ELEC & ELTEK (Lim&Tan)

S$3.80-ELEC.SI

􀁺 Elec’s dual listing on the Hong Kong Stock Exchange via way of introduction (without new shares being issued) is expected to start trading on 8 July 2011 (next Friday).

􀁺 Since the company’s initial announcement of their dual listing plan in mid March’2011, the stock has surged from $3.27 then to a recent high of $4 in late May 2011, before retracing to $3.8 currently. That’s a 16-18% gain.

􀁺 While significant, its nevertheless in-line with gains seen in companies that also listed by way of introduction on the Hong Kong Stock Exchange such as China XLX, Sound Global and China Animal Healthcare.

􀁺 While history may not repeat itself, one cannot help but be cautious given that all 3 candidates have since given up even more of their gains before their initial announcement of plans to do their dual listings, with China XLX currently down 56% from its first day trading debut in Hong Kong, Sound Global down 24% and China Animal Healthcare down 30%.

􀁺 The different quantum of declines may have to do with each companies’ fundamental performances thereafter, but there is one common negative amongst dual listing candidates via way of introduction.

􀁺 And this has to do with a one-off charge necessary to be charged-off in their next quarterly reporting period for expenses incurred for their dual listings such as lawyers fees, underwriter fees, other professional and miscellaneous fees.

􀁺 In Elec’s case, management has estimated this to be about $5mln.

􀁺 While its one-off in nature, its nevertheless a significant 32% of last quarter’s profit and its real cash outflow.

􀁺 And Elec’s 1Q 2011 profit has already started to decline by 12% yoy and qoq, its first yoy and qoq decline since the end of the global financial crisis in mid-2009. Indications from its peers and customers suggest that business outlook is getting a little more uncertain with demand conditions showing early signs of weakness.

􀁺 At 8-9x PE, Elec’s valuation is about in line with its peers listed in Hong Kong and if history is a guide, investors would be better off cashing in when the market provides a last push next week ahead of its dual listing in Hong Kong.

􀁺 If the stock were to again retest its all time high of $4 reached in late May 2011, it would be an opportune time for investors to cash in given that the most bullish supporter of the company has a fair value around that level.

􀁺 Our last call was Neutral on the stock in March 2011.