Army
Kinetics
2009
86
Electronics
2016
160
Marine
2H12
200
Aerospace
2H11
75
7-Nov
Build communication systems for LTA
11-Nov
Design and build Landing Platform Dock
27-Nov
Maintenance of 4 Indonesian Air Force aircraft
1-Dec
Build seismic vessel for Swire Pacific
Marine
2H10
30
18-Dec
Supply of Bronco Carriers to UK MOD
Kinetics
2010
330
19-Dec
Supply of 40mm ammunition to UK MOD
Kinetics
1H11
77
29-Dec
Integrated security system for Sentosa IR
Electronics
Dec-10
86
Total
Source: Company
Page 4
2670
Company Focus ST Engineering Appendix 2: Quarterly cash flow statements FY Dec (m)
1Q08
Pre-tax Profit
2Q08
3Q08
156.4
151.1
144.3
Tax Paid
(6.9)
(47.5)
(35.3)
Depreciation & Amortization
37.7
37.3
38.9
Associates & JVs Inc
(8.5)
(7.2)
(13.1)
Other Non-Cash Adjustments
17.5
24.9
26.3
Changes in Non-Cash Work Cap
65.5
(146.7)
(60.6)
Cash From Operations
261.6
11.9
100.5
Net Change in Capex
(49.1)
(29.5)
(32.8)
61.8
0.5
6.1
0.0
(2.7)
0.0
Net Change In Investments Net Change in Investments in Assoc & JVs Dividends received from Associates & JVs Other Investing Activities Cash from Investing Activities Dividends Paid Net Change in Gross Debt Capital Issues Other Financing Activities
28.5
4.9
5.2
(120.6)
(59.8)
(3.0)
(79.4)
(86.7)
(24.4)
(0.8)
(445.8)
(89.9)
6.9
35.5
(14.3)
17.7
9.1
2.1
(26.0)
(24.2)
3.2
(2.2)
(425.3)
(99.0)
Currency Adjustments
(13.0)
(3.0)
12.0
Net Changes in Cash / ST Investment
167.2
(503.1)
(11.0)
Cash/ST Investment at beginning of period
1,282.7
1,449.9
946.7
Cash/ST Investment at end of period
1,449.9
946.7
935.8
Cash from Financing Activities
Source: Company
Operating cash flows relatively healthy The Group has managed to deliver healthy operating cash flows over the first three quarters of 2008, with healthy profits compensating for working capital outflows – which resulted from decreases in creditors and accruals – in 2Q08 and 3Q08.
The Group paid out FY07 final dividends amounting to S$446 m in 2Q08. The Group also declared an interim dividend of 3 cents per share in 2Q08, which should be paid out in 4Q08. FY08 cumulative dividends are expected to be 100% of net profits – we expect the group to declare final DPS of 13cts, to be paid in May 2009.
FY07 final dividend paid out in 2Q08, expect final DPS of 13cts to be declared in Feb 2009.
Page 5
Company Focus ST Engineering Income Statement (S$ m) FY Dec
Balance Sheet (S$ m) 2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
5,051 (3,923) 1,128 (568) 560 39 47 (8) 0 638 (115) (20) 0 504 504 780
5,327 (4,182) 1,145 (580) 566 20 40 (22) 0 603 (92) (21) 0 491 491 772
5,555 (4,333) 1,222 (635) 587 29 41 (13) 0 644 (116) (22) 0 506 506 808
5,751 (4,486) 1,265 (621) 645 0 42 (13) 0 674 (121) (23) 0 529 529 841
Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
1,015 268 810 1,468 1,228 954 302 6,043
1,068 308 810 1,637 1,296 1,019 302 6,440
1,117 350 810 1,582 1,351 1,063 302 6,575
1,162 393 810 1,539 1,399 1,100 302 6,705
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
859 2,892 3 510 1,633 147 6,043
859 3,281 3 510 1,620 168 6,440
859 3,378 3 510 1,635 190 6,575
859 3,462 3 510 1,658 213 6,705
12.6 11.1 17.9 13.1 18.0
5.5 (1.0) 1.0 (2.6) 15.2
4.3 4.7 3.8 3.2 18.0
3.5 4.1 9.7 4.5 18.0
Non-Cash Wkg. Capital Net Cash/(Debt)
(409) 606
(664) 775
(662) 721
(661) 677
FY Dec
2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
638 134 (105) (47) (8) 55 668 (165) 112 40 24 (4) 6 (508) (10) 94 (102) (526) 148
603 147 (92) (40) 255 0 874 (200) 0 (50) 49 0 (201) (503) 0 0 0 (504) 169
644 151 (116) (41) (1) 0 637 (200) 0 (50) 49 0 (201) (491) 0 0 0 (491) (55)
674 155 (121) (42) (1) 0 664 (200) 0 (50) 49 0 (201) (506) 0 0 0 (506) (43)
22.3 11.1 10.0 31.5 8.7 15.2 100.0 71.0 0.9 65.5 137.9 112.3 1.1 0.6 CASH 19.2 20.3 22.7 16.9
21.5 10.6 9.2 30.2 7.9 15.2 100.0 25.6 0.9 67.6 140.9 114.2 1.0 0.6 CASH 23.2 26.0 20.7 22.6
22.0 10.6 9.1 31.1 7.8 15.2 100.0 44.9 0.9 68.4 141.8 115.6 1.0 0.6 CASH 23.2 24.2 21.4 14.6
22.0 11.2 9.2 32.1 8.0 16.4 100.0 49.3 0.9 68.6 142.2 115.9 1.0 0.6 CASH 23.2 22.7 22.3 15.5
2007A
2008F
2009F
2010F
1,835 1,023 1,178 863 152 5,051
1,918 1,119 1,320 804 167 5,327
1,959 1,211 1,411 788 186 5,555
1,982 1,253 1,547 763 206 5,751
341 115 80 97 5 638
304 113 102 79 5 603
307 122 118 92 6 644
328 126 128 86 6 674
18.6 11.3 6.8 11.2 3.3 12.6
15.9 10.1 7.8 9.8 3.0 11.3
15.7 10.1 8.3 11.7 3.0 11.6
16.5 10.0 8.3 11.2 3.0 11.7
Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (S$ m)
Rates & Ratio
Quarterly / Interim Income Statement (S$ m)
FY Dec
Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Asset Turnover (x) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N. Cash/(Debt)PS (S cts) Opg CFPS (S cts) Free CFPS (S cts) Segmental Breakdown
FY Dec
4Q2007
1Q2008
2Q2008
3Q2008
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
1,296 (999) 297 (159) 138 30 12 (2) 0 178 (26) (5) 146 146 207
1,315 (1,021) 295 (154) 141 12 9 (4) 0 156 (31) (3) 123 123 198
1,300 (1,006) 294 (146) 149 1 7 (5) 0 151 (29) (2) 120 120 194
1,382 (1,102) 280 (142) 138 (1) 13 (6) 0 144 (10) (5) 129 129 190
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
4.8 7.9 (3.3) 16.6 22.9 10.6 11.3
1.5 (4.1) 1.9 (16.3) 22.4 10.7 9.3
(1.1) (2.4) 5.7 (2.1) 22.6 11.4 9.2
6.3 (2.1) (6.9) 7.5 20.3 10.0 9.3
Page 6
FY Dec
FY Dec
Revenues (S$ m) Aerospace Electronics Land Systems Marine Others Total PBT (S$ m) Aerospace Electronics Land Systems Marine Others Total PBT Margins (%) Aerospace Electronics Land Systems Marine Others Total
Company Focus ST Engineering
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned company as of 31 Dec 2008
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
3.
Compensation for investment banking services: i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the mentioned company.
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Page 7
Company Focus ST Engineering
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 8
Malaysia Company Focus
AMMB Holdings Bloomberg: AMM MK
|
Reuters: AMMB.KL
DBS Group Research . Equity
5 Jan 2009
BUY RM2.51 KLCI : 894.36
Inflexion point
Price Target : 12-month RM 2.90 Reason for Report : Company update Potential Catalyst: Capturing synergies with new shareholder
We believe AMMB has reached an inflexion point in terms of valuation. It hit its trough P/BV multiple of 0.7x in Nov-08, the lowest since 1999. We believe there is no premium attributed to AMMB for ANZ’s presence in terms of management and expertise. Buy AMMB with a target price of RM2.90, which implies 1.0x CY09 BV.
Analyst Sue Lin Lim +603 2711 0971 [email protected]
“Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.” Price Relative RM
Relative Index
5.30
219
4.80
199
4.30
179 159
3.80
139 3.30
119
2.80
99
2.30 1.80 2004
Strategies intact but execution could be delayed We believe the strategies put in place by management are intact. Its focus is to de-risk, diversify and grow dynamically. Nevertheless, the challenging outlook in 2009 could see some of AMMB’s strategies bear fruit later than expected. There have been changes to ANZ representatives in AMMB, but it is more to beef up the necessary expertise in the respective areas of focus.
79 2005
2006
AMMB Holdings (LHS)
2007
59 2008
Relative KLCI INDEX (RHS)
Forecasts and Valuation FY Mar (RM m)
Pre-prov. Profit Net Profit Net Pft (Pre Ex.) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) Diluted EPS (sen) PE Pre Ex. (X) Net DPS (sen) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (sen) P/Book Value (x)
2008A
2009F
2010F
2011F
1,814 669 669 24.6 24.6 (376) 24.6 10.2 4.3 1.7 11.1 11.1 1.0 263 1.0
1,499 795 795 29.2 29.2 19 29.2 8.6 7.3 2.9 10.6 10.6 1.0 285 0.9
1,569 845 845 31.0 31.0 6 31.0 8.1 7.8 3.1 10.5 10.5 1.0 308 0.8
1,614 918 918 33.7 33.7 9 33.7 7.4 8.4 3.4 10.5 10.5 1.0 334 0.8
0.0 28.0
(2.2) 27.4
(2.7) 32.5
Earnings Rev (%): Consensus EPS (sen): ICB Industry : Financials ICB Sector: Banks Principal Business: Banking and Finance
“In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.” www.dbsvickers.com Refer to important disclosures at the end of this report ed: SGC / sa: WMT
Different profile since crisis Asset quality is expected to be generally stable, but management did not discount a possible uptick in the NPL ratio in FY10. We expect NPL ratio of 3.0% in FYMar09 and 3.1% for FYMar10. AMMB’s provision charge-off rate ballooned to 6.84% in 1998 after it was severely hit by chunky NPLs. But now, AMMB’s loan book has flipped completely with 70% retail loans compared to 80% corporate loans during the crisis. Valuations may have bottomed out Maintain Buy with target price at RM2.90 based on the Gordon Growth Model, implying 1.0x CY09 BV. The market has not imputed any ANZ premium in AMMB’s valuation. We believe AMMB’s P/BV valuations have bottomed out after hitting a low of 0.7x recently. We reduced our forecasts by 2-3% to reflect higher NPL ratios in FY Mar 10-11. At A Glance Issued Capital (m shrs) Mkt. Cap (RMm/US$m) Major Shareholders ANZ Funds (%) AmCorpGroup (%) EPF (%) Free Float (%) Avg. Daily Vol.(‘000)
2,723 6,835 / 1,971 19.7 17.6 9.2 53.5 6,629
Company Focus AMMB Holdings
Highlights Reconfiguring business focus. Management highlighted its strategic focus for FY10-11 that includes: (i) building up its deposits base, especially low cost deposits, (ii) increasing transactional deposits to enable AMMB to expand its cash management business, cross-sell and grow non-interest income, (iii) further expansion of its insurance business, and (iv) leveraging on the technical services JV with ANZ to diversify revenue through forex and derivatives. Management also said that it would reduce focus on origination activities because this segment of the capital market is expected to remain subdued. But if opportunities arise, it would enhance its distribution channels and ensure optimal pricing for distribution. We note that AMMB’s path for expansion tracks that of ANZ from 2001-2004. Improving deposit mix is key priority. AMMB’s low cost deposits now comprise 13% of total deposits; it is targeting 25%. We think it is crucial to not just ramp up low cost deposits, but to be able to retain them. AMMB is adopting a “AAA” strategy in deposit generation: (i) acquisition – where it aims to focus on mass affluent segments and payroll crediting facilities, (ii) activation – to provide convenience and simplified services, and (iii) anti-attrition – to reduce dormant and account closures. We understand that AMMB is actively bringing new deposit products to the market and leveraging on ANZ’s technical expertise for new product development and deposit expansion programs. Enhancing distribution network. AMMB aims to expand its branch network from 186 to at least 200 branches and ATM network by another 850 machines by 2011. AMMB has inked a strategic tie up with 7-11 (a 24-hour convenience store) to house up to 400 ATM machines in selected strategic store locations by 2010.
Restructuring of insurance business. AMMB announced that its 70%-owned subsidiary, AmG Insurance Bhd ("AmG"), had entered into a non-binding Memorandum of Understanding with MAA Holdings and MAA Assurance in respect of the proposed acquisitions. The proposal involves AmG acquiring the general insurance business of MAA Assurance and a 4.9% equity stake in MAA Takaful. Separately, Friends Provident plc will buy a 49% stake in AmAssurance Bhd, which would allow AmAssurance to grow AMMB’s life insurance segment. As part of AMMB’s internal restructuring of its insurance businesses, AMMB had in 2Q08 announced the establishment of AmG Insurance to undertake AmAssurance’s (AMMB’s 70% subsidiary) insurance business with the plan to split its life and general insurance business into two entities. Insurance business contributed c.12% of AMMB’s operating profit. The restructuring is positive for AMMB, allowing it to widen its insurance product offerings. For one, AMMB will get a ready customer base from MAA’s general insurance business. And the small stake in MAA Takaful would at least give AMMB a toehold into the takaful business, while Friends Provident plc will help AMMB to further enhance its life insurance business. AMMB’s insurance business used to contribute up to c.12% of operating profit, but could grow with these new collaborations. Looking back. AMMB suffered severe losses during the Asian crisis due to its exposure to large corporate loans. In FY98, it had to make a c.RM2.1bn provision or a charge-off rate of 6.84%, which resulted in a RM1.2bn loss for the year. But since then, AMMB’s loan composition for retail and non-retail loans has changed. This is also the reason why we believe NPLs and asset quality will not deteriorate to levels during the crisis period. AMMB’s NPLs and charge-off rates also shot up after the acquisition of MBf Finance in 2003. AMMB: Retail and non-retail loan breakdown
Page 2
Retail loans (%)
Source: Company data; DBS Vickers
Non-retail loans (%)
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
Scaling down IB business; focus on other fee-based business. Given the soft capital markets, AMMB could scale down its origination business. The set-up of the forex and derivatives unit in collaboration with ANZ is earmarked to be the key driver of non-interest income growth.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY97
Focus on business banking. AMMB’s key growth area will be the business banking division. It plans to build and improve customer relationships and expand referrals from existing customers. This would also be a good source of low cost deposits and non-interest income, especially from the cash management business.
Company Focus AMMB Holdings
goods and agriculture segments. But it might try to avoid large loans (which it was exposed to pre-crisis).
AMMB: Provision charge-off rate trend 8.0% Peak of NPLs during crisis i d
7.0% 6.0%
Malaysia: Mortgage market share (as at Sep-08) 18%
5.0%
Final round of kitchen sinking
4.0% Post MBf acquisition
3.0% 2.0%
15% 13%
14% 12% 10%
1.0%
8%
0.0%
6% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
16%
16%
7%
7%
6% 3%
4% 2%
Source: Company data; DBS Vickers
0% P ublic B ank
B CHB
M aybank RHB Cap
Ho ng Leo ng
AM M B
EON Cap
AMMB: (Net) NPL ratio trend Source: Company data; DBS Vickers
20.0% 18.0%
Expect loan yields to increase. Focusing on flight to quality loans will result in better loan yields. But we have not fully factored in better loan yields in our forecasts because we are unsure of the time frame at this juncture. As such, we are still forecasting a marginal decline in NIMs from 2.28% in FYMar09 to 2.27% in FYMar10 and to 2.21% in FYMar11.
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Company data; DBS Vickers
Prospects Unlikely to show strong loan growth. AMMB aims to grow its business banking division while moderately growing selected segments such as mortgages, credit cards and personal loans (co-op financing). Even within the mortgage space, the focus would be on the mid and mid-to-high end market segment. We note that AMMB is not out to chase market share, but grow its higher profitability segments. We project loan growth for FYMar09 at 8% before slowing to 6% for FYMar09, in anticipation of a softening economic environment. We do not expect hire purchase to grow significantly because AMMB is reconfiguring its loan asset composition to reduce concentration in lending exposures. We note that AMMB is still targeting to raise its hirepurchase business ROE from mid-single digit to double digit levels over the next 3-4 years. In business banking front, AMMB aims to entrench its position in high growth industries such as the oil & gas, fast moving consumer
Key stress segments highlighted. Management identified key stress areas that included unsecured lending, credit cards and mortgages, but these had not affected group P&L YTD. Management also expects the building and construction segments to be under more pressure as it is highly dependent on GDP growth. Possible uptick in NPL ratio in FY10. Asset quality is expected to remain stable, but management did not discount a possible uptick in NPL ratio in FY10. We expect NPL ratio of 3.0% in FYMar09 and 3.1% for FYMar10. Our stress test shows that every 10bps increase in provision charge-rates would reduce AMMB’s earnings by 6%. In the worst case scenario, when we applied a provision charge-off rate of 1.82%, which is half of the crisis levels (3.64%), AMMB would still be profitable although FYMar10F net profit would be reduced by 90%. And our projected FYMar10 book value per share could drop by 20sen to RM2.88 from RM3.08. But we do not expect this drastic scenario to materialise. To reiterate, AMMB’s loan profile is different from the crisis period.
Page 3
Company Focus AMMB Holdings
Valuation Valuations have bottomed out. Maintain Buy with target price at RM2.90 based on the Gordon Growth Model, implying 1.0x CY09 BV. The market has still not imputed any ANZ premium in AMMB’s valuation. But we believe AMMB’s P/BV valuations have bottomed out after hitting a low of 0.7x recently.
Earnings tweaked marginally. In view of the challenging operating environment in 2009-10, we reduced our earnings by 2-3% for FYMar10-11 to reflect higher NPL ratios. Key risks. Amidst the weakening economic outlook, the key risk for AMMB would be taking longer than expected to implement its strategies.
Sector valuation Banking Group
Price
Target
Rating
PE (x)
CAGR
P/BV (x)
ROE (%)
Price (RM/s)
(RM/s)
BCHB
2.51 6.20
2.90 5.50
EON Capital
3.24
Hong Leong Bank
5.15
AMMB
Net Div (%)
CY07A
CY08F
CY09F
^ (%)
CY07A
B FV
12.8 7.5
9.0 9.6
8.2 11.5
8.5 (3.4)
1.0 1.3
4.80
B
10.1
17.0
7.2
63.9
0.7
0.7
0.6
9.3
2.3
6.20
B
11.9
10.5
10.0
3.3
1.8
1.6
1.5
15.0
3.5 4.2
0.9 1.4
(RM/s)
(RM/s)
0.8 1.4
10.5 12.6
3.0 2.9
Maybank
5.20
4.20
FV
8.3
9.6
10.7
(4.4)
1.3
1.3
1.2
11.5
PBB - Foreign
8.75
11.90
B
12.5
10.7
10.1
8.0
2.8
2.7
2.6
26.0
7.9
RHB Capital
3.90
4.00
H
11.8
8.4
10.1
(0.8)
1.2
1.1
1.0
10.2
2.2
Sector Wt. Avg.
9.7
9.9
10.3
2.2
1.5
1.5
1.4
13.6
4.6
Sector Wt. Avg. (ex-Maybank)
10.3
10.0
10.1
4.4
1.6
1.5
1.4
14.5
4.7
Buy (B), Hold (H), Fully Valued (FV), Not Rated (NR), ^Refers to a 2-year EPS CAGR for CY07-09. Source: Company, DBS Vickers
Page 4
Company Focus AMMB Holdings Income Statement (RM m) FY Mar
Net Interest Income Non-Interest Income Operating Income Operating Expenses Pre-provision Profit Provisions Associates Exceptionals Pre-tax Profit Taxation Minority Interests Preference Dividend Net Profit Net Profit bef Except
Balance Sheet (RM m) 2008A
2009F
2010F
2011F
1,631 1,219 3,367 (1,552) 1,814 (638) 0 0 1,194 (384) (142) 0 669 669
1,749 914 3,206 (1,707) 1,499 (417) 0 0 1,092 (273) (24) 0 795 795
1,837 1,006 3,413 (1,844) 1,569 (417) 0 0 1,165 (291) (29) 0 845 845
1,901 1,106 3,606 (1,992) 1,614 (359) 0 0 1,270 (317) (35) 0 918 918
2009F
2010F
2011F
Profitability & Efficiency Ratios (%) FY Mar
Margins, Costs & Efficiency Yld. On Earnings Assets Avg Cost Of Funds Spread Net Interest Margin Cost-to-Income Ratio Employees ( Year End) Effective Tax Rate Business Mix Net Int. Inc / Opg Inc. Non-Int. Inc / Opg inc. Fee Inc / Opg Income Oth Non-Int Inc/Opg Inc Profitability ROAE Pre Ex. ROAE ROA Pre Ex. ROA
2008A
Net Interest Income Non-Interest Income Operating Income Operating Expenses Pre-Provision Profit Provisions Associates Exceptionals Pretax Profit Taxation Minority Interests Net Profit
Cash/Bank Balance Government Securities Inter Bank Assets Total Net Loans & Advs. Investment Associates Fixed Assets Goodwill Other Assets Total Assets Customer Deposits Inter Bank Deposits Debts/Borrowings Others Minorities Shareholders' Funds Total Liab& S/H’s Funds
2008A
2009F
2010F
2011F
10,958 0 1,388 52,454 9,730 1 233 1,802 4,924 83,192 47,767 15,119 4,861 6,488 84 7,170 83,192
9,061 0 1,402 57,974 10,275 1 237 1,712 5,671 88,292 51,111 15,905 4,861 6,553 108 7,766 88,292
9,714 0 1,416 61,405 10,854 1 242 1,712 6,016 93,612 54,689 16,541 4,861 6,599 137 8,400 93,612
10,192 0 1,423 65,541 11,468 1 247 1,712 6,393 99,566 58,517 17,368 4,861 6,698 172 9,088 99,566
2008A
2009F
2010F
2011F
119.0 63.1 11.7 70.5 22.3
120.1 65.7 11.6 71.1 22.1
119.0 65.6 11.6 71.9 21.7
117.9 65.8 11.5 72.5 21.5
6.3 4.3
5.6 3.9
5.7 4.0
5.0 3.5
15.1 8.2
14.1 8.6
14.2 9.0
14.3 9.3
10 13
11 7
6 7
7 7
Financial Stability Measures (%)
5.19 3.04 2.15 2.24 46.1 0 32.1
5.20 3.00 2.20 2.28 53.3 0 25.0
5.15 2.95 2.20 2.27 54.0 0 25.0
5.10 2.95 2.15 2.21 55.2 0 25.0
48.4 36.2 15.9 20.3
54.6 28.5 15.0 13.5
53.8 29.5 14.8 14.7
52.7 30.7 14.7 16.0
11.1 11.1 1.0 1.0
10.6 10.6 1.0 1.0
10.5 10.5 1.0 1.0
10.5 10.5 1.0 1.0
Quarterly / Interim Income Statement (RMm) FY Mar
FY Mar
FY Mar
Balance Sheet Structure Loan-to-Deposit Ratio Net Loans / Total Assets Investment / Total Assets Cust . Dep./Int. Bear. Liab. Interbank Dep / Int. Bear. Asset Quality NPL / Total Gross Loans NPL / Total Assets Capital Strength Total CAR Tier-1 CAR Growth Total Net Loans Customer Deposits
Rolling forward P/BV
3Q2008
4Q2008
1Q2009
2Q2009
473 328 924 (415) 510 (184) 0 0 326 (85) (43) 198
432 261 830 (458) 372 (63) 0 0 309 (85) (6) 217
434 220 779 (418) 362 (88) 0 0 274 (69) (1) 203
458 148 754 (394) 360 (35) 0 0 326 (91) (5) 230
(RM) 6.00
PBV 2.0x
5.00
PBV 1.6x
4.00
PBV 1.2x
3.00 PBV 0.8x 2.00 PBV 0.4x
1.00 0.00 97
98
99
00
01
02
03
04
05
06
07
08
Source: Company, DBS Vickers
Page 5
Company Focus AMMB Holdings
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned company as of 31 Dec 2008.
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
3.
Compensation for investment banking services:
Page 6
i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the mentioned company.
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Company Focus AMMB Holdings
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 7
Hong Kong / China Company Focus
China Telecom Bloomberg: 728 HK EQUITY
|
Reuters: 0728.HK
DBS Group Research . Equity
5 January 2009
BUY HK$3.07 HSI : 15,043
Negatives reflected, upsides remain
Price Target : 12-Month HK$ 3.70 Reason for Report : Company update Potential Catalyst: Strong CDMA users growth, potential favourable asymmetric measures and 3G licensing
The acquisition of the CDMA business should help mitigate the decline in fixed-line business and cement growth momentum in broadband business. With an expected turnaround in CDMA business, CT would regain double-digit earnings growth in two to three years’ time.
Analyst Steven Liu CFA, +852 2971 1780 [email protected]
Ongoing business to improve. The CDMA business would help improve CT’s ongoing business in the following aspects: 1) CT intends to migrate one third of its PHS users to CDMA services, 2) through services bundling, CT is set to gain market share in the household, enterprises and high-end individual customers market and 3) a lot of synergy should be realized by sharing resources in marketing, customer services and networks.
Price Relative HK$
R e la t iv e In d e x
7 .8 0 207 6 .8 0 187 5 .8 0
167 147
4 .8 0
127 3 .8 0 107 2 .8 0
1 .8 0 2004
87
2005
2006
C h in a T e le c o m ( L H S )
67 2008
2007
R e la t iv e H S I IN D E X ( R H S )
Forecasts and Valuation FY Dec (RMB m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A 178,656 86,808 30,251 23,702 23,702 0.29 0.33 (13.0) 0.33 0.09 3.10 9.2 2.9 3.5 2.9 1.0 0.4 11.1
2008E 211,617 87,727 30,671 24,702 24,702 0.31 0.35 4.2 0.35 0.10 3.35 8.9 2.8 3.7 3.1 0.9 0.4 10.7
2009F 240,089 82,618 22,977 17,797 17,797 0.22 0.25 (28.0) 0.25 0.07 3.53 12.3 3.1 3.7 2.3 0.9 0.3 7.3
2010F 265,342 92,676 32,319 24,574 24,574 0.30 0.34 38.1 0.34 0.10 3.77 8.9 2.7 3.1 3.3 0.8 0.3 9.4
Nil
Nil
Nil
0.32
0.27
0.31
Earnings Rev (%): Consensus EPS (HK$):
ICB Industry: Telecommunications ICB Sector: Fixed Line Telecommunications Principal Business: CT is the largest fixed-line telecom operator in China, with service areas covering 20 southern China provinces. After acquiring the CDMA business, CT will become an integrated telecom services provider in China.
