Osim International (KimEng)

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Background: Osim is a global leader in branded healthy lifestyle products such as massage chairs and health supplements. It operates a wide point-of-sales network with 1,169 outlets in more than 360 cities across 31 countries. Its brands include OSIM, Richlife, GNC and Brookstone.

Recent development: Osim has issued $118.3m worth of convertible bonds maturing in 2016, with coupon at 2.75% and conversion price at $2.025 per share, which is a 25% premium over the last traded price. If fully converted, a total of 59.3m of new shares will be issued, representing 7.8% of Osim’s existing issued and paid-up share capital. The news was not well-received by the public and share price has fallen by 11.1% since the announcement on 7 June. Osim explained the need for capital due to the delay of its TDR listing, its expansion plans in China and possible acquisitions in the near term.

Our view Accumulating cash. As of 1Q11, Osim has net cash of $29m. If we include $26.4m from the 75.4m warrants which CEO Ron Sim has exercised, $76.1m that could be raised from the TDR listing and $118.3m if the convertible bonds were fully converted, its cash would add up to a grand total of $249.8m. Importance of branding. Osim spends around 5% of sales on advertising and promotional activities, inviting world-renowned celebrities and sponsoring events to heighten brand

awareness. To pave the way for its expansion into China, Osim has sponsored the BWF World Super series where 13 international badminton tournaments will be played throughout FY11. The event is expected to reach 500m viewers.

Expansion plans in China. Following the successful debt restructuring at Brookstone stores last year, Osim has turned its attention to expansion into the Chinese market. It targets to open 60-80 new OSIM stores and 60-100 Richlife outlets by year-end. The JV with TWG-Tea will also venture into Hong Kong, followed by Taiwan and China. Store growth for the other brands has been relatively stagnant; however, Osim has mentioned plans for a possible listing of Brookstone to accelerate the turnaround.

Key ratios…

Price-to-earnings: 23.1x

Price-to-NTA: 10.7x

Dividend per share / yield: S$0.02 / 1.3%

Net cash/(debt) per share:$0.04

Net cash as % of market cap: 2.5%

Share price S$1.44

Issued shares (m) 800.4

Market cap (S$m) 1,152.6

Free float (%) 20.6

Recent fundraising activities: Pending proposed issue of 85m TDRs at NT$20.80

Financial YE 31 Dec

Major shareholders CEO Ron Sim (62.3%), Osim International (5.3%)

YTD change -12.2%

52-wk price range S$0.805-1.740

GAMUDA - 3Q results (HLIB)

Price Target: RM3.95

Share price: RM3.75

Results

 9M11 earnings came in at RM299m (14.6 sen/share) and made up 88% of our full year forecast.

Deviations

 The better than expected results were due to higher earnings margins achieved from the construction and property division.

Dividends

 Net dividend of 6 sen/share declared, bringing full year dividend payment of 11.25 sen/share (1Q11: 5.25 sen/share). Gamuda usually pays dividend in the 1Q and 3Q.

Highlights

 The construction division saw a huge jump in earnings due to increase in operating margins which surged from 8% in the previous quarter to 14%, mainly because of higher value-added works recognised for the EDTP.

 As for the MRT project, the management sees concrete progress and expects tender for the tunnelling portion to be called in August/September period with the award by next year. Overall, active outstanding order book for Gamuda stood at RM2.7bn (RM2.4bn from the EDTP), translating to 1.3x FY10’s construction revenue.

 Property sales continued to be robust with ~RM350m new sales achieved during the quarter, buoyed by launches in Bandar Botanic, Horizon Hills and Jade Hills. Unbilled sales stood at ~RM1bn, translating to 1.9x property revenue.

 As for Vietnam, the official launching of Celadon City has been delayed to end-July from April (pilling works have begun in June), whereas launching for Gamuda City has been delayed to year-end from July.

 SPLASH’s (40% associate) RM1.5bn bond repayment will be rescheduled as the Government has bought over the Selangor water bond. Nonetheless, the overall water issue remains unresolved, and Syabas continues to pay up to only 40% of its billings from SPLASH.

Risks

 1) Execution risk; 2) political and regulatory risk (both local and overseas); 3) rising raw material prices; 4) unexpected downturn in the construction and property cycle; and 5) continued devaluation of the VND.

Forecasts

 FY11, FY12, and FY13 PATMI upped by 24%, 15% and 13% respectively to better reflect the earnings margins and property sales.

Rating

 Maintain HOLD call as upside is limited from the current share price.

Valuation :

 FD SOP valuation. upped by 9% to RM3.95 from RM3.63.

Glomac - FY11 results: scaling new highs (HLIB)

Price Target: RM 2.57

Share price: RM 1.80

Results  FY11 net profit rose 54% yoy to RM63.0m, and was inline with our net profit forecast of RM66.9m, but 9% ahead of consensus.

Deviations

 FY11 revenue came in at RM601.5m which was 11% higher than our estimates and 12% higher than consensus, mainly due to faster than expected progress for Glomac Tower.

Dividends:

 Gross dividend of 5.0 sen (less 25% tax) declared in Q4, bringing full year gross dividend to 9.5 sen.

Highlights

 Sales rose 24% yoy to RM418m, driven by Glomac Damansara, Saujana Utama and Saujana Rawang (excluding the en bloc sale to Tabung Haji in FY10).

 This in turn helped unbilled sales rise from RM500m to RM550m (0.94x FY11 property development revenue).

 Property margin remains stable at 23%.

 The RM1bn Glomac Puchong (200 acres) will be the group's new flagship project after Glomac Damansara.

 Proposed 2-for-1 share split, to be completed by Q4.

Risks:

 Slower than expected sales; project execution risks.

Forecasts:

 We have raised our earnings forecast by 21-27% for FY12-13, in anticipation of strong take up rates from RM1.2bn worth of launches in FY12. This is further supported by RM550m of unbilled sales.

 Management is guiding for 30% earnings growth for FY12-13. We estimate 31% growth for FY12 but only 17% for FY13 as we have not factored in sales from Glomac Puchong (GDV: RM1bn) and Plaza Kelana Jaya Phase 4 (GDV: RM280m).

Rating:

 BUY

 Positives: (1) Strong land-banking, branding and execution track record. (2) Undemanding valuations – single-digit P/E and 44% discount to our RNAV estimate. (3) 4.4% dividend yield is also attractive.

 Negatives: Lack of liquidity / free float.

Valuation:

 After rolling over our numbers and upgrading our earnings outlook, we raise RNAV by 7% to RM3.22.

 Our target price, which is based on an unchanged 20% discount to RNAV, is also raised by 7% to RM2.57.

RHB Capital - CIMB & Maybank No Longer Interested (HLIB)

Price Target: RM10.96

Share price: RM9.03

News:

 Maybank and CIMB said (in separate announcements) that they have decided not to pursue the possible merger with RHB Cap at this juncture.

 CIMB further said that it does not believe the group could arrive at a value creating merger.

Financial impact:

 None.

Pros / Cons:

 No change in fundamental outlook of RHB Cap.

 Without merger uncertainties (which could affect staff morale), it will be back to BAU (Business As Usual). A protracted merger negotiation(s) could derail business plans and trajectory as well as result in staff attrition.

 Share price fell given that it surged drastically post announcement of Maybank and CIMB’s initial interests. Recall that RHB Cap close at RM9.22 on 31 May 2011 (the day both CIMB and Maybank announced approvals from BNM to commence merger negotiations). Subsequently, it jumped to as high as RM10.60 the next trading day.

 We are not surprised by CIMB and Maybank’s decisions given that, based on our initial assessment (please refer to our Banking Sector report dated 1 Jun 2011), there are a lot of domestic duplications while the acquirer would most likely suffer from dilution to ROE and capital ratios.

Risks:

 Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Forecasts  Unchanged.

Rating BUY

 Positives - ROE at industry average but valuations among the lowest (see Figure 1) vs. larger peers; Transformation bearing fruits, reflected in strong loan growth and improving asset quality; “Easy” contributing to higher market share in retail segment; and potential of the tie-up with Pos Malaysia.

 Negatives - Lack of liquidity.

Valuation:

 Target price unchanged at RM10.96 based on Gordon Growth with ROE of 15.3% and WACC of 9.9%.

 We view any share price weakness from this saga as opportunity to accumulate a bank that is gaining market shares and earnings growth traction but still trades at discounts to peers with comparable ROE as well as the sector average.

AMTEK (Lim&Tan)

S$0.96-AMTK.SI

􀁺 Standard Chartered Private Equity (SCPE) bought another 902,000 Amtek shares in the open market on 21 June 2011 when the stock traded between 92.5 cents to 97.5 cents.

􀁺 SCPE had made their first open market purchase of Amtek shares on 17 June 2011 when they picked up 500,000 shares between 91 cents to 92.5 cents.

􀁺 SCPE’s latest open market purchase represents about 43% of that day’s traded volume, similar to 17 June 2011’s 44%.

􀁺 SCPE currently owns 28.53% of the company and is the single largest shareholder after Metcom Group’s 28.27% and Capital Group’s 7.07%.

􀁺 Given that there were market concerns of share overhang when SCPE and Metcom Group’s 6-month moratorium expired in early June 2011, we believe SCPE’s continued open market purchases is important as it would provide comfort for shareholders that they deem it too cheap to sell at current levels and in fact are buyers of the stock.

􀁺 We too would accumulate the stock at current levels given that its off 32% from its Jan 2011 highs, 26% off its IPO price and is trading at 6-7x PE against growth of 20-25% and also provides a reasonable yield of about 6%.

Yangzijiang Shipbuilding - Penetrating the large-sized containership market (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.39

Fair Value: S$2.10

Enters into LOI and Cooperation Framework Agreement. Yangzijiang Shipbuilding (YZJ) announced yesterday that it has entered into a letter of intent (LOI) with Peter Dohle Schiffahrts-KG (Peter Dohle) to build eight 10,000 TEU container vessels. YZJ's subsidiary, Jiangsu New Yangzji Shipbuilding (JNYS), has also entered into a Cooperation Framework Agreement with China Development Bank (CDB) and Peter Dohle. Under the agreement, JNYS and Peter Dohle will enhance the cooperation of shipping purchase projects. In addition, Peter Dohle has secured about US$1b in financing that will be mainly used to pay for the containerships over the next five years, subject to CDB's loan requirements.

