Sunday, October 29, 2006

Kuala Lumpur, the cheapest city on Earth

Food for thought, get a good discount on RNAV of companies that owns prized properties on the cheapest city on Earth. Have a read:

http://malaysiafinance.blogspot.com/2006/10/kl-cheapest-city-on-earth-according-to.html

6 Month Milestone since this blog was started

I am surprised that 6 month has already passed since I started this "blog", not exactly a typical blog. Did not intend this as a typical blog, but more of a online notebook for my own purpose.

However, I realise that there are probably some of you that find some use of my "notebook", if you read this posting, thank you for sharing the special moment of this 6 month milestone with me.

Feel free to feedback or share your thoughts with me....... :)

Cheers
gsg

Saturday, October 28, 2006

Stockwatch- Adampak (Singapore), Westcomb research update

Westcomb Research Update on Adampak, 23 Oct 2006

Adampak Limited
Upside potential remains

Essential part of Seagate’s Supply Chain
Adampak plays an important role in Seagate’s supply chain, by providing labels, seals and other die-cut components to Seagate. Seagate was their biggest customer in FY03, taking up 31.9% of revenue. The breakdown of revenue in the subsequent financial years were not disclosed due to non-disclosure requirements but we believe that Seagate remains by far Adampak’s biggest customer.

Adampak has become one of Seagate’s main suppliers because of its ability to achieve flexibility in production and yet maintain quality. For example, Seagate could suddenly ramp-up production because of better-than-expected end-market demand and component suppliers (such as Adampak) would have to be able to meet Seagate’s production requirements.
Seagate is very active in this region and has recently announced that it will invest 1.3 billion Singapore dollars to build a third recording-disk plant in Singapore. The plant will produce recording media disks, which are key components of hard disk drives.

Key supplier for computer-related products and other consumer electronics products
Other main customers in FY03 include HP (20.0%), Western Digital (7.6%) and Maxtor (8.7%). Maxtor has been acquired by Seagate and correspondingly Adampak has seen increased orders from Seagate. HP and Western Digital remain Adampak’s major customers. Fujitsu is also one of Adampak’s customer.

Below is an excerpt from the Nikkei Electronics Asia (August 2006 issue) describing changes in the competitive positioning of component/materials vendors (such as Adampak) in the electronics industry:

In the past, equipment manufacturers could select the components and materials they wanted from a wide range of suppliers, but the slump in the electronics industry from the mid-1990’s to around 2005 saw prices plunge for components and materials. The number of suppliers in the business dropped rapidly, resulting in rising demand for the survivors, and creating chronic component/materials shortages for a variety of equipment. This trend was further accelerated by the need for improved functionality and performance in equipment, resulting in higher technical and capital barriers to developing new components and materials. Natural selection continued in the component/materials industry, leaving a few firms in monopolistic command for the markets."

In many ways similar to Unisteel
Adampak is in many ways similar to Unisteel. Both are making seemingly trivial components for HDD manufacturers. However, both Companies play an important role in the supply chain of HDD manufacturers such as Seagate. In much the same way that HDD manufacturers cannot do without screws, Adampak’s products such as labels, seals and die-cut components are also essential components for HDDs.


Company
Product
Market Share
Market Cap (S$m)
Hist. PER (x)
Forw. PER (x)
Rev.
(S$m)
Net Profit (S$m)
Unisteel
Screws
Approx 50% of the HDD market*
653.3
14.8
13.7
184.3
41.1
Adampak
Labels, seals and die-cut components
Approx 20-30% of the HDD market*
42.2
7.1
4.9
43.9
5.9

Fast-growing HDD industry
In-stat recently reported that the HDD will be a key component in more and more consumer electronics products through the rest of the decade, and expects HDD worldwide shipments to almost double from 380 million in 2005 to 748 million in 2010. Below is an excerpt of the research:

"While hard drives have become small enough to embed in most portable CE devices, competitive storage solutions, such as increasing flash capacities, continue to threaten this market. However, at multi-gigabyte capacities, flash becomes cost-prohibitive. HDDs will more effectively address portable multimedia devices that offer a wide range of capabilities requiring higher storage capacities."

Other than mobile devices, growth in HDDs would also likely come from digital video recorders which are set to replace conventional tape-based video recorders. Imagine the demand for HDDs if all households eventually replace their conventional tape-based video recorders with digital video recorders. This is likely to happen as more and more media Companies are shifting towards digital high-definition technology. HDDs are also increasingly used in automotive applications.

Well-certified in other industries
For FY05, the HDD sector contributed 55.8% of the revenue. The rest of the revenue came mainly from the electronics industry (e.g. computer and peripherals, consumer electronics, etc). Adampak also supplies to Companies dealing with pharmaceuticals/medical equipment, industrial products, and consumer products.

Other than obtaining the usual ISO Certifications, Adampak has also obtained numerous safety agencies approvals from UL (Underwriters Laboratories) and CSA (Canadian Standards Association). UL is a trusted source across the globe for product compliance in public safety.

Long-standing relationship with Suppliers
Adampak’s key supplier is 3M contributing approximately half of the Group’s label stocks. Other key suppliers include Fasson, Raflatac and Lintec.

We believe that Adampak has nurtured good relationships with their key suppliers. Despite the recent surge in oil prices which should have affected the cost of resin-based label stocks, Adampak has still managed to contain the cost of raw materials and even improve margins. According to Management, this is because of their long-standing relationship with suppliers such as 3M.

Proven track record and quality
Adampak’s extensive customer base of MNCs including HP, Seagate, Western Digital, Maxtor, Motorola, Baxter Healthcare, etc, demonstrates their established track record and quality of their product and services; MNCs being known for their stringent quality criterion. Adampak has been awarded "Ship-to-Stock" or similar status by many of their customers, including Western Digital, Seagate, etc. This means that Adampak’s labels can be used directly in customers’ production operations without having to undergo further quality assurance inspections. Furthermore, Adampak has been awarded the "Supplier Appreciation Award" by Hewlett-Packard (S) Pte Ltd and the "Autonomous Quality Control Approval" by Sony International (Singapore) Ltd.

Adampak provides services to pharmaceutical companies such as Baxter Healthcare and Stiefel Laboratories and this is testament of their product quality and hygiene standards.
Major customers, Seagate, Maxtor and Western Digital have been using Adampak’s services for over 10 years.

Good geographical network of manufacturing facilities
Adampak has manufacturing operations in Singapore, Philippines, Thailand and PRC. Through its associated companies, Adampak also has manufacturing presence in Malaysia and PRC. Adampak’s wide network of manufacturing facilities enables them to be in close proximity to their customers, thereby enabling them to provide their services to customers in a timely and cost-effective manner.

Integrated services provider
Adampak is an integrated label converter, with capacity in pre-press and production aspects of the label conversion process. They provide one-stop services from design to production of labels. With such integration, Adampak can better manage the quality of the final products, as well as be more responsive when customers require any rectification to the design.

Wild cards that can provide positive surprises
There are a few wildcards that can provide positive surprises:

(1) Growth in the usage of RFID for baggage handling at airports and logistics and inventory management in the general supply chain. As technology improves and the price of RFID chipsets declines, there will be wider usage of RFID technology in the tracking of items. These RFID chipsets require converters such as Adampak to insert them into labels, which requires sophisticated expertise. Adampak should benefit as the usage of RFID becomes more widespread.

