Raffles Edu unit buying JB land for RM76.5m

By NISHA RAMCHANDANI

RAFFLES Education Corp's subsidiary, Raffles K12, has accepted a letter of offer to acquire a piece of land in Johor Baru for some RM76.5 million (S$31.2 million) in its bid to expand into the international school business.

'In line with the company's expansion plans and strategic directions to expand into the international school business, the company intends to acquire the land to construct and develop an American system school in Johor Baru, Malaysia, catering to students from Kindergarten to Year 12,' Raffles Education said in a filing to the Singapore Exchange.

The land, which spans about 46.22 acres (18.7ha), is being transferred to vendor Education@Iskandar. The land is currently registered in the name of Iskandar Investment, Education@Iskandar's holding company.

The acquisition will be funded through a combination of bank borrowings and internal resources. A deposit of about RM1.53 million - or 2 per cent of the purchase price - is payable to Education@Iskandar on acceptance of the offer letter.

When the sale and purchase agreement is executed, a balance deposit of around RM6.12 million or 8 per cent of the purchase price is payable. The total amount is to be paid over five years from the date of the agreement.

According to the offer letter, the proposed acquisition is dependent on two terms - that a sale and purchase agreement is executed within 90 days from the date of acceptance of the offer letter or such other date agreed upon in writing between the parties as well as the successful transfer and registration of the land to Education@Iskandar.

黄金牛市未完 跌市是大调整

QE1规模是联储局买入3000亿美元国库券、12.5亿万美元住宅楼按证券、1000亿美元房利美及房贷美债券，引发2009年3月美股上升，2010年8月暗示推出QE2，并在2010年11月至2011年5月买入6000亿美元国库券。即前后注入一万多亿美元资金，至于OT2是买入4000亿美元6年或以上债券压低长期利息，卖出4000亿美元3年或以下短期债券，上述决定引发今年9月美股及金价大跌。估计30年期美债利率由3.6厘降至2.6厘（即2008年雷曼事件时水平。）

自2006年12月至今美国银行国内存款由11000亿美元上升到81000亿美元，平均利率只有0.79厘，日后联储局抽走4000亿美元短债后估计可令平均利率上升至1厘。2006年第一季政府新增负债占GDP3％到今年第一季上升到9.6％，私人负债由占GDP16％下降到0.5％。

即过去五年政府负债取代私人负债情况和1994年起日本相似，今天日本政府负债相等于日本GDP120％，美国政府负债是美国GDP60％。另一分别是日本经济是出口型、美国是内需型。

奢侈品股进入调整期

自1960年至今标普500平均P/E19.4倍，今年9月（用过去方法计算纯利）标普500平均P/E19倍，即到了唔算贵亦不算便宜水平。（如用新计算法P／E更降至10.4倍）。

黄金已低至1532美元重返上升轨支持区。过去半年一直叫大家小沾手黄金，到了现水平又可小量吸纳黄金，由于仍是负利率、即黄金牛市未完，近日跌市只是一次大调整。

金价在9月6日1920美元遇上阻力，理由是商品价格指数今年5月开始转弱，‘铜’博士告诉我们，全球制造业在转弱中。但客观形势仍是负利率（利息低于CPI升幅）因此未能肯定金价已见顶，但调整幅度已惊人，估计金价在1600美元重建基础。

奢侈品股进入调整期、品牌股亦面对大幅回落，资源股由2000年起步上升今年亦到了见顶日子，下一铺玩什么？10年人事几番新，20年内事物总改变一次。
2011年不是2008年，OT2对大银行有利但短期股价仍受压，OT2对黄金及白银不利并已在市场上已反映。自1997年起你的投资策略必须随形势改变而改变，不能一成不变。例如今年7月10日恒生指数的死亡交叉点出现后，投资股票宜保守。

历史告诉我们；不能依赖政府创造职位去带来繁荣，日本不能、欧洲不能、美国也不能。经济繁荣来自企业精神同人类的创见。911事件代表强如美国的防卫力量亦可从内部攻破（第二次世界大战日本大和军舰亦只能偷袭珍珠港而非美国心脏。）今年美国政府债券失去3A级地位，需时多久才能重建全球投资者对美国金融业的信心？

1929年是美国机械时代高峰期，需时20年到1949年二次大战后才出现另一繁荣期。2000年是美国电脑技术高潮，这次又需时多久才进入另一繁荣期？在另一繁荣期来临前股市仍大上大落，2010年美国GDP上升3％，企业纯利大升但人均收入49445美元和1997年差不多（较2007年下降6.4％。）

美国穷人增加太快

2010年有4620万人生活在贫穷线之下（即年入11139美元或以下。）占总人口15.1％或六个成年人中一个，是17年内新高。根据CNN Money计算！扣除通胀后中产收入较1980年上升11％、富有家庭收入上升42％、穷人收入基本上不变，即过去30年中产受惠有限，新增财富大部分落入5％富人手中。