Second 10,000 TEU container order in two weeks. This latest development comes closely on the heels of the longawaited Seaspan order to build similar 10,000 TEU containerships. YZJ's subsidiaries had entered into shipbuilding contracts worth US$0.7b with Seaspan in early Jun to build seven units of 10,000 TEU containerships with options for another 18 units. If all options are exercised, the total value of the 25 units is estimated to be around US$2.5b, translating to about US$100m per ship. Scheduled for delivery in 2014-2015, this newly-developed vessel type is significant to YZJ as the group is banking on the demand for such large vessels and foresees it being an important product for the group in the future. Being fuel-efficient, YZJ believes its proprietary designs meet the current demand for larger capacity vessels that are eco-friendly and have lower emissions.

But not all segments look positive. Despite encouraging news from the large container vessels' front, the outlook for the newbuild bulk carrier segment is relatively weak, and vessel values are pressurized partly due to the high volume of deliveries expected in 2011. According to the China Association of National Shipbuilding Industry, demand in the international shipbuilding market is now stronger for large-sized containerships, LNG carriers, and offshore work. Though YZJ has successfully received orders for its 10,000 TEU containerships and should benefit from increased demand from such products, the group may still be affected by weaker sentiment in the bulk carrier segment. As such, we lower our peg for YZJ from 15x to 13x FY11F core earnings and our fair value estimate drops to S$2.10 correspondingly (prev. S$2.42). Meanwhile, we like the company for its consistently good execution ability and substantial order book (US$5.38b as of 1Q11). Maintain BUY.

KSH Holdings Ltd - Possible order-book replenishment ahead (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$0.245

Fair Value: S$0.31

FY11 public contracts value nearer top range. We believe that the pipeline of public contracts continues to be strong in FY11 with BCA (Building and Construction Authority) forecasting total public contract value at S$12-$15b from S$8.1b last year. Now that the HDB has ramped up its projected FY11 BTO (Build-To-Order) supply to 25k new units, we think total public contracts would likely fall closer to the high end of the forecast. We could also see the pace of contract wins in 3Q11 picking up somewhat; the number of public contracts above S$40m in value is expected to increase from 16 in 3Q11 from 12 in 2Q11, as guided by the BCA.

Continued contract activity in the sector. Over 2Q11 so far, we saw continued activity in the construction space. Lian Beng Group recently secured an S$128.8m construction contract to build Waterfront Isle at Bedok Reservoir, in addition to another contract secured for Hedges Park earlier this month. Wee Hur Construction also announced this month that it had been awarded an S$109m contract for a public housing works project in Yishun. We understand that KSH management is currently actively tendering for contracts in both the private sector and public housing space. As such, we expect possible order-book replenishment in 3Q-4Q11. KSH has a current order-book of S$406m with $146m already recognized as of 31 Mar 2011.

Decent sales at development projects. Decent sales were reported at KSH's residential projects in May. 14 units were sold at The Boutiq at a $2,394 ASP, bringing total units sold to 64 out of 130 units in total. Also, five and six units were sold at Lincoln Suites and Cityscape@Farrer Park respectively in May. Lincoln Suites is now more than 73% sold while Cityscape@Farrer is at 20% sold. We note that prices have generally held steady at all three developments.

Maintain NEUTRAL at 31 cents. We continue to believe that there is significant value in KSH but also see headwinds from a slowdown in private construction demand ahead. A meaningful push into HDB housing projects may help boost the orderbook but profit margins for these projects remain uncertain. When these clouds clear and more clarity is available for development project sales, especially for Cityscape@Farrer Park, we could see a re-rating of the share price. But for now, we maintain a HOLD rating on KSH with a fair value estimate of 31 cents.

STX OSV: NOK1.2b contract wins; order momentum rising (DMG)

(BUY, S$1.20, TP S$1.89)

First orders for anchor handling vessels since global financial crisis. STX OSV secured contracts for two multi-functional deepwater anchor handling/ offshore service vessels from Farstad valued at NOK1.2b (S$270m). The new orders lifted YTD order wins to NOK4.8b, 40% of our FY11 order forecast. We believe the latest contracts for anchor handling vessels are the first orders for such vessel in the past 18 months. Order momentum is building up – three shipbuilding contracts in 1Q11 vs. nine announced in 2Q11. We maintain EPS estimates and TP at S$1.89 based on 11x FY11 P/E. Stock is now trading at 7x FY11 core P/E with 4.6% yield. Maintain BUY.

Repeat orders to be delivered from Romania/Norway. The vessels for Farstad (an Oslo-listed vessel owner) will be based on Rolls Royce’s UT 731 CD design and will be delivered from STX OSV Langsten in Norway in 2Q13. The hulls will be delivered from STX OSV Tulcea In Romania. The implied contract value for each vessel is US$110m. We believe execution for the Rolls Royce design is not a concern given STX OSV has delivered four such vessels to Farstad in the past. Total number of vessels to be delivered in 2013 has increased from six as of end-1Q11 to 12 vessels now. Note that STX OSV has the capacity to deliver 24-25 vessels per annum. We believe order momentum will continue to be strong as STX OSV looks to fill its order book for deliveries in 2013.

Valuation: S$1.89 TP based on 11x FY11 P/E; re-iterate BUY. Our target P/E for STX OSV is 10% premium to our target P/E for small and medium OSV shipyards and 30-40% discount to current valuation of big-cap shipyards. We expect +12% EPS CAGR over FY10-13F mainly driven by higher topline while expecting EBITDA margin of 11.0-11.5% (1Q11:13.8%).

YANGZIJIANG SHIPBUILDING (DMG)

BUY

Price S$1.41

Previous S$1.98

Target S$1.98

Potential US$1b contract for containerships

Signed L etter of Intent (LOI) for eight 10,000 TEU containerships. Following hot on the heels of the order for seven containerships from Seaspan, Yangzijiang (YZJ) has signed a Letter of Intent for another eight 10,000 TEU containerships valued at around US$1b. In addition to the LOI, YZJ has signed a cooperation framework agreement (CFA) with China Development Bank (CDB) and Peter Döhle to enhance the cooperation of shipping purchase projects and to realise cooperation amounting to US$1b in the future five years. No changes to our FY11-12F EPS and TP of S$1.98 based on 12x FY11 P/E. We are neutral on the shipbuilding order outlook but are positive on the stock given high order visibility, superior execution and ability to move up the value chain.

Another big boost to orderbook assuming LOI converted into firm order. Assuming the LOI is made effective, we estimate that YTD order wins will hit US$2.2b and gross order book will climb to around US$7b. We believe gross profit margins for the containerships, a new product by YZJ, should be around 8-9%. No changes to our earnings estimates as we have factored in US$2.5b new orders in FY11F for execution in FY12-13F.

Valuation: TP of S$1.98 based on 12x FY11 P/E. Our TP implies 40% upside from its last closing price. We expect +5% net profit CAGR over FY10-12F the growth in revenue (+18% revenue CAGR) will be offset by lower gross margins for new projects. Our earnings model assumed FY11-12F gross margins of 20% and 16% respectively.

Tat Hong Holdings Ltd - Limited downside from China risks (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$0.81

Fair Value: S$0.82

Rising China property risks? Standard and Poor's (S&P) recently cut its outlook for China's real estate development sector from "stable" to "negative", citing increased pressures on inventory and sales. The credit rating agency also said that further government curbs may lead to rating downgrades next year. Earlier, the People's Bank of China increased the local banks' reserve ratio requirements for the ninth time since Oct 2010, bringing the official ratio for most large Chinese banks to 21.5%. We believe that further curbs are also likely to have an adverse impact on the Chinese property market as well as the construction / infrastructure industry.

Impact likely limited. By the same token, any slowdown in the construction / infrastructure industry could also affect heavy equipment suppliers like Tat Hong Holdings (Tat Hong). However, any impact on Tat Hong is likely to be limited, given that the contribution from China is still small. In FY10, we note that China accounted for 7% of Tat Hong's total revenue, up from 4% a year ago. We expect that portion to increase to just over 10% in FY11 on the back of strong revenue contribution from its tower crane business in China. In comparison, we believe that revenue contribution from Australia and ASEAN are approximately 60% and 30% respectively. Furthermore, contagion risk between China and other regions is also likely to be mitigated by the fact that the demand drivers for cranes in different regions are different.

Australia's recovery is key. On the other hand, Australia holds the key to an improvement in Tat Hong's business. Recall that the recent natural disasters in Australia led to disruptions in a number of infrastructure projects and damages to the company's plants and equipment. We believe that reconstruction activities should provide some earnings upside in the near term. In addition, growing energy demand is likely to fuel energy-related infrastructure projects in Australia over the medium term. However, as we highlighted in our previous report dated 7 June 2011, actual construction work may come through later rather than earlier due to damaged equipment and the lengthy planning / tender process.

Maintain HOLD. In any case, we have already factored in slower growth for its heavy tower crane business in China; we further believe that any sharp contraction looks unlikely as the government remains committed to improving the nation's infrastructure. As such, we maintain our HOLD rating with a fair value estimate of S$0.82, based on 11x forward EPS. Potential catalyst could come from higher growth from Australia, although the actual timing of recovery remains uncertain.

Olam: Equity fund raising to strengthen growth (DMG)

(BUY, S$2.61, TP S$3.70)

More shares, but interest expense to be lower than our earlier expectations. Since Olam’s announcement of its S$740m fund raising two weeks ago, its share price has fallen 7% on fears that EPS will be diluted. Whilst we recognize the issue of the additional 286m new shares (comprising both placement and rights), which accounts for 11.8% of the enlarged capital of Olam, will lower EPS, this will be mitigated by lower interest expenses (compared with our earlier forecasts) and potential for stronger growth via acquisitions going forward. We maintain BUY recommendation with a DCF-derived target price of S$3.70. We lower our FY13 EPS forecast by 6.7% to 22.2S¢:

• We raised our FY12 and FY13 net profit forecasts by 5.1% and 6.6% respectively. In steady state, our FY13 interest expense is lowered by S$39m to S$359m, which is the key contributor to net profit rise of S$34m to S$540m.

• The issue of additional 286m new shares (comprising both placement and rights), which accounts for 11.8% of the enlarged capital of Olam.