(2) The Group’s new production facilities in Suzhou give them access to the vast PRC electronics market that is growing very rapidly. The Suzhou plant commenced operations in July 2006. Even though at this point we do not expect the Suzhou Plant to contribute positively in FY06, production may ramp-up unexpectedly and make some contribution.

(3) Adampak has a strong balance sheet with net cash of US$4.3 million (or
S$6.8 million equivalent) as of 30 June 2006. Adampak has signalled their intent to purchase the additional 50%-stake in its associate, Aident, for RM20.9 million (approximately S$9.1 million). The consideration represents 6.4x PER (based on earnings for the 12 months ended 31 December 2005). This is still awaiting regulatory approval and we are not certain whether it will go through – hence we have taken out the impact of the purchase from our forecasts. If the acquisition takes place, it will likely be EPS accretive as the purchase consideration will be funded by internal resources and bank borrowings. Even if this acquisition does not take place, Adampak has the financial muscle to purchase other label converters that provide a strategic fit, as well as boost the EPS of the Group, if the opportunity arises.

Attractive dividend yield
1H05
FY05
1H06
Gross Dividend (cents)
0.625
0.9375
0.625
Net Dividend less 20% tax (cents)
0.5
0.75
0.5
Yield (after tax)
2.1%
3.1%
2.1%

Competition
Adampak operates in a competitive environment where there are many small players. However, most of these small players are unable to meet the more stringent requirements of customers such as Seagate. Larger players (with more sophisticated expertise) include Adampak, Singapore-based Zephyr Co and USA-based Brady Corp. Zephyr is a private limited company of larger scale than Adampak. Brady Corp is listed on NYSE with sales of US$1018m in FY06 (July year-end). In 2004, Brady acquired ID Technologies, also a Singapore Company of similar scale to Adampak. Terms of the transaction were not disclosed.

Risks

Over-dependence on electronics sector
Any slowdown in the electronics sector, in particular, the HDD sector, would result in a decrease in demand for Adampak’s products from these customers and would likely affect their financial performance.

Loss of major customers
Any loss of major customers such as Seagate, HP and Western Digital would significantly affect the financial performance of the Group.

Increase in prices of raw materials
Label stocks account for more than 60% of the cost of production. Any increase in cost of label stocks may impact margins.

Currency fluctuations
About three quarters of revenue is denominated in US$ while about half of costs is denominated in US$. Any decline in US$ against S$ will result in decline in profits due to transaction costs. There will also be related translation costs.

Forecasts and valuation
We increase our target price from S$0.33 to S$0.39 based on 8x FY06 PER. Previously, we imposed a 15% discount due to its poor trading liquidity. We have removed this discount due to its recent surge in volume. Maintain BUY.

Stockwatch- CHT Holdings (Singapore) S$0.615

SBI-E2 Capital Not Rated Report on CHT Holdings 23 Oct 2006

CHT: All set for strong recovery

Key points:
*CHT is one of the world’s leading producer of PVC adhesive tapes for the automotive, industrial and consumer markets.
*CHT is the largest producer in the PRC, accounting for estimated 60% of all domestic production capacities.
*Strong customer base with end-customers consist of leading MNCs in automotive and electrical appliance segments.
*Strong profit growth expected in 2H, led by turnaround in Shanghai JV, lower raw material costs and new capacities.
*FY06 results are likely to beat consensus. Based on our initial estimates, CHT is deeply undervalued at 5.4x FY06 and 4.3x FY07 P/E given its dominant position in PRC.

Company background. Listed in 2003, CHT is one of the world’s leading producer of PVC adhesive tapes for the automotive, industrial and consumer markets. CHT is believed to be the only integrated adhesive tape producer in the PRC to manufacture from machinery and equipment for the production of adhesive tapes, PVC film, pressure sensitive adhesives (PSA) to the adhesive tapes. CHT derived close to 40% of revenue from automotive segment while the remaining from industrial and consumer segments. In FY05, 66% of revenue was derived from the PRC markets. CHT’s production facilities are based in Hebei province and Shanghai, PRC.


The largest PVC adhesive tape producer in the PRC. Based on management’s estimates, of the total 40 PVC adhesive tape production lines in the PRC, 24 lines (or 60%) are owned by CHT. Other PRC producers are much smaller in size and have less than 3-4 production lines each.

Strong customer base. CHT’s products are sold through 63 sole distributors and more than 300 dealers in 30 provinces in the PRC with more than 1,000 customers. CHT’s customers in the automotive industry are manufacturers of component parts for automobiles, including MNCs such as Lear, Vistaone and Delphi. The adhesive tapes are being used to insulate and color-code the different wires and cables that are used in automobile wire harness. The end-customers are auto makers such as DaimlerChrysler, Volkswagon, General Motors and Ford. In the PRC market, management believes that CHT has giant market share (>90%) of PVC adhesives tapes used by all Chinese auto makers. CHT’s industrial customers include electrical appliance manufacturers such as the Lenovo Group, Haier and TCL.

Strong profit growth in 2H. CHT made net profit (ex. exceptionals) of RMB 52m (+22% YoY) in 1H06, partly affected by RMB6.3m losses in its 75%-owned Shanghai JV with US-based Plymouth and higher costs of its oil-based raw materials. 2H profit recovery will be led by four factors:
*turnaround in its Shanghai JV, which is expected to contribute strongly with estimated RMB5m net profit/quarter from 3Q06;
*turnaround in its 39%-owned BOPP (Biaxially Oriented Polypropylene) associate which has been loss-making since 2003;
*5-6% QoQ drop in raw material costs, which accounted for 65% of COGS; and
*maiden contribution from 2 new production lines added in Aug06.

4Q is expected to see sequential growth from 3Q as the 2 new production lines will be ramped up quickly with current utilization rate already high at 85%.

FY06 results to beat consensus. We believe CHT will beat FY06 consensus profit estimate of RMB 129m. Given the strong turnaround in 3Q and strong sequential momentum in 4Q, we expect CHT to make net profit of RMB 140-150m. For FY07-09, management also targets 20-30% net profit growth per annum. Assuming RMB150m net profit for FY06 and 25% profit growth for FY07, CHT is currently trading at undemanding 5.4x FY06 and 4.3x FY07 P/E. We believe CHT is undervalued given its dominant position in the PRC’s PVC adhesive tapes market and strong earning recovery momentum.

Stockwatch- IGB Corp (Malaysia) Share Buyback on 20 Oct 2006

Company Name: IGB CORPORATION BERHAD
Stock Name: IGB
Date Announced: 20/10/2006
Date of buy back: 20/10/2006
Description of shares purchased: Ordinary Shares of RM0.50 each
Total number of shares purchased (units): 600,000
Minimum price paid for each share purchased (RM): 1.360
Maximum price paid for each share purchased (RM): 1.360
Total consideration paid (RM): 816,000.00
Number of shares purchased retained in treasury (units): 600,000
Number of shares purchased which are proposed to be cancelled (units): 0
Cumulative net outstanding treasury shares as at to-date (units): 17,319,800
Adjusted issued capital after cancellation (no. of shares) (units): 0

Stockwatch- Media Prima BHD (Malaysia), Buys bear fruit

Buys bear fruit at Media Prima
4 Sep 2006, The Edge
By Lim Ai Leen

Swallowing two television channels and two radio stations within 12 months is no mean feat, yet Media Prima Bhd has managed to do that and cough up higher earnings as well. "Things are progressing, we're sure we're on track to achieve our aggressive growth targets that we have set ourselves," says Abdul Rahman Ahmad, Media Prima's group managing director and CEO.

