WORLD PRECISION MACHINERY (Lim&Tan)

(Formerly Known As Bright World Precision Machinery)

S$0.51-BWPM.SI

􀁺 Our meeting with the company’s CFO yesterday suggests that the stock is worth accumulating at current levels. The reasons are as follows:

- the company which manufactures 200 different models of metal stamping machines in China for home appliance manufacturers (34% of sales), automotive manufacturers (32%), electronic manufacturers (15%) and recently railway engine component manufacturers is seeing strong business momentum in 2Q 2011 on the back of surge in new orders received in 1Q 2011;

- as an indication, the company’s order books increased from Jan 2011’s Rmb270mln to Rmb428mln currently;

- besides robust demand seen for existing customers, they are also seeing increased demand from new customers as their products are much cheaper than overseas competitors (by 20-30%) while providing similar production efficiencies;

- some notable new customer wins include CNR Railway Group (railway sector), Changchun First Auto Works (automotive), Jiangyin Zhongnan (oil and gas), BYD (automotive) and Midea (home appliance);

- as a result, overall factory utilization rate is expected to rise from 60-70% to 80+% this year;

- management is also targeting to capture new customers in the Northern part of China this year compared to their existing stronghold with more than 70% of sales coming from Southern China. This will be done with some of their existing customers starting new production factories there as well as referrals;

- raw material prices have started to moderate recently with the government’s active efforts to cool the property market which is a main user of steel and iron ore;

- as a result, management is comfort with current 2011 full year consensus profit estimate of Rmb170mln, up from Rmb125mln last year and also surpassing 2007’s record of Rmb144mln, giving a forward PE of 6x.

VALUATIONS & RECOMMENDATIONS

1. Like all S-Chips, the company has also been sold down close to 30% in the past month and is currently trading at 6x PE, below its historical average of 7-8x despite expecting a record profit this year. It major shareholder World Holdings who owns close to 78% of the company has been buying shares in the open market since 2006, from a high of 71 cents (2007) to low of 16 cents (2009) with a total of about 15mln shares accumulated over the last few years. The average cost is estimated to be between 50-60 cents. Except for 2008-2009 where they did not pay dividends due to a takeover attempt by a US company, since 2006 till present, they have been paying dividends in the range of 30-40% of their earnings. While sentiment could continue to remain weak in S-Chips, we believe that investors could position themselves ahead of the company’s likely robust 2Q2011 results (expected in Aug 2011).