Equity fund raising positive for long term growth. We believe the equity fund raising will provide Olam with more acquisition potential going forward, a positive for earnings in FY14 and beyond. We also estimate that Olam’s net gearing will fall to 1.49x at end FY12 from end FY10’s 1.90x, which takes into account the completion of all three components of the EFR. We raised our growth rate forecast (from now till 2016) to 29% (from 28% previously). Our 3-stage DCFderived target price of S$3.70 remains unchanged.

SingTel: Optus lands agreement with NBN Co (DMG)

The news: Optus announced that it had reached a landmark agreement with NBN Co on the migration of its Hybrid Fibre Coaxial Cable (HFC) customers to the National Broadband Network (NBN). Under the agreement, Optus will begin the progressive migration of its customers to the NBN once the network is rolled out in an area and is ready to provide services to customers currently served by Optus’ HFC network. Optus estimates the total value of the agreement as approximately A$800 million on a post tax net present value basis, with HFC customers migrated to the NBN following deployment of the network in HFC serving areas in accordance with the anticipated timetable. Payment will be received progressively on migration. Optus and NBN Co expect that the initial migration of customers to NBN infrastructure will commence in 2014.

Our thoughts: This represents a significant milestone for Singtel’s wholly-owned Optus following protracted negotiations with the government and various stakeholders over the past 12 months including the passing of two bills. In addition to levelling the playing field in Australia, the agreement with NBN provides a migratory path for Optus’ hybrid fibre co-axial (HFC) broadband customers (totalling some 425k) with the latter infrastructure eventually terminated. It also eliminates concerns that NBN, a government owned network may emerge as a direct competitor. As the NBN rollout is progressive and will take time to cover Optus’ HFC footprint, management expects the conversion to take four years, ending in 2018. The AUD800m post tax contract value is within the reported AUD500m-1bn speculated earlier, works out to some 6 cents per Singtel share.

We maintain our forecast for now pending further clarification and update from management on the extent and scope of the agreement and other costs associated with the decommissioning of its cable network. Our NEUTRAL recommendation on Singtel is maintained based on FV of SGD3.10. Optus contributes 32% of our SOP valuation on Singtel.

Lion Ind Corp Bhd - (HLIB)

Price Target: RM1.51

Share Price: RM1.87

Baosteel In Talks to Buy Amsteel Mills?

News:

According to Bloomberg, Baosteel Group Corp (the second largest steel player in China) is in talks to buy a stake in Amsteel Mills (a 99.9%-owned subsidiary of LICB, which produces long steel products) for about US$1bn. However, the size of the stake in Amsteel Mills, which Baosteel is rumoured to acquire, is unknown.

Financial impact:

No immediate financial impact.

Pros / Cons:

There are still many uncertainties with regards to the latest news (even if the news turns out to be true). The uncertainties include: (1) The pricing; (2) The size of the stake; and (3) Whether the US$1bn acquisition price includes other steel assets within Lion Group of companies, as LICB’s net assets (including Antara Steel Mills) stood at only ~RM1.5bn as at 30 Jun 2010.

Nevertheless, we are positive on the latest news (if it realizes), as the emergence of Baosteel into LICB would: (1) Enhance LICB’s steel operation’s production and cost efficiencies; (2) Improve LICB’s balance sheet and cash flow position (given Baosteel’s strong financial standing); and (3) Result in an immediate re-rating catalyst to LICB’s share price if Baosteel is acquiring Amsteel Mills at high valuations.

Risks Downside risks:

(1) Overcapacity in China remains over the longer term; (2) Volatile input prices; and (3) Influx of steel products at cheap prices.

Forecasts:

Maintained.

Rating SELL

Negatives – (1) Inability to pass on higher cost of raw materials and energy to end-users; (2) Complicated corporate structure; and (3) Corporate governance issue could surface from the venture into blast furnace project.

Positives – (1) Biggest winner from the anticipated pickup in construction activities from 2011; and (2) Low P/NTA.

Valuation:

Rating unchanged pending outcome of this latest development.

SOP-based TP maintained at RM1.51

Karin Technology Hldgs - Poised for double-digit growth in top and bottomline (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.22

Fair Value: S$0.315

Poised for double-digit growth. We believe that Karin Technology (Karin) could be poised for double-digit growth in both its top and bottom-line for FY11, having already performed strongly in 1H11. This is due to the still encouraging operating environment which Karin operates in, although the increasing uncertainty stemming from the tepid U.S. economic growth and EU sovereign debt crisis could dampen its growth prospects. Industry watcher Gartner has forecasted worldwide enterprise software revenue to increase by 9.5% to ~US$267b in 2011, followed by a subsequent 7.9% growth in 2012. In addition, Gartner also recently revised up its overall IT spending forecast growth from 5.1% to 5.6% for 2011 and marginally from 4.4% to 4.5% in 2012. Hence, we believe that Karin would be a key beneficiary of these growth trends.

Distributorship agreements to aid earnings momentum. Since the start of FY11, Karin has secured distributorship arrangements from no less than seven vendors, which include McAfee, HP and Imation. We like management's continuous efforts to improve its product offerings via partnerships with global information technology vendors. Previously in our 4 Apr report, we had highlighted that Karin could benefit positively from the sales of IBM hardware and services and Oracle applications to customers via its subsidiaries Karltec Information System and Karga. Since then, we note that IBM reported an encouraging 7.7% and 10.1% growth in revenue and net profit to US$24.6b and US$2.9b respectively for its 1Q11 results, driven by a jump in software, hardware and services sales. It also gave a stronger outlook ahead by raising its operating earnings guidance. Moving forward, we believe Karin could further leverage on its relationships with its vendors by negotiating on the possibility of distributing a wider range of their products and services.

Maintain BUY. We continue to like Karin for its diversified product and service offerings and increasing emphasis placed on 'green' technology. Prospective dividend yield remains attractive at 8.7%, which could lend some level of support to its current share price. Moreover Karin is trading at a P/B of 0.8x and forward PER of 5.7x (below its historical mean PER of 6.2x and its peers' average 7.4x PER), which is undemanding in our view. Reiterate BUY and fair value estimate of S$0.315, still based on 8x blended FY11/FY12F EPS. Key risks to our target price include a worse-than-expected global economic recovery, liquidity risks and inflationary pressures in PRC and Hong Kong.

STATS (Lim&Tan)

S$0.63-STAT.SI

􀁺 News-flow in the semiconductor continues to surprise on the downside.

􀁺 Gartner has revised down their growth forecast for the industry from 6.2% previously to 5.1% due to the negative impact from Japan’s earthquake which is causing continuing supply chain constraints, and this is expected to linger on going into 2H 2011.

􀁺 TSMC and UMC, the world’s top 2 largest foundry have seen weaker than expected orders from their key customers recently which will negatively impact both average selling prices as well as business volumes.

􀁺 As a result, Digitimes.com reported that TSMC will likely lower its previous capex budget of US$7.8bln for this year to about US$7bln, while UMC will likely reduce its from US$2bln to US$1.6bln.

􀁺 While STATS’ share price has already fallen 36% since our downgrade to Sell in Oct ’10, the above negative newsflow suggests that it is still early days for us to turn positive.

􀁺 Besides at close to 13x PE, STATS is still not cheap compared to its Taiwanese peers’ average of 9-10x (and its Taiwanese peers also provide dividend yields of 2-4%).

PSC Corporation (KimEng)

Up-to-date in 60 seconds

Background: PSC is the modern face of the old provisions store. Started in 1974 as a cooperative central purchaser, it is now involved in a range of consumer businesses, such as fast moving consumer goods (FMCG), footwear and apparel and franchised grocery retail chain stores. It also has a strategic investment arm that takes equity stakes in promising non-core but possibly strategic businesses.

Recent developments: One of PSC’s substantial shareholders, Super Group, recently sold its entire 8.9% stake at a substantial premium to a PSC insider. Prior to this, PSC had also made a string of investments in non-core businesses such as China property development and the running of a sports lottery in Cambodia.

Key ratios…

Price-to-earnings: 9.7x

Price-to-NTA: 0.5x

Dividend per share / yield: $0.01 / 4.0%

Source: Bloomberg, based on historical data

Share price S$0.25

Issued shares (m) 556.0

Market cap (S$m) 139.0

Free float (%) 54.7

Recent fundraising activities Aug 2007: 1-for-2 rights issue at $0.33 per rights share, following 5-into-1 stock consolidation

Financial YE 31 December

Major shareholders Violet Profit / Ku Yun-Sen (24.1%), Goi Seng Hui (12.2%), Tang Cheuk Chee (8.9%)

YTD change -9.1%

52-wk price range S$0.24-0.285

Our view:

Reaching deep into local hearts and pockets. PSC has been supplying the household needs of Singaporeans for generations with a range of groceries, household supplies, beverages, and health and beauty products. Its proprietary FMCG brands include Royal Umbrella and Golden Peony rice, Sobe soya milk and Fortune tofu. It also distributes third-party products from Nestle, Kao, 3M, Lion and Reckitt Benckiser, among others. In addition, it runs a large chain of minimarts in Singapore under the iEcon name, using a franchise model.

Beyond groceries. Since 2003, PSC has acquired strategic stakes in two publicly-listed companies – Tat Seng Packaging (64%) and Intraco (29.9%). Tat Seng makes corrugated paper packaging used in its FMCG business, while Intraco has a complementary seafood trading business. Less complementary however is a hospital consultancy, property development in China and recently, a 25% stake in a company that runs a sports lottery in Cambodia.

The Super Sale. Super’s sale of its PSC stake at a slight loss of $0.8m is not surprising as it wants to focus on its core coffee business. More interesting is the premium of 83.6% paid by the buyer, who is the spouse of PSC’s executive chairman, Dr Allan Yap. Although Dr Yap’s deemed holdings in PSC (last at 17.4%) did not exceed the MGO trigger of 30%, any offer made by him in the next 12 months would have to be made at the same price ($0.486).

Keppel Corp (KimEng)

Event:

Keppel Corp remains one of our prime picks, particularly with its recent share price weakness. Its fundamentals and earnings have remained intact, despite its disproportionate 8% slide in the past three weeks versus the Straits Times Index’s 4% decline. Orders for the offshore and marine division (O&M) are set to grow further, while potential concerns over property have been overplayed. With an implied 43% upside to our target price of $15.30, Keppel is a screaming BUY at this level.