Near term losses in CDMA. To fulfil its 100m customers target, CT intends to provide CDMA users handset subsidies worth 30% to 40% of total contract value. As CT would expense instead of amortize the handset subsidies, it would suffer big losses in the first two years. However, we expect significant profit improvement in the CDMA from 2H09 when revenue will continue to increase while expenses begin to decrease. Potential long-term winner. CT’s long-term competitiveness would be underpinned by 1) its abundant fixed-line and broadband network resources, 2) clear and promising growth strategies and 3) its resolution to develop the CDMA business. We have maintained our forecasts and target price at HK$3.70. With nationwide promotion of CDMA services since late December, we expect strong CDMA subscriber growth starting from 2009, which should be major catalyst to share price. Maintain Buy. At A Glance Issued Capital - H shares (m shs) - Non H shrs (m shs) H shs as a % of Total H Mkt Cap (HK$m/US$m) Major Shareholders (%) China Tel Corp GD Rising Asset Mgt Major H Shareholders (%) RF S Holdings B.V . J PMorgan Chase & Co. Barclay s PLC H Shares-F ree F loat (%) Av g Daily V olume (m shrs)
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report ed-LM / sa- GL
42,604
13,877 67,055 17 / 5,497 70.89 6.94 6.54 6.03 5.48 81.95 157.8
Company Focus China Telecom
Industry evolution in favor of CT Intensifying competition in mobile phone market. After the industry restructuring, all the three telecoms operators will become full telecom service operators in the long run. During the Jan08-Nov08 period, mobile telecoms accounted for 54.8% of the total revenue of the telecoms market in China. Hence, we believe the mobile telecom market would see the fiercest competition given its huge market potential. As of Nov08, China’s mobile phone users penetration was still at a relatively low level of 47.3%, which should imply sustainable growth at double-digit in the number of mobile phone users over the next couple of years. Though mobile phone ARPU would continue to decline in the near term due to competition, we believe it would be back on uptrend in two years to be driven by 3G-related data revenue. Full-service to mitigate fixed-line declines. Fixed-line market has been hit hard by fixed-to-mobile migration in the past two years. But the decline in the number of fixed-line would be mitigated by two factors: 1) innovation in fixed-line services, and 2) fixed and mobile convergence. Hence, the decline in fixed-line revenue would be at a moderate level of single-digit in the next couple of years. Broadband market remains promising. Though still smaller than fixed-line and mobile phone market, broadband has become the fastest-growing market in China. With broadband users penetration below 10%, we believe the market would be sustainable at a decent double-digit growth over the next five years. As a dominant provider of broadband services in the 20 southern provinces, CT would be the most beneficiary of this promising market. CDMA remains the main concern. As the parent company will bear the capex on CDMA network, we see no major concern on capex risk with CT. Instead, the major risk lies with its capability to fulfil its target of 100m CDMA users in three years time. CT intends to give handset subsidies for its CDMA users, which also raises a big downside risk in the loss of the CDMA business in the next two years. 2009: a transitional year Turnaround in CDMA from 2H09. We expect a turnaround in CDMA business from 2H09, which is to be underpinned by 1) CT’s handset subsidy policy which should secure rapid growth in the number of CDMA users, 2) to be expensed (not
Page 2
amortized), handset subsidies would mainly affect CDMA profit in the next one to two years, and 3) CT’s abundant fixed-line and broadband network resources should give it a winning edge in offering bundled services and acquiring CDMA users. CT to regain double-digit earning growth in two years’ time. CT might suffer decline in earnings over the next two years due to potential big losses from CDMA business. However, we expect rapid recovery starting from 2H10, which would be underpinned by 1) stabilizing fixed-line business thanks to bundling services, 2) rapidly growing broadband business, and 3) significant improvement in CDMA business. We also expect CT to become the most competitive full telecoms service operator in the long run in view of its abundant fixedline and broadband network resources. Financials and Valuation Financial position remains strong. As CT’s parent company will bear the capex on CDMA network expansion and update, CT expects total capex to maintain flat or decline going forward. CT intends to fund the RMB43.8bn acquisition of the CDMA by issuing corporate bonds and long-term debts, which would not affect its balance sheet substantially as net gearing remaining below 40%. A winner in the long run. Our belief in CT’s long-term competitiveness stems from its abundant fixed-line and broadband network resources as well as its clear development strategies that focus on services bundling and services differentiation. Nevertheless, CT has made it clear that LTE will be the 4G standard for the CDMA technology evolution, which would be a boost to the shrinking CDMA camp on the global telecoms market. Limited near term downside, great long-term upside. We have maintained our forecasts and target price at HK$3.70. Looking forward, the downside might come from biggerthan-expected loss from CDMA business. However, we see more upside than downside. With CT’s starting promoting CDMA services on nationwide basis since late December, we expect strong CDMA users growth starting from 2009, which should be a major catalyst for share prices. Maintain Buy.
Company Focus China Telecom
Peers comparison
Code
Company
Price (Local$) Mkt cap (USD) CNY
T US 941 HK VOD US VZ US TEF SM DTE GR FTE FP 9437 JP S US TIT IM TLS AU 728 HK BHARTI IN ST SP BCE CN 9433 JP MTN SJ TLKM IJ 762 HK SCMN VX 017670 KS 2412 TT
AT&T INC CHINA MOBILE* VODAFONE GROUP VERIZON COMMUNIC TELEFONICA DEUTSCHE TELEKOM FRANCE TELECOM NTT DOCOMO INC SPRINT NEXTEL CO TELECOM ITALIA S TELSTRA CORP CHINA TELECOM-H* BHARTI AIRTEL LT SINGAP TELECOMM BCE INC KDDI CORP MTN GROUP LTD TELEKOMUNIKASI CHINA UNICOM HON*^ SWISSCOM AG-REG SK TELECOM CHUNGHWA TELECOM
USD 28.50 HKD 81.20 GBp 138.20 USD 33.90 EUR 16.07 EUR 10.83 EUR 20.03 JPY 176,400 USD 1.83 EUR 1.16 AUD 3.85 HKD 3.07 INR 707.70 SGD 2.55 CAD 25.13 JPY 635,000 ZAr 11,012 IDR 6,900 HKD 10.12 CHF 339.50 KRW 210,000 TWD 53.50
Q US 032390 KS 2332 HK 8 HK 315 HK
QWEST COMMUNICAT KT FREETEL CO HUTCHISON TELECO PCCW LTD SMARTONE TELECOM
USD KRW HKD HKD HKD
3.64 29,550 2.10 3.68 5.75
167,951 210,063 109,618 96,292 97,272 60,738 67,369 82,200 5,228 28,862 30,679 32,055 26,856 26,784 16,295 29,577 20,396 11,449 31,031 15,093 11,367 18,622 6,200 3,709 1,303 3,215 414
FY08 PE
FY09 PE
Latest Reported EBITDA ROE EV/EBITDA margin FY10 (%) (%) (T12M) PE PB (x)
10.0 11.7 11.0 13.2 10.0 14.7 9.9 15.5 26.1 10.0 12.9 8.9 21.0 10.2 11.3 13.0 13.0 11.4 11.2 9.7 11.2 12.1
9.7 10.0 10.2 12.4 9.1 13.1 9.5 14.9 n.a. 10.2 12.4 12.3 15.9 11.8 11.2 10.4 9.6 10.7 11.5 9.3 9.9 12.1
9.1 8.7 9.7 11.8 8.2 12.0 9.1 16.2 n.a. 9.6 10.5 8.9 13.0 11.2 11.2 11.0 8.2 9.8 10.7 9.0 8.7 12.2
1.6 3.8 0.8 1.7 4.2 1.2 1.8 1.5 0.3 0.7 4.3 0.9 5.7 2.0 2.0 1.5 3.1 3.4 1.2 3.4 1.4 1.6
5.9 7.9 6.6 5.5 5.3 5.5 4.4 4.1 4.8 5.4 6.7 4.2 14.1 13.0 7.1 4.1 n.a. 4.4 2.9 5.5 4.9 5.3
35.3 55.2 37.0 32.1 40.4 26.3 36.3 33.6 25.6 37.1 41.0 50.0 42.5 29.6 39.0 21.1 43.9 64.1 41.3 37.4 35.7 54.0
10.4 25.1 9.2 11.1 47.8 1.3 22.2 11.6 (78.7) 9.4 30.3 11.1 38.6 18.9 30.0 13.6 24.7 41.6 12.3 41.4 15.8 12.1
5.0 2.8 0.1 4.9 4.7 7.2 6.5 2.7 5.5 6.9 7.3 2.9 0.0 4.9 5.8 1.7 0.0 5.2 3.1 5.0 4.5 6.6
9.1 n.a. 8.1 11.8 12.0
9.5 n.a. 8.9 11.0 14.5
10.9 n.a. 7.0 10.3 12.6
12.7 1.3 0.2 13.5 1.2
4.3 4.3 7.3 8.2 2.4
30.6 21.7 25.4 31.1 26.7
n.a. 5.7 196.9 151.7 8.6
2.2 0.0 0.0 5.4 8.3
Div yield (%)
Source: Bloomberg, *DBS Vickers
Page 3
Company Focus China Telecom Income Statement (RMB m)
Balance Sheet (RMB m)
FY Dec Turnover Cost of Goods Sold Gross Profit Other Opg (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net profit before Except.
2007A
2008E
2009F
2010F
178,656 211,617 240,089 265,342 (141,645) (177,500) (212,030) (228,551) 37,011 34,117 28,060 36,791 0 0 0 0 37,011 34,117 28,060 36,791 (2,672) 42 46 50 212 233 257 282 (4,300) (3,721) (5,385) (4,805) 0 0 0 0 30,251 30,671 22,977 32,319 (6,452) (5,862) (5,063) (7,616) (97) (107) (117) (129) 0 0 0 0 23,702 24,702 17,797 24,574 23,702 24,702 17,797 24,574
EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effective Tax Rate (%)
86,808 1.7 (3.4) (4.0) 21.3
87,727 18.4 1.1 (7.8) 19.1
82,618 13.5 (5.8) (17.8) 22.0
92,676 10.5 12.2 31.1 23.6
2007A
2008E
2009F
2010F
30,251 52,257 (7,116) 0 (212) (5,644) 5,236 74,772 (45,867) (30) 0 0 (312) (46,209) (6,273) (19,894) 0 (4,338) (30,505) (1,942)
30,671 53,336 (5,730) 0 (233) (5,339) 3,250 75,954 (47,132) 0 0 0 (40,250) (87,382) (6,791) 21,277 0 0 14,486 3,058
22,977 54,256 (4,897) 0 (257) (4,807) 3,489 70,762 (50,494) 0 0 0 (250) (50,744) (5,071) (16,987) 0 0 (22,058) (2,039)
32,319 55,552 (7,452) 0 (282) (5,984) 3,740 77,893 (53,637) 0 0 0 (250) (53,887) (7,124) (13,671) 0 0 (20,795) 3,211
Cash Flow Statement (RMB m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid (Pft)/ Loss on disposal of Assoc. & JV Inc/(loss) Non-Cash Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
FY Dec
2007A
2008E
2009F
2010F
Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
326,123 793 38,408 20,556 2,663 16,710 2,751 408,004
318,754 1,026 78,177 23,614 2,685 20,104 2,751 447,111
312,892 1,283 78,919 21,575 2,708 23,289 2,751 443,417
308,224 1,565 80,348 24,786 2,732 26,534 2,751 446,941
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
71,001 67,536 34,153 12,942 220,921 1,451 408,004
48,982 69,733 77,449 10,556 238,832 1,558 447,111
32,978 69,602 76,466 11,137 251,559 1,675 443,417
20,289 71,552 75,484 8,803 269,009 1,804 446,941
Non-Cash Wkg. Cap Net Cash/(Debt)
(45,412) (44,194) (84,598) (102,817)
(40,855) (87,869)
(39,535) (70,987)
Rates & Ratios
Interim Income Statement (RMB m)
FY Dec Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Interest Cover (x) Asset Turnover (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N.Cash/(Debt)PS (RMB) Opg CFPS (RMB) Free CFPS (RMB)
2H2006
1H2007
2H2007
1H2008
FY Dec
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
88,271 (70,946) 17,325 0 17,325 (5) 54 (1,991) 0 15,383 (2,247) (50) 13,086 13,086 43,181
89,757 (69,072) 20,685 0 20,685 0 9 (2,013) 0 18,681 (4,898) (27) 13,756 13,756 46,783
88,899 (72,573) 16,326 0 16,326 (2,672) 203 (2,287) 0 11,570 (1,554) (70) 9,946 9,946 40,025
90,434 (71,682) 18,752 0 18,752 (4) 34 (2,289) 0 16,493 (3,816) (43) 12,634 12,634 45,326
Revenues Voice revenue Broadband VAS CDMA Others Total
3 1 1 (1.0) 19.6 19.6 14.8
3 0 (2) (2.8) 23.0 23.0 15.3
1 (7) (6) (24.0) 18.4 18.4 11.2
1 (3) (9) (8.2) 20.7 20.7 14.0
Source: Company, DBS Vickers
Page 4
2008E
2009F
2010F
20.7 20.7 13.3 11.1 5.7 8.4 26.5 8.6 0.4 33.4 124.0 12.0 0.3 0.3 0.4 43.6 (1.2) 1.13 0.41
16.1 16.1 11.7 10.7 5.8 7.7 27.5 9.2 0.5 31.7 86.0 7.9 0.4 0.4 0.4 37.3 (1.4) 1.14 0.40
11.7 11.7 7.4 7.3 4.0 5.8 28.5 5.2 0.5 33.0 71.1 6.2 0.5 0.4 0.3 46.1 (1.2) 1.06 0.28
13.9 13.9 9.3 9.4 5.5 7.5 29.0 7.7 0.6 34.3 66.0 5.7 0.6 0.6 0.3 56.0 (1.0) 1.18 0.34
Segmental Breakdown (RMB m)
FY Dec
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
2007A
2007A
2008E
2009F
2010F
114,606 31,340 19,231 N/A 13,479 178,656
103,855 38,386 24,423 30,528 14,425 211,617
94,479 45,657 28,820 55,864 15,270 240,089
86,841 52,634 33,143 76,404 16,321 265,342
Company Focus China Telecom
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. The analyst and DBS Vickers (Hong Kong) Limited (“DBSVHK”) certify that no compensation or benefits in connection with this research report is received from the listed corporation or other rd 3 party. DBSVHK and the research analyst will not be held responsible if this investment research, or recommendation is published or otherwise reproduced in whole or in part by the mass media without the relevant disclosures. This document is published by DBSVHK, a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd. (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVHK accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, have not beneficially owned a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBSVUSA, within the past 12 months, have not received compensation and/or may within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
DBS Vickers (Hong Kong) Limited 18th Floor Man Yee Building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523
Page 5
Hong Kong / China Company Focus
Parkson Bloomberg: 3368 HK Equity
|
Reuters: 3368.HK
DBS Group Research . Equity
5 January 2009
HOLD HK$8.63 HSI : 15,043
Recent momentum slows
(Downgrade from BUY) Price Target : 12m HK$ 9.60 (Prev HK$12.55) Reason for Report : Company update Potential Catalyst: M&A potentials, including buying out jointventure stores and purchasing its managed stores from parent. Analyst Mavis Hui +852 2863 8879 [email protected]
Price Relative HK$
R e la t iv e In d e x
1 9 .8 0 519 1 7 .8 0 1 5 .8 0
419
1 3 .8 0 319
1 1 .8 0 9 .8 0
219 7 .8 0 5 .8 0
119
3 .8 0 19
1 .8 0 2005
2006
2007
P a rk so n (L H S )
2008
R e la t iv e H S I IN D E X ( R H S )
Forecasts and Valuation FY Dec (RMB m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A 3,060 1,131 943 676 676 0.24 0.28 46.2 0.28 0.14 1.14 31.1 26.7 18.9 1.6 7.6 0.1 27.0
2008E 3,725 1,387 1,200 882 882 0.32 0.36 29.7 0.36 0.18 1.32 24.0 21.2 14.9 2.1 6.6 CASH 29.3
2009F 4,472 1,661 1,457 1,068 1,068 0.38 0.44 21.1 0.44 0.22 1.53 19.8 17.7 11.9 2.5 5.6 CASH 30.6
2010F 5,495 2,039 1,847 1,351 1,351 0.48 0.55 26.4 0.55 0.28 1.81 15.7 14.3 9.1 3.2 4.8 CASH 32.9
(6) 0.36
(13) 0.45
(11) 0.53
Earnings Rev (%): Consensus EPS (HK$):
ICB Industry: Consumer Services ICB Sector: General Retailers Principal Business: Operates an extensive network of over 40 Parkson department stores across nearly 30 cities in China
Parkson’s sales momentum in recent weeks could fall slightly below expectations as competition intensifies. Despite our view that Parkson’s medium-term growth prospects should remain very optimistic, we have revised down our earnings projection and downgraded the counter to a HOLD in the anticipation of a more difficult environment into 1H09. Growth fell slightly below targets. We believe Parkson’s average same-store sales (SSS) growth has fallen slightly behind management targets in recent weeks amid a more competitive operating landscape among department store players. Amongst all, Parkson’s operations along the major coastal cities such as Shanghai, Wuxi, HeFei, etc. have been affected most, possibly also due to these cities’ stronger reliance on export growth. Tougher environment. As overall consumer sentiment slows in conjunction with deteriorating global economic environment, selective peers have elevated their promotional strategies of late and offer steeper discounts to attract sales. With current market expectations for a more challenging market in 1H09, management could possibly be guiding a slightly lower growth rate for November 2008 to June 2009, against earlier SSS growth targets of 12-13%. More stringent control on costs, including further room for savings on advertising costs, staff expenses and utility costs, could hopefully help to support profitability to some extent. Medium-term outlook remains positive. Sitting on c.RMB1bn net cash, Parkson will maintain its store opening momentum ahead, as well as taking advantage of the current environment to lock-up attractive acquisition opportunities for market share. Coupled with the government’s priority to roll-out longer term policies to boost domestic demand, we strongly believe that the company should still post a rosy growth prospect in the medium-term. Yet, in view of a more difficult environment ahead, we have prudently downgraded our earnings forecasts by 6% for FY08, 13% for FY09, and 11% for FY10, and revised down our target price to HK$9.6 based on 22x FY09 PE, or 1x PEG (previously based on 25x PE). Trading at 10% discount to our new target price following the recent share price rally (up 23% in the last two months), we downgrade the counter to a HOLD. At A Glance Issued Capital (m shrs) Mkt Cap (HK$m/US$m) Major Shareholders (%) Parkson Holdings J PMorgan Chase Deutsche Bank Aktiengesellschaft F ree F loat (%) Av g Daily V olume (m shrs)
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report sa- GL
2,798 24,144 / 3,115 53.68 12.83 6.00 27.49 8.8
Company Focus Parkson Income Statement (RMB m)
Balance Sheet (RMB m)
FY Dec
2007A
2008E
2009F
2010F
Turnover Cost of Goods Sold Gross Profit Other Opg (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net profit before Except.
3,060 (2,043) 1,017 0 1,017 0 1 (74) 0 943 (215) (52) 0 676 676
3,725 (2,459) 1,267 0 1,267 0 1 (67) 0 1,200 (276) (42) 0 882 882
4,472 (2,940) 1,532 0 1,532 0 1 (76) 0 1,457 (339) (50) 0 1,068 1,068
5,495 (3,593) 1,903 0 1,903 0 1 (56) 0 1,847 (439) (58) 0 1,351 1,351
1,131 40.1 41.9 43.6 22.8
1,387 21.8 22.7 24.6 23.0
1,661 20.0 19.8 21.0 23.3
2,039 22.9 22.7 24.2 23.8
EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effective Tax Rate (%)
Cash Flow Statement (RMB m)
FY Dec
2007A
2008E
2009F
2010F
Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
819 2 3,989 3,642 144 19 375 8,989
889 2 3,937 4,425 175 23 456 9,909
951 2 3,891 5,352 210 28 548 10,982
1,005 2 3,851 6,559 259 34 673 12,384
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
0 2,004 3,837 280 2,789 79 8,989
0 2,431 3,837 329 3,228 83 9,909
0 2,911 3,837 384 3,762 87 10,982
0 3,565 3,837 453 4,437 91 12,384
Non-Cash Wkg. Cap Net Cash/(Debt)
(1,466) (196)
(1,776) 588
(2,125) 1,514
(2,599) 2,722
2007A
2008E
2009F
2010F
33.2 33.2 22.1 27.0 8.2 12.2 49.2 13.8 0.4 2.2 190.7 24.0 2.1 1.8 0.1 3.9 (0.1) 0.38 0.39
34.0 34.0 23.7 29.3 9.3 13.5 50.0 18.8 0.4 2.1 198.1 24.9 2.1 1.8 CASH 5.0 0.2 0.45 0.53
34.3 34.3 23.9 30.6 10.2 15.1 50.0 20.2 0.4 2.1 199.1 25.0 2.1 1.8 CASH 5.0 0.6 0.54 0.63
34.6 34.6 24.6 32.9 11.6 17.2 50.0 33.8 0.5 2.1 196.9 24.8 2.1 1.8 CASH 5.0 1.1 0.65 0.80
Rates & Ratios
FY Dec
2007A
2008E
2009F
2010F
FY Dec
Pre-Tax Profit Dep. & Amort. Tax Paid (Pft)/ Loss on disposal of FAs Assoc. & JV Inc/(loss) Non-Cash Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
943 114 (236) 0 (1) 184 96 1,102 (148) 0 0 0 (1,586) (1,734) (271) 655 186 (349) 221 (411)
1,200 120 (302) 0 (1) 374 92 1,483 (190) 0 0 0 279 89 (441) 0 0 (347) (789) 784
1,457 128 (371) 0 (1) 419 103 1,737 (190) 0 0 0 195 5 (534) 0 0 (281) (815) 927
1,847 135 (480) 0 (1) 574 86 2,163 (190) 0 0 0 215 25 (675) 0 0 (305) (980) 1,207
Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Interest Cover (x) Asset Turnover (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N.Cash/(Debt)PS (RMB) Opg CFPS (RMB) Free CFPS (RMB)
1H2006
2H2006
1H2007
2H2007
Other Oper. (Exp)/Inc Operating Profit
943 (638) 304 0 304
1,241 (838) 404 0 404
1,481 (1,004) 477 0 477
1,578 (1,039) 540 0 540
Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except.
0 0 22 0 326 (103) (27) 196 196
0 0 2 0 406 (116) (26) 265 265
0 0 (38) 0 439 (105) (31) 303 303
0 0 (36) 0 504 (111) (21) 373 373
Sales Gth (%) Opg Profit Gth Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
87 82 84.2 32.3 32.3 20.8
75 76 87.0 32.5 32.5 21.3
57 57 54.7 32.2 32.2 20.5
27 34 40.8 34.2 34.2 23.6
Interim Income Statement (RMB m) FY Dec Turnover Cost of Goods Sold Gross Profit
Source: Company, DBS Vickers
Page 2
Segmental Breakdown (RMB m) FY Dec Revenues Sales of goods - direct sales Commission from concessionaire sales Consultancy and management fees Rental income Others Total
2007A
2008E
2009F
2010F
1,044
1,235
1,494
1,833
1,511
1,879
2,239
2,755
33
30
36
44
139 333 3,060
171 410 3,725
207 496 4,472
254 609 5,495
Company Focus Parkson
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. The analyst and DBS Vickers (Hong Kong) Limited (“DBSVHK”) certify that no compensation or benefits in connection with this research report is received from the listed corporation or other rd 3 party. DBSVHK and the research analyst will not be held responsible if this investment research, or recommendation is published or otherwise reproduced in whole or in part by the mass media without the relevant disclosures. This document is published by DBSVHK, a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd. (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVHK accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, have not beneficially owned a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBSVUSA, within the past 12 months, have not received compensation and/or may within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
DBS Vickers (Hong Kong) Limited 18th Floor Man Yee Building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523
Page 3
Hong Kong / China Company Focus
TVB Bloomberg: 511 HK EQUITY
|
Reuters: 0511.HK
DBS Group Research . Equity
5 January 2009
HOLD HK$25.20 HSI : 15,043
Gloomy outlook
Price Target : 12-Month HK$ 26.04 (Prev HK$39.04) Reason for Report : Company update Potential Catalyst: Further improvement in Pay-TV division; speculated stake sale by major shareholder in the longer term. Analyst Mavis Hui +852 2863 8879 [email protected]
Sharp drop in 4Q08 revenue. We expect TVB to post >10% y-o-y revenue fall from its core Hong Kong TV advertising unit for 4Q08. Revenue dropped more substantially in November and December, by mid-teen percentages. The biggest drop was from finance & banking, which was among the top five advertising product categories for TVB. Other products such as skincare and F&B are still holding up, but we are not hopeful revenue from these will be sustainable given the rough economic environment in the coming months.
Price Relative HK$
R e la t iv e In d e x
6 2 .2 0
213
5 7 .2 0
193
5 2 .2 0
173
4 7 .2 0
153
4 2 .2 0 133 3 7 .2 0 113 3 2 .2 0 93
2 7 .2 0
73
2 2 .2 0 1 7 .2 0 2004
2005
T V B (L H S )
2006
53 2008
2007
R e la t iv e H S I IN D E X (R H S )
Forecasts and Valuation FY Dec (HK$ m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
We believe TVB’s core revenue from Hong Kong dipped 10% in 4Q08. And 2009 revenue could be worse than during the SARS period, as the slowdown is happening on a global scale vs a regional outbreak in 1H03. We reduced our forecast earnings substantially, but retain our HOLD recommendation in view of TVB’s satisfactory yield and undemanding valuations.
2007A 4,326 1,694 1,550 1,264 1,259 2.89 6.3 2.89 1.80 12.20 8.7 6.7 5.3 7.1 2.1 CASH 24.8
2008E 4,572 1,748 1,465 1,203 1,203 2.75 (4.8) 2.75 1.72 13.23 9.2 6.8 5.2 6.8 1.9 CASH 21.6
2009F 4,253 1,379 1,116 916 916 2.09 (23.8) 2.09 1.31 14.01 12.0 8.3 6.2 5.2 1.8 CASH 15.4
2010F 4,378 1,372 1,139 935 935 2.13 2.0 2.13 1.34 14.81 11.8 8.4 5.9 5.3 1.7 CASH 14.8
(6) 2.82
(30) 2.80
(33) 3.04
Earnings Rev (%): Consensus EPS (HK$):
ICB Industry: Consumer Services ICB Sector: Media Principal Business: Free-to-air terrestrial broadcaster in Hong Kong.
Potentially worse than SARS. To recall, TVB’s domestic operations registered 11.5% y-o-y revenue drop in 1H03 due to SARS. This time round, the company has already started to selectively enhance program quality in order to retain premium customers, as well as cutting costs (e.g. laid off 212 support staff in Dec 2008). But management has not ruled out the possibility of more severe impact in 2009 because it is now a global crisis. Downward earnings revision. We lowered our earnings by 6% to HK$1.2bn for FY08, by 30% to HK$916m for FY09F, and by 33% to HK$935m for FY10F. Our new target price is HK$26.04, based on 9.7% WACC and 0.5% perpetual growth (previous:11.6% WACC and 2% perpetual growth). Sitting on HK$2bn net cash and trading at 3% discount to our new target price and merely 12x FY09F PE, TVB remains a HOLD. At A Glance Issued Capital (m shrs) Mkt Cap (HK$m/US$m) Major Shareholders (%) Shaw Run Run & Associates Dodge & Cox F ree F loat (%) Av g Daily V olume (m shrs)
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC / sa- GL
438 11,038 / 1,424 32 6.18 61.82 0.9
Company Focus TVB Income Statement (HK$ m)
Balance Sheet (HK$ m)
FY Dec
2007A
2008E
2009F
2010F
Turnover Cost of Goods Sold Gross Profit Other Opg (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net profit before Except.