根据哈佛大学教授Lawrence Katz分析：美国中产自1997年起收入不升反降及前景并不乐观！根据Ecomonic Policy Institute数字：今年7月失业人口1110万，8月份急升到1400万上升速度惊人，未来4年如美国经济陷入衰退失业人口可增加1000万即失业率达15％惊人水平。今天的问题已经不是美国有多少穷人而是穷人数目增长速度太快。

恒指P/E进入偏低区

1998年受长期资金服务公司出事标普500由1200点回落，最低连900点亦失守，1998年底开始回升并在2000年初升穿1500点。在科网股泡沫爆破后标普500急跌并在2001年8月6日跌穿1200点，加上911事件影响标普500最低跌穿800点才回升并在2007年见1576点。CDO危机出现加上2008年9月雷曼事件影响，标普500不但跌穿1200点并在2009年初跌穿700点才反弹。这次上升到2011年5月1370点又回落并在9月份1200点又再失守，面对2012年美国大企业纯利下滑，这次标普500在那一水平才获支持？

今天恒生指数P／E已进入偏低区（8倍到12倍），个人相信恒指17800点以下、16200点以上进入可以吸纳区，但未来上升空间有限。以银行股为例面对内地及本港楼价进入调整期这方面贷款增长率极之有限，银行息差收入仍在减少，加上出售基金服务、代客买卖股票、外汇等收入亦不可能大幅增长，因此P／E虽然低，但G（增长率）亦很低不见得特别吸引。

内房股亦面对相同问题，至于内地汽车股担心今年上半年已出现拐点，高增长率渐成过去，家电方面家电下乡旧换新政策即将到期，令家电销售增速无法维持，市场给予低P／E有其合理之处。

煤炭板块上半年表现仍好，不过下半年中国GDP增长率在减速，加上欧美经济动荡，煤炭需求80％来自火电、钢铁、水泥及化工四大行业，在十二．五规划下煤炭前景亦可能进入低增长期。换言之今天恒指低P／E正正反映未来上市企业纯利进入低增长期。

恒生指数牛市二期下调幅度应不止31.8％甚至50％，可能是61.8％即是16144点。A股牛市一期由2008年11月开始、2009年8月结束进入漫长的牛市二期，理由是中国经济转型需很长时间才完成。

1980年香港经济转型牛市第一期，由1982年12月2日恒指676点起步、1983年7月21日1102点结束，牛皮了三年到1986年4月联交所成立，大量外资涌入才令恒生指数大幅上升，并在1987年9月完成牛市三期。

香港那次经济转型牛市二期需三年才完成，中国应更长。牛市二期特性是有不少股份可以跌到唔清唔楚，因为在牛市一期上升是没有业绩支持，亦有不少股份可以升到唔清唔楚，理由是在熊市时被过分抛售，但他们业绩继续保持增长。那些是杂草、那些是禾？如是杂草应及早清除掉，如是禾便应留下以便他日结榖。

中国迈向中等收入区

十二五规划下未来五年中国消费市场将扩大一倍、未来工资亦大幅上升，即未来五年中国通胀率（CPI）不会低估计维持在5％左右。过去五年（2005年至2010年）中国消费由占GDP45％下降至34％因为出口增长太劲，未来五年中国消费占GDP希望超过50％。今年地方政府负债估计达到107000亿人民币，过去地方政府收入80％来自卖地，中央政府希望内地楼价在未来一段日子下调10％到15％。面对未来楼价下调地方政府在财政上面对很大压力，因此中国经济真的‘好’起来仍需一段日子。经济转型有如脱胎换骨，初期十分辛苦完成转型后才可享受由内需型所带来另一次GDP高增长期。

1993年中国政府决定改革国企，到2001年短短几年国企数字减少三分二，由120万间降至46.8万间，员工占城市就业人口比重由59％降至32％。其后将大型国企上市接受公众投资者监管，政府成为这些企业的大股东。以上述模式经营上市企业例如建行（939）、中移动（941）等，不但如此更引入外资企业做第二大股东，引入外国经营方式。这些公私合营的企业是否能战胜外国上市的私人大企业？将决定未来中国经济前途。

中国渐进入‘中等收入区’（人均收入2500美元到5000美元），能否透过经济转型进入高收入区（人均收入15000美元到30000美元）。环顾世界上不少国家经济一旦进入中等收入区GDP增长率便下降即中等收入陷阱。根据世界银行数字：菲律宾自1960年起至今过去50年GDP并没有停止增长，例如2010年GDP仍上升7.1％。为何菲律宾人普遍仍如此穷？在一个菲律宾选美会上某女士问她的丈夫：到底那些评判是否公正？菲律宾政府的贪污，令法律不能公正地执行，令财富集中在小数人手中，那些人赚到钱后因为对政府不信任将它调到海外……。菲律宾情况值得目前中国政府好好思考。