Our View:

Keppel’s O&M division currently has an estimated orderbook of some US$7.3b lasting till 2014. While new orders have been muted vis-à-vis previous quarters (US$3.9b in 1Q11), the division has still managed to secure some US$1.75m worth of new orders since April. This comprises some seven jackups and additional orders for a semisubmersible drilling tender and an accommodation semisubmersible.

While we have not yet seen firm orders for deepwater rigs such as semisubmersibles and drillships, we understand that enquiry levels remain high, with Keppel continuing to quote

firm prices. According to ODS-Petrodata, day-rates for mid-water depth semisubmersibles were up in the last month, while utilisation levels are starting to pick up as well. We believe it is a matter of time before this translates to new orders, especially with oil prices remaining firm at around US$114 per barrel.

The replacement cycle and the demand for a new generation of deepwater rigs, akin to what has already been driving orders for the jackup market, are likely to be replicated in the deepwater segment.

The share price of 53%-held subsidiary Keppel Land has also taken a beating, declining by 46 cents, or 11%, in the past three weeks on concerns over its exposure to China. This translates to imputed erosion in Keppel’s SOTP by just 21 cents. We continue to like Keppel Land for its diversified business mix and our target price stands at $5.90 (10% premium to RNAV).

Action & Recommendation:

Our earnings forecasts and positive outlook for Keppel Corp remain very much intact. Our SOTP-based target price is maintained at $15.30. Reiterate BUY.

GMG Global Limited (KimEng)

Up-to-date in 60 seconds

Background: GMG is an integrated natural rubber company with corporate headquarters in Singapore. It owns upstream plantations in Africa and has mid-stream processing operations globally. In 2008, China-listed Sinochem International acquired a 51% stake in GMG, giving the company a link to China, currently the world’s biggest consumer of natural rubber.

Recent development: Natural rubber price has resumed its upward rally since the plunge in March on fears over Japan nuclear fallout. On a 12-month basis, spot prices in Malaysia for, say, tyre-grade rubber are up 48% to US$4,500/ tonne while GMG’s share price has remained flat.

Key ratios…

12-mth trailing PER: 16.3x

Price-to-book: 2.1x

Dividend per share / yield: 0.3 cts / 1.3%

Net cash position: $8.5m

Source: Company, Bloomberg

Share price S$0.23

Issued shares (m) 3,839

Market cap (S$m) 883

Free float (%) 30.6

Recent fundraising activities Rights issue July 09 – price $0.0055, 9-for-10, raised $100m

Financial YE 31 Dec

Major shareholders Sinochem Int’l – 51%, Gondobintoro family – 18%

YTD change -22%

52-wk price range S$0.205-0.345

Our view:

Higher rubber prices contribute directly to profitability. Although it is a net consumer of natural rubber, with its own supplies contributing about 24% of processing tonnage, GMG still stands to benefit from higher rubber prices. This is because its processing operations are essentially a cost-plus type of business, while prices above its breakeven of US$1,500/tonne contribute directly to its gross profit.

Right side of planting cycle. With a tight supply situation, rubber prices could trend upward further. Unlike many other agricultural commodities, the scenario of a sudden flood of new supply to take advantage of the price boom is unlikely. This is because rubber trees take seven years to gestate and another three years to reach peak production. The situation was exacerbated by the conversion of many rubber plantations to palm oil over the past decade.

Looking like a good year. The average rubber price last year was about US$3,500/tonne. If prices this year continue to be high, profitability would see a significant jump from last year, as this year will also be the first full-year contribution of its newly acquired Thailand subsidiary, Teck Bee Hang.

Singapore Exchange (KimEng)

Event:

Since downgrading our recommendation on Singapore Exchange (SGX) to HOLD in April, the stock has drifted down by 9%, reflecting the lacklustre market activity during the period. At its current valuation, we continue to see downside risks in terms of near-term earnings profile outweighing positive initiatives which may develop in the longer term. Maintain HOLD.

Our View:

With FY Jun11 coming to a close, we expect SGX to register a full-year net profit of $305m ($287m pre-adjustments for exceptional items). This takes into account an average daily trading value of $1.6m in 4QFY Jun11, which is lower QoQ and YoY. We expect the 85-90% dividend payout policy to remain intact and this will work out to a final dividend of $0.11 per share.

Management has been proactive in seeking to increase product offerings and improve the trading environment. One area of note is in regulation, where SGX has recently proposed rule changes on annual general meetings to increase shareholder engagement and enhance corporate governance practice. It also announced several new appointments in its efforts to beef up its regulatory team.

The trading of Singapore government bonds (SGS bonds) will start on SGX from 8 July this year, making it easier for individual investors to trade. Other recent initiatives include the clearing of Asian Foreign Exchange Forwards by September this year and progress on the ASEAN Exchanges Collaboration to achieve inter-connectivity among the markets. We believe these are all positive steps that will bear fruit, but in an incremental way over a longer time period.

Action & Recommendation:

In the meantime, securities trading will continue to account directly for 45% of group revenue. We assume FY Jun12 and FY Jun13 ADT of $1.8b and $2b, respectively, which are mid-peak levels of the last cycle. We peg our target price of $7.55 at 25x FY Jun12F (historical PER cycle). At this juncture, we see downside risks to our assumptions. Maintain HOLD.

Territory Resources recommends its shareholders to accept Noble’s takeover offer (DMG)

The news: Territory Resources (iron ore producer listed on ASX) released a document yesterday recommending its shareholders to accept a takeover from Noble. Reasons cited included Noble’s offer being a premium to the Exxaro offer, and a significant premium to the historical share price of Territory Resources.

Our thoughts: Noble already owns 32% of Territory Resources, which implies it would need to fork out ~A$94m to acquire the remaining shares that it does not already own. We do not expect this to have a material impact on Noble’s earnings and balance sheet and are leaving our earnings forecasts unchanged. Maintain BUY and TP of S$2.50.

Mencast: Proposed acquisition of Unidive Marine Services for S$14.85m (DMG)

The news: Mencast entered into a sale and purchase agreement (SPA) with Tan Eng Hoe Edwin and Ong Yong Chye (Wang Yongcai) to acquire the entire stake in Unidive Marine Services (Unidive), which is engaged in the provision of a full range of topside (rope access) and subsea (diving) services for the offshore and inshore marine industry, particularly in inspections, repairs, and maintenance. Total acquisition cost will be S$14.85m, of which S$12.425m will be satisfied in cash while the rest will be satisfied via allotment of new shares in Mencast to the vendors of Unidive in four payment tranches.

Our thoughts: For FY10, PBT and NAV of Unidive were S$3.17m and S$6.78m respectively. Assuming a tax rate of 17% (Singapore’s corporate tax rate), Unidive’s PAT in FY10 is estimated at S$2.6m. The proposed purchase consideration would imply a trailing P/E of 5.6x. Compared to Mencast’s trailing and forward P/E of 8.6x and 7.2x respectively, the deal is value accretive. Upon completion, the latest deal would be the second M&A deal in 2011 for Mencast and will take the total acquisitions done YTD11 to S$38.9m. We do not have a rating on this counter.

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).

UMLand - A forgotten gem (HLIB)

Price Target: RM 2.87

Share price: RM 1.87

Highlights:

 Forgotten Johor play with 1,300 acres of development land in Iskandar Malaysia, and still trading at single digit P/E and 0.5x P/B.

 Two-pronged growth strategy via integrated townships and high-end niche projects.

 Strong JV partners such as Capitaland, UEM Land, Bolton and Tradewinds allow them to continuously expand landbank and roll out new projects.

 Value-enhancing initiatives in Seri Alam, with the entry of HELP College, Masterskill Universifty, Raffles International School, UiTM and KL University.

 Strong presence in KL via the Suasana brand.

Catalysts:

 Major earnings growth in 2012 with the launch of Waterfront @ Puteri Harbour and Matex in conjunction with earnings contribution from Suasana Bukit Ceylon.

 Improvement in share liquidity from increasing investor awareness of UMLand’s growth story.

 Landbank expansion via new strategic partnerships.

Risks:

 Execution risk for Jalan Mayang project.

 Earnings volatility due to very few active projects.

 Relatively lacking in free float and liquidity.

Forecasts:

 Strong earnings growth of 30% expected in 2012, driven by launch of Puteri Harbour in Q3 2011, strong takeup rates for Suasana Bukit Ceylon and improving sales in the flagship Seri Alam development.

 RM495m worth of launches this year.

Rating:

 Initiate with a BUY

 Positives: 67% discount to RNAV; strong upside to earnings as Jalan Mayang and Pulai Jaya have not been factored in; consistent dividend payout, even in loss-making years; major beneficiary of Iskandar Malaysia story; net gearing is less than 0.1x.

 Negatives: Potential earnings volatility and lack of liquidity.

Valuation:

 Trading at 67% discount to RNAV and single-digit P/E; timing is ripe for investors to enter before earnings and share price re-rating take place.

 57% upside to our target price of RM2.87 (based on 50% discount to RNAV), inclusive of dividends. BUY

MAS - Additional B737-800s (HLIB)

Share price: RM1.42

Price Target: RM1.27

News:

 MAS announced that it has exercised an option to purchase 10 additional units of Next-Generation B737-800s, which is valued at more than US$800m (based on current list prices).

 MAS still has remaining options to purchase 10 additional units of B737-800s from its initial 2008 contract.

 Additionally, MAS has signed an exclusive 5-year agreement for Pratt & Whitney’s environmentally friendly EcoPower® engine wash service which will reduce fuel burn by as much as 1.2%.

Financial impact:

 Minimal in the short term from P&W engine wash service while we expect the new aircraft to be delivered by 2015.

Pros / Cons:

 The exercise will increase MAS’s total delivery of B737-800 to 45 units, further improving its overall cost-efficiency.

 The additional B737-800 bodes well with MAS’s strategy in joining Oneworld Alliance, as the narrow-body aircrafts (suitable for short routes and regional routes) enhance the connectivity of MAS in South East Asia region.

 Furthermore, the additional capacity is timely with the expected increase in passenger demand as Oneworld Alliance members leverage on MAS strong regional network distribution, improving its load factor and yields.