4,326 (1,511) 2,815 (1,249) 1,566 0 (125) 104 5 1,550 (284) (2) 0 1,264 1,259
4,572 (1,678) 2,893 (1,452) 1,442 0 (60) 83 0 1,465 (260) (2) 0 1,203 1,203
4,253 (1,791) 2,462 (1,390) 1,071 0 (51) 96 0 1,116 (198) (2) 0 916 916
4,378 (1,885) 2,493 (1,422) 1,071 0 (43) 110 0 1,139 (202) (2) 0 935 935
1,694 3.0 4.1 2.7 18.3
1,748 5.7 3.2 (7.9) 17.7
1,379 (7.0) (21.2) (25.7) 17.7
1,372 3.0 (0.5) 0.0 17.7
EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (HK$ m) FY Dec
FY Dec
2007A
2008E
2009F
2010F
Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
1,908 85 239 2,142 9 1,406 461 6,251
2,402 85 239 2,056 10 1,486 461 6,738
2,344 85 239 2,511 9 1,382 461 7,031
2,250 85 239 2,932 10 1,423 461 7,400
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
0 741 0 141 5,344 25 6,251
0 779 0 141 5,794 25 6,738
0 730 0 141 6,136 25 7,031
0 749 0 141 6,485 25 7,400
Non-Cash Wkg. Cap Net Cash/(Debt)
1,135 2,142
1,177 2,056
1,122 2,511
1,144 2,932
2007A
2008E
2009F
2010F
65.1 36.2 29.2 24.8 21.2 24.3 62.4 N/A 0.7 117.2 183.2 3.5 5.4 4.8 CASH N/A 4.9 3.54 2.61
63.3 31.5 26.3 21.6 18.5 20.7 62.6 N/A 0.7 115.4 191.3 2.7 5.1 4.5 CASH N/A 4.7 3.19 1.13
57.9 25.2 21.5 15.4 13.3 14.4 62.6 N/A 0.6 123.1 173.6 2.5 6.0 5.3 CASH N/A 5.7 2.56 2.00
56.9 24.5 21.3 14.8 13.0 13.6 62.6 N/A 0.6 116.9 157.9 2.2 6.4 5.8 CASH N/A 6.7 2.92 2.30
Rates & Ratios
2007A
2008E
2009F
2010F
FY Dec
1,550 253 (278) 0 125 (149) (97) 1,403 (259) 140 0 0 (68) (187) (767) 0 0 95 (671) 545
1,465 367 (260) 0 60 (42) (235) 1,354 (861) 0 0 0 174 (687) (754) 0 0 0 (754) (86)
1,116 358 (198) 0 51 55 (204) 1,177 (300) 0 0 0 152 (148) (574) 0 0 0 (574) 455
1,139 344 (202) 0 43 (22) (43) 1,258 (250) 0 0 0 (2) (252) (585) 0 0 0 (585) 421
Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Interest Cover (x) Asset Turnover (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N.Cash/(Debt)PS (HK$) Opg CFPS (HK$) Free CFPS (HK$)
2H2006
1H2007
2H2007
1H2008
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
2,314 (809) 1,505 (602) 904 0 (77) 43 0 870 (151) 0 719 719 961
1,919 (841) 1,078 (452) 626 0 (69) 47 0 603 (105) 0 497 497 681
2,407 (670) 1,737 (798) 940 0 (56) 57 5 946 (179) (1) 766 761 1,013
2,073 (962) 1,111 (508) 604 0 (31) 33 0 605 (102) 0 503 503 705
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
2 11 11 13.2 65.0 39.0 31.1
2 2 1 5.8 56.2 32.6 25.9
4 5 4 6.6 72.2 39.0 31.8
8 4 (4) 1.1 53.6 29.1 24.2
Pre-Tax Profit Dep. & Amort. Tax Paid (Pft)/ Loss on disposal of FAs Assoc. & JV Inc/(loss) Non-Cash Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
Interim Income Statement (HK$ m) FY Dec
Source: Company, DBS Vickers
Page 2
Segmental Breakdown (HK$ m) FY Dec Revenues Terrestrial television broadcasting Programme licensing & distribution Overseas satellite pay TV operations Channel operations Others Total PBT
2007A 2008E 2009F 2010F 2,366 2,449 2,081 2,154 635 674 687 703 281 298 304 310 948 1,062 1,093 1,126 96 90 87 85 4,326 4,572 4,253 4,378
Company Focus TVB
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. The analyst and DBS Vickers (Hong Kong) Limited (“DBSVHK”) certify that no compensation or benefits in connection with this research report is received from the listed corporation or other rd 3 party. DBSVHK and the research analyst will not be held responsible if this investment research, or recommendation is published or otherwise reproduced in whole or in part by the mass media without the relevant disclosures. This document is published by DBSVHK, a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd. (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVHK accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, have not beneficially owned a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBSVUSA, within the past 12 months, have not received compensation and/or may within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
DBS Vickers (Hong Kong) Limited 18th Floor Man Yee Building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523
Page 3
Thailand Company Focus
True Corporation | Reuters: TRUE.BK
Bloomberg: TRUE TB
DBS Group Research . Equity
5 Jan 2009
HOLD Bt1.79 SET: 449.96 Price Target: 12-month Bt1.90 (prev Bt1.69) Reason for Report: Company update Potential Cat Catalyst: alyst: Hutch entering IC regime, improving economy and tariff rate increase Analyst Chirasit Vuttigrai +66 0 2657 7836 [email protected]
Price Relative Bt
Relative Index 222
13 . 00
202
11 . 00
182
9 . 00
142 122 102
5 . 00
82 62
3 . 00
42 22
1 . 00 2004
2005
True Corporation
2006
( LHS )
2007
Relative SET INDEX
2008
( RHS )
Forecasts and Valuation FY Dec (Bt m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (Bt) EPS Pre Ex. (Bt) EPS Gth Pre Ex (%) Diluted EPS (Bt) Net DPS (Bt) BV Per Share (Bt) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A
2008E
2009F
2010F
61,641 20,229 302 1,697 (722) 0.38 (0.16) nm. 0.38 2.36 4.7 nm. 1.1 4.2 0.8 639 19.5
62,883 21,292 320 (3,395) (422) (0.75) (0.09) nm. (0.75) 1.60 nm. nm. 0.5 3.8 1.1 983 (38.1)
63,858 22,144 119 (1,018) (1,018) (0.23) (0.23) nm. (0.23) 1.38 nm. nm. 0.6 3.4 1.3 1,134 (15.2)
64,958 22,306 925 (689) (689) (0.15) (0.15) (32) (0.15) 1.22 nm. nm. 0.6 3.2 1.5 1,198 (11.8)
(0.2)
0.0
0.1
Earnings Rev (%): Consensus EPS (Bt Bt): Bt :
Sector: Telecom Principal Business: TRUE has a 25-year concession from TOT Corp to operate 2.5m fixed lines in BMA. The company has also expanded into the cellular business and Internet.
www.dbsvickers.com Refer to important disclosures at the end of this report ed: LM/sa: CS
True Corporation (TRUE TB) announced that the rights issue subscription ratio was set at 1 old to 2.22 new shares, in line with our forecast. Assuming conservatively that the CP Group would take the rights issue issue on its 27.6% stake, out of its total of 35.2% interest, TRUE would raise at least Bt5.4bn fresh cash, and this would lower its financial risks substantially. Hence, we maintain our HOLD rating on TRUE with revised DCFDCF-based target price of Bt1.90. Subscription ratio announced TRUE reported to the SET on 30 Dec that the subscription ratio was set at 1 old share to 2.22 new shares at Bt1.95 apiece. The stock goes XR today (5 Jan), while the share subscription form would be distributed around mid-Jan and the subscription period is expected around early Feb.
162
7 . 00
The subscription ratio set at 1 old to 2.22 new shares
Lower financial risks Its major shareholder CP Group has committed to take the rights issue on its 27.6% stake. The minimum Bt5.4bn fresh cash raised together with its annual residual cashflow of c. Bt5bn would be enough to repay its Bt8.9bn debts due in 2009. HOLD maintained Despite its weak competitive position, the likely successful re-capitalization would help reduce its financial risks substantially and increase the chance for the company to have a foreign strategic partner. We maintain our HOLD rating for TRUE with revised DCFbased target price of Bt1.90.
At A Glance Issued Capital (m shrs) 4,503 Mkt. Cap (Btm/US$m) 6,710 / 195 Major Shareholders Thai NVDR (%) 12.1 8.1 Charoen Pokphand Group (%) State Street Bank & Trust Company For London (%) 7.4 Free Float (%) 50.7 Avg. Daily Vol.(‘000) 53,139
Company Focus True Corporation
More details released Subscription ratio at 1:2.22. True Corporation (TRUE TB) reported to the SET on 30 Dec morning on more details related to its rights issue. The subscription ratio is set at 1 old share to 2.22 new shares, in line with our expectation. We believe this is an attempt to raise as much proceeds as possible, in the event that most of its minority shareholders would not participate.
TRUE: Current debt repayment schedule Btbn 14 12 10 8
Online Mobile Pay TV
6 4 2
Share overover-allotment not exceeding 2x... The shareholders have a right to subscribe for shares in excess of their entitlement. Nonetheless, it is restricted to not more than two times of their entitlement. The offer price has been fixed at Bt1.95 apiece. …afraid of being taken over? We believe the CP Group is concerned that TRUE may be taken over. For instance, an investor (or competitor) may buy one TRUE share now and over-subscribe all unsubscribed shares (72.4%) by minority shareholders. Then, they would become the major shareholder with a larger stake than the CP Group. Subscription period around early Feb. The stock goes XR today (5 Jan). The share subscription form would be distributed to shareholders around mid-Jan and the subscription period is expected around early Feb. Lower financial risks The CP Group to take at least 27.6%. Its major shareholder CP Group committed to take the rights issue on its 27.6% stake, out of its total 35.2% interest. Bt5.4bn fresh capital raised. Assuming conservatively that only the CP Group takes its 27.6% part in the rights issue and no minority shareholder takes the rights, TRUE would raise Bt5.4bn fresh cash from the rights issue. Easier to issue new debenture. TRUE plans to make a debt refinancing for its Bt6.75bn Baht bond, namely 2/2545, due 2009-2010, but the deal has been postponed from Dec 2008 to Feb 2009 due to the political turmoil in Dec 2008. In our view, the successful re-capitalization would help push through the debenture issuance.
Page 2
0 2008
2009
2010
2011
2012
Source: Companies, DBS Vickers
Worst case: Fresh Bt5.4 capital would be enough. In the worst case that TRUE could not raise debenture, we believe the Bt5.4bn fresh cash to be raised together with its annual residual cashflow of c. Bt5bn would be enough to repay its Bt8.9bn debts due in 2009. Base case: buy back debts or TrueMove stake. In the base case that TRUE can raise Bt6.75bn debenture to refinance its debts as planned, the company would instead spend Bt5.4bn fresh cash from the rights issue to buy back its US$ debenture, currently trading at 45-50% discount, or buyback 23.3% BITCO/TrueMove stake from the CP Group. Lower gearing. The likely successful re-capitalization would improve its financial position substantially. Assuming conservatively that the company can raise only Bt5.4bn fresh capital, its net financial gearing would drop from 8.9x to 5.4x. The net gearing should drop further if the company uses the proceeds to buy back US$-denominated debentures at a deep discount. Recommendations Potential strategic partner as a next step? As a result of improving financial position, we believe the re-capitalization would help increase the chance for TRUE or TrueMove to have a foreign strategic partner. HOLD maintained. Despite its weak competitive position, the likely successful re-capitalization would improve its financial outlook. We maintain our HOLD rating for TRUE with revised DCF-based target price of Bt1.90.
Company Focus True Corporation
Thai Telecom Sector: Peer Comparison Bloomberg
Mkt
Price
Target
Upside
PE
EV/EBITDA
Dividend Yield
ROE
Code
Cap
30 Dec
Price
(%)
(x)
(x)
(%)
(%)
ADVANC TB DTAC TB TRUE TB
US$m
(Bt)
(Bt)
6,760 2,178 232
79.50 32.00 1.79
103.00 42.00* 1.90
Note: Under revision Source: DBS Vickers
29.4 30.3% 6.3%
Rcmd
08F
09F
08F
09F
08F
09F
08A
09F
11.6 7.6 nm
12.2 8.7 nm
5.3 4.5 3.8
5.0 4.0 3.4
8.6 3.9 -
8.6 3.5 -
26.9 17.7 (38.1)
25.8 13.9 (15.2)
B B* H
Page 3
Company Focus True Corporation Income Statement (Bt m)
Balance Sheet (Bt m)
FY Dec
Turnover EBITDA Depr/Amort Opg Profit Asso & Other Inc Interest (Exp)/Inc Pre-Tax Profit Tax Minority Interest Extra & Forex Net Profit Sales Growth (%) Net Profit Gr (%) EBITDA Mgn (%) Tax Rate (%)
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
61,641 62,883 63,858 64,958 20,229 21,292 22,144 22,306 (12,824) (14,288) (15,095) (14,840) 7,405 7,004 7,049 7,466 (220) 185 174 178 (6,883) (6,869) (7,104) (6,718) 302 320 119 925 (999) (1,940) (1,504) (1,657) (24) 1,199 367 43 2,419 (2,973) 1,697 (3,395) (1,018) (689) 18.6 2.0 1.5 1.7 nm. nm. nm. (32.3) 32.8 33.9 34.7 34.3 316 572 1,121.9 176.7
Cash Flow Statement (Bt m) 2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
20,243 21,311 22,159 22,318 (3,719) 3,497 86 25 (2,989) (4,052) (3,707) (3,774) 13,534 20,756 18,538 18,569 (4,779) (4,758) (4,901) (4,601) 8,756 15,998 13,638 13,968 (5,054) (9,044) (9,045) (9,042) 3,702 6,954 4,593 4,926 3,217 (2,973) 1 6,919 3,981 4,593 4,927 (76,353) (72,372) (67,779) (62,852) 3.3 2.4 3.1 3.1 3.5 5.2 4.8 4.7 1.7 3.5 3.1 3.2 1.9 3.0 2.6 2.7
Quarterly / Interim Income Statement (Bt m) FY De Decc
Turnover EBITDA Depr/Amort Opg Profit Asso & Other Inc Interest (Exp)/Inc Pre-Tax Profit Tax Minority Interest Extra & Forex Net Profit Sales Growth (%) Net Profit Gr (%) EBITDA Mgn (%) Tax Rate (%)
Source: Company, DBS Vickers
Page 4
Fixed assets Other LT Assets Cash/ST Investments Other Current Assets Total Assets ST Debt Other Current Liabilities LT Debt Minority Interests Shareholders' equity Total Capital Share Capital (m) Net cash/(debt) Working capital Gearing (%)
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
74,683 70,081 64,659 59,497 24,626 24,968 25,354 25,784 6,884 23,503 23,221 33,148 18,525 15,136 15,401 15,704 124,718 133,688 128,636 134,133 6,965 4,875 6,000 8,000 25,728 26,463 27,471 28,490 80,070 94,987 89,187 92,396 1,346 147 (220) (263) 10,610 7,215 6,197 5,509 124,718 133,688 128,636 134,133 4,503 4,503 4,503 4,503 (76,353) (72,372) (67,779) (62,852) 7,203 11,327 12,070 12,786 696 1,302 1,522 1,830
Rates & Ratio
FY Dec
EBITDA Change in W/C Taxes paid i) Operating FCF Net interest payment ii) Net FCF Investing cashflow iii) Residual cashflow Cashflow fr equity Change in net cash Ending net cash Gross CF/Shr (Bt) CF Opera/Shr (Bt) Net FCF/Shr (Bt) CF Int. Cover (x)
FY Dec
FY Dec
ROE (%) ROA (%) Net Margin (%) Div. Coverage (x) Interst Coverage (x) Asset Turnover (x) Asset/Debt (x) Gearing (%) Net Gearing (%) Debt/EBITDA (x) Debt/ Market Cap (x) Capex/Debt (x) Capex/Sales (x) EV (Btbn) EV/EBITDA (x)
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
19.5 1.4 2.8 nm. 1.0 0.5 1.5 696 639 4.1 10.3 0.1 0.1 86 4.2
(38.1) (2.6) (5.4) nm. 1.0 0.5 1.4 1,302 983 4.5 11.9 0.1 0.1 81 3.8
(15.2) (0.8) (1.6) nm. 1.0 0.5 1.4 1,522 1,134 4.1 11.3 0.1 0.1 76 3.4
(11.8) (0.5) (1.1) nm. 1.1 0.5 1.4 1,830 1,198 4.3 11.9 0.1 0.1 71 3.2
Revenue Breakdown (Btm)
4Q2007 4Q2007
1Q2008
2Q2008
3Q2008
15,893 3,260 (2,046) 1,215 (27) (1,586) (398) 603 10 567 781 19.3 (133.9) 20.5 152.3
15,940 5,660 (3,065) 2,595 48 (1,663) 980 (85) (615) 2,458 2,738 11.6 561.8 35.5 8.7
15,084 4,569 (3,006) 1,562 (4) (1,754) (195) (825) 833 (2,485) (2,672) (5.7) 284.1 30.3 (427)
15,044 6,305 (5,034) 1,271 72 (1,699) (356) (508) 425 (788) (1,228) (2.8) (202.5) 41.9 (143)
FY Dec
-Basic wireline -Payphone -Other fixed line -DDN Service -PCT Services -PCT Handset Sales -Asia Multimedia -Asia Infonet -UBC -TrueMove -Others Total Revenues SG&A/Sales Other Inc./Sales
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
9,307 983 654 2,074 786 (6) 300 5,027 8,785 33,420 1,365 61,641
8,586 715 958 1,673 603 63 6,314 9,251 31,580 3,140 62,883
7,938 668 1,029 1,746 423 54 6,753 9,562 32,545 3,140 63,858
7,549 637 875 1,844 338 52 6,821 9,959 33,711 3,171 64,958
21.3 0.6
19.5 0.8
18.8 0.8
18.3 0.8
Company Focus True Corporation
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This document is published by DBS Vickers Securities (Thailand) Co., Ltd. ("DBSVT"), a direct wholly-owned subsidiary of DBS Vickers Securities Holding Pte Ltd. The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVT accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBS Vickers Securities Holdings Pte Ltd is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVT, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVT, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. DBSVT, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients. DBS Vickers Securities (Thailand) – 989 Siam Tower, 9th ,14th –15th Floor, Rama1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 (0) 2657 7831, Fax: 66 (0) 2658 1269
Page 5
Morning Pack DBS Group Research . Equity
Spotlight on (SP) Cosco Corporation: Profit Warning FULLY VALUED S$0.925 COS SP; Price Target: 12-month S$0.76 (Prev S$0.80) Cosco dropped a bombshell, indicating that 2008 profits would be lower than 2007, due to provisions for doubtful debts, cost overun and potential penalties for delays. We cut our forecasts by 20% to 30% on lower sales and margin assumptions, maintained Fully Valued.
05 January 2009
The "Pulse of Asia" Conference 6th~ 8th January, 2009
Updates & Results SINGAPORE
(SP) ST Engineering: Holding Fort BUY (upgrade from HOLD) S$2.46; STE SP; Price Target: 12-month S$2.80
Equity Strategy 20: Fire sale
We upgrade ST Engineering to BUY with a target price of S$2.80. Amidst the worsening global economic outlook, STE has sustained its reputation of being a defensive counter, with a slew of new contract wins in recent months across different segments. In spite of possible slowdowns in its Aerospace and Marine segments, we are positive on the stock given 1) its ability to boost growth through M&A, 2) a relatively secure dividend yield of 7%, 3) record orderbook of S$10b and 4) cash and cash equivalents of S$1b.
Cosco Corporation: – See Spotlight
(MK) AMMB Holdings: Inflexion point BUY; RM2.51; AMM MK; Price Target: 12-month RM2.90 AMMB seem to have reached an inflexion point in terms of valuation. It hit its trough P/BV multiple of 0.7x in Nov-08, the lowest since 1999. We believe there is still no premium attributed to AMMB for ANZ’s presence in terms of management and expertise. Buy AMMB with a target price of RM2.90, which implies 1.0x CY09 BV. (HK) China Telecom: Negatives reflected, upsides remain BUY; HK$3.07; 728 HK; Price Target: 12-Month HK$3.70 The acquisition of the CDMA business should help China Telecom to mitigate lower fixed-line business, and cement growth momentum in the broadband business. With an expected turnaround in the CDMA business, the company should resume double-digit earnings growth in two to three years’ time.
Small/Mid Cap Strategy: Survival of the fittest
ST Engineering: – See Spotlight MALAYSIA AMMB Holdings: – See Spotlight HONG KONG China Telecom: – See Spotlight Parkson: Recent momentum slows HOLD (downgrade from BUY); HK$8.63; 3368 HK; Price Target: 12m HK$9.60 (Prev HK$12.55) TVB: Gloomy outlook HOLD; HK$25.20; 511 HK; Price Target: 12-Month HK$26.04 (Prev HK$39.04) THAILAND True Corp.: The subscription ratio set at 1 old to 2.22 new shares HOLD; Bt1.79 TRUE TB; Price Target: 12-month Bt1.90 (prev Bt1.69)
Singapore Research Team – 6533 9688 [email protected] www.dbsvickers.com “In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.”
“Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.”
Regional
Morning Pack Key Indices
DBSV Roadshow & Event Calendar* Analyst Roadshows / Events Topic
Date
Location
DBSV Analyst
Pulse of Asia Conference - 1H09
6-9 Jan 2009
SPORE
-
Singapore Strategy
12-16 Jan 2009
UK
JC
Singapore Strategy
19-23 Jan 2009
US
JC
*To register your interest in the above events, please contact your DBSV Sales representative.
Indices Asia HSCEI Index Hang Seng HSCCI Index STI KOSPI KLCI MXFEJ index JCI Index PCOMP Taiex SET Nikkei 225 U.S./Others Dow Jones S&P NASDAQ FTSE 100
Closed as at 02.01.09
% chg vs previous close
YTD (%)
QTD (%)
MTD (%)
8,314 15,043 3,442 1,830 1,157 894 278 1,355 1,873 4,591 450 8,860
5.4 4.6 4.5 3.9 2.9 2.0 1.8 1.1 0.6 0.0 0.7 1.3
5.4 4.6 4.5 3.9 2.9 2.0 1.8 0.0 0.0 0.0 0.0 0.0
5.4 4.6 4.5 3.9 2.9 2.0 1.8 0.0 0.0 0.0 0.0 0.0
5.4 4.6 4.5 3.9 2.9 2.0 1.8 0.0 0.0 0.0 0.0 0.0
9,035 932 1,632 4,562
2.9 3.2 3.5 2.9
2.9 3.2 3.5 2.9
2.9 3.2 3.5 2.9
2.9 3.2 3.5 2.9
Market Data EPS Gth (%) 08F 09F 0.2 (5.5) 6.6 (9.0) (11.3) 3.9 28.2 4.7 3.1 (0.3) (8.7) 0.9 2.7 2.7
Singapore Malaysia HK HSI HK HSCCI (Red) HK HSCEI (H) Thailand Indonesia
PE (x) 08F 8.9 10.5 10.9 10.4 11.7 8.0 11.1
09F 9.4 11.5 10.5 9.9 11.7 7.9 10.7
Source: DBS Vickers Commodity Indicators Commodities
Latest Closing
Previous Closing
Crude Oil Nickel Spot Coal Spot Tin Steel Copper Gold Spot
USD/barrel USD/mt USD/mt USD/mt RMB/mt USD/lb USD/t. oz
46 13,110 80 11,625 3,696 322 883
45 11,609 10,700 3,678 317 875
Soybean Oil Spot Soybean Spot Sugar Spot Rice Wheat Spot Palm Oil Spot (CIF R) Palm Oil Spot (FOB Msia) Crude Oil Brent Spot Corn Spot Rubber Spot
USD/pound USD/bushel USD/pound USD/cwt USD/bushel USD/mt RM/mt USD/barrel USD/bushel SGD/gram
31.95 9.59 12.81 15.12 4.79 540 1,630 49 3.83 205
31.67 9.60 12.75 15.25 4.80 535 1,570 48 3.75 202
Source: Bloomberg
Page 2
YTD % chng 3.9%
Crude Oil
12.9%
Nickel Spot
-11.2%
Coal Spot 8.6%
Tin
-16.8%
Steel 0.0%
Copper
0.1%
Gold Spot
0.9%
Soybean Oil Spot
-0.1%
Soybean Spot
0.5%
Sugar Spot
-0.9%
Rice
-0.4%
Wheat Spot
-45.7%
Palm Oil Spot (CIF R) Palm Oil Spot (FOB M sia)
-47.5%
Crude Oil Brent Spot
17.0%
Corn Spot
2.3%
Rubber Spot
1.5% -100%
-50%
0%
50%
100%
150%
DBS Vickers Securities
Corporate Access Event DBS Group Research . Equity
December 2008
DBS Vickers Securities will be hosting Asia Corporate Access Events in Singapore on January 6th ~ 8th, 2009.
Meet with representatives from companies listed in Singapore, Hong Kong/China, Malaysia, Korea, Thailand and Indonesia. The meetings may be one-on-one or group presentations, to give you further insight into the companies’ operations, directions and prospects.
The long term fundamentals of Asia support a favorable environment for Asian equities.
The "Pulse of Asia" Conference The Fullerton Singapore th th 6 ~ 8 January, 2009
For further information and registration, please contact your sales representative or: DBS Vickers Securities (Spore) Fax: 65 6534 4533
Participating Companies*: Tuesday, 6 January 2009 SINGAPORE: Ascott Residence Trust • Capitaland Limited • DBS Group Holdings • Ezra Holdings • Fraser & Neave • Hyflux Ltd • Mermaid Maritime • Olam International • SembCorp Industries • SembCorp Marine • ST Engineering • Singapore Exchange • Starhub • Strait Asia Resources
Thursday, 8 January 2009 MALAYSIA: AMMB Holdings • KNM Group • YTL Power THAILAND: Bangkok Bank • Central Pattana • Quality House • Thai Oil • Thai Union Frozen INDONESIA: Adaro Energy • Indo Tambangraya Megah
Wednesday, 7 January 2009 CHINA: China Hongxing Sports • China XLX Fertiliser • Cosco Corporation • Midas • Sihuan Pharmaceutical Holdings • Synear Food • Yanlord Group HONG KONG: AMVIG • China Pharmaceutical Group • China Telecom Corp • China Yurun Food • Hengan International Group • Solargiga Energy KOREA: Halla Climate Control • NCSoft Corporation • POSCO • S-Oil * As at 19 December 2008. Subject to change
www.dbsvickers.com Refer to important disclosures at the end of this report
Regional Small/MidMarket Cap Strategy Focus Q4 2008 Singapore Country Assessment
Equity Strategy DBS Group Research . Equity
05 January 2009
Singapore Fire sale The market is oversold, and poised for a rebound on cheap valuations. But uncertainties continue to lurk amidst a tough operating environment, as recession hits and job cuts continue to rise. The bears will prevail in 2009, and we expect the STI to trade within a band of 1250 to 2100 as it base-builds towards a more convincing recovery in 2010. Poised for technical rebound off low valuations. Post the meltdown in October 2008, the market is cheap by all measures. At current levels of 1740, forward PE of 11x is close to the regional crisis low and dividend yields of 5.2% has surpassed previous lows of 3.5%. An expansionary budget to be unveiled in January 2009, coupled with optimism over Obama’s fiscal measures to boost the US economy are key catalysts for the rebound in the near term. But the bear market persists. The economy is not out of the woods yet, and bad news from the corporate sector will cap performance. We expect the STI to trade within a range of 1450 to 2180. The low end of the range reflects a P/B from the mean, which is -2 standard deviations. This is consistent with recession year valuations. Stick to survivors of the fittest with the tenacity to ride through this recession. These will be companies backed by relatively resilient earnings, strong cash flows, and cashed-up balance sheet. They are in a favourable position to acquire cheap assets as deflation runs its course into 2009. Our preferred picks are SMRT, SIA Engineering, SPH and ST Engineering. We would sell asset plays including property and shipping companies on the rebound, as the process of de-leveraging will lead to asset devaluation in 2009. Distressed valuation levels will spur M&A activities, potential candidates can be found among technology, oil and gas and S chips.
Janice Chua . (65) 6398 7954 . [email protected] Page 1 www.dbsvickers.com Refer to important disclosures at the end of this report
Market Focus Equity Strategy
Market Data Index
Close
Chng Net
-1 mth%
-3 mth
-6 mth
-12 mth
12 Dec 08
1m
(%)
(%)
(%)
(%)
High
Low
1,740
(44)
(2.4)
(32.3)
(42.4)
(50.7)
3531
1474
342
(27)
(7.3)
(40.7)
(55.0)
(61.7)
908
299
FTSE Small Cap
291
(15)
(4.8)
(38.4)
(54.9)
(66.5)
867
257
FTSE Financials
424
(11)
(2.4)
(35.7)
(45.3)
(53.5)
913
375
FTSE Real Estate
345
(21)
(5.8)
(39.9)
(53.7)
(61.4)
895
316
FTSE Re Hold & Dev
353
(2)
(0.5)
(35.6)
(51.6)
(61.0)
905
308
FTSE Re Invest Trust
332
(59)
(15.1)
(47.1)
(57.2)
(61.9)
890
309
FTSE Oil & Gas
247
4
1.7
(47.6)
(65.5)
(73.6)
935
168
FSSTI FTSE Mid Cap
52 week
FTSE Basic Materials
222
1
0.5
(33.6)
(64.2)
(73.9)
851
181
FTSE Industrials
340
(44)
(11.6)
(39.6)
(53.7)
(61.6)
885
286
FTSE Consumer Goods
353
12
3.5
(30.8)
(52.6)
(62.9)
988
249
FTSE Healthcare FTSE Consumer Services FTSE Telecommunication
370
(66)
(15.2)
(38.5)
(53.0)
(58.2)
969
335
520
(18)
(3.3)
(27.3)
(34.0)
(44.7)
941
458
634
43
7.2
(25.2)
(30.2)
(36.0)
1022
493
FTSE Utilities
282
(43)
(13.3)
(38.6)
(55.8)
(74.8)
1117
217
FTSE Technology
357
(45)
(11.2)
(36.9)
(53.1)
(61.6)
934
332
FTSE China
187
2
1.3
(33.5)
(57.5)
(76.6)
799
136
Transactions: Volume (bn) Value (S$bn)
YTD 328 369
Source: Bloomberg
MARKET REVIEW Plunge in equities in October. The current global financial crisis is the worst of its kind since the Great Depression. The past few months saw government bail outs for companies like Freddie Mac, Fannie Mae and AIG; the collapse of investment bank Lehman Brothers; the sale of Merrill Lynch to Bank of America, the conversion of Goldman Sachs and Morgan Stanley into commercial banks and the failure of more European banks. October was the most volatile month YTD. Major global indices registered steep falls, amid concern that economic stimulus measures would fail to stop a global slowdown and hurt corporate earnings. The fall would have been worse if not for the concerted effort by central banks to cut interest rates, provide government guarantees and ownership of banks and to adopt other stimulatory measures.
