Tat Hong Holdings: Management more confident about prospects (OCBC)

Australia's slow recovery. We recently met up with the Tat Hong Holdings Ltd's management for an update. Compared to a couple of months ago, the management is more confident about its prospects; the company is currently seeing some improvements in its business, with a good number of cranes being rented out. However, management informed us that the recovery of its Australia's business, which formed 60% of its total revenue for FY10, would take some time. This is in line with our expectations. As mentioned in our report dated 7 June 2011, we believe that actual reconstruction work in Australia would come through later rather than earlier due to damaged equipment and the lengthy planning and tender process. What this also implies is that we are unlikely to see a sharp pickup in its results in the near term. However, we remain optimistic about its Australia's operations over the next 12 months due to the large number of reconstruction activities and energy-related projects.

Hong Kong's mega infrastructure projects. We believe that a potential catalyst may come from Hong Kong, due to the large number of upcoming infrastructure projects, such as the Guangzhou-Hong Kong Express Rail and Kai Tak Development Plan (See Table 1). Several of these projects are expected to commence in 2011, and should bolster crane demand over the next several years. As such, we believe that Tat Hong - one of the largest crane companies in Asia and the world - would be one of the prime beneficiaries.

Change in CFO. Meanwhile, Tat Hong's CFO Lester Wong Hein Jee has resigned to pursue other career opportunities. He will be replaced by Lional Tseng, former CFO of infrastructure & building development services provider CPG Corporation Pte Ltd. With more than 30 years of experience in finance, tax and treasury management in real estate development, construction and engineering consulting businesses, Mr. Tseng is suitably qualified to assume CFO responsibilities. Mr. Tseng will join on 1 August 2011, a month before Mr. Wong's last day of service on 31 August 2011; this arrangement should help minimize disruptions to the company's operations.

Cautiously optimistic, maintain HOLD In our view, the recent change in CFO is unlikely to cause disruptions to Tat Hong's operations. Although the company is seeing some improvements in its business, the recovery of its Australia's operations remains slow. We maintain our HOLD rating with a fair value estimate of S$0.82. Potential catalyst could come from Hong Kong's mega infrastructure projects.