Last Wednesday, the group posted revenue of RM232.7 million for the six months ended June 30, 2006, a 35% growth from the RM172 million earned for the same period last year. Net profits (excluding an exceptional item) grew 29% to RM18.37 million over the same period. However, taking into account the exceptional item — a RM12.5 million share of cost incurred for a voluntary separation scheme at 43% associate New Straits Times Press (M) Bhd (NSTP) — net profit only came in at RM9.5 million.

This performance places the group firmly on the growth path, three years after its debt restructuring plan was implemented. And it looks like better numbers are in store as Media Prima's new acquisitions start to break even and it consolidates its monopoly position in the free-to-air (FTA) TV sector.

Media Prima owns 100% of TV3, its flagship mass-market channel, and recent additions NTV7 and TV9. It also owns 80% of 8TV, which targets the urban youth market. The government owns the remaining FTA stations, RTM 1 and RTM2.

"TV earnings will be the earnings driver in the short term," observes Rahman. He notes however that radio will start contributing strongly in the future, though this will be small relative to the entire group. Media Prima owns Fly FM and Hot FM, both bought last year.

Some media analysts, however, have been sceptical of the group's ability to command monopoly ad prices from the time Media Prima embarked on its aggressive shopping spree. These critics did not like the fact that despite TV3's already dominant position with 55% of adex (advertising expenditure) share, the group still had to buy up its competitors in order to stamp out rampant discounting and up its ad revenue. Media Prima's TV stations now control 80% of ad spend amongst the FTA networks.

Rahman concedes that one of the reasons for consolidating was to better manage discounting, which stood at between 55% and 60% of reported industry ad rates. But he doesn't believe that the focus should be on rates per se, as evidenced by the group's earnings.

"... our strategy internally is not rate-focused, it's revenue-focused. To us it's more important for us to grow our revenue faster and larger, rather than being very focused on what level of rates are in a particular slot. On that score, I think we've been very successful in terms of going to advertisers and agencies to provide them better value. With that, they're willing to commit a higher level of revenue to us and I think that the revenue focus strategy is working very well," he explains.

Analysts were also concerned that stubborn advertisers could run to other media like print and pay TV operator Astro if Media Prima started hiking up rates. Unlike other countries, Malaysia's print sector is stronger than TV, commanding some 60% of total adex, while TV garners just under 30%. Meanwhile, Astro is more dependent on subscriptions, not ads, for its revenue, and can thus offer attractive packages to advertisers. But Rahman believes he has his bases covered.

First off, the group is an integrated media company with businesses in TV, radio and print. He explains: "We admit we have quite a big share of the TV market but we no longer look at the adex market as purely TV. We look at the adex market as a total and while we may have large share of the TV pie, TV adex in Malaysia is one of the lowest in the region as a proportion of total adex."

Hence the group embarked on its TV-print cross-media bundling exercise four months ago. "It's led by the print, NSTP, side because the market we were targeting are those more on the print side — automotive, consumer, electronics and corporate profiling market. I think it's been very encouraging and we hope to do more and expand it further going forward," says Rahman.

Also, latest figures indicate that advertisers may be migrating from print to TV, albeit very slowly. "Structurally if you look at most recent Nielsen data, newspaper growth declined by 3% for the first six months. Of course, Nielsen figures are to a certain extent influenced by discounting, but TV adex did grow by 2% to 5%," he points out.

Competing against the likes of Astro however requires a different and costlier strategy —pending on brand-building and content or programmes to attract viewers. Media Prima spends about RM200 million yearly on content, and is expected to announce a higher content budget this Friday when it unveils its schedule to advertisers and media buyers.

Potential upside
All these efforts, and their bottom line results, seem to have assuaged the analysts somewhat. Six of the seven analysts listed on Bloomberg have "buy" calls on Media Prima stock, with target prices in the RM2.20-range. The counter ended at RM1.72 last Wednesday.

More earnings should flow to the bottom line once TV9 and NTV7 start showing profits, as soon as this year for NTV7 if it hits its cost saving target of RM30 million. The standard gestation period for new TV stations to be up and running and profitable is two years, and Media Prima has a track record of doing it faster. "8TV did it within 18 months, ahead of our expectations," declares Rahman.

He is also proud of the fact that Chicago-based foreign fund, Harris Associates LP, has been accumulating shares in the company and holds 70.5 million shares or a direct interest of 9.5%as at July 21. He points out that Harris is a long-term value investor, "not a hedge fund that goes in and out".

"Our group is more appreciated by foreign fund managers than local investment community. We are one of the few corporates which foreign fund managers find very appealing. They benchmark us against other media companies internationally in HK, Australia, Indonesia. There are not many media companies they believe are well-run, corporate governance-wise and in terms of strong future growth value," he says.

He believes that a key attraction is the group's ability to generate cash flow, or Ebitda (earnings before interest, tax, depreciation and amortisation). He says: "When I came in, our Ebitda was roughly RM50 million. Last year we closed at RM107 million, which is doubling of Ebitda in three years ... we hope to deliver 15% growth every year for the next three years. We've been exceeding that by far every year and hope to continue to do that."

Investors are also promised a dividend pay out ratio of 20% for the next three years, which should grow up to 50% thereafter. Now that this group has pretty much bought up the media assets up for sale locally, it appears that regional expansion is the next step.

Rahman responds: "We are always looking for investment opportunities; we are interested in anything that adds shareholder value. But at the moment our focus is to make sure all our acquisitions are digested, to create value and show the value."


Media Prima 2Q net profit soars 127% to RM16m
By Tamimi Omar, The Edge 30 Aug 2006

Media Prima Bhd's net profit jumped 127% to RM16.41 million for its second quarter (2Q) ended June 30, 2006 from RM7.23 million a year earlier on the back of strong performances from its television networks operations.

Revenue rose 41.31% year-on-year (y-o-y) to RM132.817 million from RM93.98 million previously.

“TV3, the group flagship network, maintained its leadership position in terms of advertising revenue and viewership share, while 8TV continued its exceptional revenue growth,” Media Prima group managing director and chief executive officer Abdul Rahman Ahmad said.
According to AC Nielsen, Media Prima, which has four TV networks, TV3, NTV7, 8TV and Ch-9, maintained its leadership position with 48% share of TV viewership against 38% in the previous corresponding period.

However for the first six months, Media Prima’s net profit fell 23.47% to RM9.47 million from RM12.38 million, while revenue rose to RM232.69 million from RM171.97 million.
The lower net profit was due to the one-off exceptional cost from the voluntary separation scheme (VSS) undertaken by the group’s associate company, The New Straits Times Press Bhd, in the first quarter this year, which was partly offset by writeback of long-standing accruals in certain subsidiaries.