 However, we expect the additional aircrafts will only be delivered starting 2015 after the full delivery of its existing

orders.

Risks:

 World crisis (ie. war, tourism and epidemic outbreak), prolong surge in jet fuel price and the development of high speed train between Singapore and Pulau Pinang.

Forecasts:

 Unchanged

Rating: Sell

 Positives –

 Leveraging on Oneworld Alliance network to improve services and connectivity.

 Beneficiary of strong air traffic into Malaysia, inline with government initiatives to boost tourism sectors.

 Reduced unit operating cost with delivery of new aircrafts.

 Negatives –

 Restructuring plan (BTP) subject to implementation risk.

 Competitive pressure on airfare from LCCs and FSCs.

 Surging jet fuel prices.

Valuation:

 Maintained target price at RM1.27 based on P/B of 1.4x.

Mapletree Logistics Trust - Completes KPPC Pyeongtaek Centre buy (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$0.91

Fair Value: S$1.01

KPPC Pyeongtaek Centre. Mapletree Logistics Trust (MLT) announced on 17 Jun that it has completed the acquisition of KPPC Pyeongtaek Centre in South Korea. Recall that MLT has previously reported on 25 May that it has signed a conditional sale and purchase agreement with Korea Port Processing Co. Ltd (KPPC) for this property at a purchase price of approximately S$85.9m (KRW 75.6b). The property comprises two blocks of dry goods warehouses with a total GFA of about 100,900 sqm. There is also potential for organic growth as it has yet to maximise its permissible plot ratio, which will yield an additional GFA of close to 20,000 sqm. The vendor, KPPC, will lease the entire property for a period of 5 years with an annual rental escalation of 3.0%.

Important milestone in South Korea. MLT has stated that this acquisition marks an important milestone to entrench the trust into the South Korea market. Given the sizeable acquisition, the contribution of South Korea to the total portfolio's gross revenue is expected to increase from 2.7% to 5.6%. Consequently, KPPC will be the first Korean customer in MLT's list of top ten tenants; thus further diversifying its tenant base. Assuming that the purchase price and other acquisition costs of the property are fully funded by debt, we estimate that MLT's gearing should increase to about 41.3% in FY11 from 37.7% in FY10 (after taking into account all acquisitions and divestments announced to date).

Yield-accretive acquisition. According to MLT, the new property provides an initial NPI yield-on-cost of 8.6%. We have factored in contributions from KPPC Pyeongtaek Centre starting on 18 Jun with a modest starting rent of S$7.02 psm/month or KRW 6178 psm/month (GFA basis). Based on our estimates, this compares favourably with the NPI yield of 5.58% in FY10.

More acquisitions to come. Apart from Korea, MLT has also said that it is actively looking at acquiring a warehouse (60,000 sqm and 98% leased) in Malaysia from its sponsor. MLT should be able to complete this acquisition by this year. Going forward, its main acquisition focus continues to be in Singapore, Malaysia and South Korea. MLT has a proven track record of executing a virtuous cycle of accretive acquisitions and competitive fund-raising. It is also a favourable move to recycle proceeds into better-yielding assets. Reiterate BUY with an unchanged RNAV-derived fair value of S$1.01.

Wilmar Int’l Ltd (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$5.33

Fair Value: S$5.68

China price caps still in place. Recent media reports suggest that China is maintaining its price caps on essential food items for now, with some even speculating that the government could keep these caps until Mid-Autumn Festival in early Oct; these measures are part of Beijing's efforts to contain inflation. Earlier in Jun, a Reuters report citing industry sources said that China has lifted the 7-month cap on retail vegetable oil prices; although it notes that it is unclear if cooking oil producers still need government approval to raise prices following the removal of the price freeze.

Unilever may be an exception. On a separate but related note, Anglo-Dutch consumer goods giant Unilever has gone ahead with its product prices despite being asked not to; it was also fined RMB2m, after the government said that the group's planned price hikes contributed to inflationary expectations and also triggered panic buying. While industry watchers note that this could be a sign that price caps are not effective in a market economy, and this could lead to the Chinese government adopting a fresh approach on price controls for consumer goods, they remain divided if other companies would follow Unilever's move.

No impact on Wilmar. In any case, we do not expect the latest developments to have any impact on Wilmar International Limited (WIL), as the company has reportedly said that it was not aware of any change in the government's stance towards the price controls. Furthermore, WIL had earlier revealed that the Chinese government has released some 1.2m tons of subsidized soy beans to WIL (which can be converted into 200k tons of cooking oil); this in an effort to reduce cost pressures on the major cooking oil producers. As such, we believe that its Consumer Product segment's PBT margin per ton should be bottoming.

Maintain HOLD with S$5.68 fair value. Nevertheless, we believe that inflation in China (and other parts of the world, especially in developing countries) could continue to be an issue and we would monitor the situation closely. Meanwhile, the renewed risk of a global economic slowdown (including in China) could also cap the stock's upside potential in the near to medium term. As such, we maintain our HOLD rating and S$5.68 fair value. We would be buyers closer to S$5 as we do see better long-term prospects for the group, buoyed by its recent expansion in the sugar industry; this following the recent planned acquisition of the business assets of Proserpine Cooperative Sugar Milling Association.

KS Energy (KimEng)

Up-to-date in 60 seconds

Background: KS Energy is a service provider to the oil and gas sector. It also distributes parts and components, charters capital equipment and provides drilling and rig management services.

Recent development: Pacific One, the holding company of Chairman Kris Wiluan, has purchased a further 7% stake in the company from Tael One Partners, an investment fund, raising its stake from 33% to 40%. Under SGX rules, Pacific One now must make a mandatory conditional cash offer for all the ordinary listed shares at the same purchase price of $1.07 per share. This is an 11% premium over its trading price prior to the purchase. If the offer results in acceptances of more than 50%, it becomes unconditional. A circular will be distributed in due course to the shareholders.

Key ratios…

Price-to-earnings: na

Price-to-NTA: 1.3x

Dividend per share / yield: 0 cts / na

Net debt per share: $0.56

Net debt as % of market cap: 53%

Share price S$1.06

Issued shares (m) 421.6

Market cap (S$m) 447.0

Free float (%) 40.5%

Recent fundraising Nil

Financial YE 31 December

Major shareholders Management - 40.4%

YTD change -1.85%

52-wk price range S$0.76 – 1.19

Our view:

To remain listed. If unconditional, Pacific One will also make a nominal offer for some 84.1m listed warrants at $0.001; these are way out of the money with conversion at $1.36. Pacific One intends to maintain the listing status of KS Energy. The other major strategic partners, Dubai Transport Company (12% stake) and Kim Seng Holdings (5.4% stake), are not expected to take up the offer.

Building up its asset base. Operationally, KS Energy is building up its asset base. It recently commissioned the construction of two drilling rigs worth US$388m through Le Tourneau to be built with Cosco Shipyard in China, with delivery in around 30 months. This will increase its fleet to 12 rigs (six offshore, six land).

Itochu invests in drilling division. Itochu Corp of Japan is taking up a 20% stake in KS Drilling, the company’s drilling division, for US$45-50m, subject to regulatory approvals. It is expected to expand KS Drilling’s customer scope and new businesses such as renewable energy projects.

Earnings show life. KS Energy’s share price has been on the slide since hitting $1.40 in April last year. It recorded a $98.4m loss last year due to lower revenues, provisions and impairments. In 1Q11 earnings did show some improvement, but still lost $8.3m on lower revenue despite better gross margins. In view of the earnings risk, investors may be keen to accept the exit offer at $1.07 per share.

China Minzhong (KimEng)

Event:

Our recent site visit to China Minzhong’s facilities in Putian, Fujian Province, has reinforced our positive view on the group. This is despite market concerns over potential share overhang by its private equity shareholders and corporate governance issues involving Chinese companies listed here and abroad. In our view, Minzhong’s strong fundamentals are intact. The stock is trading at an attractive valuation of 6.1x FY Jun12F PER after a sell-off. Maintain BUY.

Our View:

Minzhong targets to raise fresh vegetable sales by 40-45% in FY Jun12 following the increase in its farmland area. This should give the group’s profitability a boost as the gross margin for fresh vegetables is typically higher at 60%. In particular, the cultivation of high-value products like black fungus could provide a new impetus that may see fresh vegetable sales accounting for half of its overall turnover in the next 3-5 years.

Operations at the new king oyster mushroom cultivation facility in Tianjin City has commenced. Add its existing facility in Shanghai which has a daily capacity of 4 tons, the group’s total capacity per day has doubled to 8 tons. But both facilities are now operating at full capacity and we understand there are plans to increase the total capacity of each to 15 and 24 tons/day by end-2011 and 2012, respectively.

Longer term, organic vegetables may well be the next plateau of growth for Minzhong. The prospects are bright as China’s increasingly affluent population seeks healthier and safer food. Management expects this product segment to make up about 10-15% of the group’s domestic sales once it can achieve at least 30 third-party-owned speciality stores. It currently has seven such stores. The expansion will occur over the next three years or so with the stores mainly located in the coastal regions.

Action & Recommendation

Contrary to market belief, the slide in China’s wholesale vegetable prices in April and May is seasonal in nature and not a major cause for concern. We believe crop prices will remain in a structural uptrend, albeit at a more moderate pace given the current food inflationary environment. Maintain BUY and target price of $2.05, still pegged at 9x FY Jun12F PER.

SMRT Corporation Ltd (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price : S$1.87

Fair Value : S$2.04

1Q revenue growth likely to be minimal. SMRT's 1QFY12 revenue growth over the previous quarter is likely to be minimal despite increases in MRT and bus ridership for the first two months of the quarter as compared to 4QFY11. Extrapolating the ridership statistics for the quarter, we anticipate an increase in ridership of about 5% QoQ for MRT and 4% QoQ for bus services, but believe that the lower average fares resulting from the implementation of distance-based fares will negate these ridership improvements and limit revenue growth to only around 1% QoQ. Furthermore, the general increase of wholesale electricity prices over the same period and the upsurge in staff and related costs after the completion of additional staff recruitments for Stages 4 and 5 on the Circle Line during the last quarter will put a squeeze on 1Q11 operating profits.