Page 2
Unprecendated efforts by Central Banks and government efforts to stabilize the financial systems and equity markets. While the financial crisis is the worst since the Great Depression, the markets were comforted by unprecedented interventions by central banks and governments to restore stability to the financial systems. Fiscal stimulus packages from the US$800bn by US Fed to unfreeze credit markets, US$326bn to rescue Citigroup, China’s US$586bn economic stimulus package are measures aimed at boosting these major economies. In addition, central banks around the world embarked on easier monetary policies and unleashed aggressive interest rate cuts.
Market Focus Equity Strategy
Oil & Gas sector was the worst performing sector, and plunged by 52%, on the back of the steep drop in oil prices, poor SPC results and concerns over the balance sheet strength of offshore vessels owners. Oil prices fell more than 70% from the peak of US$150/bbl to US$42/bbl currently.
asset devaluation in the face of de-leveraging in the global financial markets. Defensive sectors outperformed : Telecoms, Consumer Goods, Consumer Services(benefiting from lower oil prices) outperformed the market.
Asset plays were hammered. Shipping, Property and REITs were not spared from the sell-down, as investors bet on Index Key Events DC charge raised from 50% to 70%
3,900 3,800
Inflation fears, more subprime related write-off, concerns about slowdown in US economy
3,700 3,600 China Market falls 9% in a single day on 27 Feb
3,500 3,400 3,300 3,200 3,100
Continued optimism in the property sector, construction recovery, RTOs, small caps outperform blue chips
3,000 2,900 2,800 2,700 2,600
Liquidity led rally triggered by positive news
2,500 2,400
Subprime & credit market crisis; caution about property
Fed cut discount rate by 50pbs to 5.75%
Led by O&M and energy stocks as oil price and precious metals rallied; S-chips on QDII
US recession fear, margin squeezed by escalating oil and commodity prices; further writedown Speculation of in CDO assets US rate cut
Inflation concerns; slowdown in global economies; more financial institutions collapsed
Rebound on hopes that credit crisis has eased Surprised 75pbs rate cut by Fed to 3.5% Near-collapse of Bear Stearns; Fed cut discount rate
2,300
US bailout Freddie Mac and Fannie Mae; fall in oil prices Collapse of Lehman Brothers; US bailout AIG Collapse of Fed’s bailout plan, failure of European banks
2,200 2,100
Obama wins presidency; China's US$586bn stimulus package
Rescue efforts by Fed and European central banks, including government guarantee and ownership of banks
2,000 1,900 1,800 1,700
Central banks cut interest rates to boost bank lending and economic growth
1,600
D ec -0 8
N ov -0 8
O ct -0 8
S ep -0 8
A ug -0 8
Ju l-0 8
Ju n08
M ay -0 8
A pr -0 8
M ar -0 8
Fe b08
Ja n08
D ec -0 7
N ov -0 7
O ct -0 7
S ep -0 7
A ug -0 7
Ju l-0 7
Ju n07
M ay -0 7
A pr -0 7
M ar -0 7
Fe b07
Ja n07
D ec -0 6
1,500
Source: DBS Vickers
Sector Performance (Sorted in Descending Order on 3 months Performance) Sector Consumer Goods Telecommunications Consumer Services Basic Materials DBSV Universe Financials Health Care Industrials Real Estate Technology REITS Oil & Gas
1 Mth Ago (%) 4 7 -3 2 -2 0 -19 -9 -3 -14 -15 -3
3 Mth Ago (%) -19 -24 -25 -32 -33 -33 -34 -39 -40 -45 -46 -52
6 Mth Ago (%) -46 -29 -27 -65 -45 -39 -53 -54 -56 -60 -57 -69
1 yr Ago (%) -51 -35 -36 -69 -53 -47 -59 -64 -67 -69 -62 -75
Source: DBS Vickers
Page 3
Market Focus Equity Strategy
external environment, domestic demand will be weakened by the weak labour market, delays in mega construction projects and uncertainties in the financial sector.
GROWTH YTD, earnings cut by 20%(08F) and 33%(09F). Since the start of the year, we have cut earnings by 20% for 2008 and 33% for 2009. The biggest cut in earnings came from the technology sector due to a weakening demand outlook from the US, amidst disappointing NODX for several quarters. Oil and gas were de-rated due to execution issues among the offshore vessel owners and charterers which suffered from forex losses(Jaya) and execution problems at Swiber. In addition, SPC earnings were cut due to an expected decline in refining margins. Real estate earnings were not spared. We halved earnings by 27% for 2009 on expectation that developers will push back earnings recognition of presold units, coupled with delay in construction of projects, while the quiet property market would lead to reduced unit sales. Banks earnings were cut due to expectations of lower fee based income. We also raised provision charges given the propect of a deterioration in asset values and quality of loan books. Earnings dropped by 40% during past regional crises. In 1998 and 2001 during the regional crisis and dotcom bust, Singapore’s earnings declined by between 40% to 50%, mainly due to increases in banks’ provisions and mark to market losses at property companies, and losses at technology companies in 2001. Technology company losses will feature less prominently in this cycle, given that profits have shrunk over the past few years of contraction and forms a small portion of our coverage now. Banks’ provisions hit a high of 2.3% in 1998, compared to current provision levels of 0.4%. While we have increased our provisions to 0.5% to 0.6% over the next two years, this is a far cry from 1998’s levels, particularly if asset values were to decline significantly next year. Net earnings decline of –21% and –6% for 2008 and 2009 respectively : DBS Economist has cut Singapore’s GDP growth forecast for 2009 to –0.6%. Singapore is the first economy to fall into a ‘technical recession’ with three quarters of negative sequential growth. In 2008, Singapore’s GDP growth was weaker than expected at +1.5% vs consensus estimates of +2.5%. This reflects its vulnerability as a small and open economy. The Singapore government has revised down Singapore’s GDP forecast to a range of –2% to +1% for 2009. Downside risk to global growth is high, and will be a drag to Singapore’s GDP growth, particularly exports of electronics and pharmaceuticals. In addition to the hostile
Page 4
Earnings downgrades to continue. Against this backdrop, we expect earnings downgrades to continue for the next few quarters. The biggest risk lies in property and bank earnings, as provisions and write downs take centrestage due to asset devaluation. Our forecasts currently shows a 15% growth in real estate earnings in 2009 from pre-sold units in 2006/2007. Downside risk for property companies will come in the form of provisions in the event of defaults by speculators who purchased properties on deferred payment scheme or mark to market losses on investment properties and land bank. Property write-downs could push earnings decline to –15% for STI companies. Assuming property companies take the decision to write-down the value of assets of its commercial and development properties in 2009, this will push 2009 net earnings growth from -8% to -15% for STI stocks and – 28% for DBS’ universe of stocks. Spore GDP Growth vs Earnings growth % 50 40 30 20 10 0 -10 -20
Earnings growth
-30
GDP growth
-40 -50 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F 09F
Source: Datastream, Bloomberg 2008 & 2009 earnings growth forecast from bottom up of STI stocks using Bloomberg consensus
Market Focus Equity Strategy
Earnings Estimates by Sector
Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Real Estate REITS Technology Telecommunications Grand Total Ex Property & Reits
Earnings Growth % 2007 2008 2009 22.9 47.2 31.4 23.5 89.8 -23.4 22.3 -20.8 -4.6 21.1 -1.5 -7.1 35.3 -0.4 8.8 40.0 -1.1 -7.7 56.6 -19.3 2.6 47.7 -7.9 14.7 40.8 40.3 -0.1 67.5 -53.7 -105.8 2.5 -12.0 2.7 26.0 0.3 -5.4 23.0 -0.1 -8.2
STI DBSV Forecast Float Factor Avg STI Consensus Float Factor Avg
37.7 37.7
-17.7 -20.8
-8.3 -5.9
CAGR 07-09 39.1 20.6 -13.1 -4.3 4.1 -4.5 -9.0 2.8 18.4 nm -4.9 -2.6 -2.6 -13.2 -13.7
PATMI S$m 2007 2008 321 473 1,883 3,574 3,179 2,518 6,871 6,770 141 140 4,926 4,873 749 604 3,138 2,891 872 1,224 729 338 4,197 3,692 27,007 27,097 22,997 22,983
2009 622 2,738 2,402 6,288 153 4,496 620 3,316 1,223 -20 3,793 25,631 21,092
2007 7.5 12.8 8.3 8.3 14.0 7.4 3.3 8.1 11.9 4.2 10.9 8.7 8.3
PE (x) 2008 5.1 6.7 10.5 8.4 14.1 7.5 4.1 8.8 8.5 9.2 12.4 8.7 8.3
2009 3.9 8.8 11.0 9.1 12.9 8.2 4.0 7.6 8.5 -157.7 12.1 9.2 8.8
35,032 35,032
24,067 23,785
7.2 7.2
9.0 9.1
9.8 9.7
26,436 25,082
Source: DBS Vickers
LIQUIDITY
Cash levels proxy for emerging markets, international equity and global equity funds
USD – SGD Money Market Yield Trands %pa
4.00
%pa
6.00
24
5.50
3.50
5.00
3.00
20
% 1994: Tequila debt crisis 1997/98 Asia financial crisis
4.50
2.50
4.00 3.50
2.00 1.50
3M SGD SOR 12M SGD SOR
1.00
12M USD Libor (RHS)
3.00 2.50 2.00
0.50
1.50
Sep-06 Dec-06 Mar-07 Jun-07
Oct-07 Jan-08
Apr-08 Aug-08 Nov-08
(%)
3,500
35.0 30.0
3,000
25.0 STI Index (LHS)
15.0
1,500
10.0
1,000
5.0 Money Suppy y-o-y growth (RHS)
0.0
0 1999
-5.0 2000
2001
2002
2003
Source: Bloomberg, DBS Vickers
2004
8 4
2005
Emerging markets Global equity
International equity
Source: Datastream
20.0
2,000
500
2001 Nasdaq bubble
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Index
2,500
12
0
Money Supply y-o-y growth vs STI 4,000
16
2007
2008
M1 growth heading south, expect SIBOR to remain low. M1 growth continues to head southwards, reflecting an outflow of liquidity. SIBOR spiked up in October 2008 at the peak of the US financial crisis but retreated on government intervention. SIBOR rates are expected to stay low at <1% for 3 month SIBOR, due to low Fed Funds rate and easier monetary policies globally.
Page 5
Market Focus Equity Strategy
Fund redemptions have yet to hit crisis levels. On the flip side, we expect more room for fund redemptions, using past history as a guide. Although cash levels have risen over the past two quarters, it has yet to hit peak levels seen during 1994 and 1998 crisis levels. USD to weaken in 2009 vs SGD. In October 2008, MAS shifted to a neutral exchange policy or zero appreciation for its SGD (NEER), in response to weak economic conditions both in Singapore and globally . DBS believes the US$ appreciation over the past quarter is not sustainable as it did not appreciate on its own merits, but due to deleveraging triggered by the US financial crisis turning global and hitting the economies. With central banks working together to rescue the world’s financial system, DBS expects the unwinding of yen carry trades to complete its course and the shortage of US$ liquidity to ease. DBS has lowered its forecasts for US$ vs S$ to 1.44 for end 2009, and expects it to range between 1.45 to 1.50 in 1H09 and below 1.45 in 2H09.
VALUATION Cheap by any measure post the sell-down. Post the meltdown in October 2008, the market is cheap by all measures. At current levels of 1740, forward PE of 11x is close to the regional crisis low. Dividend yields of 5.2% surpasses regional crisis levels of 3.5%, partly due to corporates raising its dividend payout ratio in recent years vs the crisis years. However, we would expect corporates to conserve cash given tight liquidity, and putting yields under downward pressure.
into deeper recession of –2% next year, property prices plunged by 50% and we peg STI components’ valuation to 1998 levels. Forward PE
D
(%)
25 23 21 19 17 15 13 11 9 7 5
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Datastream, DBS
P/BV
D 3
(x)
2.5
2
1.5
Market traded at price to book of 0.9x to 1.5x during previous recession cycle – trading range of 1450 to 2180 on STI. Currently STI is trading at price to book of close to 1x. We note that the market trades within an average range and standard deviation of –2 during recession years, implying a trading band of 1450 to 2180 on the STI. Bottom up STI target cut to 2100(base case). The cut in earnings and target prices over the past quarter resulted in a lower bottom up target for the STI from 2960 to 2100, providing an upside of 21%. Bear target of 1250 on the downside. pegged to regional crisis valuations. We have attempted to shock our targets deriving a bear target of 1250, assuming Singapore goes
Page 6
1
0.5 93
95
97
Source: Datastream, DBS
99
01
03
05
07
Market Focus Equity Strategy
Dividend Yield 6 (%) 5
But the bear will continue to claw in 2009. While a bear market rally is imminent to correct the oversold positions, we have yet to hit the inflexion point for a market bottom. The slew of bad news from the corporate world is unlikely to recede, as the ill-effects of a recession works itself through the economy. In the chart below, equities led the sell-down before GDP growth turned down in recession periods in 1984, 1998 and 2002. Post the meltdown in equities, the markets undergo a period of base-building lasting four to eight quarters, as the market struggles to find a bottom before the economy bottoms. A recovery in equities has typically been precipitated by a recovery in GDP growth.
4 3 2 1
Market bottoms when GDP bottoms 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: Datastream, DBS
yo y%
yo y%
15
10
120 100
GDP grow th
80 60
5
40
OUTLOOK
20
0
Near term rebound likely as markets were oversold. Market poised for near term rebound. We believe valuations have overshot on the downside, with valuations close to 1998’s levels post the meltdown in October 2008. Bad news is being well absorbed by the market as the market searches for signs of stability in the financial market on the back of concerted efforts by governments and central governments using both fiscal and monetary policies and injection of liquidity. Optimism will be spurred by the swearing-in ceremony of US President Elect, Obama on the back of his plan to pump prime the economy via the infrastructure sector. At a cost of US$500m, it is expected to create 2.5m jobs.
0 -20
-5
-40
STI (R) -10
-60 80 82 84 86
88 90 92 94 96
98 00 02 04 06 08
Source: Datastream, DBS
Quarterly GDP performance 20.0
15.0
10.0 QoQ
Closer to home, expectations of an expansionary budget in Singapore on January 22, 2009 will underpin the market. This follows the recent unveiling of a S$2.3bn stimulus package for small and medium enterprises to gain access to credit in this downturn, which will reduce default rates. The budget could throw up surprises in the form of tax cuts, and cost cutting measures for corporates, bringing forward construction projects worth S$4.7bn and direct handouts to households and consumers.
5.0 YoY 0.0
-5.0
-10.0 1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
Source: DBS
Page 7
Market Focus Equity Strategy
In Singapore, previous recessions have lasted between 4 to 6 quarters. With looming prospects of a global recession and Singapore’s vulnerability to external demand weakness, DBS economist expects 1H09 to be weak, and GDP to hit its trough in 1Q09, before it starts to recover in 4Q09. We would look for a market bottom in 1Q09, in line with the GDP at its trough, and a dismal corporate reporting season in February which could trigger downside risks for the market. However, confidence needs to be restored, and we expect the market to be range bound between 1250 and 2100 during the base building period next year. We expect a sustainable recovery only from 2010, with the upcoming completion of integrated resorts in Marina and Sentosa, and with the economy on firmer footing for recovery. Risks : The risks triggering STI to our bear target of 1250 will come from : a) failure of central banks and government efforts to stabiise the financial system. News of any collapse of major banks or industries in US, Europe or Asia will cause jitters to the market, particularly after the injection of liquidity by central banks. b) asset deflation is more severe than projected. We expect a decline of 40% in high end property prices and 20% for mass market properties. A sharper than expected fall or bankruptcy in the property sector will trigger another round of sell-offs. c) banks remain cautious, the effects of the credit crunch continues to cripple the expansion of industries requiring high capex - specifically oil and gas, shipyards, environmental sector, shipping and property sectors. d) worse than expected job losses and economic recession. We expect unemployment rate to hit 3.6% next year, similar to 1998 levels and GDP growth of –0.6% vs Ministry of Trade and Industry’s guidance of –1% to +2% for 2009. A sharper than expected decline in these areas will be negative for the market
Page 8
STRATEGY Themes : A) Go for stocks with earnings resilience during recession We would pick stocks with earnings resilience, as the economy struggles through the recession. As we are still in the early phase of the recessionary cycle, we would pick stocks with resilient earnings – mainly land transport companies, media services and telecoms companies. Our preferred picks are SMRT and Comfort Delgro, beneficiaries of the switch to public transport, as evidenced by a rise in ridership, while M1 is the cheapest telco play. Singpost’s revenues were maintained during previous recessions (1998 and 2003) while SPH is the monopolistic player in newspaper advertising in Singapore. B) Sell asset plays on strength. The process of de-leveraging has yet to complete its course, and asset deflation has just started to unwind. We would take the opportunity in a bear market rally to sell on strength stocks in the property, shipping and hotel sectors. Property stocks have been sold down to distressed levels, trading at prices close to its 1998 valuation levels, hovering at price to RNAV of 0.5x. The sector, while cheap, provides no catalyst for re-rating as yet, as we expect more downside to prices of properties. Anecdotal evidence indicated that prices for high end properties have declined by 20% from its peak, vs our expectations of a 40% decline. Shipping stocks are hit by a plunge in freight rates, overcapacity issues and aggressive expansion plans which will stress its balance sheet. Hotel plays are capped by drops in tourist arrivals since June 2008, amidst new capacity coming on-stream from 2009 once Marina Sands is completed by end-09. C) Survival of the fittest – stress testing the balance sheet
Contrary to market perception, net debt to equity ratio of STI companies at 23% currently is higher than the regional crisis levels of 1997 to 1999. In early 2000, companies, particularly Temasek-linked entities, were shifting towards optimizing their capital structure and efficient capital management, leading to higher dividend payouts. As such, net debt ratios shot up to 50% in 2002, in tandem with a rise in dividend payout ratio to 80% and a fall in corporate earnings. Subsequent years of economic boom led to a period of build up in cash flows, and decline in net debt.
Market Focus Equity Strategy
Net debt to equity – STI companies
Although net debt ratio of STI companies at 23% is low, 65% of companies under our coverage are in net debt positions. We would pick blue chips with prudent management and efficient capital management. Faced with deterioriating demand outlook and tight credit, companies with a strong balance sheets have the tenacity to ride out this recession. Small caps are more vulnerable and we would prefer blue chips with strong cash flow, net cash positions, and sustainable dividend payout ratios.
60%
50%
40%
30%
20%
10%
0% 1996
1997 1998
1999
2000 2001
2002
2003 2004
2005
2006 2007
2008
Net Debt / Equity
Source: Bloomberg, DBS Vickers
Dividend payout and yield – STI companies 100
6.0%
We have also included Z-scores in our screen. The Altman Zscore is a measurement of the financial health of a company. The lower the score, the higher the chance of bankruptcy. The high scoring companies are in a better position to weather the current crisis and to acquire assets during testing times. Our preferred picks are SIA Engineering – cash generative and strong visibility to revenue streams, ST Engineering which is in a position to acquire assets, backed by its net cash of >S$1bn, and SPH, which enjoys a monopolistic position in advertising revenue in Singapore.
90 5.0%
80 70
4.0%
60 50
3.0%
40 2.0%
30 20
1.0%
10 0
0.0% 1996
1997
1998
1999
2000
2001
2002
Div Payout Ratio (LHS)
2003
2004
2005
2006
2007
2008
Div Yld (RHS)
Source: Bloomberg, DBS Vickers
Page 9
Market Focus Equity Strategy
Survivors of the fittest Free op. CFPS
PE
Price /BV
Net
(Scts)
(x)
(x)
Div Yld
Mkt
Price
Target
Cap
(S$) 12Dec
Price
%
(S$)
Upside
Rcmd
08F
08F
09F
08F
08F
6.4
9.2
0.9
8.6
9.1
Net Cash/ Gearing Mkt
(%)
(x)
Cap
Z-
09F
08F
(%)
9.1
9.1
cash
30
2.47
1.9
9.8
9.3
cash
20
4.90
Company Big Cap (>S$1bn)
(S$m)
Singapore Airlines SIA Engineering
13,09 9 2,199
11.04
14.00
27%
Buy
2.04
2.50
23%
Buy
220.6 3 3.10
SembCorp Marine Venture Corporation
3,459
1.67
1.90
14%
Hold
23.34
7.3
7.0
1.8
9.6
10.1
cash
18
2.30
1,168
4.26
6.40
50%
Buy
57.40
3.9
6.0
0.6
11.7
11.7
cash
17
3.98
ST Engineering
6,895
2.30
2.80
22%
Hold
22.58
14.0
13.4
4.2
7.1
7.4
cash
11
1.61
SPH
5,047
3.17
4.25
34%
Buy
25.40
10.8
10.4
2.4
8.6
8.8
cash
6
3.28
SMRT
2,396
1.58
1.82
15%
Buy
11.25
15.9
14.6
3.5
4.9
5.1
0.00
0
2.23
score
Source: DBS Vickers
Looking ahead, we believe large takeovers running to the tunes of billions are less likely given tighter credits but smaller Low valuations can trigger industry deals are still possible: 1) robust companies could buy consolidations/privatization/ M&A. The credit crunch and competitors weakened by the tight credit market to enlarge financial crisis has resulted in a sharp reduction in the sector their own market share; 2) strategic buyers could take M&A activity for 2008 and possibly into 2009. But, the massive advantage of either a strong balance sheet (cash/credit decline in equities’ has also beaten down valuations to levels capacity) or relatively stronger equity position to acquire lowcompelling enough to draw potential buyers. priced companies distressed by a combination of declining revenue and rising borrowing costs; and 3) major shareholders We have witnessed a flurry of corporate takeovers and could privatize undervalued companies which have been privatizations year to date. Most offers are struck with indiscriminately sold down with the market. respectable premiums over market prices. D) M&A potential on distressed valuation
Singapore M&A year-to-date Date announced
Takeover target
Acquirer
7-Jun-08
Unisteel
KKR
21-Jul-08
Bright World Precision Datacraft Asia
22-Jul-08 25-Aug-08 15-Sep-08 6-Nov-08 02-Dec-08
China Hldgs Acquisition Dimension Data Hldgs Singapore Computer SingTel Sys SP Chemicals Ltd SP Chemicals Holdings Ltd ETLA Eletrotech Singapore Food Industries
Singapore Airline Terminal Svcs
Source: Bloomberg, Company data, DBSV
Page 10
Offer Price (S$) S$1.95
Size of Deal
Hist. P/BV (x) 6.1
EV/ EBITDA Hist. (x) PE (x)
Fwd PE (x)
S$785m
Premium to last Px (%) 14.5
10.6
17.7
16.3
S$0.70 0.75 US$ 1.33
S$300m
77.8
2.3x-2.5x
7.7x-8.2x
8.9x-9.5x
9.5x-10.2x
US$276 m 33.0
3.0
5.5
19
S$ 1.50
S$139.7m 12.0
2.0
5.9
13.1
13.7
S$0.73
S$400m
1.70
6.0x
7.0x
1.40
Share swap S$30.05m 22.0
0.8
3.0
7.4
S$0.93
3.1
7.4x
15.5
18.7
S$334.5m 4.50%
Market Focus Equity Strategy
Within tech, we think Chartered and Hi-P are potential M&A targets whereas Creative would be a prime candidate for privatization to extract cash. Chartered is an attractive takeover target given record low valuation of only 0.2x P/B. With an enterprise value of S$2b, a potential buyer would be getting Chartered’s wafer fabs -one 300mm fab and five 200mm - at a price far below replacement cost. Today, a leading-edge 300mm fab like Chartered’s Fab 7 already costs more than US$2b. Word on the street has rumoured both TSMC and UMC to be interested buyers.
10.7 Scts per Swissco share. This implies that the equity market is ignoring the breakup value of Swissco, and valuing its core offshore vessel chartering business at a mere 3.4x FY08 PE. Its core earnings are expected to be driven by the expected delivery of 10 new vessels by end 2008, and supported by the sustained high day charter rates for offshore vessels. Furthermore, Swissco’s balance sheet is expected to strengthen going forward on the back of reduced capex commitments post 2008, and strong positive operating cash flows stemming from its chartering income.
Hi-P, on the other hand, would be a strategic fit for bigger electronic manufacturing companies such as Flextronics, Jabil or even Venture.
As for KS Energy, a new substantial shareholder in the form of Dubai Transport Company LLC (“DTC”) emerged in late July 2008. Also known as Dutco Group, DTC is a private UAE-based conglomerated involved in construction of freight services to oil and gas. We note that it has been increasing its stake in KS Energy steadily over the past few months, and most recently, acquiring another 6.7m shares in KS Energy, at a price range of c. S$0.60 – 1.00, bringing its total stake to 13.1%.
As for Creative, the stock is trading below cash of US$3.14 per share as at end of Sep 08. A potential buyer can extract cash by firstly shutting down the loss-making retail business; then paying off debts with the company’s cash and last but not least, monetizing Creative’s rich library of intellectual properties. In the industrial space, Swissco International and KS Energy are our picks as possible M&A candidates. Swissco, a charterer of offshore and out-of-port limit vessels is currently trading at an attractive valuation of 0.4x forward P/B. It also holds a 9% stake in Swiber Holdings, which at current market price, is worth c.
China Sports is a likely privatisation candidate, having a net cash position of S$127.5m vs. the current free float of a mere S$38.6m. The share is currently trading at c. S$0.16, considerably lower than the net cash per share of c. S$0.19. However, the operating environment remains tough, amidst falling demand and rising competition from listed players.
Potential M & A targets Company
FYE
Mkt Cap
Price (S$)
(S$m)
12-Dec
PE (x)
P/BV (x)
EV/EBITDA
Net gearing
Free cashflow
Rcmd
08F
09F
08F
09F
08F
(%)
(S$m)
470 325 262
0.185 Hold 3.80 Fully Valued 0.295 Buy
nm nm 2.9x
nm nm 3.5x
0.2 0.6 0.5
0.3 0.7 0.4
3.4 6.6 1.3
56.4 cash cash
-279.5 126.2 15.1
Dec Dec
365 80
1.05 Fully Valued 0.405 Buy
8.0x 4.9x
7.3x 4.6x
1.0 0.4
0.9 0.4
8.1 nm
121.2 2.6
-124.2 -39.9
Dec
104
0.155
2.3x
2.3x
0.6
0.5
nm
cash
18.4
Semiconductor CSM Creative Technology Hi-P
Dec Jun Dec
Industrials KS Energy Swissco International S-chip China Sports
Hold
Source: Bloomberg, DBS Vickers
Page 11
Market Focus Equity Strategy
Sector recommendation and stocks for Singapore SECTOR
REMARKS
Banks & Finance
We believe that most of the bad news has been priced in. We have removed the 100bps risk premium attributed to banks when we downgraded the sector in Oct-08 as (1) we believe the financial sector is stabilising – credit default spreads has come off, (2) we believe asset quality would not be as bad as the Asian Financial crisis and (3) banks are well capitalised, with room to raise further capital, if necessary. We upgraded Singapore banks to Neutral (from Cautious) and revised our calls. OCBC is upgraded to a Buy (from Hold) while UOB is upgraded to a Hold (from Fully Valued).
Neutral
Consumer Goods
Neutral
For plantation, we expect palm oil prices to stay weak at RM1,520/MT next year, lower than most market expectations of between RM1,600 and RM1,900. We expect current record inventory of 2.1m MT in Malaysia to continue to rise, as Chinese import volumes weaken and slower GDP growths in Asia become more apparent. For pure planters, earnings are to drop significantly over the next three quarters, and we believe this has not been factored in current lofty multiples. For integrateds, we still like Wilmar for its ability to consistently hedge its costs and sales, although we recommend investors to wait for a reasonable entry level, as China’s palm and soybean import volume growth may decelerate due to current global economic weakness. We maintain neutral on downstream consumer goods. We expect discretionary spending to be affected as consumers cut back on spending amid slowing growth and job losses. Nonetheless, consumer staples should be less affected given that these are essential items. Also, with easing oil and commodity prices, these should be positive for consumer staple companies though there will be a lagged effect for lower prices to trickle down. Our top pick for the sector is China Fishery Group given exposure in the upstream fishing operations. Valuations are relatively undemanding at 3.6x and 3.1x FY08F and FY09F. Though gearing is relatively high at 0.93x, 75% of its debt have maturity of more than one year (largely comprising of its senior notes due 2013).