Reviewing Media Prima’s second quarter results at a media conference in Petaling Jaya yesterday, he said the group was on track to surpass its previous target of 20% growth on both the bottom line and revenue this year.

“We announced last year that we wanted to maintain the level of growth that we have been delivering, which is a 20% growth target in terms of revenue as well as bottom line in the last three years.”

“I think the results today have shown that not only have we met that target but on track to exceed it,” Abdul Rahman said.

He said Media Prima would also unveil its 2007 content programme investment next week.
“We mentioned last year that we are going to spend between RM170 million and RM200 million of investment in content, I think we are on track to invest in that amount and hope to be able to increase it for next year,” he said.

Stockwatch- IGB Corp (Malaysia) RM$1.41 JP Morgan initiate coverage 28 Oct 2006

IGB Corporation
Attractive piece of real estate

Initiate with OW, PT of M$1.90: We initiate on IGB with Overweight and a Dec-07 target of M$1.90. Its earnings profile and growth is set to improve due to the M$1.3bn new commercial project launch ‘The Gardens’ by Sept-2007. We expect recurring property investment income and hotel earnings to rise from 65% to 76% of profit in FY06-08, and EPS growth to rise from 8% in FY06 to a CAGR of 18% in FY07-08 vs the sector’s 8%.

Share price drivers: Commercial property trends continue to improve with rising activity levels fueled by the set up of REITS, expectation of a stronger Ringgit, and Malaysia’s attractive capital values (the cheapest in the region) and yields (8% for prime office space vs Singapore’s 4%). IGB is well positioned given its prime, expanding commercial asset base. Higher dividends and/or a shift in focus to capital management are also possible from FY08 as ‘The Gardens’ nears completion and with rising free cash flows.

PT and risks: IGB trades at a 50% discount to RNAV of M$2.71. The discount should narrow as assets generate stronger earnings from FY07. Our PT of M$1.90 is at a 30% discount to RNAV and implies an FY07E P/E of 18x versus the Malaysian average of 9x, and regional average of 29x for property investors. Risks: earnings disappointments from residential segment, and oversupply of commercial property (though unlikely for prime assets).

Commercial property industry trends improving
The residential property segment is moderating after the strong growth since 2004 and due to oversupply in certain segments. However, activities in the commercial segment have picked up over the last two years with commercial transactions in the Klang Valley rising from 30% of residential transactions in 2002 to 45% in 2005.

Capital values for commercial property have also been on the rise. Our basket of office property transactions in the Klang Valley shows an average rise in value of 17% Y/Y in 2006 to M$479/sqft as well as higher value for recent hotel transactions (see Table 3). In Kuala Lumpur, hotel occupancy rates have also improved from 63% in 2003 to 70% in 1Q06, while the average room rate for top tier hotels rose by 12% Y/Y in 1H06. Prospects for hotels, especially in prime locations, remain good given the rising tourist arrivals (projected to rise 7% Y/Y in 2006), the ‘2007 Visit Malaysia Year’ drive and the continued healthy economic growth.

Malaysia’s capital value/yields remain attractive regionally (see Table 4), with average Klang Valley net rental yields at 6-8% for office space (8% for prime space) and at 7-10% for retail complex. Considering this and the increasing interest/demand among foreign property investors as well as from REITS, there is potential upward pressure in capital values, which augurs well for IGB given its prime commercial assets. Every 1% rise in commercial asset values would increase our RNAV estimate by 0.8%.

Prime commercial assets—Key prized asset, MVC
IGB owns combined office space of 0.95 million sq ft in KL with occupancy rates of 76-100%. The company also has interest in 10 hotels—five in KL, one in Pangkor island resort, and four overseas—with occupancy rates of 60-88%. Its key prized commercial asset however is its MVC retail mall (Phase 1) with a net lettable space of 1.7 million sq ft and operating at a 100% occupancy rate, situated in a prime location in Klang Valley between the business area of Kuala Lumpur and Petaling Jaya residential area. The retail mall caters largely to middle-income consumers and commands a patronage of about 30 million visitors annually, versus 40 million for the Suria KLCC Mall in the heart of KL.

IGB is developing ‘The Gardens’ development, which will entail a high-end retail mall (MVC-Phase 2) with a net lettable area of 0.8 million sqft. The mall will come onstream by September 2007, followed by two new office towers and two hotels in the same area by end-2008 and end-2009, respectively. The project will raise IGB’s total net lettable area of retail and office space by 83% to 4.85 million sq ft by end-2008, versus KLCC’s current 5.6 million sq ft. Rentals at MVC- Phase 2 are being negotiated at a 20-25% premium to MVC—Phase 1's M$8/sqft. To date, the group has leased out 50% of space for MVC—Phase 2 (anchor tenants: Isetan and Robinsons), and is on track to achieve 70% by September 2007. The total development cost stands at M$1.3 billion, which includes M$150 million for infrastructure upgrades and additional parking bays. Discussions are also being held with the authorities for connections with the Monorail and Putra LRT via ‘The Gardens’.

Property development
IGB’s sales continued to rise amid the softer residential market, up 94% Q/Q in 2Q06, aided by the group’s niche strategy and branding in the mid-high end segments in Klang Valley’s prime areas. The group has estimated unbilled sales of M$260 million as of end-1H06 (0.9x of historical property revenue), and cumulative planned launches in the Klang Valley total about M$700-750 million over FY06-07, at M$0.3-2.5 million per unit. We believe this will help sustain earnings up to FY08. Beyond this, IGB can tap onto its remaining land bank of 240 acres in the Klang Valley for at least the next three to four years.

Wednesday, October 25, 2006

Stockwatch- KLCC Property (Malaysia) RM$2.27 Deutsche Bank initiate coverage 16 Oct 2006

Deutsche Bank - Equity Research

KLCC Property Holdings {Ticker: KCCP.KL, Closing Price: 2.22 MYR, Target Price:2.90 MYR, Recommendation: Buy}

* Most sought after commercial address at 10% implied yield; initiate with Buy

KLCC Property (KLCCP) offers investors an opportunity to co-own the world's tallest Twin Towers and other prime commercial assets at a 10% asset yield vs the market transacted yield of 5%. In addition, it offers 10-15% pa earnings growth in FY07-09E, a net div yield of 3.6% as well as potential upside from the growing pipeline of assets from its parent company. Our RM2.90 price target values the company at 9% implied yieldor 22% discount to RNAV. Buy.

* Defensive rental stream plus leverage to uptrend in property cycle

39% of KLCCP's rental revenue has locked-in rental growth of 3% cagr, at least until 2012. The rest is leveraged to the current uptrend in the commercial property cycle. We project a 5-10% pa growth in office rental and capital value in 2007 due to tightening supply and growing demand. We estimate that every 10% rise in hotel ARR and retail rental increases FY07E net profit by 2.6% and 4%, respectively.

* Rising free cash flow + opportunity to make value-accretive acquisition

KLCCP's projected rising free cash flow, from RM133m in FY07E to RM531min FY2011E, provides it with great financial flexibility to pay higher dividends and/or make acquisitions, especially after FY09.Opportunities are plenty given the parent company's growing asset portfolio.

