WORLD PRECISION (Lim&Tan)

S$0.565-WPRE.SI

􀁺 Key point from our plant visit is that business momentum has picked up pace both on a yoy as well as qoq basis in 2Q’2011 with utilization rates on an overall group basis rising close to 85-90% up from 70-80% a year and quarter ago;

􀁺 the strong business momentum in turn reflected their record order books of about Rmb428mln secured as at end Apr’2011, up from Rmb250-300mln in early 2011;

􀁺 in fact demand from customers was so strong that the company managed to raise average selling prices by 5% in Apr’2011 for the higher tonnage and performance equipment, after having raised selling prices by a similar amount for the conventional machines earlier in the year;

􀁺 as their overall group utilization rate is reaching maximum limits and expecting more orders ahead, management will be bringing in more production capacity in 2H2011, targeting to increase production capacity by another 20% which will cost them about Rmb80mln;

􀁺 next year, the company will be starting up a new production plant in Shenyang with the completion of Phase 1 expected to be in 2H2012, with estimated annual production output of Rmb300mln, representing another 20+% increase in production capacity;

􀁺 as most of their current customer base is predominantly in Southern China, the new plant in Shenyang will allow them to tap a new pool of customers in the North Eastern part of China as well as allow them to be closer to the source of their raw material supply, thereby helping them save costs;

􀁺 management expects total capex this year to amount to Rmb200-250mln and next year another Rmb200-250mln which will be financed partly by internal resources, bank borrowings and if the market allows some form of equity financing;

􀁺 since the company’s IPO in 2006, its sales has grown from Rmb449mln to Rmb1.04bln in 2010 and management is expecting to grow another 40% this year to Rmb1.46bln, which will be a record for them;

􀁺 their market share has grown from 2-3% since their IPO to about 7-8% currently and with new markets and customers, management targets to continue to grow this closer to their number 1 competitor’s 12-13%;

􀁺 bottom-line has also grown from its IPO’s base of Rmb116mln to Rmb125mln last year and management is targeting to grow this further to Rmb180mln this year, surpassing 2007’s record Rmb144mln, implying a forward PE of 6x which is undemanding compared its growth rate and its historical average of about 8x;

􀁺 the company had paid 38% of their earnings as dividends last year and is targeting again to maintain it within this range this year, implying a potential yield of 6%;

􀁺 unlike other S-Chips, the company’s founder, Chairman and major shareholder has increased his shareholding in the company since its IPO in 2006 from about 73% to 77.4% currently at an average acquisition price in the range of mid-50 cents and together with his board members they account for close to 80% of the company’s shareholding. And since its IPO in 2006, the company has also not raised funds from the market and in fact has paid out an average of 30-40% of their earnings as dividends;

􀁺 in an effort to improve their corporate transparency, the company is engaged Frost and Sullivan to do an independent market survey of their competitive landscape in an effort to allow investors to understand their industry positioning and the report is expected to be released sometime at the end of this month;

􀁺 since our last BUY report on 22 June 2011, the stock has risen about 11% but we believe the company’s record interim results could see further re-rating catalysts ahead, hence maintain our BUY recommendation.