Page 12
STOCK SELECTION OCBC
China Fishery Group
Market Focus Equity Strategy
Sector recommendation and stocks for Singapore SECTOR
REMARKS
STOCK SELECTION
Consumer Services
While not spared from the market tumble in Oct, consumer services emerged as the best performing segment with a 22% decline versus 35% for the broader market. We maintain our positive view of the consumer services sector. We believe ridership for land transport will be relatively resilient despite the economic gloom, hence our preference for it. Retreating oil price is positive for SMRT and ComfortDelGro as energy and fuel costs accounts for 11% - 40% of companies revenue. With oil price retreating to around US$45/bbl, we estimate that SMRT’s fuel and electricity costs will be significantly lower. Their current 6-months contract till Mar 09 is 30% higher from previous. Top picks are SMRT, ComfortDelgro and SPH.
SMRT, ComfortDelgro, SPH
Positive
Industrials
Cautious
Shipyard. We maintain our cautious view on the shipyard sector as we reckon more news flow on order cancellations / delays to plague the sector going forward. Shipbuilders like Cosco and Yangzijiang are seeing heightened risk of cancellation in view of the plunge in freight rates and tight credit lines. The global credit crunch has extended its grasp to rigbuilding sectors as well, with three of Keppel Corp’s customers requesting for contract renegotiations. We have Hold recommendation on Sembcorp Marine (S$1.90), and Fully Valued for Cosco (S$0.80), Keppel Corp (S$3.58) and Yangzijiang (S$0.34). For these stocks to re-rate, we need to see a turning in the macro environment and recovery rebound in oil prices or BDI.
Hyflux, Epure International, SIA Engineering
Shipping. We maintain our cautious stance on dry bulk shipping. We see the general reluctance of listed companies to cancel orders as reinforcing the cyclical downturn in 2009, which will be worse than the Asian Crisis. We expect most dry bulk carriers to be making losses, except for some of the fully depreciated vessels. Secondhand prices are also expected to plunge 80%. We have Hold recommendations on Mercator (S$0.13), and Fully Valued for STX Pan Ocean (S$6.70). We recommend investors to sell into strength should the BDI stage an expected technical rebound in late 1Q to 2Q09. Oil & Gas
Neutral
We are neutral on the oil and gas sector in Singapore, preferring the operators to builders. The lower breakeven level for production projects would continue to create jobs for oil service and equipment providers, supported by most oil majors and national oil companies' current decision to maintain 2009 capex. We prefer Ezra and Swiber to KS Energy for their more attractive valuations, and believe that capex funding risk on the former two companies is misplaced. We are cautious on Jaya, given its huge newbuild program of 56 speculative vessels, while preferring ASL Marine due to its more resilient repair and chartering businesses.
ASL Marine, Ezra
Page 13
Market Focus Equity Strategy
Sector recommendation and stocks for Singapore SECTOR
REMARKS
STOCK SELECTION
Property
Our cautious stance on developers remains. Much of the expected bad news like asset writedowns, negative job creation and distressed sales have yet to materialise. These factors should continue to weigh down the sector in coming months, hampering sector outperformance. We would look to reenter the sector only upon seeing key inflexion points in the form of the worst of the bad news. These include the worst in job loss data and the weakest residential sales in the secondary market, historical precursors to an uptick in property stocks. We favour residential over office given the time needed to digest the huge impending supply coming on-stream. Our top buys are companies with strong balance sheets that we believe would be more resilient. Our top big-cap pick is City Dev (lower risk of asset writedown); our top mid-cap pick is Wheelock Properties (net cash, does not offer DPS). Avoid companies that are relatively more highly geared and with a greater exposure to the high-end residential market, where higher default risk may lie. Top sells are SC Global and Ho Bee.
City Devt, Wheelock
Lowering our call on Sreits to neutral. In addition to slower earnings growth, continued headwinds from refinancing concerns due to the tight credit market and prospect of balance sheet deleveraging due to asset value deflation would hamper share price outperformance. The sector is currently offering historically high average DPU yield of 15.5%, indicating that a measure of these risks have been reflected into the share price. Our strategy would be to remain highly selective, preferring reits with low gearing and little refinancing issues such as Parkway Life reit.
Parkway Life Reit
We maintain Cautious on tech stocks as newsflow will remain bearish, leading to more earnings downgrades on the street, near term. Throughout FY09, the industry would see falling utilization, inventory correction, higher working capital requirement and continued earnings revision as long as the market remains entrenched in a recession. Margins will also remain depressed, as competition and pricing pressures negate the strengthening USD and falling material costs. But, industry consolidation or privatization could be a catalyst. We think Chartered and Hi-P are potential buys given their integration potential. We think Creative would be a privatization candidate to extract cash.
Venture
Cautious
Reits
Neutral
Technology
Cautious
Avoid small caps. Top pick is Venture.
Telecom
Neutral
Page 14
Ground checks indicate that competition in the sector is easing, as operators are reducing handset subsidies. However, subscriber growth is under pressure as immigrantion led population growth is bound to recede with economic recession in Singapore. Current sector valuation of 12.4x FY09F PER for 4.4% FY08-FY10 EPS CAGR do not appear attractive compared to market's 9.4x PER for –0.3% growth. We would like to stress that sector earnings are less volatile and dividend yield of 5-10% limits the downside. SingTel and StarHub have challenges ahead in the medium term from National Broadband Network (NBN) with M1 as the only beneficiary. M1 is our top pick in the sector and is trading at 8.5x FY09 PER and 10% dividend yield.
M1
Market Focus Equity Strategy
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 31 Dec 2008
3.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
4.
Compensation for investment banking services: a)
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the SPH,Hyflux,, ASL Marine, City Development, Parkway Life REIT.
b)
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Page 15
Market Focus Equity Strategy
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 16
Regional Small/MidMarket Cap Strategy Focus Q4 2008 Singapore Country Assessment
Small/Mid Cap Strategy DBS Group Research . Equity
05 January 2009
Singapore Survival of the fittest We see the bear market rally that started in 4Q08 extending into 1Q 09. Our 1Q strategy focuses on companies with strong balance sheets that give them the ability to ride out the recession. Markets managed to find a short-term low in 4Q08 as investors bet that 1) the frozen credit markets may start to thaw following recent aggressive measures by central banks to inject liquidity, 2) valuation has fallen to previous crisis troughs, the recent stock market correction has priced in weak FY08 earnings and poor economic data and 3) global efforts to pump prime economies could shorten the global recession Still, we remain mindful of the current credit crunch on small and medium size companies. With earnings downgrades still an on-going process, our stock selection adds focus on companies with strong balance sheets that should enable them to weather and emerge from the current crisis as stronger entities. We take a positive view of recent plans to review capital expenditure by Ezra as well as its improved charter rates that are backed by long-term contracts. We also like ASL Marine’s good earnings visibility and net cash position in FY09. Among S-chips, we view the Chinese government’s initiatives to shift its weight from exports to domestic consumption as positive for China Hongxing, which is backed by 17Scts net cash per share. We also pick water treatment company, Epure for its more defensive business model and good net cash position. Our final pick is Raffles Medical in light of the defensive nature of the healthcare sector, the company’s strong operating cashflow and net cash position.
Yeo Kee Yan (65) 6398 7955 [email protected] Ling Lee Keng (65) 6398 7970 [email protected] Page 1 www.dbsvickers.com Refer to important disclosures at the end of this report
Market Focus Small/Mid Cap Strategy
Market Data 52-Week Indices FSSTI FTSE Mid Cap FTSE Small Cap Transactions: STI (bn) FTSE Mid Cap (bn) FTSE Small Cap (bn)
Closed 12 Dec 08 1,740 342 291
Chng Net -1 mth (44) (27) (15)
-1 mth (%) -3 mth (%) (2.4) (7.3) (4.8)
(32.3) (40.7) (38.4)
-6 mth (%)
-12 mth (%)
(42.4) (55.0) (54.9)
(50.7) (61.7) (66.5)
High
Low
3531 908 867
1474 299 257
YTD* 63.3 43.6 58.0
Source: Bloomberg * Start 10 Jan 08
PERFORMANCE REVIEW Relative Performance - Small cap picks vs FSTS & FSTM Last quarter, in particular October, saw global equity indices experience the worst fall in recent history, with the impact of the global credit crisis deepening spurring the collapse of more financial institutions. Concerted efforts by global central banks to cut interest rates and to roll out economic stimulus packages managed to prevent the market from free falling. However, sentiment remained cautious.
1.2 1.0 0.8 0.6 0.4 0.2
Small cap stocks were hit harder, as a result of a flight to quality. Against this backdrop, our small cap stock picks were not spared. Our small cap portfolio fell 32.7% Q-o-Q on a price-weighted basis, vs 38.4% and 40.7% drop in the FS Small Cap Index (FSTS) and FS Mid Cap Index (FSTM) respectively. Among our four picks, both Ezra and Celestial underperformed the FSTS and FSTM most of the time. Ezra was hit by falling oil prices and concerns about funding for its high capex needs while margins for Celestial were affected by high raw materials. High dividend yield stocks Parkway Life REIT and Pan United Corp, outperformed the market during the 3-month period.
0.0 Sep-08
Oct-08 Celestial Parkway Life REIT
Nov-08
Ezra FSTS
Pan United FSTM
Source: Bloomberg, DBS Vickers
STI vs FS Mid and Small Cap 4,000
STI
FTSE Small and mid Cap
1000 900
3,500
800 700
3,000
600 2,500
500 400
2,000
300 1,500 J an-08
200 Mar-08
FS STI
Source: Bloomberg, DBS Vickers
Page 2
J un-08
FTSE Small Cap
Aug-08
Nov -08
FTSE Mid Cap
Market Focus Small/Mid Cap Strategy
Average daily turnover volume eased from above 1.2bn to around the 1bn mark shortly after the market recovered from its low in end October as sentiment remained cautious. Turnover for mid cap stocks accounted for an average of 20% of total volume in 4Q08 while small cap stocks accounted for an average of 17% during the same period.
FTSE Volume Traded (mil shares) 3,000
m
50% 45% 40%
2,500
35% 30%
2,000
25% 20%
1,500
15% 10%
1,000
5% 500 J an-08
0% Mar-08
J un-08
Sep-08
Nov-08
Total V olume (LHS) FTSE Small Cap V ol vs Tot V ol % (RHS) FTSE Mid Cap V ol vs Tot V ol % (RHS)
Source: Bloomberg, DBS Vickers
GROWTH AND VALUATION Growth and Valuation – Large Caps vs Small / Mid Caps
Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Real Estate REITS Technology Telecommunications Large Caps
2007 22.5 19.9 8.1 8.4 15.3 7.5 2.3 10.5 10.5 3.7 10.9 9.2
PE (x) 2008F 6.1 7.7 10.3 8.5 15.7 7.8 4.9 9.8 9.1 19.2 12.4 9.2
2009F 3.3 11.6 10.9 9.2 14.8 8.6 5.1 9.3 9.3 (7.7) 12.1 10.1
2007 -41% 2% 21% 20% 35% 35% 79% 48% 27% 34% 3% 21%
Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Real Estate REITS Technology Telecommunications Small / Mid Caps DBSV Universe Small Cap Ex Pty & Fin
5.2 4.8 14.3 4.5 11.8 7.0 5.6 4.8 13.7 5.0 6.0 6.3 8.7 6.0
4.6 4.3 14.0 4.0 11.3 6.0 3.6 6.7 7.9 5.8 6.3 5.9 8.7 5.3
4.4 4.1 12.4 3.7 9.9 5.8 3.4 5.0 7.7 7.5 7.8 5.5 9.2 5.2
47% 61% 99% 128% 36% 99% 24% 48% 64% 169% -10% 63% 26% 70%
-32% -34%
-36% -42%
-46% -48%
Small vs Large Caps Small Caps Ex Pty v Large Caps
Earnings Growth (%) 2008F 267% 159% -22% -2% -3% -3% -54% 8% 15% -81% -12% -1% 13% 12% 2% 10% 4% 17% 54% -29% 74% -13% -5% 6% 0% 14%
2009F 86% -34% -5% -7% 6% -9% -4% 5% -2% -350% 3% -8% 4% 4% 13% 9% 14% 2% 7% 34% 2% -23% -19% 9% -5% 2%
Source: DBS Vickers
Page 3
Market Focus Small/Mid Cap Strategy
Market de-rated further in 4Q08. Our small/mid caps FY08 and FY09 PE declined to 6.0x and 5.5x as at end 4Q08 from 7.9x and 6.2x respectively when compared to the previous quarter. Small/mid caps continue to trade at much lower valuation multiples compared to large caps, which are trading at 9.5x FY08 and 10.2x FY09. Further earnings downgrades reduced growth to 6% FY08 and 9% FY09, much lower than the 10% FY08 and 29% FY09 during 3Q. Nevertheless, the revised earnings growth for small/mid caps are still much better than zero growth for large caps in FY08 and negative 7% growth in FY09. Oil & Gas and Financials the worst hit. Oil & Gas, REITs and Real Estate were the worst hit sectors in 4Q08. Oil & Gas sector eased 52.8% on a 3-mth basis on the back of more than 50% fall in oil prices and concerns of order cancellations. Stocks like Jaya, Swiber and ASL Marine were among the top 20 most oversold stocks. REITS and Shipping Trusts were hit by fears about re-financing issues arisingamid the current credit crisis. 35% of the most oversold stocks featured here are Shipping Trusts and REITS. Basic Materials’ performance was skewed by Midas (beneficiary of stimulus
package) and SP Chemicals (takeover offer). Healthcare was generally more defensive in the down market.
Small/Mid Cap Sector Performance (Sorted in ascending order on 3-month performance)
Oil & Gas REITS
Chng 1m
Chng 3m
Chng 6m
Chng 12m
-3.5
-53.2
-72.3
-77.7
-11.8
-47.2
-59.5
-65.9
Real Estate
-3.0
-47.0
-63.5
-76.9
Industrials
-6.9
-43.4
-56.4
-64.8
Total
-4.5
-41.9
-58.9
-69.6
-11.3
-40.1
-60.3
-67.8
-9.5
-39.7
-48.6
-47.9 -61.5
Financials Telecommunications Technology
-12.3
-38.2
-51.5
Consumer Services
8.5
-33.8
-54.4
-61.0
Consumer Goods
1.7
-32.1
-54.8
-67.3
Health Care
6.6
-30.0
-44.1
-49.4
Basic Materials
0.7
-9.0
-44.4
-66.2
Source: DBS Vickers
Small/Mid Cap 20 most oversold stocks in the past 3 months Pric e/ Company
Mkt Cap (S$m)
Pric e (S$)
T arget Pric e
%
12- Dec
(S$)
Upside
Rc md
08F
0.23 0.10 0.31 US$0.52 0.63 0.34
-22% -3% 30% 271% 59% 60%
FV FV H B H B
Div Y ld
BV (x )
(%)
09F
08F
08F
3M
6M
12M
1.5x 4.2x 6.3x 3.3x 5.4x 5.0x
2.7x 6.3x 8.0x 3.8x 5.8x 4.2x
0.5x 0.3x 0.2x 0.3x 0.3x 0.9x
44.1% 6.7% 24.5% 30.6% 32.2% 0.0%
(73) (64) (64) (63) (62) (61)
(82) (78) (71) (66) (65) (58)
(83) (88) (73) (67) (69) (70)
PE ( x )
Share Pric e Perf ormanc e ( % )
J ay a Hldgs Asia Env ironment F rasers Commercial Trust Pacific Shipping Trust Rickmers Maritime Epure International
227 0.30 45 0.11 171 0.24 119 US$ 0.14 145 0.40 271 0.21
Bany an Tree Swiber Hldgs Mapletree Logistics Trust CSE Global ASL Marine F irst Ship Lease
305 231 611 204 133 253
0.40 0.55 0.32 0.40 0.44 0.51
0.37 1.00 0.57 0.80 0.84 1.65
-8% 83% 82% 100% 91% 227%
FV B B B B B
12.8x 3.3x 4.6x 4.0x 2.6x 25.4x
14.2x 2.2x 5.9x 4.0x 2.5x 93.7x
0.5x 0.6x 0.4x 1.3x 0.6x 0.4x
3.1% 0.0% 22.4% 11.3% 9.1% 33.9%
(60) (59) (57) (56) (55) (54)
(74) (79) (65) (63) (63) (58)
(78) (84) (71) (68) (71) (61)
China Sky Chemical F ibre Silv erlake Axis Asia Enterprises
232 112 49
0.29 0.10 0.18
25% 30% -43%
(54) (53) (53)
(68) (70) (57)
(85) (82) (62)
47% 105%
1.9x nm nm
7.3% 18.6% 18.8%
0.04 0.19
2.1x 2.5x 2.1x 8.2x nm
0.3x 1.6x 0.4x
33 470
H FV FV FV H
2.3x 6.6x
Global Testing Corp CSM
0.35 0.13 0.10 0.05 0.38
0.2x 0.2x
0.0% 0.0%
(53) (53)
(65) (77)
(81) (82)
Tat Hong Suntec REIT K-Reit
296 999 392
0.60 0.65 0.60
0.75 0.88 0.93
26% 35% 55%
B H H
3.3x 8.8x 18.4x
3.9x 7.4x 20.1x
0.8x 0.3x 0.2x
9.8% 15.8% 16.7%
(52) (51) (51)
(71) (58) (58)
(81) (62) (72)
Source: DBS Vickers
Page 4
Market Focus Small/Mid Cap Strategy
susceptible to the economic slowdown compared to highend consumables. Hongxing offers good value at current value as stock is backed by 17Scts net cash per share and offering 16.5% EPS CAGR over FY09 and FY10.
STRATEGY/THEMES AND STOCK PICKS A Bear market rally Just as bull markets consolidate for breathers, so do counter-trend rallies interrupt bear markets.
(2) Beneficiary of China’s massive USD583bil stimulus plan. The recently announced stimulus package include plans for environmental protection that could be beneficial for waste and water treatment companies. Our second pick is leading water and wastewater treatment company Epure. The company has a strong net cash of 14cts/share, and is in a strong financial position which enables it to finance BOT projects and future working capital through internally generated funds. Current valuation is compelling at 4.7x FY09 PER.
As stocks reeled from a massive sell off across the board during 4Q08, there is optimism that stock prices have touched a temporary floor following the US government’s efforts to save big corporations such as Citigroup and US auto manufacturers, global government’s concerted efforts to pump prime their respective economies and unfreeze credit markets (e.g. the USD 700bil bailout plan, China’s USD583bil economic stimulus and Singapore’s SGD2.3bil stimulus plan to encourage bank to give credit). Going ahead, investors can look forward to year-end window dressing activities and Singapore’s budget scheduled on January 22nd. , US President elect Obama’s pledge to revive the economy and create jobs should continue to see bargain hunting on minor dips ahead of his swearing in ceremony on January 20th next year.
(3) Rebound in oil price lifts oversold O&M stocks Oil price has fallen nearly 70% since peaking out at USD147pbl. Our average oil price assumption for 2009 is USD60pbl, which is about 40% higher compared to current price. Our technical analyst sees strong support for oil price at USD38-40pbl. Our picks are Ezra and ASL Marine. We view Ezra’s recent announcement to review its orders for 5 multi-functional support vessels positively as it signals a preference towards cash conservation, thus improving on its current net debt position even as growth continues to be underpinned by long-term charter contracts. ASL Marine’s strong balance sheet and good earnings visibility from its large shipbuilding order book coupled with sustained strong demand for ship repair and chartering services justifies the company as our next pick in the O&M sector. ASL also offers an attractive dividend yield of c. 11%.
Despite near-term positives, we remain mindful of the ongoing credit crisis and the vulnerability of small companies. As banks impose stricter lending criterions, we prefer to stay away from companies with high gearing and poor operating cash flows. Focus on strong balance sheet Thus, in addition to attractive PE valuations, we think a strong balance sheet is a must. Our additional criterions are companies with net cash (or slight net debt), an Altman’s Z-score (a formula for predicting bankruptcy, the lower the score, the higher chance of bankruptcy) of at least 2.0 and good operating cash flows. There should be no sharp increase in debtor’s turnover days.
(4) Healthcare sector as defensive Our final pick is Raffles Medical. Besides the defensive nature of its business, the company boasts of a strong operating cash flow and has a strong net cash position that should increase from S$9mil as of Sept08 to S$16mil by end 2008. Its healthy balance sheet will see it through this period of uncertainty. It is trading at its historical low valuation of c. 10x PE
(1) Beneficiary of China’s focus on domestic consumption China Hongxing is expected to benefit from the Chinese government’s initiatives to focus on domestic consumption. Its sportswear products, which cater to mid-to-low end consumers in 2nd and 3rd tier cities in China, are less . 1Q09 Small/Mid Cap Stock Picks FYE Company
Mkt
Price
Target
Cap
(S$)
Price
%
(S$m)
12-Dec
(S$)
Upside
Rcmd
08E
EV/EBITDA
P/BV
Div Yld
ROE
(x)
(x)
(%)
(%)
6m
09F
08E
08E
08E
08E
($000s)
PE (x)
Val/Day
ASL Marine
Jun
133
0.44
0.84
91
Buy
2.6
2.5
2.0
0.6
9.1
31
253
China Hongxing
Dec
533
0.21
0.33
56
Buy
5.0
4.3
1.0
0.6
4.0
13
6,719
Epure International
Dec
271
0.21
0.34
60
Buy
5.0
4.2
1.5
0.9
0.0
20
469
Ezra Holdings
Aug
404
0.69
1.25
81
Buy
5.0
4.5
4.6
0.7
26.1
55
4,545
Raffles Medical
Dec
334
0.645
0.76
17
Buy
11.6
10.1
7.5
1.5
3.9
14
226
Source: DBS Vickers
Page 5
Market Focus Small/Mid Cap Strategy
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the securities recommended in this report as of 31 Dec 2008
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, beneficially own a total of 1% or more of any class of common equity securities of the Pacific Shipping Trust as of 5 Jan 2008
3.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of Pacific Shipping Trust as of 5 Jan 2009.
4.
Compensation for investment banking services:
Page 6
i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the ASL Marine,Parkway Life REIT,Pacific Shipping Trust, Mapletree Logistics Trust, Silverlake Axis
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any
Market Focus Small/Mid Cap Strategy
investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 7
Singapore Company Focus
Cosco Corporation Bloomberg: COS SP
|
Reuters: COSC.SI
DBS Group Research . Equity
5 Jan 2009
FULLY VALUED S$0.925
Profit Warning
Price Target : 12-month S$ 0.76 (Prev S$ 0.80) Reason for Report : Profit warning Potential Catalyst: New contract wins, smooth execution
Cosco dropped a bombshell, indicating that 2008 profits would be lower than 2007, due to provisions for doubtful debts, cost overun and potential penalties for delays. We cut our forecasts by 20% to 30% on lower sales and margin assumptions, maintained Fully Valued.
STI : 1,829.71
Analyst Janice Chua +65 6398 7954 [email protected]
Could plunge into losses in 4Q08. As the group has achieved net profits of S$326.5 up to 9months in 2008, this implies that 4Q08 net profit is likely to be a loss or at best, profits of less than S$10m vs consesnus expectations of S$96m.
Price Relative S$
R e la t iv e In d e x
8 .5 0
790
7 .5 0
690
6 .5 0
590
5 .5 0
490
4 .5 0 390
3 .5 0
290
2 .5 0
190
1 .5 0 0 .5 0 2004
2005
2006
C o s c o C o r p o r a t io n ( L H S )
90 2008
2007
R e la t iv e S T I IN D E X ( R H S )
Forecasts and Valuation FY Dec (S$ m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A
2008F
2009F
2010F
2,262 576 498 337 337 15.0 15.0 80 15.5 7.0 42.0 6.2 6.2 5.0 2.7 7.6 2.2 CASH 41.8
3,469 535 442 292 292 13.1 13.1 (13) 13.5 7.3 48.1 7.1 7.1 5.1 4.1 7.9 1.9 CASH 29.0
4,391 635 504 275 275 12.3 12.3 (6) 12.7 8.2 53.1 7.5 7.5 5.1 4.1 8.9 1.7 CASH 24.3
3,996 657 503 264 264 11.8 11.8 (4) 12.2 9.2 56.6 7.8 7.8 5.0 4.4 10.0 1.6 0.0 21.5
(29.2) 17.8
(21.8) 15.7
(16.8) 14.8
Earnings Rev (%): Consensus EPS (S cts):
ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: Cosco Corp's core businesses include ship repair, shipbuilding, offshore and marine engineering, dry bulk shipping and shipping agency.
www.dbsvickers.com Refer to important disclosures at the end of this report ed: YM / sa: JC
Hit by provisions for debts, cost over-run and penalties. Earnings were hit by :(1) Provisions for doubtful debts – includes provision for S$19m due for repair works on three Russian vessels which defaulted, and MPF which went into bankruptcy. Delays in payment will rise as shipowners are losing money due to the plunge in freight rates; (2) Cost overrun for shipbuilding and offshore marine projects due to weak execution, higher steel prices, sub-contracting cost, and additional development cost at Zhoushan. The group provided for the 30% drop in steel prices over the past quarter for its stockpile; (3) Potential penalties for delivery delays - it completed only one 57K bulk carrier in 2008 vs ten originally scheduled. Clients push back vessel deliveries Cosco has rescheduled the delivery of seven bulk carriers, from 2009/2010 to 2011/2012, on request from its clients. With shipowners operating at a loss, we expect more cancellations, rescheduling, and bad debts. Net profits forecasts cut by 20% to 30%. We cut our sales estimates and now expect cancellations and delays affecting 40% of its order book (from 15% previously). Including provisions and cut in margin assumptions, the net impact is a 20% to 30% cut in earnings forecasts. Maintained Fully Valued, target price cut to 76cts based on 4x its shipbuilding profits and 8x its shiprepair profits. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders China Ocean Shipping (%) SembCorp Marine (%) Free Float (%) Avg. Daily Vol.(‘000)
2,239 2,071 / 1,421 53.4 5.0 41.7 31,863
Company Focus Cosco Corporation
Income Statement (S$ m) FY Dec
Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Effective Tax Rate (%)
Balance Sheet (S$ m) 2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
2,262 (1,652) 610 (115) 495 0 1 3 0 498 (20) (142) 0 337 337 576
3,469 (2,868) 601 (181) 420 0 1 22 0 442 (47) (103) 0 292 292 535
4,391 (3,738) 653 (154) 500 0 1 4 0 504 (71) (158) 0 275 275 635
3,996 (3,353) 643 (137) 506 0 1 (4) 0 503 (74) (164) 0 264 264 657
Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
1,479 2 55 1,083 486 828 35 3,967
1,814 3 55 532 578 771 46 3,797
2,129 3 55 276 798 1,098 1 4,360
2,429 4 55 123 799 999 1 4,409
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
112 2,446 65 42 940 363 3,967
112 2,037 65 42 1,076 466 3,797
112 2,330 65 42 1,188 624 4,360
112 2,135 65 42 1,268 788 4,409
86.1 61.1 67.6 63.9 3.9
53.4 (7.1) (15.2) (13.1) 10.6
26.6 18.6 19.0 (6.0) 14.2
(9.0) 3.3 1.3 (3.8) 14.8
Non-Cash Wkg. Capital Net Cash/(Debt)
(1,097) 906
(642) 355
(433) 100
(336) (54)
2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
498 81 (23) (1) 1,007 24 1,586 (462) 0 0 1 14 (447) (119) (230) 27 (13) (334) 805
442 115 (20) (1) (482) 0 56 (250) (200) 0 0 0 (450) (157) 0 0 0 (157) (551)
504 135 (47) (1) (234) 0 357 (250) (200) 0 0 0 (450) (163) 0 0 0 (163) (255)
503 150 (71) (1) (100) 0 481 (250) (200) 0 0 0 (450) (184) 0 0 0 (184) (154)
27.0 21.9 14.9 41.8 11.5 33.3 46.5 NM 0.8 88.4 342.3 79.9 1.0 0.7 CASH 262.0 40.5 25.9 50.2
17.3 12.1 8.4 29.0 7.5 22.9 55.7 NM 0.9 84.1 287.9 70.6 0.9 0.6 CASH 141.6 15.9 24.0 (8.7)
14.9 11.4 6.3 24.3 6.7 22.6 67.1 NM 1.1 77.7 208.8 69.7 0.9 0.6 CASH 141.6 4.5 26.4 4.8
16.1 12.7 6.6 21.5 6.0 20.0 78.0 124.5 0.9 95.8 238.9 91.0 0.9 0.5 0.0 141.6 (2.4) 25.9 10.3
Cash Flow Statement (S$ m) FY Dec
Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
Rates & Ratio
Quarterly / Interim Income Statement (S$ m) FY Dec
1Q2008
2Q2008
3Q2008
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
847 (664) 182 (36) 146 0 0 3 (2) 148 9 (40) 117 118 170
718 (517) 201 (55) 145 0 0 3 0 149 (21) (44) 84 84 173
1,047 (802) 245 (38) 208 0 0 10 0 218 (22) (67) 129 129 235
988 (786) 202 (27) 175 0 0 7 0 183 (24) (45) 114 114 203
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
54.8 1.9 2.3 19.2 21.5 17.3 13.8
(15.2) 1.5 (0.5) (28.0) 28.0 20.3 11.7
45.9 35.9 42.8 53.4 23.4 19.8 12.3
(5.7) (13.4) (15.6) (11.5) 20.4 17.7 11.5
Page 2
FY Dec
Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Asset Turnover (x) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N. Cash/(Debt)PS (S cts) Opg CFPS (S cts) Free CFPS (S cts) Segmental Breakdown
4Q2007
Source: Company, DBS Vickers
FY Dec
FY Dec
2007A
2008F
2009F
2010F
Revenues (S$ m) Charter Shipping agency Ship repair and marine
208 22 2,032
253 22 3,193
139 23 4,229
111 24 3,861
Others Total
0 2,262
0 3,469
0 4,391
0 3,996
Company Focus Cosco Corporation
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned company as of 31 Dec 2008.