* Trading at 40% discount to RNAV; TP offers >30% upside

At TP of RM2.90, we value KLCCP at 9% implied asset yield, pricing it at the lower end of the 9-10.7% historical range. The discount reflects the low possibility of it divesting its assets, and regulatory restriction on foreigners to invest in property. Key risks include a sharp downturn in the domestic economy, interest rate hikes and sustainability of current premium rental rate.

Tuesday, October 24, 2006

Stockwatch- CK Tang, some earlier articles on its Orchard Road property

Singapore's CK Tang may consider sale of Orchard Road property
9/28/2006 3:29:00 PM

SINGAPORE (XFN-ASIA) - CK Tang may consider selling its property on Orchard Road here, which houses its flagship Tangs department store, if the price is right, said CK Tang executive chairman Tang Wee Sung. "We have been approached, but nothing is worked out," Tang told XFN-Asia. Tang did not identify the prospective buyer. He said offer was not viable. Asked whether CK Tang will redevelop its flagship store, Tang said there were plans to do so but that they were still being drawn up. At the moment, the retailer is focussing on preparations to open its new store at VivoCity here early next month. The new store will embody a new Tangs identity. "What we would like to portray is a retail establishment that is modern, stylish, personable and confident," Tang said. Tang said CK Tang would look for other expansion opportunities here and in Malaysia. (1 usd = 1.58 sgd)

STOCK ALERT - Singapore's CK Tang up on hopes it will sell Orchard Rd property 9/28/2006 4:03:00 PM SINGAPORE (XFN-ASIA) - Shares in CK Tang were higher on renewed hopes that the retailer will sell the property in Orchard Road here that houses its flagship Tangs retail store, dealers said. In late afternoon trading, CK Tang stock was up 0.02 sgd or 3.85 pct at 0. 54, with 169,000 shares having changed hands. CK Tang executive chairman Tang Wee Sung said the sale might be considered if the price is right. "We have been approached, but nothing is worked out," Tang told XFN-Asia. Tang did not identify the prospective buyer. He said offer was not viable. Investors have long speculated that owners of property on Orchard Road will be approached by prospective buyers, in view of the high bids the government received for three Orchard Road sites that it auctioned last year and this year. (1 usd = 1.58 sgd)

Singapore unlikely to see shopping mall glut despite new malls - CK Tang 9/28/2006 6:11:00 PM -

SINGAPORE (XFN-ASIA) - Singapore is not likely to experience a glut of shopping mall space despite the increasing number of new shopping malls set to mushroom across the city-state in the next three years, executives from top retailer CK Tang said. Asked whether he thinks there is a threat of an oversupply situation in the retail industry, CK Tang chief executive officer Foo Ting Sooi said: "The answer is no." Foo said the new malls being built on Orchard Road for instance will make the shopping belt more vibrant. Some 1.2 mln square feet of additional shopping mall space are expected to be built in Orchard Road shopping belt here three new shopping malls are under conmstruction, according to a recent report by BNP Paribas. The biggest of these shopping mall is being built by CapitaLand right across CK Tang's flagship department store at the corner of Orchard Road and Scotts Road. The CapitaLand mall will have some 690,000 square feet of retail space when completed in 2008. Not too far from the CapitaLand mall are two shopping malls being built by Australia's Lend Lease and local developer Far East Organization near the Somerset MRT station. Both malls will have 300,000 square feet of retail space each. CK Tang executive Tang Wee Sung said he also does not believe that the new shopping malls will create a glut of mall space. "We (Singapore) are positioning ourselves for the future. Plans for Orchard Road are very exciting," Tang said. Tang said the Orchard Road developments will basically establish the shopping belt as the place for branded fashion items, while other places like Little India and Chinatown will have the niche of their own. "It gives Singapore a certain flavor," Tang said. Tang said the recovery in that the retail sector has seen in the last few years looks sustainable and this will ensure continued robust demand for retail space. Apart from the new shopping malls on Orchard Road, new shopping malls are veing built in Marina Bay, Serangoon Road, Ang Mo Kio, Jurong, Tampines and HarbourFront. The VivoCity at HarbourFront, which will have some 1.1 mln square feet of retail space, will open next month. CK Tang will have a new store there. As part of the integrated resort project of Las Vegas Sands at Marina Bay, a 1 mln square feet of shopping space will start operating in 2009. Suburban malls are also being built. Next year, a 350,000 square feet shopping mall will open at the Ang Mo Kio bus interchange and in 2008, a 400,000 square feet mall will be open to expand Jurong Point in the west and a new 300,000 square feet mall in Tampines in the east will start operating as well. (1 usd = 1.58 sgd)

Wednesday, October 18, 2006

Stockwatch- Rotary Engineering (S'pore) says to double order book

Rotary says to double order book

SINGAPORE - Singapore's Rotary Engineering, an oil and gas infrastructure services firm, said on Wednesday that it plans to double its order book and headcount thanks to strong demand for petrochemical facilities in Asia. Rotary - which has contracts to build oil and chemical storage tanks, terminals and processing facilities in Singapore, China, Thailand, and the Middle East - had an order book of $525 million (US$332.7 million) at the end of June and a 3,000-strong work force.

Rotary's chairman Chia Kim Piow said he expects the headcount to double in the next two years but declined to give a time frame for the increase in order book, adding that the firm was using only half its capacity. 'We are soliciting for more contracts because we have the capacity to execute them, both in terms of available work force and fabrication capacity,' he added.

Mr Chia said new contracts were expected in petrochemical plants planned to be set up by oil majors in Singapore, including a 800,000 tonnes per year ethylene cracker by Royal Dutch Shell Plc, as well as in Thailand and the Middle East where Rotary is a pre-qualified contractor for state oil firm Saudi Aramco. 'We are actively pursuing tenders in Singapore, Saudi Arabia and Thailand,' he said. Rotary is building a new fabrication facility in the Jubail industrial zone in Saudi Arabia which will produce 50,000 tonnes of steel plates for storage tanks and 300,000 diameter inch of piping starting end 2007. -- REUTERS

Monday, October 16, 2006

Stockwatch- Innovalues Precision (Singapore) BNP report 5 Oct 2006 target price $1.40

We paid another visit to Innovalues’ Pasir Gudang facilities which was bustling with activity, suggesting that its office automation and automotive businesses remain strong. The HDD segment, which is manufactured in Thailand, is the only weak spot. We have raised our target price to SGD1.40 as we rollover our valuation to 2007. Maintain BUY.

OA and automotive in full ramp
*OA and automotive progressing as expected.
*HDD segment is weaker than expected.
*Maintain BUY with revised target price of SGD1.40.

OA and automotive progressing as expected
We recently paid our second visit (first visit in June 2006) to Innovalues’ manufacturing facilities in Pasir Gudang (Malaysia). To recap, this plant manufactures brake sensor parts for Sensata (formerly TI’s sensor unit) and printer parts for Hewlett Packard (HP) and other office automation (OA) customers. As expected, the facilities were bustling with activity in this seasonally strong period.

For its office automation business, we understand that Innovalues has begun work for another printer customer in August 2006. The group manufactures shafts for laser cartridges for this customer with volumes expected to ramp up significantly next year. We estimate that this customer could potentially contribute some SGD10-12m to group sales next year. However, Innovalues has seen a delay in the production of rollers and shafts for HP’s wide format printers which is now scheduled for 2Q07. We understand that HP currently purchases about USD20m worth of such parts from Spain and has decided to source from Asia due to obvious cost reasons.