Challenging operating environment remains. As SMRT's 1QFY12 comes to a close, we expect cost pressures to persist with revenue growth being unable to keep pace with operating expenses. We maintain our view that operating losses from the Circle Line will continue due to the lack of optimal ridership levels and higher staff costs, and may persist even after the completion and full operation of the Circle Line in Oct 2011. The higher electricity and diesel costs experienced earlier during the year will also continue to bite and augment expenses. Although cost prices have since come off from earlier highs, they remain elevated at current levels compared to previous quarters. In terms of revenue growth, modification of fares seem unlikely this year even with increases in the consumer price index and average wages, which are the two main components in the fare adjustment formula. Given the general sensitivity of the population towards price increases, we believe that any fare hike decision will only take place towards the end of the year at the earliest.

Lack of growth catalysts, maintain HOLD. Since our last update issued on 3 May 2011, SMRT's share price has hovered around S$1.86-S$1.92. We feel that these range-bound movements reflect the incorporation of the above-mentioned factors by the market as well as the general bearish mood over the recovery strength of the global economy by investors although prices have been supported by its relatively decent dividend yield of about 4.5%. As such, any immediate catalyst for improvement in its stock performance will have to come externally, from improvements in the general sentiment of investors over the global economic situation. In light of the anticipated mediocre 1Q results, we have revised our previous fair value estimate of S$2.07 down to S$2.04 and maintain our HOLD rating.

M1: Giving life to LTE (DMG)

(BUY, S$2.52, TP S$2.85)

M1 has launched Singapore’s first commercial LTE network in selected parts of the republic. The coverage will be progressively expanded island-wide by 1Q2012. The telco is rolling out the service to enterprise customers first until more LTE enabled devices are available in the market. Asia’s first. We believe M1 (29%-owned by Axiata) is the pioneer in the commercialization of a LTE network in South East Asia, having conducted trials over the past year. Its 2 rivals, Singtel and StarHub, plan to launch their LTE networks by 2012 and are in various stages of field test and trials in selected locations. M1 joins the ranks of a handful of mobile operators to have commercialized their LTE networks (mainly in Europe and the US), albeit on a small scale, with a string of trials and committed deployments across the globe. TeliaSonera was the first operator to roll out LTE in Norway back in Dec 2009.

First mover advantage constrained by lack of devices and fledgling eco-system. While LTE is a natural progression for current 3G networks, early adopters are inherently constrained by the lack of handsets and devices, which are only expected to be made available on a wider scale from 2013. As such, we are not surprised that M1 is only making the service available to mobile broadband enterprise customers. This should give it ample time to fine-tune its LTE strategy, address technical glitches and assess other deployment strategies before making the high-speed network available to mainstream small screen customers. The service is currently available in Suntec City, Beach Road, Tanjong Pagar, Shenton Way, Chinatown, Marina Bay and Tanjung Rhu.

Maintain BUY. We are leaving our core net profit forecasts of SGD170.4m and SGD187.5m for FY11 and FY12 unchanged for now. While M1’s first mover advantage in LTE is positive in terms of its branding campaign, we see little upside in the short to medium-term until adoption reaches critical mass, accompanying the maturity of the 4G eco-system over the next 2-3 years. The stock’s key share price re-rating catalysts are: (i) the stronger than expected results going forward; (ii) potential for further capital management; and (iii) better- than-expected take-up of its NGNBN service.

M1 - Launch of LTE(CIMB)

NEUTRAL Maintained

S$2.52 Target: S$2.63

Mkt.Cap: S$2,284m/US$1,848m

Telecommunications - Mobile

“Soft launch” of LTE

M1’s “soft launch” of LTE is not expected to have much impact on either its revenue or costs given the limited coverage and devices on offer. Moreover, the cost of the dongles is not too hefty at this point. We view this launch more as a publicity campaign to drum up support as coverage is widened and more devices are available as M1 typically likes to be the first to launch new services. There should not be any issue over spectrum as it, together with StarHub, has the highest amount of 1800 MHz spectrum. This should be sufficient for M1 to cope with any upsurge in data traffic. We make no changes to our earnings forecasts, NEUTRAL rating or DCF-based target price of S$2.63 (WACC 8.5%). M1 remains our top Singapore telco pick.

The news

M1 has launched its Long Term Evolution (LTE) service to enterprise customers which would operate on the 1800 MHz and 2600 MHz bands with initial theoretical download speeds of 75 Mbps and upload speeds of 37.5 Mbps. By end-2012, download speeds will be upgraded to 150 Mbps and upload speeds to 75 Mbps.

The service will only be available to selected parts of the island within the financial district, including Marina Bay, Suntec, Shenton Way and others. Coverage will progressively be expanded to other areas and should be nationwide by 1Q12. The launch will only involve enterprise customers which will be able to access the service via USB modems on existing mobile broadband plans of S$59.40/month. An expanded range of devices including tablets and smartphones will be available later this year.

LTE is a mobile broadband standard widely regarded as a successor to 3G and is on the path to 4G. It is based on all-IP network and promises improvements in speed, network capacity, coverage, operating costs and user experience. The standard currently provides download peak rates of at least 100 Mbps with future developments potentially yielding speeds as fast as 300 Mbps while upload speeds should at least be 50 Mbps.

Comments

More of a soft launch. We view the announcement as more of a soft launch as it is only targeted at enterprise customers, LTE coverage is fairly limited and more devices will only be expected in the later part of the year (expected sometime in 3Q at the earliest). Nationwide coverage is only expected in 1Q12. We believe M1 is trying to drum up publicity ahead of a wider launch as it likes to be the first to launch services, having done so with HSDPA in Dec 06 and NGNBN in Sep 10.

Not much impact on revenue and costs. We do not expect major revenue contributions from the service as coverage and devices remain limited. Moreover, M1 has protected its ARPU at this stage by charging S$59.40/month, which is the equivalent pricing for its fastest mobile broadband plan of 21 Mbps. On the cost front, there is not expected to be a huge impact as take-up will not be that significant and cost per device is not too exorbitant.

Spectrum not an issue. LTE will consume the bulk of M1’s capex spending of S$100m this year, as guided in the past, although no exact quantum has been disclosed. A key prerequisite by IDA for the re-use of 1800 MHz and 2600 MHz is there should no degradation to the quality of the operators’ 2G services. This should not be a problem for M1 as it had purchased an additional 2x5 MHz of 1800 MHz in Mar 11 at a whopping cost of S$21.7m (54x the reserve price) and together with StarHub, has the most 1800 MHz spectrum. This should enable the operators to handle any upsurge in data traffic and any potential network congestion issues.

Valuation and recommendation

We make no adjustments to our earnings forecasts, DCF-based target price of S$2.63 (WACC: 8.5%) and NEUTRAL rating. M1 lacks catalysts though this is balanced by having the most upside from NGNBN and benefits from soaring inbound visitors. It also has the most scope for capital management. M1 remains our top pick in the Singapore telco sector.

AMTEK (Lim&Tan)

S$0.925-AMTK.SI

􀁺 Standard Chartered Private Equity (SCPE) bought 500,000 Amtek shares in the open market on 17 June 2011, raising their holding from 28.3% to 28.4% or 154,066,673 shares.

􀁺 The 500,000 shares represent 44% of that day’s trading volume when the shares traded between 91 cents to 92.5 cents.

􀁺 During Amtek’s IPO in Dec ’10, SCPE had sold 115mln vendor shares at $1.30 each, raising them $150mln. In May 2007, they had spent $258mln to privatize the company.

􀁺 SCPE’s 6-month moratorium just expired on 1 June 2011. Instead of selling down further to re-coup their cost, SCPE’s open market purchase provides some comfort as it signals that they remain confident in Amtek’s prospects.

􀁺 While 500,000 is insignificant compared to their existing stake as well as the 115mln vendor shares that they sold during the IPO, it nevertheless represents a significant 44% of that day’s trading volume.

􀁺 With Amtek currently trading 34% off its Jan ’11 all time high and 29% off its IPO price and with its valuations down to only 6-7x PE against growth of 20-25% and also providing a decent yield of 6+%, we maintain BUY.

ComfortDelGro Corporation Ltd – Buying in at trough valuations (POEMS)

Buy (Maintained)

Closing Price S$1.36

Target Price S$2.01 (+47.5%)

• Current valuation for the stock overly pessimistic

• Defensive stock for uncertain times

• Trading at discount to closest peer

• Forex remains the key risk to our forecasts

• Maintain Buy with target price of S$2.01

A defensive stock for uncertain times

Being a land transport operator, we opine that ComfortDelGro (CDG) has valuable defensive characteristics against a backdrop of uncertain economic environment. Currently, we see relatively little downside risk to our profit growth estimates of 2% for FY11. In fact, the company’s bus business could even see improved profitability resulting from lower oil prices in a global economic slowdown. Majority of the company’s business are non-discretionary and are fairly resilient against a weakening economy.

Undervalued against closest peer

While SMRT and CDG are not directly comparable due to their varied business exposure, their valuation remains the benchmark to the land transport sector on the SGX. CDG currently trades at a discount to its closest peer, SMRT, when compared using the P/E and P/B multiples. Even with our conservative payout ratio assumption of 55% for CDG, the stock offers a fairly similar dividend yield of 4.5% with SMRT.

Key risks lies in forex

With its global exposure, the key risk for CDG lies with potentially lower earnings from weaker forex translation. We estimate that CDG has the highest forex operating profit exposure to AUD (c.20%), GBP (c.13%) & RMB (c.11%) and would be negatively impacted by a depreciation of these currencies against the SGD.

Trading at only 12X T12M EPS

CDG’s share price continues to drift lower in line with the weak market sentiments. We view current market valuations of merely 12X T12M EPS as overly pessimistic, considering the historical +/- 1S.D. P/E range of 13.5 to 16.6X. Even during the GFC, CDG traded below current valuations for less than a fortnight in Oct-Nov 2008.

Valuation. We used a blended valuation model of DCF (COE: 8.2%, terminal g: 1%) and P/E (17X FY11e PATMI) to arrive at our target price of S$2.01. CDG could potentially return 52.1% after incorporating our forecasted dividends of 6.1¢ over the next 12months. Hence, we maintain our Buy call on CDG.