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
3.
Compensation for investment banking services: i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the mentioned company.
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Page 3
Company Focus Cosco Corporation
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 4
Singapore Company Focus
ST Engineering Bloomberg: STE SP
|
Reuters: STEG.SI
DBS Group Research . Equity
5 Jan 2009
BUY S$2.46 STI : 1,829.71
Holding Fort
Upgrade from HOLD Price Target : 12-month S$ 2.80 Reason for Report : Company Update Potential Catalyst: Announcement of acquisitions
We upgrade ST Engineering to BUY with a target price of S$2.80. Amidst the worsening global economic outlook, STE has sustained its reputation of being a defensive counter, with a slew of new contract wins in recent months across different segments. In spite of possible slowdowns in its Aerospace and Marine segments, we are positive on the stock given 1) its ability to boost growth through M&A, 2) a relatively secure dividend yield of 7%, 3) record orderbook of S$10b and 4) cash and cash equivalents of S$1b.
Analyst Janice Chua +65 6398 7954 [email protected] Suvro Sarkar +65 6398 7973 [email protected]
Price Relative S$
Robust orderbook of S$10b will drive revenues. Contract wins have been stable across the Group's subsidiaries in recent months, demonstrating the defensive nature of the Group's diversified earnings stream. It is also in line with our expectation that public spending in defence, transport, and infrastructure projects will mainly drive revenue growth over the next two years.
R e la t iv e In d e x
4 .3 0 208 188
3 .8 0
168 3 .3 0 148 128
2 .8 0
108 2 .3 0 88 1 .8 0 2004
2005
2006
S T E n g in e e r in g (L H S )
68 2008
2007
R e la t iv e S T I IN D E X (R H S )
Forecasts and Valuation FY Dec (S$ m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A
2008F
2009F
2010F
5,051 780 638 504 504 16.9 16.9 12 16.9 16.9 54.7 14.5 14.5 12.4 8.8 6.9 4.5 CASH 31.5
5,327 772 603 491 491 16.4 16.4 (3) 16.4 16.4 54.3 15.0 15.0 12.3 8.7 6.7 4.5 CASH 30.2
5,555 808 644 506 506 17.0 17.0 3 17.0 17.0 54.8 14.5 14.5 11.9 8.4 6.9 4.5 CASH 31.1
5,751 841 674 529 529 17.7 17.7 5 17.7 17.7 55.6 13.9 13.9 11.4 8.2 7.2 4.4 CASH 32.1
16.6
(0.8) 17.1
18.9
Earnings Rev (%): Consensus EPS (S cts):
ICB Industry : Industrials ICB Sector: Aerospace & Defense Principal Business: An integrated engineering group providing solutions and services in aerospace, electronics, land systems and marine sectors.
www.dbsvickers.com Refer to important disclosures at the end of this report ed: YM / sa: JC
US operations may recover faster than expected. Even though major US airlines have pared capacity in FY08, jet fuel prices have corrected significantly and airline industry losses, going forward, will be lower than previously expected. Hence, the demand for 3rd-party MRO work may recover earlier than projected. Upgrade to BUY, attractive dividend yield of 7%. The group is focused on enhancing value for shareholders and STE has been paying out 100% of its earnings as dividends since 2002. As a result, the Group has been able to generate very high ROEs in the range of 30%, while still retaining cash and cash equivalents of approximately S$1b at the end of 3Q08. We believe this strong cash holding will present potential growth upside – in the form of good acquisitions at distressed valuations. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Temasek Holdings Pte Ltd (%) Aberdeen Asset Management The Capital Group Companies Free Float (%) Avg. Daily Vol.(‘000)
2,999 7,377 / 5,060 50.3 8.1 7.0 34.6 5,250
Company Focus ST Engineering
Pace of order wins unaffected by global slowdown ST Engineering capped off the year 2008 with its first contract from a Singapore Integrated Resort – The Resorts World at Sentosa – to build an Integrated Security System, an IT Infrastructure System and a Carpark Guidance & Payment System. The contract is worth S$86m and will take STE’s outstanding orderbook at the end of FY08 to more than S$10b. Apart from this, STE has also been awarded contracts to supply the UK Defence Ministry with All Terrain Vehicles and 40mm ammunition (S$400m), build warships for the Thai Navy (S$200m) and build communication systems for the LTA (S$160m) – to name a few – in recent months.
Orderbook at the end of period 12.0
Competitive Strengths 10.0
8.0
9.7
9.6
9.9
10.0 9.5
9.2
9.3
9.5
1Q08
2Q08
3Q08
7.4
6.0
5.3
5.4
FY04
FY05
4.6 4.0
2.0
0.0
In all, STE won about S$1b worth of new orders each in 3Q08 and 4Q08, thereby demonstrating its resilient business model. Though FY07 remains the record year in terms of order wins – largely owing to the aircraft conversion orders from Fedex and Boeing/ ANA – FY08 order wins of S$2.7b is highly commendable in the face of a global meltdown. New order wins as announced 4500
3877
4000 3500 3000
2670
2603
2500 2000
1752
1781
2004
2005
1500 1000 500 0 2006
2007
2008
Source: Company
Record outstanding orderbook of S$10b provides for steady earnings visibility Over the last 8 quarters – since the jump in orderbook in 1Q07 from about S$7.4b to S$9.7b – the outstanding orderbook has remained largely stable, providing steady earnings visibility for forthcoming quarters. As evident from the last two quarters, we expect public spending in defence, transport, and infrastructure projects will mainly drive orderbook and revenue growth over the next two years. Management expects a year-end orderbook in excess of S$10b, which is the highest level ever.
Page 2
FY03
FY06
1Q07
2Q07
3Q07
4Q07
4Q08
Source: Company
US aerospace operations may recover faster than expected. IATA’s recent forecast for North American carriers paints a better picture than before, with 2009 industry losses expected to be lower than that in 2008. Carriers in this region were among the hardest hit by high fuel prices, but are now expected to post a loss of about US$4b in 2008, down from an earlier projection of US$6-7b of losses. An early 10-20% domestic capacity reduction has given the region’s carriers a head start in combating the recession-led fall in demand. The lack of hedging is also allowing North American carriers to now take full advantage of the significantly lower jet fuel prices. Hence, we believe the demand for 3rd party MRO works in the US may recover earlier than expected. Prototyping losses should be avoided in FY09 Pre-tax margins in the Aerospace segment in FY08 will be hit by high prototyping costs as the unit develops its Boeing 757 and 767 passenger-to-freighter (“PTF”) conversion capabilities. However, we believe that the PTF conversion program should start to contribute positively in FY09, as costs are incrementally lowered further along the learning curve, after another 3 units are delivered in 4Q08. Cash and cash equivalents of S$1b inspires confidence A strong balance sheet and excellent cash flows have helped the Group maintain a strong cash hoard of approximately S$1b, at the end of 3Q08. Only about S$100m of this constitutes investment assets, of which about S$70m is in the form of fixed income securities and only S$30m is exposed to the volatile equity markets. Hence, risks to the S$1b cash holding are relatively minimal.
Company Focus ST Engineering
What this implies – secure dividends, M&A The group is focused on enhancing value for shareholders and STE has been paying out 100% of its earnings as dividends since 2002. Despite this, the Group has been able to retain cash and cash equivalents of approximately S$1b at the end of 3Q08, while generating very high ROEs in the range of 30%. Thus, we forecast a relatively secure dividend yield of 7.2% for the full year of 2008 and 7.5% in FY09. The Group has historically made timely acquisitions like SAS Components and VT Halter Marine, as well as investments in JVs like STARCO and STATCO in China. Hence, we believe
that the current market environment provides the Group with an opportunity to provide further growth upside by pursuing good acquisitions at distressed valuations. Upgrade to BUY, unchanged target price of S$2.80. Debunking the conglomerate discount theory, investors have traditionally accorded ST Engineering a premium to the STI and our target price is based on 16x FY09 earnings, at the lower end of its forward PE valuation band. In light of potentially stable earnings, attractive dividend yield and potential growth upside through M&A; we upgrade the stock to BUY.
STE Forward PE Band (2001 – 2008) 4.5 4.0
24x
3.5
21x
3.0
18x
2.5
15x
2.0
12x
1.5 1.0 0.5 Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
0.0
Source: Bloomberg, DBS Vickers
Page 3
Company Focus ST Engineering
Appendix 1: List of major contracts secured in FY08 Date
Description of contract
Division
Date of Completion
Value (S$m)
12-Feb
2 PSVs for L&M Botruc Rental
Marine
2010
78
18-Feb
Maintenance of ATC system for CAAS
Electronics
2023
52
20-Feb
Extension of Flybe maintenance contract
Aerospace
2016
232 45
20-Feb
Delivery of mortar system for Middle East customer
Kinetics
2011
20-Feb
Supply of 40mm ammunition to UK MOD
Kinetics
2009
43
20-Feb
Outfitting of seismic vessel for Waveship
Marine
2H08
28 87
20-Feb
Engine maintenance contract with Comair
Aerospace
2016
24-Apr
Develop key systems for Thales ATC contract
Electronics
2012
37
7-May
Build AHTS for Ezra
Marine
2H09
26
30-May
Upgrade Derrick barge for Clough Java Offshore
Marine
1H09
29
5-Jun
Guangzhou Metrro Line contract
Electronics
Oct-10
18
16-Jun
Provide taxi management system in Sharjah
Electronics
Oct-09
12
18-Jul
Build an Ice-Class Diving Support Vessel
Marine
2H10
128
7-Aug
Renewed component supply contract with Polish Airlines
Aerospace
2011
19
1-Sep
Half height platform doors for MRT stations for LTA
Electronics
2012
112
16-Sep
Provide RSAF with aircraft and training
Aerospace
2032
105
23-Sep
Heavy maintenance works for SIA leased fleet
Aerospace
2016
-
29-Sep
Phase II of Egyptian Navy FMC contract
Marine
2012
577
16-Oct
Deliver 8600 rugged testers for US Army
Kinetics
2009
86
Electronics
2016
160
Marine
2H12
200
Aerospace
2H11
75
7-Nov
Build communication systems for LTA
11-Nov
Design and build Landing Platform Dock
27-Nov
Maintenance of 4 Indonesian Air Force aircraft
1-Dec
Build seismic vessel for Swire Pacific
Marine
2H10
30
18-Dec
Supply of Bronco Carriers to UK MOD
Kinetics
2010
330
19-Dec
Supply of 40mm ammunition to UK MOD
Kinetics
1H11
77
29-Dec
Integrated security system for Sentosa IR
Electronics
Dec-10
86
Total
Source: Company
Page 4
2670
Company Focus ST Engineering Appendix 2: Quarterly cash flow statements FY Dec (m)
1Q08
Pre-tax Profit
2Q08
3Q08
156.4
151.1
144.3
Tax Paid
(6.9)
(47.5)
(35.3)
Depreciation & Amortization
37.7
37.3
38.9
Associates & JVs Inc
(8.5)
(7.2)
(13.1)
Other Non-Cash Adjustments
17.5
24.9
26.3
Changes in Non-Cash Work Cap
65.5
(146.7)
(60.6)
Cash From Operations
261.6
11.9
100.5
Net Change in Capex
(49.1)
(29.5)
(32.8)
61.8
0.5
6.1
0.0
(2.7)
0.0
Net Change In Investments Net Change in Investments in Assoc & JVs Dividends received from Associates & JVs Other Investing Activities Cash from Investing Activities Dividends Paid Net Change in Gross Debt Capital Issues Other Financing Activities
28.5
4.9
5.2
(120.6)
(59.8)
(3.0)
(79.4)
(86.7)
(24.4)
(0.8)
(445.8)
(89.9)
6.9
35.5
(14.3)
17.7
9.1
2.1
(26.0)
(24.2)
3.2
(2.2)
(425.3)
(99.0)
Currency Adjustments
(13.0)
(3.0)
12.0
Net Changes in Cash / ST Investment
167.2
(503.1)
(11.0)
Cash/ST Investment at beginning of period
1,282.7
1,449.9
946.7
Cash/ST Investment at end of period
1,449.9
946.7
935.8
Cash from Financing Activities
Source: Company
Operating cash flows relatively healthy The Group has managed to deliver healthy operating cash flows over the first three quarters of 2008, with healthy profits compensating for working capital outflows – which resulted from decreases in creditors and accruals – in 2Q08 and 3Q08.
The Group paid out FY07 final dividends amounting to S$446 m in 2Q08. The Group also declared an interim dividend of 3 cents per share in 2Q08, which should be paid out in 4Q08. FY08 cumulative dividends are expected to be 100% of net profits – we expect the group to declare final DPS of 13cts, to be paid in May 2009.
FY07 final dividend paid out in 2Q08, expect final DPS of 13cts to be declared in Feb 2009.
Page 5
Company Focus ST Engineering Income Statement (S$ m) FY Dec
Balance Sheet (S$ m) 2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
5,051 (3,923) 1,128 (568) 560 39 47 (8) 0 638 (115) (20) 0 504 504 780
5,327 (4,182) 1,145 (580) 566 20 40 (22) 0 603 (92) (21) 0 491 491 772
5,555 (4,333) 1,222 (635) 587 29 41 (13) 0 644 (116) (22) 0 506 506 808
5,751 (4,486) 1,265 (621) 645 0 42 (13) 0 674 (121) (23) 0 529 529 841
Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
1,015 268 810 1,468 1,228 954 302 6,043
1,068 308 810 1,637 1,296 1,019 302 6,440
1,117 350 810 1,582 1,351 1,063 302 6,575
1,162 393 810 1,539 1,399 1,100 302 6,705
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
859 2,892 3 510 1,633 147 6,043
859 3,281 3 510 1,620 168 6,440
859 3,378 3 510 1,635 190 6,575
859 3,462 3 510 1,658 213 6,705
12.6 11.1 17.9 13.1 18.0
5.5 (1.0) 1.0 (2.6) 15.2
4.3 4.7 3.8 3.2 18.0
3.5 4.1 9.7 4.5 18.0
Non-Cash Wkg. Capital Net Cash/(Debt)
(409) 606
(664) 775
(662) 721
(661) 677
FY Dec
2007A
2008F
2009F
2010F
2007A
2008F
2009F
2010F
Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
638 134 (105) (47) (8) 55 668 (165) 112 40 24 (4) 6 (508) (10) 94 (102) (526) 148
603 147 (92) (40) 255 0 874 (200) 0 (50) 49 0 (201) (503) 0 0 0 (504) 169
644 151 (116) (41) (1) 0 637 (200) 0 (50) 49 0 (201) (491) 0 0 0 (491) (55)
674 155 (121) (42) (1) 0 664 (200) 0 (50) 49 0 (201) (506) 0 0 0 (506) (43)
22.3 11.1 10.0 31.5 8.7 15.2 100.0 71.0 0.9 65.5 137.9 112.3 1.1 0.6 CASH 19.2 20.3 22.7 16.9
21.5 10.6 9.2 30.2 7.9 15.2 100.0 25.6 0.9 67.6 140.9 114.2 1.0 0.6 CASH 23.2 26.0 20.7 22.6
22.0 10.6 9.1 31.1 7.8 15.2 100.0 44.9 0.9 68.4 141.8 115.6 1.0 0.6 CASH 23.2 24.2 21.4 14.6
22.0 11.2 9.2 32.1 8.0 16.4 100.0 49.3 0.9 68.6 142.2 115.9 1.0 0.6 CASH 23.2 22.7 22.3 15.5
2007A
2008F
2009F
2010F
1,835 1,023 1,178 863 152 5,051
1,918 1,119 1,320 804 167 5,327
1,959 1,211 1,411 788 186 5,555
1,982 1,253 1,547 763 206 5,751
341 115 80 97 5 638
304 113 102 79 5 603
307 122 118 92 6 644
328 126 128 86 6 674
18.6 11.3 6.8 11.2 3.3 12.6
15.9 10.1 7.8 9.8 3.0 11.3
15.7 10.1 8.3 11.7 3.0 11.6
16.5 10.0 8.3 11.2 3.0 11.7
Turnover Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (S$ m)
Rates & Ratio
Quarterly / Interim Income Statement (S$ m)
FY Dec
Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Asset Turnover (x) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N. Cash/(Debt)PS (S cts) Opg CFPS (S cts) Free CFPS (S cts) Segmental Breakdown
FY Dec
4Q2007
1Q2008
2Q2008
3Q2008
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
1,296 (999) 297 (159) 138 30 12 (2) 0 178 (26) (5) 146 146 207
1,315 (1,021) 295 (154) 141 12 9 (4) 0 156 (31) (3) 123 123 198
1,300 (1,006) 294 (146) 149 1 7 (5) 0 151 (29) (2) 120 120 194
1,382 (1,102) 280 (142) 138 (1) 13 (6) 0 144 (10) (5) 129 129 190
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
4.8 7.9 (3.3) 16.6 22.9 10.6 11.3
1.5 (4.1) 1.9 (16.3) 22.4 10.7 9.3
(1.1) (2.4) 5.7 (2.1) 22.6 11.4 9.2
6.3 (2.1) (6.9) 7.5 20.3 10.0 9.3
Page 6
FY Dec
FY Dec
Revenues (S$ m) Aerospace Electronics Land Systems Marine Others Total PBT (S$ m) Aerospace Electronics Land Systems Marine Others Total PBT Margins (%) Aerospace Electronics Land Systems Marine Others Total
Company Focus ST Engineering
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned company as of 31 Dec 2008
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
3.
Compensation for investment banking services: i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the mentioned company.
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Page 7
Company Focus ST Engineering
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 8
Malaysia Company Focus
AMMB Holdings Bloomberg: AMM MK
|
Reuters: AMMB.KL
DBS Group Research . Equity
5 Jan 2009
BUY RM2.51 KLCI : 894.36
Inflexion point
Price Target : 12-month RM 2.90 Reason for Report : Company update Potential Catalyst: Capturing synergies with new shareholder
We believe AMMB has reached an inflexion point in terms of valuation. It hit its trough P/BV multiple of 0.7x in Nov-08, the lowest since 1999. We believe there is no premium attributed to AMMB for ANZ’s presence in terms of management and expertise. Buy AMMB with a target price of RM2.90, which implies 1.0x CY09 BV.
Analyst Sue Lin Lim +603 2711 0971 [email protected]
“Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.” Price Relative RM
Relative Index
5.30
219
4.80
199
4.30
179 159
3.80
139 3.30
119
2.80
99
2.30 1.80 2004
Strategies intact but execution could be delayed We believe the strategies put in place by management are intact. Its focus is to de-risk, diversify and grow dynamically. Nevertheless, the challenging outlook in 2009 could see some of AMMB’s strategies bear fruit later than expected. There have been changes to ANZ representatives in AMMB, but it is more to beef up the necessary expertise in the respective areas of focus.
79 2005
2006
AMMB Holdings (LHS)
2007
59 2008
Relative KLCI INDEX (RHS)
Forecasts and Valuation FY Mar (RM m)
Pre-prov. Profit Net Profit Net Pft (Pre Ex.) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) Diluted EPS (sen) PE Pre Ex. (X) Net DPS (sen) Div Yield (%) ROAE Pre Ex. (%) ROAE (%) ROA (%) BV Per Share (sen) P/Book Value (x)
2008A
2009F
2010F
2011F
1,814 669 669 24.6 24.6 (376) 24.6 10.2 4.3 1.7 11.1 11.1 1.0 263 1.0
1,499 795 795 29.2 29.2 19 29.2 8.6 7.3 2.9 10.6 10.6 1.0 285 0.9
1,569 845 845 31.0 31.0 6 31.0 8.1 7.8 3.1 10.5 10.5 1.0 308 0.8
1,614 918 918 33.7 33.7 9 33.7 7.4 8.4 3.4 10.5 10.5 1.0 334 0.8
0.0 28.0
(2.2) 27.4
(2.7) 32.5
Earnings Rev (%): Consensus EPS (sen): ICB Industry : Financials ICB Sector: Banks Principal Business: Banking and Finance
“In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.” www.dbsvickers.com Refer to important disclosures at the end of this report ed: SGC / sa: WMT
Different profile since crisis Asset quality is expected to be generally stable, but management did not discount a possible uptick in the NPL ratio in FY10. We expect NPL ratio of 3.0% in FYMar09 and 3.1% for FYMar10. AMMB’s provision charge-off rate ballooned to 6.84% in 1998 after it was severely hit by chunky NPLs. But now, AMMB’s loan book has flipped completely with 70% retail loans compared to 80% corporate loans during the crisis. Valuations may have bottomed out Maintain Buy with target price at RM2.90 based on the Gordon Growth Model, implying 1.0x CY09 BV. The market has not imputed any ANZ premium in AMMB’s valuation. We believe AMMB’s P/BV valuations have bottomed out after hitting a low of 0.7x recently. We reduced our forecasts by 2-3% to reflect higher NPL ratios in FY Mar 10-11. At A Glance Issued Capital (m shrs) Mkt. Cap (RMm/US$m) Major Shareholders ANZ Funds (%) AmCorpGroup (%) EPF (%) Free Float (%) Avg. Daily Vol.(‘000)
2,723 6,835 / 1,971 19.7 17.6 9.2 53.5 6,629
Company Focus AMMB Holdings
Highlights Reconfiguring business focus. Management highlighted its strategic focus for FY10-11 that includes: (i) building up its deposits base, especially low cost deposits, (ii) increasing transactional deposits to enable AMMB to expand its cash management business, cross-sell and grow non-interest income, (iii) further expansion of its insurance business, and (iv) leveraging on the technical services JV with ANZ to diversify revenue through forex and derivatives. Management also said that it would reduce focus on origination activities because this segment of the capital market is expected to remain subdued. But if opportunities arise, it would enhance its distribution channels and ensure optimal pricing for distribution. We note that AMMB’s path for expansion tracks that of ANZ from 2001-2004. Improving deposit mix is key priority. AMMB’s low cost deposits now comprise 13% of total deposits; it is targeting 25%. We think it is crucial to not just ramp up low cost deposits, but to be able to retain them. AMMB is adopting a “AAA” strategy in deposit generation: (i) acquisition – where it aims to focus on mass affluent segments and payroll crediting facilities, (ii) activation – to provide convenience and simplified services, and (iii) anti-attrition – to reduce dormant and account closures. We understand that AMMB is actively bringing new deposit products to the market and leveraging on ANZ’s technical expertise for new product development and deposit expansion programs. Enhancing distribution network. AMMB aims to expand its branch network from 186 to at least 200 branches and ATM network by another 850 machines by 2011. AMMB has inked a strategic tie up with 7-11 (a 24-hour convenience store) to house up to 400 ATM machines in selected strategic store locations by 2010.
Restructuring of insurance business. AMMB announced that its 70%-owned subsidiary, AmG Insurance Bhd ("AmG"), had entered into a non-binding Memorandum of Understanding with MAA Holdings and MAA Assurance in respect of the proposed acquisitions. The proposal involves AmG acquiring the general insurance business of MAA Assurance and a 4.9% equity stake in MAA Takaful. Separately, Friends Provident plc will buy a 49% stake in AmAssurance Bhd, which would allow AmAssurance to grow AMMB’s life insurance segment. As part of AMMB’s internal restructuring of its insurance businesses, AMMB had in 2Q08 announced the establishment of AmG Insurance to undertake AmAssurance’s (AMMB’s 70% subsidiary) insurance business with the plan to split its life and general insurance business into two entities. Insurance business contributed c.12% of AMMB’s operating profit. The restructuring is positive for AMMB, allowing it to widen its insurance product offerings. For one, AMMB will get a ready customer base from MAA’s general insurance business. And the small stake in MAA Takaful would at least give AMMB a toehold into the takaful business, while Friends Provident plc will help AMMB to further enhance its life insurance business. AMMB’s insurance business used to contribute up to c.12% of operating profit, but could grow with these new collaborations. Looking back. AMMB suffered severe losses during the Asian crisis due to its exposure to large corporate loans. In FY98, it had to make a c.RM2.1bn provision or a charge-off rate of 6.84%, which resulted in a RM1.2bn loss for the year. But since then, AMMB’s loan composition for retail and non-retail loans has changed. This is also the reason why we believe NPLs and asset quality will not deteriorate to levels during the crisis period. AMMB’s NPLs and charge-off rates also shot up after the acquisition of MBf Finance in 2003. AMMB: Retail and non-retail loan breakdown
Page 2
Retail loans (%)
Source: Company data; DBS Vickers
Non-retail loans (%)
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
FY00
FY99
FY98
Scaling down IB business; focus on other fee-based business. Given the soft capital markets, AMMB could scale down its origination business. The set-up of the forex and derivatives unit in collaboration with ANZ is earmarked to be the key driver of non-interest income growth.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY97
Focus on business banking. AMMB’s key growth area will be the business banking division. It plans to build and improve customer relationships and expand referrals from existing customers. This would also be a good source of low cost deposits and non-interest income, especially from the cash management business.
Company Focus AMMB Holdings
goods and agriculture segments. But it might try to avoid large loans (which it was exposed to pre-crisis).
AMMB: Provision charge-off rate trend 8.0% Peak of NPLs during crisis i d
7.0% 6.0%
Malaysia: Mortgage market share (as at Sep-08) 18%
5.0%
Final round of kitchen sinking
4.0% Post MBf acquisition
3.0% 2.0%
15% 13%
14% 12% 10%
1.0%
8%
0.0%
6% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
16%
16%
7%
7%
6% 3%
4% 2%
Source: Company data; DBS Vickers
0% P ublic B ank
B CHB
M aybank RHB Cap
Ho ng Leo ng
AM M B
EON Cap
AMMB: (Net) NPL ratio trend Source: Company data; DBS Vickers
20.0% 18.0%
Expect loan yields to increase. Focusing on flight to quality loans will result in better loan yields. But we have not fully factored in better loan yields in our forecasts because we are unsure of the time frame at this juncture. As such, we are still forecasting a marginal decline in NIMs from 2.28% in FYMar09 to 2.27% in FYMar10 and to 2.21% in FYMar11.
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Company data; DBS Vickers
Prospects Unlikely to show strong loan growth. AMMB aims to grow its business banking division while moderately growing selected segments such as mortgages, credit cards and personal loans (co-op financing). Even within the mortgage space, the focus would be on the mid and mid-to-high end market segment. We note that AMMB is not out to chase market share, but grow its higher profitability segments. We project loan growth for FYMar09 at 8% before slowing to 6% for FYMar09, in anticipation of a softening economic environment. We do not expect hire purchase to grow significantly because AMMB is reconfiguring its loan asset composition to reduce concentration in lending exposures. We note that AMMB is still targeting to raise its hirepurchase business ROE from mid-single digit to double digit levels over the next 3-4 years. In business banking front, AMMB aims to entrench its position in high growth industries such as the oil & gas, fast moving consumer
Key stress segments highlighted. Management identified key stress areas that included unsecured lending, credit cards and mortgages, but these had not affected group P&L YTD. Management also expects the building and construction segments to be under more pressure as it is highly dependent on GDP growth. Possible uptick in NPL ratio in FY10. Asset quality is expected to remain stable, but management did not discount a possible uptick in NPL ratio in FY10. We expect NPL ratio of 3.0% in FYMar09 and 3.1% for FYMar10. Our stress test shows that every 10bps increase in provision charge-rates would reduce AMMB’s earnings by 6%. In the worst case scenario, when we applied a provision charge-off rate of 1.82%, which is half of the crisis levels (3.64%), AMMB would still be profitable although FYMar10F net profit would be reduced by 90%. And our projected FYMar10 book value per share could drop by 20sen to RM2.88 from RM3.08. But we do not expect this drastic scenario to materialise. To reiterate, AMMB’s loan profile is different from the crisis period.