Innovalues’ automotive business continues in full swing and the group is set to begin production for several new customers. As shown in the table below, Innovalues has a healthy pipeline of new projects ready for ramp, which includes parts for Siemens VDO, Bosch, Hiliite, Luk and a new part for Sensata. This new part was initially scheduled to start production in 3Q06 in China but has since been pushed to next year. All in, we believe Innovalues’ automotive business will remain the major driver for the group going forward. Note that we have not included contribution from new automotive customers such as Hilite and Luk, given the risks of project delays. Hence, we believe there could be upside to our 2007 and 2008 automotive sales projections should the ramp commence as planned.

Sunday, October 15, 2006

Stockwatch- Innovalues Precision (Singapore) on IES publication Oct 2006

Innovalues focuses on automotive sector

Within just a decade of its establishment, Innovalues Precision, a precision parts supplier, has achieved a string of accolades from the industry. The company, founded by Goh Leng Tse as a four-man set-up, is today a Mainboardlisted regional fi rm with a market capitalisation of more than $100 million. Innovalues has identifi ed the automotive industry to drive itself to greater heights.

“Judging from the industry trend, over the last three years, automotive suppliers from the US and Europe are doing more outsourcing from Asia,” says Steven Pung, the company’s business director. “Since we are in the precision-engineering business, we see opportunities. We can value-add to the industry, and our focus is on ‘critical-to-function, critical-to-safety’ components.”

Innovalues got its first big break from the automotive industry in 2003, when the company was introduced to Texas Instruments (TI), to supply parts that go into sensors used in brakes and airbags. These parts are then supplied to marquee names like Mercedes and BMW — a testament to their quality.

It is not easy being an automotive-parts supplier. The qualification process takes about a year and can cost the customer up to $1 million to do the necessary tests and processes, says Pung. Besides TI, the company has won a few more German customers, like Bosch and Siemens VDO. Pung says introductions by International Enterprise Singapore’s officers stationed overseas have been very helpful in opening doors. “Some of them can’t even differentiate between China and Singapore, but IE’s introduction and pre-marketing has made all the difference,” he adds.

In the financial year ended December 2005, the automotive segment contributed 10% of total revenue, up from a mere 3% in 2004. This year, analysts are expecting this proportion to hit 18%, and the company’s target is for automotive parts to generate half of its turnover by 2008. “We want the automotive business to be the core,” says Pung.

The company’s optimism is not without basis. US and European companies are relatively new in outsourcing to Asian manufacturers, which have helped them to enjoy costs savings of about 20%. Furthermore, Asia as a car market is probably the world’s fastestgrowing.

“They want to be near where the action is,” says Soh Wai Kong, Innovalue’s chief financial officer. To cater for this projected growth in the business, the company is adding capacity to its plants in Thailand, Malaysia and China. The total factory fl oor space is about 30,000 sq m, and will be increased to 47,000 sq m by the end of 2008, says Soh.

Stockwatch- Innovalues Precision (Singapore) CIMB report 5 Oct 2006 target price $1.52

Innovalues Precision - Turning steel into cash

• Our recent Malaysian plant visit reinforced our positive view on Innovalues. The Malaysian plants represent 65% of group capacity, focusing mainly on office automation (OA) and automotive components. All three plants are operating close to full capacity on the back of seasonal demand and new customers and programmes.

• Cost-cutting exercise and yield improvements to bear fruit in 2007. The company has been cutting costs and improving yields and efficiency, which we believe will start to bear fruit in 2007.

• Thailand and China plants also busy with automotive and OA businesses, respectively. The Thai plant is operating at about 80% capacity due to a slowdown in the HDD components business. However, the slowdown has been partially compensated by a surge in the automotive segment. The China facility, which focuses on OA and automotive, is running close to full capacity.

• Maintain Outperform; raising target price from S$1.18 to S$1.52. We have kept our FY06-08 forecasts unchanged but continue to believe that there could be upside to our numbers if the automotive components business takes off. We have also raised our target price from S$1.18 to S$1.52 as we roll over our 13x target P/E from CY06 to CY07. Our target P/E is pegged at a slight premium to its historical average P/E band in view of the healthy 34% earnings CAGR projected for FY05-08. Maintain Outperform, and we see catalysts from evidence of accelerated sales in the automotive sector and potentially solid full-year results.

Stockwatch- Innovalues Precision (Singapore) Prospect and Business Outlook presented in 1H Results

Extracted from the press release on Innovalues' 1H results:

Prospects and Future Plans
The industry outlook for the automotive industry is bright and Asia is becoming an increasingly important place to source for automotive components by the European and US car parts manufacturers. According to a report by consulting firm KPMG on the automotive components industry, the market value of the sector in China alone is expected to reach USD 13 billion by 2007. This trend is expected to be sustained as Asia begins to export higher value-added components for the automotive sector.

Mr Goh commented, “Going forward, our AU segment will continue to be one of the key growth drivers for the Group and we see great opportunities in this segment. Over the past few months, we have received an increasing number of enquiries from interested parties for possible strategic business alliances. We also see potential in our OA segment as we continue to secure projects with higher value-add. As for our HDD segment, we are currently working with other major players in the industry to increase our sales from this segment.”

As part of the Group’s plans to enhance its market presence in the region and to cope with the increasing orders, Innovalues expects to invest an estimated S$13 million in property, plant and machinery in China, Malaysia and Thailand in the current financial year. Some S$8 million and S$2 million will be used to spur the growth of the AU and OA segments respectively. To cut down on the volatility of the raw material prices, Innovalues will also be constantly sourcing for and working closely with its steel suppliers to monitor the steel market conditions.

Barring unforeseen circumstances, the Group expects its performance for FY06 to exceed its FY05 results.

From Innovalues' slide presentations on its 1H results:

Business Outlook

Automotive (AU)....
1. Expect to contribute abt 20% of Group's FY2006 revenue (up from 10% in FY2005)
2. AU sales from 2003 to 1H 2006 was for Sensata (formerly unit of Texas Instrument) only
3. Sensata
- expect high double digit growth for growth for existing 2 projects (Braking sensors and Occupant weight sensors) up to FY2008
- new projects transferring to this region being awarded
4. Other AU customers
- Siemens VDO
- selective plating technology know how transfer from customer
- Other US and Europe car component manufacturers with high market shares outsourcing to this region
- a few projects in qualification or advanced discussion stage

Office Automation (OA)....
1. Healthy growth in OA segment
2. Hewlett Packard (HP)
- expected increasing orders from HP's new printer platform, which requires 3 times as many rollers as before
- new projects
3. Other major players- continue to see growth and new projects from various customers
4. New high volume customer- for their laser printers which require more rollers

Hard Disk Drive (HDD)....
1. expect sales and profit contribution to reduce yoy of about 25%
2. major customer drops in sales volume and cut down of outsourcing requirement
3. already start supplying to a new major HDD player, however, contribution not significant this year
4. Group to target other major HDD players
5. switch existing HDD machinery to run OA and AU parts

China....
1. Our presence in China provides business opportunities
2. Many customers and their CMs have presence in China to take advantage of the lower manufacturing costs and to be near the potential market
3. We have plating license which the issue of license in Shanghai is restricted
4. China Government is encouraging sourcing of car components from the local market and may impose custom duties for components imported into China starting mid 2007