Ausgroup Ltd - CEASING COVERAGE (CIMB)

S$0.33

Mkt.Cap: S$155m/US$125m

Oil & Gas - Equipment & Svs

Positive guidance intact

Ceasing coverage. We are ceasing coverage of Ausgroup due to a lack of institutional interest in the stock. Our last rating was Neutral; while our last target price was S$0.52, based on 10x CY 12 P/E, slightly above its Australian peers (9.3x).

Focus on execution... We recently caught up with Ausgroup’s Acting CEO, Stuart Kenny. Mr Kenny was CEO of the group for four years until Jan 08 and has been a non-executive director since. In all, there are no differences to the outlook painted by him and the ex-CEO. Mr Kenny stressed that business is as usual and the ex-CEO, John Sheridan, had left behind a strong operational team. The group had hired several senior project managers to provide more oversight in the execution process. Improvements in systems have also expedited reviews and facilitated the tighter control of projects. Lastly, in anticipation of a labour crunch from a high level of activities in Western Australia, management has beefed up recruitment and implemented worldwide recruitment programmes. As a result, Mr Kenny said that Ausgroup has grown to become one of the preferred contractors of mining giants, BHP Billiton and Rio Tinto.

… & rebuilding order book. With improved processes in place, the group is keen to rebuild its order book. 3Q11 order book was A$249m, with an estimated A$400m secured YTD, meeting our FY11 order target. Investors could possibly hear of a sizeable A$200m order from the Karara project by end-FY11.

Expect operational improvements. With the tighter control of projects and completion of two problematic construction projects (which had incurred losses due to execution issues) by end-FY11, the group expects a turnaround in margins. We had factored such an improvement into our forecasts. We also expect the group to collect some of the A$100m trade receivables in 4Q11 with the finalisation of the above problematic projects.

Dual-listing could catalyse share price. Ausgroup has set up a committee to explore a secondary listing on the ASX. We believe such a listing could catalyse the stock and lift Ausgroup’s valuations towards its peers’ average of 9x CY12 P/E. Ausgroup’s closest peers include Monadelphous, Rcr Tomlinson, WDS Ltd and VDM Group. Vdm Group is trading at 3x CY12 P/E due to hefty impairment losses; while Monadelphous is trading at a premium of 15x CY12 P/E due to its exceptional ROEs. With an anticipated turnaround and strong 3-year EPS CAGR of 30%, Ausgroup could possibly be re-rated to its peers’ average, at the least.

Time DotCom (HLIB)

Price Target: RM 0.95

Share Price: RM0.79

Time Engineering’s Offer-For-Sale of TDC

News:

 Time Engineering (TENG) announced yesterday the final details on its offer-for-sale (OFS) of its TDC shares. TENG’s entire holding of 626.18m TDC shares (representing 24.74% of TDC’s shares) would be offered at an OFS price of RM0.53 per TDC share on the basis of 8 offer shares for every 10 TENG shares held as at 5.00pm on 5th July 2011.

 The price is based on a discount of 33.75% to the 5-day weighted average market price up to 17th June 2011.

Pros / Cons:

 As we had flagged in our earlier report (dated 24th January 2011, titled “Short-Term Overhang due to Offer For Sale) the OFS is likely to pose a short-term overhang to TDC’s share price due to the large volume of TDC shares coming into the market at a relatively steep discount.

 Nonetheless, we remain positive on TDC’s fundamentals as the company would be a key beneficiary from the mobile, fixed and media convergence in the data era and is poised to become a regional growth telco.

Risks:

 Irrational wholesale pricing and competition, new fiber roll-outs, government regulations and a contraction in demand for wholesale bandwidth.

Rating:

BUY (TP: 0.95)

 Positives – The company is entering into a multi-year growth cycle with a high degree of operating leverage. By tapping into new growth areas such as global bandwidth and node fiberisation as well as entering a series of synergistic acquisitions, the company is poised to become a regional growth telco.

Valuation:

 We believe the overhang on TDC will likely be brief and remain positive on the stock due to its outlook and long-term growth fundamentals. Maintain our Buy call with an unchanged SOP target price of RM0.95.

FRASERS CENTREPOINT TRUST (DMG)

BUY

Price S$1.49

Previous S$1.77

Target S$1.77

Drop i n share price presents buying opportunity Reiterate our top pick for S-REITs. Against the uncertain outlook revolving around weak US and China data, European debt crisis, and China’s property cooling measures, we reiterate our OVERWEIGHT stance on S-REITs which offer a current dividend yield of 6.9%. Our top pick within the space remains Frasers Centrepoint Trust (FCT) which owns prime suburban malls that are experiencing strong positive rental reversion. Despite the Asset Enhancement Initiatives (AEI) at Causeway Point (CWP) which saw occupancy fell to 69% during 1Q11, FCT’s DPU were not affected much due to contribution from its Northpoint 2 and Yew Tee Point which were acquired in Feb 2010. Backed by 1) strong pre-commitment for CWP’s space being redeveloped under AEI, 2) strong rental reversion, and 3) potential acquisition of Bedok Point in 2H11, we believe FCT is primed for growth at cheap valuation. Maintain BUY with TP of S$1.77 based on DDM (COE: 8.8%; TGR: 2.0%).

CWP AEI expected to be completed by Dec 2012. In addition to positive rental reversion from new leases expected at +11-12%, the progressive completion of CWP AEI will add to FCT’s DPU growth. Construction of CWP is currently 33% completed. Despite full completion requires another 1.5 years, the space undergoing refurbishment has been 99% pre-committed, indicating the strong demand for the mall space. Upon completion, the average rent is projected to rise 20% from S$10.2 to S$12.2, giving rise to ROI of 13.0%.

Undemanding valuation given clear growth profile. At S$1.49, FCT is trading at a yield of 3.8% to Singapore’s 10-year bond yield of 2.3%, which is significantly higher than its pre-crisis mean spread of 1.8%. Coupled with its clear growth profile going forward (positive rental reversion, completion of CWP AEI, and acquisition of Bedok Point), we favour FCT as our top S-REIT pick for 2011.

CWP AEI is 33% completed; occupancy rate expected to rise in subsequent quarters. CWP AEI works started in Sep 2010 and is currently 33% completed. Full completion of the AEI works is expected in Dec 2012. Major refurbishment revolves around 1) shifting escalators on B1 and L1 to improve visual lines and create more prime retail space, 2) expanding retail and F&B offerings on L5, as well as 3) introducing more pro-family features. As of Mar 2011, occupancy rate of CWP stood at 69% due to AEI works. In the subsequent quarters of FY11, we expect the occupancy rate to inch upwards to >80% by end FY11.

Rental reversion remains strong at 11.7% over preceding rents in 2QFY11. Suburban malls continue to show strong rental reversion in 2QFY11, particularly CWP which registered 19.8% rental hike over preceding rents. For 1QFY11, the rental hike was 11.6% for the entire portfolio.

Lease expiries to peak in FY12 at 56.6% of total NLA. FCT is already working on renegotiating the leases which are expiring in FY11 and FY12. The lease expiry profile for FY12 is expected to decline due to pre-terminations. Given the defensive characteristics of the suburban malls and the large catchment population in those areas, we think it will not be overly difficult for FCT to seek for new tenants.

Defensive characteristics of prime suburban malls add to FCT’s allure. During the crisis, spot rents of prime suburban mall fell 4% while that of urban mall dropped 13% from peak to trough. In comparison, industrial and office rents fell as much as 11-28% (depending on the type of industrial units) and 58% respectively. Meanwhile, average daily room rates of Singapore hotels fell as much as 31% from peak to trough. This illustrates the resilience of suburban spot rents even in times of economic recessions, which increases the appeal of FCT in our opinion. During the crisis, even though FCT’s NPI dropped 11% YoY in FY08, its DPU increased by 11% YoY in FY08 as only ~80% of FCT’s distributable income was paid out in FY07 – the year FCT was listed on SGX. In the following year (FY09), FCT’s NPI and DPU grew 6% and 3% YoY respectively.

Cheap valuation compared to pre-crisis (before Dec 2007) considering the clear growth outlook. Currently trading at S$1.49, FCT is trading at a yield of 3.8% to Singapore’s 10-year bond yield of 2.3%, which is significantly higher than its pre-crisis mean spread of 1.8%. Coupled with its clear growth profile going forward (positive rental reversion, completion of CWP AEI, and acquisition of Bedok Point), we favour FCT as our top S-REIT pick for FY11.

VALUATION & RESULTS REVIEW

We value FCT at S$1.77 based on DDM (COE: 8.8%; TGR: 2.0%). At its current trading level, FCT’s 12-month forward dividend yield is 6.1% while its spread is 3.8%. Compared against its pre-crisis mean spread of 1.8%, we believe FCT has further upside potential considering its steady growth profile in the coming years.

Hiap Hoe (KimEng)

Company background:

Hiap Hoe has more than three decades of experience in the construction industry in Singapore. Today, its primary focus is the development of mid- to high-end residential properties and its construction subsidiary mainly takes on the group’s own development projects.

Key ratios…

Price-to-earnings: 5.9x

Price-to-NTA: 0.96x

Dividend per share / yield: 0.5 cts / 1.1%

Net debt per share: $0.50

Source: Bloomberg, based on historical data

Everything else…

Share price S$0.435

Issued shares (m) 471.5

Market cap (S$m) 205.1

Free float (%) 30%

Recent fundraising activities Jul 2008: 1-for-4 rights issue at $0.28; $21m raised

Financial YE December 31

Major shareholders Founding Teo family – 70%

YTD change -1.14%

52-wk price range S$0.385-0.50

Our View:

Projects see good sales. The take-up rate for Hiap Hoe’s projects has been very healthy at 75% overall. The two most profitable projects are the 100%-owned Waterscape at Cavenagh and Skyline 360 at St Thomas Walk. For Waterscape, we estimate the company’s all-in cost to be about $220m, which compares favourably with the project’s estimated GDV

which is nearly double at about $400m. As for Skyline 360, the cost for Hiap Hoe is $140m while the GDV of the project is estimated to be close to $250m.

A piece of Balmoral. The group is awaiting an opportune time to launch its 48-unit Balmoral development called Treasure on Balmoral, a 60:40 joint venture with SuperBowl. Assuming a price of $2,500 psf, we expect the project to achieve 10% pre-tax margin.