Page 3
Company Focus AMMB Holdings
Valuation Valuations have bottomed out. Maintain Buy with target price at RM2.90 based on the Gordon Growth Model, implying 1.0x CY09 BV. The market has still not imputed any ANZ premium in AMMB’s valuation. But we believe AMMB’s P/BV valuations have bottomed out after hitting a low of 0.7x recently.
Earnings tweaked marginally. In view of the challenging operating environment in 2009-10, we reduced our earnings by 2-3% for FYMar10-11 to reflect higher NPL ratios. Key risks. Amidst the weakening economic outlook, the key risk for AMMB would be taking longer than expected to implement its strategies.
Sector valuation Banking Group
Price
Target
Rating
PE (x)
CAGR
P/BV (x)
ROE (%)
Price (RM/s)
(RM/s)
BCHB
2.51 6.20
2.90 5.50
EON Capital
3.24
Hong Leong Bank
5.15
AMMB
Net Div (%)
CY07A
CY08F
CY09F
^ (%)
CY07A
B FV
12.8 7.5
9.0 9.6
8.2 11.5
8.5 (3.4)
1.0 1.3
4.80
B
10.1
17.0
7.2
63.9
0.7
0.7
0.6
9.3
2.3
6.20
B
11.9
10.5
10.0
3.3
1.8
1.6
1.5
15.0
3.5 4.2
0.9 1.4
(RM/s)
(RM/s)
0.8 1.4
10.5 12.6
3.0 2.9
Maybank
5.20
4.20
FV
8.3
9.6
10.7
(4.4)
1.3
1.3
1.2
11.5
PBB - Foreign
8.75
11.90
B
12.5
10.7
10.1
8.0
2.8
2.7
2.6
26.0
7.9
RHB Capital
3.90
4.00
H
11.8
8.4
10.1
(0.8)
1.2
1.1
1.0
10.2
2.2
Sector Wt. Avg.
9.7
9.9
10.3
2.2
1.5
1.5
1.4
13.6
4.6
Sector Wt. Avg. (ex-Maybank)
10.3
10.0
10.1
4.4
1.6
1.5
1.4
14.5
4.7
Buy (B), Hold (H), Fully Valued (FV), Not Rated (NR), ^Refers to a 2-year EPS CAGR for CY07-09. Source: Company, DBS Vickers
Page 4
Company Focus AMMB Holdings Income Statement (RM m) FY Mar
Net Interest Income Non-Interest Income Operating Income Operating Expenses Pre-provision Profit Provisions Associates Exceptionals Pre-tax Profit Taxation Minority Interests Preference Dividend Net Profit Net Profit bef Except
Balance Sheet (RM m) 2008A
2009F
2010F
2011F
1,631 1,219 3,367 (1,552) 1,814 (638) 0 0 1,194 (384) (142) 0 669 669
1,749 914 3,206 (1,707) 1,499 (417) 0 0 1,092 (273) (24) 0 795 795
1,837 1,006 3,413 (1,844) 1,569 (417) 0 0 1,165 (291) (29) 0 845 845
1,901 1,106 3,606 (1,992) 1,614 (359) 0 0 1,270 (317) (35) 0 918 918
2009F
2010F
2011F
Profitability & Efficiency Ratios (%) FY Mar
Margins, Costs & Efficiency Yld. On Earnings Assets Avg Cost Of Funds Spread Net Interest Margin Cost-to-Income Ratio Employees ( Year End) Effective Tax Rate Business Mix Net Int. Inc / Opg Inc. Non-Int. Inc / Opg inc. Fee Inc / Opg Income Oth Non-Int Inc/Opg Inc Profitability ROAE Pre Ex. ROAE ROA Pre Ex. ROA
2008A
Net Interest Income Non-Interest Income Operating Income Operating Expenses Pre-Provision Profit Provisions Associates Exceptionals Pretax Profit Taxation Minority Interests Net Profit
Cash/Bank Balance Government Securities Inter Bank Assets Total Net Loans & Advs. Investment Associates Fixed Assets Goodwill Other Assets Total Assets Customer Deposits Inter Bank Deposits Debts/Borrowings Others Minorities Shareholders' Funds Total Liab& S/H’s Funds
2008A
2009F
2010F
2011F
10,958 0 1,388 52,454 9,730 1 233 1,802 4,924 83,192 47,767 15,119 4,861 6,488 84 7,170 83,192
9,061 0 1,402 57,974 10,275 1 237 1,712 5,671 88,292 51,111 15,905 4,861 6,553 108 7,766 88,292
9,714 0 1,416 61,405 10,854 1 242 1,712 6,016 93,612 54,689 16,541 4,861 6,599 137 8,400 93,612
10,192 0 1,423 65,541 11,468 1 247 1,712 6,393 99,566 58,517 17,368 4,861 6,698 172 9,088 99,566
2008A
2009F
2010F
2011F
119.0 63.1 11.7 70.5 22.3
120.1 65.7 11.6 71.1 22.1
119.0 65.6 11.6 71.9 21.7
117.9 65.8 11.5 72.5 21.5
6.3 4.3
5.6 3.9
5.7 4.0
5.0 3.5
15.1 8.2
14.1 8.6
14.2 9.0
14.3 9.3
10 13
11 7
6 7
7 7
Financial Stability Measures (%)
5.19 3.04 2.15 2.24 46.1 0 32.1
5.20 3.00 2.20 2.28 53.3 0 25.0
5.15 2.95 2.20 2.27 54.0 0 25.0
5.10 2.95 2.15 2.21 55.2 0 25.0
48.4 36.2 15.9 20.3
54.6 28.5 15.0 13.5
53.8 29.5 14.8 14.7
52.7 30.7 14.7 16.0
11.1 11.1 1.0 1.0
10.6 10.6 1.0 1.0
10.5 10.5 1.0 1.0
10.5 10.5 1.0 1.0
Quarterly / Interim Income Statement (RMm) FY Mar
FY Mar
FY Mar
Balance Sheet Structure Loan-to-Deposit Ratio Net Loans / Total Assets Investment / Total Assets Cust . Dep./Int. Bear. Liab. Interbank Dep / Int. Bear. Asset Quality NPL / Total Gross Loans NPL / Total Assets Capital Strength Total CAR Tier-1 CAR Growth Total Net Loans Customer Deposits
Rolling forward P/BV
3Q2008
4Q2008
1Q2009
2Q2009
473 328 924 (415) 510 (184) 0 0 326 (85) (43) 198
432 261 830 (458) 372 (63) 0 0 309 (85) (6) 217
434 220 779 (418) 362 (88) 0 0 274 (69) (1) 203
458 148 754 (394) 360 (35) 0 0 326 (91) (5) 230
(RM) 6.00
PBV 2.0x
5.00
PBV 1.6x
4.00
PBV 1.2x
3.00 PBV 0.8x 2.00 PBV 0.4x
1.00 0.00 97
98
99
00
01
02
03
04
05
06
07
08
Source: Company, DBS Vickers
Page 5
Company Focus AMMB Holdings
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.] The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a whollyowned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5 Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1.
DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned company as of 31 Dec 2008.
2.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 5 Jan 2009.
3.
Compensation for investment banking services:
Page 6
i.
DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the mentioned company.
ii.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Company Focus AMMB Holdings
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Australia
This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”] under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.
Singapore
This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report published by any foreign DBS Vickers entities is distributed in Singapore only to “institutional investors” as defined under the Securities and Futures Act. Distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited Investors” as defined under the Financial Advisers Regulations is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of the First Schedule to the FAA.
United Kingdom
This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
United Arab Emirates
This report is being distributed in United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for wholesale clients. DBS Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States
Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
rd
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424 Tel. 65-6533 9688, Fax: 65-6226 8048 Company Regn. No. 198600295W
Page 7
Hong Kong / China Company Focus
China Telecom Bloomberg: 728 HK EQUITY
|
Reuters: 0728.HK
DBS Group Research . Equity
5 January 2009
BUY HK$3.07 HSI : 15,043
Negatives reflected, upsides remain
Price Target : 12-Month HK$ 3.70 Reason for Report : Company update Potential Catalyst: Strong CDMA users growth, potential favourable asymmetric measures and 3G licensing
The acquisition of the CDMA business should help mitigate the decline in fixed-line business and cement growth momentum in broadband business. With an expected turnaround in CDMA business, CT would regain double-digit earnings growth in two to three years’ time.
Analyst Steven Liu CFA, +852 2971 1780 [email protected]
Ongoing business to improve. The CDMA business would help improve CT’s ongoing business in the following aspects: 1) CT intends to migrate one third of its PHS users to CDMA services, 2) through services bundling, CT is set to gain market share in the household, enterprises and high-end individual customers market and 3) a lot of synergy should be realized by sharing resources in marketing, customer services and networks.
Price Relative HK$
R e la t iv e In d e x
7 .8 0 207 6 .8 0 187 5 .8 0
167 147
4 .8 0
127 3 .8 0 107 2 .8 0
1 .8 0 2004
87
2005
2006
C h in a T e le c o m ( L H S )
67 2008
2007
R e la t iv e H S I IN D E X ( R H S )
Forecasts and Valuation FY Dec (RMB m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A 178,656 86,808 30,251 23,702 23,702 0.29 0.33 (13.0) 0.33 0.09 3.10 9.2 2.9 3.5 2.9 1.0 0.4 11.1
2008E 211,617 87,727 30,671 24,702 24,702 0.31 0.35 4.2 0.35 0.10 3.35 8.9 2.8 3.7 3.1 0.9 0.4 10.7
2009F 240,089 82,618 22,977 17,797 17,797 0.22 0.25 (28.0) 0.25 0.07 3.53 12.3 3.1 3.7 2.3 0.9 0.3 7.3
2010F 265,342 92,676 32,319 24,574 24,574 0.30 0.34 38.1 0.34 0.10 3.77 8.9 2.7 3.1 3.3 0.8 0.3 9.4
Nil
Nil
Nil
0.32
0.27
0.31
Earnings Rev (%): Consensus EPS (HK$):
ICB Industry: Telecommunications ICB Sector: Fixed Line Telecommunications Principal Business: CT is the largest fixed-line telecom operator in China, with service areas covering 20 southern China provinces. After acquiring the CDMA business, CT will become an integrated telecom services provider in China.
Near term losses in CDMA. To fulfil its 100m customers target, CT intends to provide CDMA users handset subsidies worth 30% to 40% of total contract value. As CT would expense instead of amortize the handset subsidies, it would suffer big losses in the first two years. However, we expect significant profit improvement in the CDMA from 2H09 when revenue will continue to increase while expenses begin to decrease. Potential long-term winner. CT’s long-term competitiveness would be underpinned by 1) its abundant fixed-line and broadband network resources, 2) clear and promising growth strategies and 3) its resolution to develop the CDMA business. We have maintained our forecasts and target price at HK$3.70. With nationwide promotion of CDMA services since late December, we expect strong CDMA subscriber growth starting from 2009, which should be major catalyst to share price. Maintain Buy. At A Glance Issued Capital - H shares (m shs) - Non H shrs (m shs) H shs as a % of Total H Mkt Cap (HK$m/US$m) Major Shareholders (%) China Tel Corp GD Rising Asset Mgt Major H Shareholders (%) RF S Holdings B.V . J PMorgan Chase & Co. Barclay s PLC H Shares-F ree F loat (%) Av g Daily V olume (m shrs)
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report ed-LM / sa- GL
42,604
13,877 67,055 17 / 5,497 70.89 6.94 6.54 6.03 5.48 81.95 157.8
Company Focus China Telecom
Industry evolution in favor of CT Intensifying competition in mobile phone market. After the industry restructuring, all the three telecoms operators will become full telecom service operators in the long run. During the Jan08-Nov08 period, mobile telecoms accounted for 54.8% of the total revenue of the telecoms market in China. Hence, we believe the mobile telecom market would see the fiercest competition given its huge market potential. As of Nov08, China’s mobile phone users penetration was still at a relatively low level of 47.3%, which should imply sustainable growth at double-digit in the number of mobile phone users over the next couple of years. Though mobile phone ARPU would continue to decline in the near term due to competition, we believe it would be back on uptrend in two years to be driven by 3G-related data revenue. Full-service to mitigate fixed-line declines. Fixed-line market has been hit hard by fixed-to-mobile migration in the past two years. But the decline in the number of fixed-line would be mitigated by two factors: 1) innovation in fixed-line services, and 2) fixed and mobile convergence. Hence, the decline in fixed-line revenue would be at a moderate level of single-digit in the next couple of years. Broadband market remains promising. Though still smaller than fixed-line and mobile phone market, broadband has become the fastest-growing market in China. With broadband users penetration below 10%, we believe the market would be sustainable at a decent double-digit growth over the next five years. As a dominant provider of broadband services in the 20 southern provinces, CT would be the most beneficiary of this promising market. CDMA remains the main concern. As the parent company will bear the capex on CDMA network, we see no major concern on capex risk with CT. Instead, the major risk lies with its capability to fulfil its target of 100m CDMA users in three years time. CT intends to give handset subsidies for its CDMA users, which also raises a big downside risk in the loss of the CDMA business in the next two years. 2009: a transitional year Turnaround in CDMA from 2H09. We expect a turnaround in CDMA business from 2H09, which is to be underpinned by 1) CT’s handset subsidy policy which should secure rapid growth in the number of CDMA users, 2) to be expensed (not
Page 2
amortized), handset subsidies would mainly affect CDMA profit in the next one to two years, and 3) CT’s abundant fixed-line and broadband network resources should give it a winning edge in offering bundled services and acquiring CDMA users. CT to regain double-digit earning growth in two years’ time. CT might suffer decline in earnings over the next two years due to potential big losses from CDMA business. However, we expect rapid recovery starting from 2H10, which would be underpinned by 1) stabilizing fixed-line business thanks to bundling services, 2) rapidly growing broadband business, and 3) significant improvement in CDMA business. We also expect CT to become the most competitive full telecoms service operator in the long run in view of its abundant fixedline and broadband network resources. Financials and Valuation Financial position remains strong. As CT’s parent company will bear the capex on CDMA network expansion and update, CT expects total capex to maintain flat or decline going forward. CT intends to fund the RMB43.8bn acquisition of the CDMA by issuing corporate bonds and long-term debts, which would not affect its balance sheet substantially as net gearing remaining below 40%. A winner in the long run. Our belief in CT’s long-term competitiveness stems from its abundant fixed-line and broadband network resources as well as its clear development strategies that focus on services bundling and services differentiation. Nevertheless, CT has made it clear that LTE will be the 4G standard for the CDMA technology evolution, which would be a boost to the shrinking CDMA camp on the global telecoms market. Limited near term downside, great long-term upside. We have maintained our forecasts and target price at HK$3.70. Looking forward, the downside might come from biggerthan-expected loss from CDMA business. However, we see more upside than downside. With CT’s starting promoting CDMA services on nationwide basis since late December, we expect strong CDMA users growth starting from 2009, which should be a major catalyst for share prices. Maintain Buy.
Company Focus China Telecom
Peers comparison
Code
Company
Price (Local$) Mkt cap (USD) CNY
T US 941 HK VOD US VZ US TEF SM DTE GR FTE FP 9437 JP S US TIT IM TLS AU 728 HK BHARTI IN ST SP BCE CN 9433 JP MTN SJ TLKM IJ 762 HK SCMN VX 017670 KS 2412 TT
AT&T INC CHINA MOBILE* VODAFONE GROUP VERIZON COMMUNIC TELEFONICA DEUTSCHE TELEKOM FRANCE TELECOM NTT DOCOMO INC SPRINT NEXTEL CO TELECOM ITALIA S TELSTRA CORP CHINA TELECOM-H* BHARTI AIRTEL LT SINGAP TELECOMM BCE INC KDDI CORP MTN GROUP LTD TELEKOMUNIKASI CHINA UNICOM HON*^ SWISSCOM AG-REG SK TELECOM CHUNGHWA TELECOM
USD 28.50 HKD 81.20 GBp 138.20 USD 33.90 EUR 16.07 EUR 10.83 EUR 20.03 JPY 176,400 USD 1.83 EUR 1.16 AUD 3.85 HKD 3.07 INR 707.70 SGD 2.55 CAD 25.13 JPY 635,000 ZAr 11,012 IDR 6,900 HKD 10.12 CHF 339.50 KRW 210,000 TWD 53.50
Q US 032390 KS 2332 HK 8 HK 315 HK
QWEST COMMUNICAT KT FREETEL CO HUTCHISON TELECO PCCW LTD SMARTONE TELECOM
USD KRW HKD HKD HKD
3.64 29,550 2.10 3.68 5.75
167,951 210,063 109,618 96,292 97,272 60,738 67,369 82,200 5,228 28,862 30,679 32,055 26,856 26,784 16,295 29,577 20,396 11,449 31,031 15,093 11,367 18,622 6,200 3,709 1,303 3,215 414
FY08 PE
FY09 PE
Latest Reported EBITDA ROE EV/EBITDA margin FY10 (%) (%) (T12M) PE PB (x)
10.0 11.7 11.0 13.2 10.0 14.7 9.9 15.5 26.1 10.0 12.9 8.9 21.0 10.2 11.3 13.0 13.0 11.4 11.2 9.7 11.2 12.1
9.7 10.0 10.2 12.4 9.1 13.1 9.5 14.9 n.a. 10.2 12.4 12.3 15.9 11.8 11.2 10.4 9.6 10.7 11.5 9.3 9.9 12.1
9.1 8.7 9.7 11.8 8.2 12.0 9.1 16.2 n.a. 9.6 10.5 8.9 13.0 11.2 11.2 11.0 8.2 9.8 10.7 9.0 8.7 12.2
1.6 3.8 0.8 1.7 4.2 1.2 1.8 1.5 0.3 0.7 4.3 0.9 5.7 2.0 2.0 1.5 3.1 3.4 1.2 3.4 1.4 1.6
5.9 7.9 6.6 5.5 5.3 5.5 4.4 4.1 4.8 5.4 6.7 4.2 14.1 13.0 7.1 4.1 n.a. 4.4 2.9 5.5 4.9 5.3
35.3 55.2 37.0 32.1 40.4 26.3 36.3 33.6 25.6 37.1 41.0 50.0 42.5 29.6 39.0 21.1 43.9 64.1 41.3 37.4 35.7 54.0
10.4 25.1 9.2 11.1 47.8 1.3 22.2 11.6 (78.7) 9.4 30.3 11.1 38.6 18.9 30.0 13.6 24.7 41.6 12.3 41.4 15.8 12.1
5.0 2.8 0.1 4.9 4.7 7.2 6.5 2.7 5.5 6.9 7.3 2.9 0.0 4.9 5.8 1.7 0.0 5.2 3.1 5.0 4.5 6.6
9.1 n.a. 8.1 11.8 12.0
9.5 n.a. 8.9 11.0 14.5
10.9 n.a. 7.0 10.3 12.6
12.7 1.3 0.2 13.5 1.2
4.3 4.3 7.3 8.2 2.4
30.6 21.7 25.4 31.1 26.7
n.a. 5.7 196.9 151.7 8.6
2.2 0.0 0.0 5.4 8.3
Div yield (%)
Source: Bloomberg, *DBS Vickers
Page 3
Company Focus China Telecom Income Statement (RMB m)
Balance Sheet (RMB m)
FY Dec Turnover Cost of Goods Sold Gross Profit Other Opg (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net profit before Except.
2007A
2008E
2009F
2010F
178,656 211,617 240,089 265,342 (141,645) (177,500) (212,030) (228,551) 37,011 34,117 28,060 36,791 0 0 0 0 37,011 34,117 28,060 36,791 (2,672) 42 46 50 212 233 257 282 (4,300) (3,721) (5,385) (4,805) 0 0 0 0 30,251 30,671 22,977 32,319 (6,452) (5,862) (5,063) (7,616) (97) (107) (117) (129) 0 0 0 0 23,702 24,702 17,797 24,574 23,702 24,702 17,797 24,574
EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effective Tax Rate (%)
86,808 1.7 (3.4) (4.0) 21.3
87,727 18.4 1.1 (7.8) 19.1
82,618 13.5 (5.8) (17.8) 22.0
92,676 10.5 12.2 31.1 23.6
2007A
2008E
2009F
2010F
30,251 52,257 (7,116) 0 (212) (5,644) 5,236 74,772 (45,867) (30) 0 0 (312) (46,209) (6,273) (19,894) 0 (4,338) (30,505) (1,942)
30,671 53,336 (5,730) 0 (233) (5,339) 3,250 75,954 (47,132) 0 0 0 (40,250) (87,382) (6,791) 21,277 0 0 14,486 3,058
22,977 54,256 (4,897) 0 (257) (4,807) 3,489 70,762 (50,494) 0 0 0 (250) (50,744) (5,071) (16,987) 0 0 (22,058) (2,039)
32,319 55,552 (7,452) 0 (282) (5,984) 3,740 77,893 (53,637) 0 0 0 (250) (53,887) (7,124) (13,671) 0 0 (20,795) 3,211
Cash Flow Statement (RMB m) FY Dec Pre-Tax Profit Dep. & Amort. Tax Paid (Pft)/ Loss on disposal of Assoc. & JV Inc/(loss) Non-Cash Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
FY Dec
2007A
2008E
2009F
2010F
Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
326,123 793 38,408 20,556 2,663 16,710 2,751 408,004
318,754 1,026 78,177 23,614 2,685 20,104 2,751 447,111
312,892 1,283 78,919 21,575 2,708 23,289 2,751 443,417
308,224 1,565 80,348 24,786 2,732 26,534 2,751 446,941
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
71,001 67,536 34,153 12,942 220,921 1,451 408,004
48,982 69,733 77,449 10,556 238,832 1,558 447,111
32,978 69,602 76,466 11,137 251,559 1,675 443,417
20,289 71,552 75,484 8,803 269,009 1,804 446,941
Non-Cash Wkg. Cap Net Cash/(Debt)
(45,412) (44,194) (84,598) (102,817)
(40,855) (87,869)
(39,535) (70,987)
Rates & Ratios
Interim Income Statement (RMB m)
FY Dec Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Interest Cover (x) Asset Turnover (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N.Cash/(Debt)PS (RMB) Opg CFPS (RMB) Free CFPS (RMB)
2H2006
1H2007
2H2007
1H2008
FY Dec
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
88,271 (70,946) 17,325 0 17,325 (5) 54 (1,991) 0 15,383 (2,247) (50) 13,086 13,086 43,181
89,757 (69,072) 20,685 0 20,685 0 9 (2,013) 0 18,681 (4,898) (27) 13,756 13,756 46,783
88,899 (72,573) 16,326 0 16,326 (2,672) 203 (2,287) 0 11,570 (1,554) (70) 9,946 9,946 40,025
90,434 (71,682) 18,752 0 18,752 (4) 34 (2,289) 0 16,493 (3,816) (43) 12,634 12,634 45,326
Revenues Voice revenue Broadband VAS CDMA Others Total
3 1 1 (1.0) 19.6 19.6 14.8
3 0 (2) (2.8) 23.0 23.0 15.3
1 (7) (6) (24.0) 18.4 18.4 11.2
1 (3) (9) (8.2) 20.7 20.7 14.0
Source: Company, DBS Vickers
Page 4
2008E
2009F
2010F
20.7 20.7 13.3 11.1 5.7 8.4 26.5 8.6 0.4 33.4 124.0 12.0 0.3 0.3 0.4 43.6 (1.2) 1.13 0.41
16.1 16.1 11.7 10.7 5.8 7.7 27.5 9.2 0.5 31.7 86.0 7.9 0.4 0.4 0.4 37.3 (1.4) 1.14 0.40
11.7 11.7 7.4 7.3 4.0 5.8 28.5 5.2 0.5 33.0 71.1 6.2 0.5 0.4 0.3 46.1 (1.2) 1.06 0.28
13.9 13.9 9.3 9.4 5.5 7.5 29.0 7.7 0.6 34.3 66.0 5.7 0.6 0.6 0.3 56.0 (1.0) 1.18 0.34
Segmental Breakdown (RMB m)
FY Dec
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
2007A
2007A
2008E
2009F
2010F
114,606 31,340 19,231 N/A 13,479 178,656
103,855 38,386 24,423 30,528 14,425 211,617
94,479 45,657 28,820 55,864 15,270 240,089
86,841 52,634 33,143 76,404 16,321 265,342
Company Focus China Telecom
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. The analyst and DBS Vickers (Hong Kong) Limited (“DBSVHK”) certify that no compensation or benefits in connection with this research report is received from the listed corporation or other rd 3 party. DBSVHK and the research analyst will not be held responsible if this investment research, or recommendation is published or otherwise reproduced in whole or in part by the mass media without the relevant disclosures. This document is published by DBSVHK, a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd. (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVHK accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, have not beneficially owned a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBSVUSA, within the past 12 months, have not received compensation and/or may within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
DBS Vickers (Hong Kong) Limited 18th Floor Man Yee Building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523
Page 5
Hong Kong / China Company Focus
Parkson Bloomberg: 3368 HK Equity
|
Reuters: 3368.HK
DBS Group Research . Equity
5 January 2009
HOLD HK$8.63 HSI : 15,043
Recent momentum slows
(Downgrade from BUY) Price Target : 12m HK$ 9.60 (Prev HK$12.55) Reason for Report : Company update Potential Catalyst: M&A potentials, including buying out jointventure stores and purchasing its managed stores from parent. Analyst Mavis Hui +852 2863 8879 [email protected]
Price Relative HK$
R e la t iv e In d e x
1 9 .8 0 519 1 7 .8 0 1 5 .8 0
419
1 3 .8 0 319
1 1 .8 0 9 .8 0
219 7 .8 0 5 .8 0
119
3 .8 0 19
1 .8 0 2005
2006
2007
P a rk so n (L H S )
2008
R e la t iv e H S I IN D E X ( R H S )
Forecasts and Valuation FY Dec (RMB m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (RMB) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A 3,060 1,131 943 676 676 0.24 0.28 46.2 0.28 0.14 1.14 31.1 26.7 18.9 1.6 7.6 0.1 27.0
2008E 3,725 1,387 1,200 882 882 0.32 0.36 29.7 0.36 0.18 1.32 24.0 21.2 14.9 2.1 6.6 CASH 29.3
2009F 4,472 1,661 1,457 1,068 1,068 0.38 0.44 21.1 0.44 0.22 1.53 19.8 17.7 11.9 2.5 5.6 CASH 30.6
2010F 5,495 2,039 1,847 1,351 1,351 0.48 0.55 26.4 0.55 0.28 1.81 15.7 14.3 9.1 3.2 4.8 CASH 32.9
(6) 0.36
(13) 0.45
(11) 0.53
Earnings Rev (%): Consensus EPS (HK$):
ICB Industry: Consumer Services ICB Sector: General Retailers Principal Business: Operates an extensive network of over 40 Parkson department stores across nearly 30 cities in China
Parkson’s sales momentum in recent weeks could fall slightly below expectations as competition intensifies. Despite our view that Parkson’s medium-term growth prospects should remain very optimistic, we have revised down our earnings projection and downgraded the counter to a HOLD in the anticipation of a more difficult environment into 1H09. Growth fell slightly below targets. We believe Parkson’s average same-store sales (SSS) growth has fallen slightly behind management targets in recent weeks amid a more competitive operating landscape among department store players. Amongst all, Parkson’s operations along the major coastal cities such as Shanghai, Wuxi, HeFei, etc. have been affected most, possibly also due to these cities’ stronger reliance on export growth. Tougher environment. As overall consumer sentiment slows in conjunction with deteriorating global economic environment, selective peers have elevated their promotional strategies of late and offer steeper discounts to attract sales. With current market expectations for a more challenging market in 1H09, management could possibly be guiding a slightly lower growth rate for November 2008 to June 2009, against earlier SSS growth targets of 12-13%. More stringent control on costs, including further room for savings on advertising costs, staff expenses and utility costs, could hopefully help to support profitability to some extent. Medium-term outlook remains positive. Sitting on c.RMB1bn net cash, Parkson will maintain its store opening momentum ahead, as well as taking advantage of the current environment to lock-up attractive acquisition opportunities for market share. Coupled with the government’s priority to roll-out longer term policies to boost domestic demand, we strongly believe that the company should still post a rosy growth prospect in the medium-term. Yet, in view of a more difficult environment ahead, we have prudently downgraded our earnings forecasts by 6% for FY08, 13% for FY09, and 11% for FY10, and revised down our target price to HK$9.6 based on 22x FY09 PE, or 1x PEG (previously based on 25x PE). Trading at 10% discount to our new target price following the recent share price rally (up 23% in the last two months), we downgrade the counter to a HOLD. At A Glance Issued Capital (m shrs) Mkt Cap (HK$m/US$m) Major Shareholders (%) Parkson Holdings J PMorgan Chase Deutsche Bank Aktiengesellschaft F ree F loat (%) Av g Daily V olume (m shrs)
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report sa- GL
2,798 24,144 / 3,115 53.68 12.83 6.00 27.49 8.8
Company Focus Parkson Income Statement (RMB m)
Balance Sheet (RMB m)
FY Dec
2007A
2008E
2009F
2010F
Turnover Cost of Goods Sold Gross Profit Other Opg (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net profit before Except.