Diversification....
1. Innovalues' business is well diversified
2. 3 major business segments- AU, OA & HDD
3. AU business is stable and not seasonal
4. Within each segment there are a few major existing or potential customers
5. Some of our machinery can be switched for different business segments

Challenges

Competition....
1. There is indeed competition and price pressure, but....
2. our size and volume give advantage to bring in major palyers and projects
3. we are well positioned for HDD and AU which have high quality requirement, long qualification period and high cost of qualification
4. AU market is big and many function critical and safety related components in a car
5. we have good business relationship with customers

Others....
1. weakening US$ against asian currencies
- our assets and liabilities are naturally hedged
- we actively entered into forward and currency structures for transaction requirement
2. rising cost of borrowing
- we have favourable machinery and material purchase terms
- we manage our working capital and stock holding

Summary

1. We are growth business supply components for AU, OA and HDD
2. We are positive in the next few years' outlook
3. The Group will continue our drive to improve margin and control our costs
4. FY06 expected to be better than FY05, barring any unforeseen circumstances

Stockwatch- Innovalues Precision (Singapore) S$0.855

I have been following Innovalues Precision with interest in recent weeks as I am looking for outperformers in the manufacturing sector which has been a laggard in the recent market rallies. Innovalues come to my mind as I noted with interest that Lion Capital become a substantial shareholder. And with a recent plant visit, with analysts raising their target price, Innovalues broke out of its trading range.

And on receiving this week's The Edge Singapore, I read an interesting articles on Innovalues. After reading it, I made up my mind Innovalue is really worth watching.

Highlights of the article on Innovalues Precision on this week's The Edge Singapore:

1. Lion Capital has a 6.03% stake in Innovalues.

2. Innovalues has made a profitable shift to manufacturing components for the automobile industry from the traditional office automation (OA) industry.

3. Several US and European automotive component manufacturers have been outsourcing work to Asia. Innovalues has been able to ride this boom.

4. Innovalues looks forward to winning new customers as automobile companies increase emphasis on safety and seek out more safety components for their cars. And Innovalues founder and CEO Goh Leng Tse hopes turnover from automotive will overtake OA to make up 50% of total revenues by 2008.

5. Innovalues currently produces 3 components for Sensata Technologies, a former unit of Texas Instruments:

(Website of Sensata Technologies- http://www.sensata.com/about/index.htm)

i. Braking sensors- provide enhanced safety features, especially for nagivating along winding roads; so far used only in luxury cars in Europe, but which will be used in luxury and mass market cars in the US by next year. Strong growth expected in this component. Innovalues manufactures it out of its Malaysian plants.

ii. Occupant weight sensors- Occupant weight sensors measure the weight of an occupant. An advanced air bag system might use this information to prevent the air bag from deploying at all in the presence of children. The Federal Motor Safety 208 rule in the US made it mandatory this year for all passenger cars to have an advanced airbag deployment system based on the physical weight of passengers to increase the level of protection. Demand is therefore growing. Innovalues currently manufactures 95% of the components used in these sensors at its Thailand plant on behalf of Texas Instruments.

iii. Automotive pressure transducer (APT) sensors- activate the fan in the car according to temparature changes. Innovalues started the production of APT sensors at its China plant under a pilot programme by Texas Instruments in May. Currently, the bulk of these sensors are still being produced by other manufacturers in Japan and Mexico. But production would eventually be entirely relocated in China. Innovalues may garner a bigger order book as worldwide demand for APT sensors is expected to reach 70 mil units this year.

6. Apart from Texas Instruments, Innovalues has also secured new automotive component manufacturing customers like:

i. Siemens VDO (fuel injector) - after trial runs for Siemens VDO diesel engine fuel injector components, mass production is expected to start at the end of Oct 2006. In CIMB research report, it states that Siemens could become a major customer of innovalues' Malaysian operations as the company is in talks for more projects.

ii. Bosch (fuel pump)

iii. HILITE International (engine valve and transmission valve)

iv. LUK (clutch disc)- production is expected to start next year for LUK's clutch discs, which would be used in General Motors, Audi and BMW cars.

7. Despite growth potential in automotives, Innovalues is not scaling down its OA business.

i. Goh says the company is in talks with a major printer customer to manufacture laser printer shafts. If successful, this potential customers could contribute 20% to Innovalues' total OA revenues next year.

ii. Innovalues has also benefited from Hewlett-Packard's recent volume growth- 15% y-o-y between May and July. As a result, it has widened its product offerings to HP to include components for wide-format printers, the production of which HP is gradually moving away from Europe to Asia.

8. Innovalues' Malaysia and China plants are running at almost full capacity, but the existing Thailand plant, which produces mostly automotive and hard disk drive (HDD) components and represents about 20% of total group capacity, is operating at about 80%.

9. (Negatives and risks) Innovalues' HDD business and therefore its HDD production in its Thailand plants has been impacted by a decision by a key HDD customer, Minebea, to allocate more production in-house following a management reshuffle last October. Previously, Minebea outsources 75% of the production to Innovalues but has since reduced this to 70% this year. And the volume could drop further.

10. While CIMB analyst says Innovalues may no longer focus on this area but will increase its focus on the stable automotive components sector, Goh says Innovalues is in talks with a potential HDD customer who could invest US$200 mil to develop the business regionally. If things go as planned, this would provide Innovalues an opportunity to deal directly with a HDD original equipment manufacturer. For now, the weakness in the Thailand plant has been partially compensated for by a surge in the automotive components business as volume for occupant weight sensors remains robust.

11. Capex. Innovalues has budgeted for a total of $16.5 million in capital expenditure, up from $15.8 million in 2005. It will be financed through internal funds and bank borrowings. To date, it has spend $7 mil this year.

12. Its second plant in Thailand, which is under construction, is on track to commence production in 4Q2007. This plant will triple its production floor area in Thailand from 41,000 sq ft to 108,000 sq ft.

13. Innovalues will also expand its China facilities from 88,000 sq ft to 161,000 sq ft next year to support rising demand.

Saturday, October 14, 2006

Stockwatch- Adampak (Singapore) Directors purchase while Significant Shareholders sell

Adampak ends this week at 24ct, up from 22ct on the first posting.

Interesting to note that this stock move up amidst 2 significant shareholders, who are not involved in the business of Adampak, paring down their stakes, while 3 executive directors, including the CEO, purchase via married deal with one of the significant shareholders who are paring down his stake.

Sunday, October 08, 2006

Stockwatch- CIMA (Malaysia) Vicat offer for CIMA stake valid until Dec 5

Vicat offer for CIMA stake valid until Dec 15

French cement manufacturer VICAT's offer for to acquire controlling interests in Cement Industries of Malaysia Bhd (CIMA) subsidiaries, remains valid until Dec 15, 2006.
CIMA said on Oct 6 that both parties were still in discussion and had not concluded any agreement in respect of VICAT's offer to acquire equity interest in the subsidiaries.
"However, both parties have now agreed that VICAT's offer shall remain valid until Dec 15, 2006," it said.