中国未来会否一如过去60年的菲律宾成为‘资金’出口国？改革开放初期因集中在经济层面上比较上容易，例如拉丁美洲国家、东南亚国家等都能完成黄金30年达到中等收入水平（人均收入3,000美元到6,000美元。）能否进入富裕社会（人均收入15000美元到30000美元）有赖建立一个廉洁及有效率政府，江山易改、本性难移。中国亦有‘周处除三害’的故事。山中老虎给周处打死了、海中蛟龙亦被周处杀掉，最后周处改过自身不再欺压老百姓……。

从2011年到2020年的世界将是怎样？1980年伊朗皇朝倒下伊朗由亲美变成反美，美国支持伊拉克发动两伊战争，一打便十年。到1990年伊拉克不听美国的话入侵科威科，美国出兵攻打伊拉克！1990年前美国支持阿富汗对付苏联，2001年美国出兵将阿富汗政权推翻。十年人事几翻新，天下事皆因共同利益而走在一起，亦因利意见分歧而闹翻。

本人曾见过狂升股市4次，亦见过狂泻股市5次，见过接近20％一年的通胀率及黄金疯狂上升，亦见过20年黄金变烂铜。今天唯一相信的是‘止蚀唔止赚’。不少人以为长期持有实赚，如你在1972年投资Avon持有到今年仍蚀54％、宝丽来即影即有相机蚀52％、兰克斯诺影印机蚀44％、IBM蚀36％、柯达拍纸蚀24％。

以经济周期思考问题

换言之拣股好重要如买错股份只有止蚀，唔好同佢谈恋爱。烂滚老公、唔生性仔系好难改好的。请不要痴痴地等。例如1980年买入佳宁集团，佢可以破产。如果你学晓拣股，每年赚两分钱好易，我不是指2009年呢D大升市，甚至2010年买电盈（008）股价亦由2元升上3.5元、中电（002）由55元升到日前73元、港灯（006）今天叫电能实业由44元升到64元。2011年的赌场股……。

大部分投资者或投资策略决策者很少由经济周期角度去思考问题，一般都采用‘直线投射法’（例如过去两年企业纯利每年上升25％，便展望今年、明年纯利每年仍升25％。）利用经济周期去分析后市必须有一连串‘假设’及‘推理’，一旦同现实有出入便必需速速作出纠正，上述非一般人可以做到。

1997年后的香港经济不断出现盛衰周期，令大部分投资者无所适从，公司领导层受过去经验所局限，很易陷入‘决策上的陷阱’，无法适应如此短的盛衰周期。大量衍生工具的出现加上利率低企，代表‘Less skin in the game’。

结果一有风吹草动投资者便纷纷加入抢购或抛售行列。2001年Enron不合规格的会计引致破产，带来2002年股市危机，2008年9月雷曼事件又引发金融海啸，近年的高频交易令2009年5月及今年8月的股市出现迅速溶解。

读过garden-vareity理论便知道商业循环周期不离5年一小变、10年一大变，此乃自第二次世界大战后的正常商业周期。日本在1990年出现‘资产负债表衰退’，睇过Richard Koo的文章有助了解‘资产负债表’衰退。只有重整资产负债表另一繁荣期才可以再来而不是由政府进一步增加负债，以债养债迟早大镬，个人如此、公司如此、国家如此一样。

美国推出量化宽松政策可以阻止1930年代式经济萧条出现（即没有双底衰退。）但逃不出日式衰退，何况世界经济已进入再平衡期（日本GDP由1990年占全球比重12％降至目前6％。未来20年欧、美GDP将由2007年各占全球GDP25％降至只占12％，新兴工业国所占比重倍增、上述改变不是美国联储局推出什么TO2可以改变。）

了解大趋势创造财富

过去几个决定影响你今天拥有多少财富。一、1982年8月中国政府宣布收回1997年7月香港主权及1989年**事件，你是否对香港前途仍然抱有信心？二、1997年7月1日特区政府成立推出八万五房屋政策，你对投资房地产态度？三、2001年中国加入WTO你有没有投资资源股或黄金？四、2007年9月在‘港股直通车’谣言下，你有没有出售当时已偏高的港股？五、2008年10月中国政府推出四万亿人民币刺激经济计划，你有没有重新入市吸纳股份？

今天你仍未发达四大原因：

一、你买的住宅单位超过你负担能力，结果一阔三大。（尤其是在1997年那年买楼。）
二、你不了解什么是‘价值’。有没有买物非所值的‘名牌’消费品。在投资方面有没有在接近最高价时才买入、在接近最低价才卖出，因为恐慌。
三、买入你不需要的东西。例如女性买皮草、首饰、手袋，男性追求车款，结果垃圾满屋，通通都是浪费金钱行为。
四、对‘学习’没有兴趣。太多人离校之后对吸收知识兴趣大减，浪费时间在无聊的事物上，包括行街、睇戏、打机、吹水、研究马经、赌波、睇八卦周刊。上述没有一项有助你致富，时间便是如此无无谓谓地浪费掉，最后一事无成。