3,060 (2,043) 1,017 0 1,017 0 1 (74) 0 943 (215) (52) 0 676 676
3,725 (2,459) 1,267 0 1,267 0 1 (67) 0 1,200 (276) (42) 0 882 882
4,472 (2,940) 1,532 0 1,532 0 1 (76) 0 1,457 (339) (50) 0 1,068 1,068
5,495 (3,593) 1,903 0 1,903 0 1 (56) 0 1,847 (439) (58) 0 1,351 1,351
1,131 40.1 41.9 43.6 22.8
1,387 21.8 22.7 24.6 23.0
1,661 20.0 19.8 21.0 23.3
2,039 22.9 22.7 24.2 23.8
EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effective Tax Rate (%)
Cash Flow Statement (RMB m)
FY Dec
2007A
2008E
2009F
2010F
Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
819 2 3,989 3,642 144 19 375 8,989
889 2 3,937 4,425 175 23 456 9,909
951 2 3,891 5,352 210 28 548 10,982
1,005 2 3,851 6,559 259 34 673 12,384
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
0 2,004 3,837 280 2,789 79 8,989
0 2,431 3,837 329 3,228 83 9,909
0 2,911 3,837 384 3,762 87 10,982
0 3,565 3,837 453 4,437 91 12,384
Non-Cash Wkg. Cap Net Cash/(Debt)
(1,466) (196)
(1,776) 588
(2,125) 1,514
(2,599) 2,722
2007A
2008E
2009F
2010F
33.2 33.2 22.1 27.0 8.2 12.2 49.2 13.8 0.4 2.2 190.7 24.0 2.1 1.8 0.1 3.9 (0.1) 0.38 0.39
34.0 34.0 23.7 29.3 9.3 13.5 50.0 18.8 0.4 2.1 198.1 24.9 2.1 1.8 CASH 5.0 0.2 0.45 0.53
34.3 34.3 23.9 30.6 10.2 15.1 50.0 20.2 0.4 2.1 199.1 25.0 2.1 1.8 CASH 5.0 0.6 0.54 0.63
34.6 34.6 24.6 32.9 11.6 17.2 50.0 33.8 0.5 2.1 196.9 24.8 2.1 1.8 CASH 5.0 1.1 0.65 0.80
Rates & Ratios
FY Dec
2007A
2008E
2009F
2010F
FY Dec
Pre-Tax Profit Dep. & Amort. Tax Paid (Pft)/ Loss on disposal of FAs Assoc. & JV Inc/(loss) Non-Cash Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
943 114 (236) 0 (1) 184 96 1,102 (148) 0 0 0 (1,586) (1,734) (271) 655 186 (349) 221 (411)
1,200 120 (302) 0 (1) 374 92 1,483 (190) 0 0 0 279 89 (441) 0 0 (347) (789) 784
1,457 128 (371) 0 (1) 419 103 1,737 (190) 0 0 0 195 5 (534) 0 0 (281) (815) 927
1,847 135 (480) 0 (1) 574 86 2,163 (190) 0 0 0 215 25 (675) 0 0 (305) (980) 1,207
Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Interest Cover (x) Asset Turnover (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N.Cash/(Debt)PS (RMB) Opg CFPS (RMB) Free CFPS (RMB)
1H2006
2H2006
1H2007
2H2007
Other Oper. (Exp)/Inc Operating Profit
943 (638) 304 0 304
1,241 (838) 404 0 404
1,481 (1,004) 477 0 477
1,578 (1,039) 540 0 540
Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except.
0 0 22 0 326 (103) (27) 196 196
0 0 2 0 406 (116) (26) 265 265
0 0 (38) 0 439 (105) (31) 303 303
0 0 (36) 0 504 (111) (21) 373 373
Sales Gth (%) Opg Profit Gth Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
87 82 84.2 32.3 32.3 20.8
75 76 87.0 32.5 32.5 21.3
57 57 54.7 32.2 32.2 20.5
27 34 40.8 34.2 34.2 23.6
Interim Income Statement (RMB m) FY Dec Turnover Cost of Goods Sold Gross Profit
Source: Company, DBS Vickers
Page 2
Segmental Breakdown (RMB m) FY Dec Revenues Sales of goods - direct sales Commission from concessionaire sales Consultancy and management fees Rental income Others Total
2007A
2008E
2009F
2010F
1,044
1,235
1,494
1,833
1,511
1,879
2,239
2,755
33
30
36
44
139 333 3,060
171 410 3,725
207 496 4,472
254 609 5,495
Company Focus Parkson
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. The analyst and DBS Vickers (Hong Kong) Limited (“DBSVHK”) certify that no compensation or benefits in connection with this research report is received from the listed corporation or other rd 3 party. DBSVHK and the research analyst will not be held responsible if this investment research, or recommendation is published or otherwise reproduced in whole or in part by the mass media without the relevant disclosures. This document is published by DBSVHK, a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd. (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVHK accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, have not beneficially owned a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBSVUSA, within the past 12 months, have not received compensation and/or may within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
DBS Vickers (Hong Kong) Limited 18th Floor Man Yee Building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523
Page 3
Hong Kong / China Company Focus
TVB Bloomberg: 511 HK EQUITY
|
Reuters: 0511.HK
DBS Group Research . Equity
5 January 2009
HOLD HK$25.20 HSI : 15,043
Gloomy outlook
Price Target : 12-Month HK$ 26.04 (Prev HK$39.04) Reason for Report : Company update Potential Catalyst: Further improvement in Pay-TV division; speculated stake sale by major shareholder in the longer term. Analyst Mavis Hui +852 2863 8879 [email protected]
Sharp drop in 4Q08 revenue. We expect TVB to post >10% y-o-y revenue fall from its core Hong Kong TV advertising unit for 4Q08. Revenue dropped more substantially in November and December, by mid-teen percentages. The biggest drop was from finance & banking, which was among the top five advertising product categories for TVB. Other products such as skincare and F&B are still holding up, but we are not hopeful revenue from these will be sustainable given the rough economic environment in the coming months.
Price Relative HK$
R e la t iv e In d e x
6 2 .2 0
213
5 7 .2 0
193
5 2 .2 0
173
4 7 .2 0
153
4 2 .2 0 133 3 7 .2 0 113 3 2 .2 0 93
2 7 .2 0
73
2 2 .2 0 1 7 .2 0 2004
2005
T V B (L H S )
2006
53 2008
2007
R e la t iv e H S I IN D E X (R H S )
Forecasts and Valuation FY Dec (HK$ m) Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (HK$) EPS Gth (%) Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
We believe TVB’s core revenue from Hong Kong dipped 10% in 4Q08. And 2009 revenue could be worse than during the SARS period, as the slowdown is happening on a global scale vs a regional outbreak in 1H03. We reduced our forecast earnings substantially, but retain our HOLD recommendation in view of TVB’s satisfactory yield and undemanding valuations.
2007A 4,326 1,694 1,550 1,264 1,259 2.89 6.3 2.89 1.80 12.20 8.7 6.7 5.3 7.1 2.1 CASH 24.8
2008E 4,572 1,748 1,465 1,203 1,203 2.75 (4.8) 2.75 1.72 13.23 9.2 6.8 5.2 6.8 1.9 CASH 21.6
2009F 4,253 1,379 1,116 916 916 2.09 (23.8) 2.09 1.31 14.01 12.0 8.3 6.2 5.2 1.8 CASH 15.4
2010F 4,378 1,372 1,139 935 935 2.13 2.0 2.13 1.34 14.81 11.8 8.4 5.9 5.3 1.7 CASH 14.8
(6) 2.82
(30) 2.80
(33) 3.04
Earnings Rev (%): Consensus EPS (HK$):
ICB Industry: Consumer Services ICB Sector: Media Principal Business: Free-to-air terrestrial broadcaster in Hong Kong.
Potentially worse than SARS. To recall, TVB’s domestic operations registered 11.5% y-o-y revenue drop in 1H03 due to SARS. This time round, the company has already started to selectively enhance program quality in order to retain premium customers, as well as cutting costs (e.g. laid off 212 support staff in Dec 2008). But management has not ruled out the possibility of more severe impact in 2009 because it is now a global crisis. Downward earnings revision. We lowered our earnings by 6% to HK$1.2bn for FY08, by 30% to HK$916m for FY09F, and by 33% to HK$935m for FY10F. Our new target price is HK$26.04, based on 9.7% WACC and 0.5% perpetual growth (previous:11.6% WACC and 2% perpetual growth). Sitting on HK$2bn net cash and trading at 3% discount to our new target price and merely 12x FY09F PE, TVB remains a HOLD. At A Glance Issued Capital (m shrs) Mkt Cap (HK$m/US$m) Major Shareholders (%) Shaw Run Run & Associates Dodge & Cox F ree F loat (%) Av g Daily V olume (m shrs)
In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC / sa- GL
438 11,038 / 1,424 32 6.18 61.82 0.9
Company Focus TVB Income Statement (HK$ m)
Balance Sheet (HK$ m)
FY Dec
2007A
2008E
2009F
2010F
Turnover Cost of Goods Sold Gross Profit Other Opg (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net profit before Except.
4,326 (1,511) 2,815 (1,249) 1,566 0 (125) 104 5 1,550 (284) (2) 0 1,264 1,259
4,572 (1,678) 2,893 (1,452) 1,442 0 (60) 83 0 1,465 (260) (2) 0 1,203 1,203
4,253 (1,791) 2,462 (1,390) 1,071 0 (51) 96 0 1,116 (198) (2) 0 916 916
4,378 (1,885) 2,493 (1,422) 1,071 0 (43) 110 0 1,139 (202) (2) 0 935 935
1,694 3.0 4.1 2.7 18.3
1,748 5.7 3.2 (7.9) 17.7
1,379 (7.0) (21.2) (25.7) 17.7
1,372 3.0 (0.5) 0.0 17.7
EBITDA Sales Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Effective Tax Rate (%) Cash Flow Statement (HK$ m) FY Dec
FY Dec
2007A
2008E
2009F
2010F
Net Fixed Assets Invts in Assocs & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets
1,908 85 239 2,142 9 1,406 461 6,251
2,402 85 239 2,056 10 1,486 461 6,738
2,344 85 239 2,511 9 1,382 461 7,031
2,250 85 239 2,932 10 1,423 461 7,400
ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.
0 741 0 141 5,344 25 6,251
0 779 0 141 5,794 25 6,738
0 730 0 141 6,136 25 7,031
0 749 0 141 6,485 25 7,400
Non-Cash Wkg. Cap Net Cash/(Debt)
1,135 2,142
1,177 2,056
1,122 2,511
1,144 2,932
2007A
2008E
2009F
2010F
65.1 36.2 29.2 24.8 21.2 24.3 62.4 N/A 0.7 117.2 183.2 3.5 5.4 4.8 CASH N/A 4.9 3.54 2.61
63.3 31.5 26.3 21.6 18.5 20.7 62.6 N/A 0.7 115.4 191.3 2.7 5.1 4.5 CASH N/A 4.7 3.19 1.13
57.9 25.2 21.5 15.4 13.3 14.4 62.6 N/A 0.6 123.1 173.6 2.5 6.0 5.3 CASH N/A 5.7 2.56 2.00
56.9 24.5 21.3 14.8 13.0 13.6 62.6 N/A 0.6 116.9 157.9 2.2 6.4 5.8 CASH N/A 6.7 2.92 2.30
Rates & Ratios
2007A
2008E
2009F
2010F
FY Dec
1,550 253 (278) 0 125 (149) (97) 1,403 (259) 140 0 0 (68) (187) (767) 0 0 95 (671) 545
1,465 367 (260) 0 60 (42) (235) 1,354 (861) 0 0 0 174 (687) (754) 0 0 0 (754) (86)
1,116 358 (198) 0 51 55 (204) 1,177 (300) 0 0 0 152 (148) (574) 0 0 0 (574) 455
1,139 344 (202) 0 43 (22) (43) 1,258 (250) 0 0 0 (2) (252) (585) 0 0 0 (585) 421
Gross Margin (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Interest Cover (x) Asset Turnover (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Capex to Debt (%) N.Cash/(Debt)PS (HK$) Opg CFPS (HK$) Free CFPS (HK$)
2H2006
1H2007
2H2007
1H2008
Turnover Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA
2,314 (809) 1,505 (602) 904 0 (77) 43 0 870 (151) 0 719 719 961
1,919 (841) 1,078 (452) 626 0 (69) 47 0 603 (105) 0 497 497 681
2,407 (670) 1,737 (798) 940 0 (56) 57 5 946 (179) (1) 766 761 1,013
2,073 (962) 1,111 (508) 604 0 (31) 33 0 605 (102) 0 503 503 705
Sales Gth (%) EBITDA Gth (%) Opg Profit Gth Net Profit Gth (%) Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)
2 11 11 13.2 65.0 39.0 31.1
2 2 1 5.8 56.2 32.6 25.9
4 5 4 6.6 72.2 39.0 31.8
8 4 (4) 1.1 53.6 29.1 24.2
Pre-Tax Profit Dep. & Amort. Tax Paid (Pft)/ Loss on disposal of FAs Assoc. & JV Inc/(loss) Non-Cash Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Net Cashflow
Interim Income Statement (HK$ m) FY Dec
Source: Company, DBS Vickers
Page 2
Segmental Breakdown (HK$ m) FY Dec Revenues Terrestrial television broadcasting Programme licensing & distribution Overseas satellite pay TV operations Channel operations Others Total PBT
2007A 2008E 2009F 2010F 2,366 2,449 2,081 2,154 635 674 687 703 281 298 304 310 948 1,062 1,093 1,126 96 90 87 85 4,326 4,572 4,253 4,378
Company Focus TVB
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) * Share price appreciation + dividends
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. The analyst and DBS Vickers (Hong Kong) Limited (“DBSVHK”) certify that no compensation or benefits in connection with this research report is received from the listed corporation or other rd 3 party. DBSVHK and the research analyst will not be held responsible if this investment research, or recommendation is published or otherwise reproduced in whole or in part by the mass media without the relevant disclosures. This document is published by DBSVHK, a direct wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd. (“DBSVH”). The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVHK accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, have not beneficially owned a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. As of the latest available date and information, DBSVHK, DBSVS, DBS Bank Ltd and/or its affiliates, including of DBSVUSA, within the past 12 months, have not received compensation and/or may within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients.
DBS Vickers (Hong Kong) Limited 18th Floor Man Yee Building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523
Page 3
Thailand Company Focus
True Corporation | Reuters: TRUE.BK
Bloomberg: TRUE TB
DBS Group Research . Equity
5 Jan 2009
HOLD Bt1.79 SET: 449.96 Price Target: 12-month Bt1.90 (prev Bt1.69) Reason for Report: Company update Potential Cat Catalyst: alyst: Hutch entering IC regime, improving economy and tariff rate increase Analyst Chirasit Vuttigrai +66 0 2657 7836 [email protected]
Price Relative Bt
Relative Index 222
13 . 00
202
11 . 00
182
9 . 00
142 122 102
5 . 00
82 62
3 . 00
42 22
1 . 00 2004
2005
True Corporation
2006
( LHS )
2007
Relative SET INDEX
2008
( RHS )
Forecasts and Valuation FY Dec (Bt m)
Turnover EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (Bt) EPS Pre Ex. (Bt) EPS Gth Pre Ex (%) Diluted EPS (Bt) Net DPS (Bt) BV Per Share (Bt) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)
2007A
2008E
2009F
2010F
61,641 20,229 302 1,697 (722) 0.38 (0.16) nm. 0.38 2.36 4.7 nm. 1.1 4.2 0.8 639 19.5
62,883 21,292 320 (3,395) (422) (0.75) (0.09) nm. (0.75) 1.60 nm. nm. 0.5 3.8 1.1 983 (38.1)
63,858 22,144 119 (1,018) (1,018) (0.23) (0.23) nm. (0.23) 1.38 nm. nm. 0.6 3.4 1.3 1,134 (15.2)
64,958 22,306 925 (689) (689) (0.15) (0.15) (32) (0.15) 1.22 nm. nm. 0.6 3.2 1.5 1,198 (11.8)
(0.2)
0.0
0.1
Earnings Rev (%): Consensus EPS (Bt Bt): Bt :
Sector: Telecom Principal Business: TRUE has a 25-year concession from TOT Corp to operate 2.5m fixed lines in BMA. The company has also expanded into the cellular business and Internet.
www.dbsvickers.com Refer to important disclosures at the end of this report ed: LM/sa: CS
True Corporation (TRUE TB) announced that the rights issue subscription ratio was set at 1 old to 2.22 new shares, in line with our forecast. Assuming conservatively that the CP Group would take the rights issue issue on its 27.6% stake, out of its total of 35.2% interest, TRUE would raise at least Bt5.4bn fresh cash, and this would lower its financial risks substantially. Hence, we maintain our HOLD rating on TRUE with revised DCFDCF-based target price of Bt1.90. Subscription ratio announced TRUE reported to the SET on 30 Dec that the subscription ratio was set at 1 old share to 2.22 new shares at Bt1.95 apiece. The stock goes XR today (5 Jan), while the share subscription form would be distributed around mid-Jan and the subscription period is expected around early Feb.
162
7 . 00
The subscription ratio set at 1 old to 2.22 new shares
Lower financial risks Its major shareholder CP Group has committed to take the rights issue on its 27.6% stake. The minimum Bt5.4bn fresh cash raised together with its annual residual cashflow of c. Bt5bn would be enough to repay its Bt8.9bn debts due in 2009. HOLD maintained Despite its weak competitive position, the likely successful re-capitalization would help reduce its financial risks substantially and increase the chance for the company to have a foreign strategic partner. We maintain our HOLD rating for TRUE with revised DCFbased target price of Bt1.90.
At A Glance Issued Capital (m shrs) 4,503 Mkt. Cap (Btm/US$m) 6,710 / 195 Major Shareholders Thai NVDR (%) 12.1 8.1 Charoen Pokphand Group (%) State Street Bank & Trust Company For London (%) 7.4 Free Float (%) 50.7 Avg. Daily Vol.(‘000) 53,139
Company Focus True Corporation
More details released Subscription ratio at 1:2.22. True Corporation (TRUE TB) reported to the SET on 30 Dec morning on more details related to its rights issue. The subscription ratio is set at 1 old share to 2.22 new shares, in line with our expectation. We believe this is an attempt to raise as much proceeds as possible, in the event that most of its minority shareholders would not participate.
TRUE: Current debt repayment schedule Btbn 14 12 10 8
Online Mobile Pay TV
6 4 2
Share overover-allotment not exceeding 2x... The shareholders have a right to subscribe for shares in excess of their entitlement. Nonetheless, it is restricted to not more than two times of their entitlement. The offer price has been fixed at Bt1.95 apiece. …afraid of being taken over? We believe the CP Group is concerned that TRUE may be taken over. For instance, an investor (or competitor) may buy one TRUE share now and over-subscribe all unsubscribed shares (72.4%) by minority shareholders. Then, they would become the major shareholder with a larger stake than the CP Group. Subscription period around early Feb. The stock goes XR today (5 Jan). The share subscription form would be distributed to shareholders around mid-Jan and the subscription period is expected around early Feb. Lower financial risks The CP Group to take at least 27.6%. Its major shareholder CP Group committed to take the rights issue on its 27.6% stake, out of its total 35.2% interest. Bt5.4bn fresh capital raised. Assuming conservatively that only the CP Group takes its 27.6% part in the rights issue and no minority shareholder takes the rights, TRUE would raise Bt5.4bn fresh cash from the rights issue. Easier to issue new debenture. TRUE plans to make a debt refinancing for its Bt6.75bn Baht bond, namely 2/2545, due 2009-2010, but the deal has been postponed from Dec 2008 to Feb 2009 due to the political turmoil in Dec 2008. In our view, the successful re-capitalization would help push through the debenture issuance.
Page 2
0 2008
2009
2010
2011
2012
Source: Companies, DBS Vickers
Worst case: Fresh Bt5.4 capital would be enough. In the worst case that TRUE could not raise debenture, we believe the Bt5.4bn fresh cash to be raised together with its annual residual cashflow of c. Bt5bn would be enough to repay its Bt8.9bn debts due in 2009. Base case: buy back debts or TrueMove stake. In the base case that TRUE can raise Bt6.75bn debenture to refinance its debts as planned, the company would instead spend Bt5.4bn fresh cash from the rights issue to buy back its US$ debenture, currently trading at 45-50% discount, or buyback 23.3% BITCO/TrueMove stake from the CP Group. Lower gearing. The likely successful re-capitalization would improve its financial position substantially. Assuming conservatively that the company can raise only Bt5.4bn fresh capital, its net financial gearing would drop from 8.9x to 5.4x. The net gearing should drop further if the company uses the proceeds to buy back US$-denominated debentures at a deep discount. Recommendations Potential strategic partner as a next step? As a result of improving financial position, we believe the re-capitalization would help increase the chance for TRUE or TrueMove to have a foreign strategic partner. HOLD maintained. Despite its weak competitive position, the likely successful re-capitalization would improve its financial outlook. We maintain our HOLD rating for TRUE with revised DCF-based target price of Bt1.90.
Company Focus True Corporation
Thai Telecom Sector: Peer Comparison Bloomberg
Mkt
Price
Target
Upside
PE
EV/EBITDA
Dividend Yield
ROE
Code
Cap
30 Dec
Price
(%)
(x)
(x)
(%)
(%)
ADVANC TB DTAC TB TRUE TB
US$m
(Bt)
(Bt)
6,760 2,178 232
79.50 32.00 1.79
103.00 42.00* 1.90
Note: Under revision Source: DBS Vickers
29.4 30.3% 6.3%
Rcmd
08F
09F
08F
09F
08F
09F
08A
09F
11.6 7.6 nm
12.2 8.7 nm
5.3 4.5 3.8
5.0 4.0 3.4
8.6 3.9 -
8.6 3.5 -
26.9 17.7 (38.1)
25.8 13.9 (15.2)
B B* H
Page 3
Company Focus True Corporation Income Statement (Bt m)
Balance Sheet (Bt m)
FY Dec
Turnover EBITDA Depr/Amort Opg Profit Asso & Other Inc Interest (Exp)/Inc Pre-Tax Profit Tax Minority Interest Extra & Forex Net Profit Sales Growth (%) Net Profit Gr (%) EBITDA Mgn (%) Tax Rate (%)
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
61,641 62,883 63,858 64,958 20,229 21,292 22,144 22,306 (12,824) (14,288) (15,095) (14,840) 7,405 7,004 7,049 7,466 (220) 185 174 178 (6,883) (6,869) (7,104) (6,718) 302 320 119 925 (999) (1,940) (1,504) (1,657) (24) 1,199 367 43 2,419 (2,973) 1,697 (3,395) (1,018) (689) 18.6 2.0 1.5 1.7 nm. nm. nm. (32.3) 32.8 33.9 34.7 34.3 316 572 1,121.9 176.7
Cash Flow Statement (Bt m) 2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
20,243 21,311 22,159 22,318 (3,719) 3,497 86 25 (2,989) (4,052) (3,707) (3,774) 13,534 20,756 18,538 18,569 (4,779) (4,758) (4,901) (4,601) 8,756 15,998 13,638 13,968 (5,054) (9,044) (9,045) (9,042) 3,702 6,954 4,593 4,926 3,217 (2,973) 1 6,919 3,981 4,593 4,927 (76,353) (72,372) (67,779) (62,852) 3.3 2.4 3.1 3.1 3.5 5.2 4.8 4.7 1.7 3.5 3.1 3.2 1.9 3.0 2.6 2.7
Quarterly / Interim Income Statement (Bt m) FY De Decc
Turnover EBITDA Depr/Amort Opg Profit Asso & Other Inc Interest (Exp)/Inc Pre-Tax Profit Tax Minority Interest Extra & Forex Net Profit Sales Growth (%) Net Profit Gr (%) EBITDA Mgn (%) Tax Rate (%)
Source: Company, DBS Vickers
Page 4
Fixed assets Other LT Assets Cash/ST Investments Other Current Assets Total Assets ST Debt Other Current Liabilities LT Debt Minority Interests Shareholders' equity Total Capital Share Capital (m) Net cash/(debt) Working capital Gearing (%)
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
74,683 70,081 64,659 59,497 24,626 24,968 25,354 25,784 6,884 23,503 23,221 33,148 18,525 15,136 15,401 15,704 124,718 133,688 128,636 134,133 6,965 4,875 6,000 8,000 25,728 26,463 27,471 28,490 80,070 94,987 89,187 92,396 1,346 147 (220) (263) 10,610 7,215 6,197 5,509 124,718 133,688 128,636 134,133 4,503 4,503 4,503 4,503 (76,353) (72,372) (67,779) (62,852) 7,203 11,327 12,070 12,786 696 1,302 1,522 1,830
Rates & Ratio
FY Dec
EBITDA Change in W/C Taxes paid i) Operating FCF Net interest payment ii) Net FCF Investing cashflow iii) Residual cashflow Cashflow fr equity Change in net cash Ending net cash Gross CF/Shr (Bt) CF Opera/Shr (Bt) Net FCF/Shr (Bt) CF Int. Cover (x)
FY Dec
FY Dec
ROE (%) ROA (%) Net Margin (%) Div. Coverage (x) Interst Coverage (x) Asset Turnover (x) Asset/Debt (x) Gearing (%) Net Gearing (%) Debt/EBITDA (x) Debt/ Market Cap (x) Capex/Debt (x) Capex/Sales (x) EV (Btbn) EV/EBITDA (x)
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
19.5 1.4 2.8 nm. 1.0 0.5 1.5 696 639 4.1 10.3 0.1 0.1 86 4.2
(38.1) (2.6) (5.4) nm. 1.0 0.5 1.4 1,302 983 4.5 11.9 0.1 0.1 81 3.8
(15.2) (0.8) (1.6) nm. 1.0 0.5 1.4 1,522 1,134 4.1 11.3 0.1 0.1 76 3.4
(11.8) (0.5) (1.1) nm. 1.1 0.5 1.4 1,830 1,198 4.3 11.9 0.1 0.1 71 3.2
Revenue Breakdown (Btm)
4Q2007 4Q2007
1Q2008
2Q2008
3Q2008
15,893 3,260 (2,046) 1,215 (27) (1,586) (398) 603 10 567 781 19.3 (133.9) 20.5 152.3
15,940 5,660 (3,065) 2,595 48 (1,663) 980 (85) (615) 2,458 2,738 11.6 561.8 35.5 8.7
15,084 4,569 (3,006) 1,562 (4) (1,754) (195) (825) 833 (2,485) (2,672) (5.7) 284.1 30.3 (427)
15,044 6,305 (5,034) 1,271 72 (1,699) (356) (508) 425 (788) (1,228) (2.8) (202.5) 41.9 (143)
FY Dec
-Basic wireline -Payphone -Other fixed line -DDN Service -PCT Services -PCT Handset Sales -Asia Multimedia -Asia Infonet -UBC -TrueMove -Others Total Revenues SG&A/Sales Other Inc./Sales
2007A 2007A
2008E 2008E
2009F 2009F
2010F 2010F
9,307 983 654 2,074 786 (6) 300 5,027 8,785 33,420 1,365 61,641
8,586 715 958 1,673 603 63 6,314 9,251 31,580 3,140 62,883
7,938 668 1,029 1,746 423 54 6,753 9,562 32,545 3,140 63,858
7,549 637 875 1,844 338 52 6,821 9,959 33,711 3,171 64,958
21.3 0.6
19.5 0.8
18.8 0.8
18.3 0.8
Company Focus True Corporation
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (0-15% total return over the next 12 months for small caps, 0-10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson (www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.
ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This document is published by DBS Vickers Securities (Thailand) Co., Ltd. ("DBSVT"), a direct wholly-owned subsidiary of DBS Vickers Securities Holding Pte Ltd. The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVT accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBS Vickers Securities Holdings Pte Ltd is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVT, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. DBSVT, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the subject company mentioned in this document. DBSVT, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the subject company. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research distributed in the UK is intended only for institutional clients. DBS Vickers Securities (Thailand) – 989 Siam Tower, 9th ,14th –15th Floor, Rama1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 (0) 2657 7831, Fax: 66 (0) 2658 1269
Page 5
Related Documents
20090105 Regional
December 2019 8
20090105 Fisika Dasar Usg, Jje
December 2019 17
Regional Slides
November 2019 8
Regional Imbalances
April 2020 5
Regional Circulation
December 2019 9