VICAT intends to acquire controlling interests in Negeri Sembilan Cement Industries Sdn Bhd, Pemasaran Simen Negara Sdn Bhd, Unipati Concrete Sdn Bhd, Cimaco Edar Sdn Bhd and Cimaco Quarry Sdn Bhd.

Saturday, October 07, 2006

Stockwatch- China Sky (Singapore): Merrill Lynch initiate coverage with $1.82 price target

Merrill Lynch initiate coverage on 6 Oct 2006 and China Sky closes at $1.17 up from $1.07 the closing price on the first posting:

China’s leading nylon fiber producer, set to stay ahead

Doubling of market share in three years
We initiate coverage on China Sky with a Buy and price objective of S$1.82. Nylon fiber consumption is expected to continue growing at more than 15% pa in China. As the largest producer, China Sky is well-positioned to outpace industry growth by grabbing market share from both foreign imports and domestic competition.

EPS CAGR and ROE of more than 30% in FY05-09E
China Sky is expanding through new products and capacities. It increased its nylon FDY/HOY capacity by 85% to 72,000 tpa in June 2006. Its new 16,000 tpa nylon ATY/DTY facility is on track for completion by 1Q07. We also expect the launch of 30,000 tpa nylon SR fiber capacity to contribute significantly from FY08.

Potential M&A to accelerate earnings growth
China Sky has identified potential acquisition targets to help it break into new markets. It is also considering moving upstream into caprolactam/nylon chips over the medium term to become an integrated nylon player. These prospects have not been factored into our earnings forecasts.

Our PO suggests 63% potential upside
China Sky was listed at S$0.55 in October 2005 and reached a high of S$1.32 in May 2006. It is now trading at an attractive 6.3x FY07E earnings, implying a low PEG of 0.2x. Our PO is based on a blended valuation approach using P/E, EV/EBITDA and DCF. We also project China Sky to grow 3Q06 earnings by 50-60% YoY and see the strong result delivery as a price catalyst in the near term.

Risks to growth and our PO
China Sky has been able to pass on higher raw material costs to customers but failure to do so in the future would hurt margins. An unexpected decline in selling price would also dent profit margins.

Friday, October 06, 2006

Stockwatch- Adampak (Singapore) S$0.22

I found Adampak to be a micro-cap company with exposure to the electronic/manufacturing sector with a reasonable PE and dividend yield, plus very decent cash generation. Seagate is its largest customer.

One negative- one of its founder, Tham Kim Par, who retires in 2004, has been consistently trimming down his stake.

Company website: http://www.adampak.com.sg/

Since its incorporation in 1979, Adampak has grown to become one of South East Asia’s leading converters, producing all types of high-end labels, nameplates and die-cut parts for the electronic, pharmaceutical, computers/peripherals, petroleum and consumer industries. Today, it has wholly owned subsidiaries in Philippines and Thailand and associate companies in Malaysia and China to serve its worldwide customers. From a staff of 5 in 1979, Adampak currently employs more than 300 staff in total.

Here's some recent research reports after its recent strong 1H results:

WestComb- maintain BUY and target price of 33ct

Revenue growth of 25.7% and net profit growth of 51.0%
As a substantial part of the Group’s operating activities are in US$, the Group has changed the functional and presentation currency from S$ to US$ with effect from 1 January 2006.

1H06 results were in line with expectations. Revenue grew 25.7%, from US$ 12.08 million in 1H05 to US$ 15.18 million in 1H06. Average US$/Sing$ exchange rate was approximately 1.647 in 1H05 and 1.609 in 1H06. This was a decline of 2.3%. Revenue growth would have been correspondingly lower if the results had been reported in Sing$.

After review of the useful economic lives of assets, the Group has also changed the depreciation rate for plant and machinery from 20% per annum to 10% per annum with effect from 1 January 2006. The effect is that PBT for the period under review had been inflated by US$ 0.27 million.

Gross profit margin improved from 26.7% in 1H05 to 31.2% in 1H06 (29.4% if you exclude the effects of the change in depreciation rate). The improvement was due to better economies of scale and better performance from all operating units.

Other operating income increased US$ 0.41 million mainly because of exchange rate gains of US$ 0.27 million and gain on disposal of plant and equipment of US$ 0.14 million.
Income from associates declined 57.0% to US$ 0.27 million, as 1H05 contribution was inflated by write-backs, and gain on asset disposal, and 1H06 contribution was affected by start-up losses in a subsidiary.

The net effect was a 51.0% improvement in net profit from US$ 1.65 million in 1H05 to US$ 2.49 million in 1H06. We estimate that without the effect of accounting changes and exceptional gains, growth in operating profit could still have been more than 40%.

The purchase of the additional 50%-stake in Aident is still awaiting regulatory approval and we are not certain whether it will go through – hence we have taken out the impact of the purchase from our forecasts.

We expect revenue and net profit to grow in double digits in both FY06 and FY07, driven by continued optimism in the HDD industry and the Group’s new production facilities in Suzhou that gives them access to the vast PRC market. The Suzhou plant has commenced operations in July 2006, but is not expected to contribute positively in FY06.

The potential wildcard is the growth in the usage of RFID for baggage handling at airports and logistics and inventory management in the general supply chain. As technology improves and the price of RFID chipsets declines, there will be wider usage of RFID technology in the tracking of items. These RFID chipsets require converters such as Adampak to insert them into labels. Adampak should benefit as the usage of RFID becomes more widespread.

Interim dividend
Adampak has declared an interim dividend of 0.625 cents per ordinary share (less tax), which equates to a yield of 3.2%. This highlights the Management’s optimism of the Group’s operating cash flow and future prospects.

Forecasts and valuation
We maintain our target price at S$0.33, which is at a 15% discount to fair valuation of S$0.39 (8x FY06 PER) due to its poor trading liquidity. Maintain BUY.
Key risks include downturn in electronics (HDD) sector, loss of major customers, increasing raw material prices, price pressure from customers, unfavourable currency fluctuations and increasing competition on the basis of price.

Net Research Asia- Maintain BUY and target price raised from 29 to 31ct

Adding Excitement to the Stable Fundamentals
· Adampak reported strong revenue and profit growth for 1H06. Revenue grew 25.7% to US$15.2m and gross profit grew 46.5% to US$4.7m, backed by a higher gross margin of 31.2%.

· Two accounting policy changes have been adopted wef FY06. Functional currency has been changed from SGD to USD and depreciation rate has been reduced from 20% per annum to 10% per annum.

· Net profit grew by an impressive 51.0% to US$2.5m. Taking out the impact of the change in
depreciation rate, net profit and net profit margin would be US$2.2m and 14.6% respectively.

· Another year of strong growth is expected. Positive outlook in the electronics sector and HDD industry will continue boosting the demand for label, seals and other die-cut components.

· Impact of Seagate’s acquisition is likely to be felt in FY07. Management views this as a positive development as Seagate is the biggest customer of Adampak.

· New RFID (Radio Frequency Identification) tag business adds new life to the stable underlying business. RFID tags provide more attractive margins and management indicated that they were getting more enquiries on their RFID tag from potential customers.

· Target price has been raised from S$0.29 to S$0.31, backed by the strong fundamentals of the underlying business and potential new growth catalyst from the RFID tag business and Aident acquisition. The stock is currently priced at an attractive 4.2x current year earnings. Maintain BUY.

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