Foray into hospitality sector. Hiap Hoe made its first hotel investment in 2008 after winning a tender for a hotel site at Balestier Road. The plot of land has a total GFA of about 421,000 sq ft and is currently being developed into two office buildings and two hotels with about 800 rooms. The total development cost is expected to be $300m and the project is scheduled for completion in 2014.

Steep discount. The stock currently trades at steep 50% discount to the RNAV and below its book of $0.455. The future development profits consist of about $110m from sold units and $95m from future sales priced at current market values.

Semiconductor Sector - Rising cost pressures poses risks (OCBC)

Neutral

1QCY11 marred by cost pressures. The recent 1QCY11 results released by most semiconductor companies listed on SGX exhibited a common trend - rising cost pressures which have caused margins and hence profitability to decline. Such cost pressures have arisen from increasing raw material prices & labour costs (due largely to the minimum wage policy implemented by the PRC government), unfavourable currency movements and higher energy prices. Of the ten Singapore listed companies we have tracked, seven of them delivered revenue growth although only four reported an improvement in net profit, attributed mainly to the aforementioned factors. Despite such discouraging statistics, we are maintaining our BUY rating and S$0.67 fair value on Micro-Mechanics Holdings (MMH). In our opinion, MMH was one of the few bright sparks in the semiconductor industry in the previous quarter, having reported a healthy 31.6% YoY bottom-line growth. We continue to like MMH for its attractive prospective dividend yield of 6.6% and potential upside ahead.

Global chip sales in Apr show YoY growth... Latest data from the Semiconductor Industry Association (SIA) indicated that global semiconductor sales for Apr 2011 increased by 3.9% YoY to US$24.7b, although this represented a 2.2% sequential decline. We note that this YoY increase was the 18th straight month of YoY growth since Nov 2009, notwithstanding the apparent slowdown in growth magnitude. The sequential decline in semiconductor sales could partly be attributed to the recent Japanese earthquake and tsunami, which had resulted in supply chain disruption. However, efforts are ongoing to remedy the production process and thus SIA believes that significant improvement should be reflected in 2H11.

…although Singapore's May electronics exports disappoint. Singapore recorded a 15.2% YoY fall in electronics exports in May, which was the fourth consecutive monthly YoY decline. This was attributed largely to fewer shipments of integrated circuits, PC components and disk drives. The disaster in Japan could also have been another probable cause to the lower electronics export numbers due to the shortage of components.

Maintain NEUTRAL. In addition, IMF recently pared its forecast for U.S.'s GDP growth to 2.5% and 2.7% in 2011 and 2012 respectively (previously 2.8% and 2.9%). Given the openness of the Singapore economy and the importance of U.S. as a key export market, we opine that semiconductor companies could thus be adversely affected. Nevertheless, we see potential for growth ahead, albeit at a more moderated pace vis-a-vis 2010, given the still popular demand for IT gadgets such as smartphones and tablets and the increasing prevalent use of semiconductors across various industries. Hence we maintain NEUTRAL on the sector.

KS Energy: Mandatory conditional cash offer (DMG)

The news: Pacific One Energy (POE), a wholly-owned company by the Wiluan family (Kris Wiluan: 15%, Rija Holdings which is controlled by Richard James Wiluan – 85%), has offered to acquire all shares of KS Energy for S$1.07/share, representing a 11.46% premium to Friday’s closing of S$0.96. As of announcement of acquisition, POE and interested parties have already owned or controlled a 40.4% stake and 32.8m warrants which represent 5.8% of shares.

Our thoughts: Five years since the entry of Kris Wiluan as the major shareholder of the predecessor of KS Energy Services – the predecessor of KS Energy, the Indonesian tycoon now intends to privatise the entire KS Energy. This has come on the back of a loss-making 1Q11 results, KS Energy’s first results since its formation through merger of KS Energy Services, Aqua-Terra, and SSH. However, the company mentioned that the benefits of merger will be seen only in 2H11 during the 1Q11 results release. Currently, KS Energy’s net gearing stands at 0.7x while it is trading at 13x FY12 Bloomberg consensus earnings. We do not have a rating on this counter.

Gallant Venture (KimEng)

BUY

Bintan tourism set to enter new phase

Event:

 We recently concluded a roadshow for Gallant Venture. The group’s plans to bring tourism in Bintan to a new phase were well‐received by the fund managers. In particular, they were delighted when management said it aims to cut travelling time between Singapore and Bintan to just 30 minutes, from the current 50 minutes, by moving its ferry services to the upcoming International Cruise Terminal at Marina South and by purchasing high‐speed ferries. Maintain BUY.

Our View:

 Management reported that tourism in Bintan is booming, citing record profits registered last year by the island’s resort operators and the construction of new wings to accommodate rising tourist arrivals. We also understand that both the residential development at Pantai Indah and Alila’s project are doing very well, selling at about $200‐250 psf. In addition, the utilities and industrial park businesses are returning to the pre‐crisis levels.

 A question was raised on Gallant’s two acquisitions. One was resource mining company PT Silo in Sebuku Island, Indonesia, and the other, a high‐end development in Lao Xi Men, Shanghai. Management said these were “bargain buys” and the opportunities came about during the global financial crisis. They were meant to plug the earnings gap in the interim before the initial phases of Lagoi Bay and Treasure Bay are completed.

 The group’s earnings for this year and next will be underscored by the recognition of land sales of $55m. PT Silo will start to contribute earnings once the convertible bond is converted to 29% equity stake, expected to be within this year. The mining subsidiary made US$20m last year. The Shanghai project is slated for completion in two phases over 2013‐14, for which an estimated $300m in net profit will be recognised. From 2014 onwards, we expect a jump in Gallant’s recurring income as a result of increased utilities demand from Lagoi Bay and Treasure Bay.

Action & Recommendation:

We reiterate our BUY recommendation and target price of $0.75, based on SOTP valuation.

CapitaCommercial Trust (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.44

Fair Value: S$1.63

Permission granted to demolish Market Street Car Park

Approval granted for MSCP demolition. CapitaCommercial Trust (CCT) has announced on 16 Jun that it has been granted permission to demolish Market Street Car Park (MSCP) to make way for its new ultra-modern Grade A office tower. The carpark, including its food court and all its shops, will be closed on June 30 and eventually torn down. The new tower is expected to be completed before end 2014.

MSCP redevelopment. Recall that CCT was granted the Outline Planning Permission (OOP) by URA for the redevelopment of MSCP in Jan 2008. However, the project was aborted in Jan 2009 amid the Financial Crisis due to uncertain outlook, tight credit conditions and high development cost and significant size of the undertaking. The OOP was thus allowed to lapse. Subsequently, CCT rekindled redevelopment plans for MSCP and obtained provisional permission in Nov 2010. It will be jointly developing MSCP with its sponsor CapitaLand, with a 40% stake in the JV and capital commitment of S$560m. This constitutes 9.3% of its total assets as of 31 Mar, which is below the stipulated development limit of 10%. CCT will commit S$335m in 2011, and the rest via internal cash resources and debt, keeping pro forma gearing below 31%. The new office tower has a GFA of 887,000 sqft and height of 245m. It will have a towering presence around the area and is likely to be the fifth tallest building in Singapore after OUB Centre (280m), Republic Plaza (280m), UOB Plaza One (280m) and Capital Tower (254m). We have factored in contributions from MSCP starting Dec 2014, with a stabilised NPI yield-on-cost of 6.9% and a modest starting rent of S$14 psf/month. This compares favourably with CCT existing NPI yield in FY10, which is 5.46% according to our estimates.

Reiterate BUY. We are overall positive on the MSCP redevelopment but remain wary that its land lease is only 59 years following the 2014 completion. There is potentially an additional supply of about 1m sqft of commercial space on the reserved list at Marina View (near Asia Square Tower 1 & 2), which was recently announced in the 2H11 GLS programme, with its estimated launched date1 in Oct 2011. We forecast for CCT to continue to experience negative rent reversions in 2011, but this should change in 2012. With its near 100% occupancy and active leasing strategy, CCT stands in a good stead to reap the office rental uptrend for its existing properties, at least in the short to medium term. Reiterate BUY with an unchanged RNAV-derived fair value of S$1.63.

Mudajaya (HLIB)

Price Target: RM6.75

Share price: RM4.56

Highlights:

 We visited Mudajaya’s management last week and returned on a positive note especially on their local prospects.

 The management reiterated that the land issue for the India IPP has been resolved and common infrastructure works for the plant has rebounded in pace. At the current rate, Phase 1 (360MW) is scheduled for completion by 2H12, with commercial operations within 3Q12, which is a few months delay from the originally planned timeline. Phase 2, which consists of 3x360MW, will be commercially ready by 3Q13.

 The management has also stated that they have been shipping the plant equipment from China, whereby some will be stored at the forwarder’s warehouse and some at the power plant site itself. Hence, we believe that 2Q and 3Q numbers will come in stronger on a QoQ and YoY basis. As for 4Q, we believe there could be seasonal weaknesses due to the monsoon season, unless equipment installation works are carried out during that period.

 On the local front, the management explained that the RM720m Letter of Intent for Janamanjung was issued first as Mudajaya has already started mobilisation works. It should be a matter of formality before the contract becomes “official”.

 As for the Tanjung Bin power plant, Mudajaya is part of the Alstom consortium and we understand that they are given the “exclusivity” to bid for the contract. The contract size at minimum should be the same as Janamaunjung’s RM720m, and this will bring their total active outstanding order book to RM3.5bn, translating to 4x FY10’s revenue. The contract is expected to be awarded by September.

 Recognising that power plant contracts are limited, the management is also looking forward to winning infrastructure projects especially for the MRT elevated track works and some packages of the West Coast Expressway which is worth ~RM500m each. We believe that these orders could come in next year.

Risks:

 Delay in completing the IPP project which will have a huge impact on our earnings forecasts; regulatory and political risks (both domestic and overseas); rising raw material prices; and unexpected downturn in the construction sector.

Forecasts:

 Unchanged.

Rating:

 Maintain BUY as we believe that the company will be able to successfully replenish their local order book and the setback

in India IPP project is temporary.

Valuation:

 Target Price of RM6.75 based on Sum-Of-Parts valuation

maintained