换言之花时间或金钱在无谓的事物上，都是你今天仍未发达的原因。知识就是财富因为知识能提升你的洞察力、领悟力。

例如分析过1970年到1980年的金价狂升后，自然了解到由2000年起的金价再次进入十年上升期。

1984年到1997年本港楼价因政府决定每年只卖地五十公顷政策而大幅上升，2003年9月特区政府取消公开卖地，改为采纳钩地表。1950年到1980年香港制造业的发展史，有助分析1978年到2007年中国制造业的黄金30年。1990年起来自日本经验，亦有助了解2000年起的美国未来。

知识没法协助你预测明天股市怎样，但有助你了解大趋势将如何，来自1975年新力公司推出Walkman产品的盛衰周期经验，亦有助了解新科技产品的盛衰周期，及明白没有任何事物是永恒的。

SGX: Weak Sep ADT could linger on (DMG)

(NEUTRAL, S$6.74, TP S$6.90)

We are cutting our ADT assumptions, and downgrading recommendation. 1QFY12 securities market average daily turnover (ADT) was weaker than expectations. For the period of Jul-Sep 2011, securities market ADT of S$1.60b was up from Apr-Jun 2011’s S$1.45b. However, it is below our expectations. Factoring in the global market uncertainties (which led to Sep 2011’s ADT of a lower S$1.37b), we are lowering our FY12 ADT assumption to S$1.66b, from S$1.90b previously. Our FY13 ADT assumption is also cut to S$1.78b, from S$2.02b previously. Following this, we cut our FY12F & FY13F net profit by 12% and 11% respectively. Our target price for SGX, which is pegged to FY13 EPS, is therefore cut by 22% to S$6.90.

Downgrade to NEUTRAL.

Futures trading volume surged in Aug 2011, but strength not expected to sustain. Aug 2011 futures trading volume was 7.84m, up 49% YoY, on the back of volatile global markets. This pushed up Jul-Aug 2011 futures volume to a monthly average of 6.4m, ahead of Apr-Jun 2011’s monthly average of 5.19m. Whilst this is positive, we do not expect the Aug strength in futures trading volume to persist.

Target P/E rating has been lowered. SGX’s P/E is also unattractive when compared against peers. Based on consensus expectations, SGX’s P/E is higher than the average of peers such as Bursa Msia and ASX. Although SGX’s P/E is lower than HKEx, we feel this is justified given the stronger growth potential for HKEx. Whilst SGX traded at a 10-year historical average P/E of 23x, the P/E was low during periods of global uncertainty. In FY09 (the midst of the global financial crisis), SGX traded at an average P/E of only 16.5x. Instead of valuing SGX at 22x FY13 EPS, we now set SGX target price at 19x FY13 EPS, which yields our new target price of S$6.90.

KSH Holdings: Wins S$49.9m Mount Alvernia Hospital contract (DMG)

(BUY, S$0.215, TP S$0.31)

KSH announced that it secured a S$49.9m building contract by Mount Alvernia Hospital. This win boosted its order books to >S$385m, up 10% from Jun 11. No change to our earnings estimates. We estimate a development surplus of 5.3S¢ per share, on the back of contribution from four property development projects. We expect property to give earnings a lift for the next few years. Based on our SOTP valuation, our TP of S$0.31 is maintained as we value its construction segment at 5.5x FY12 earnings. Maintain BUY on the back of the attractive valuation (trading at 3.4x prospective earnings).

Diversification of its order books. KSH was awarded a S$49.9m contract to construct an extension to the front lobby of Mount Alvernia Hospital and an extension to the side entrance. In addition, KSH will also be constructing a new medical suite block, all to be carried out over 23 months. KSH’s latest win lifted its order books to >S$385m worth of construction projects (+10% from S$350m in Jun 11) to be fulfilled by May 2014. KSH’s efforts to diversify its construction order books from private residential projects is bearing fruit, with 76.9% of its order book being attributed to private residential projects, 13% from private non-residential projects and 10.1% from public sector projects. With KSH’s strong track record (it secured the S$138.4m construction project for Eight Courtyards in Jun) and sustained construction demand, we believe it would continue to be able to secure more projects moving ahead.

Property to be earnings booster. Last week, KSH as part of a consortium, purchased Hong Leong Garden Shopping Centre for S$171.1m. The consortium intends to redevelop the property, in which KSH has an effective stake of 12.25%. Funding would be via borrowings and internal cash – not an issue for KSH which has a low net gearing of 0.1% as at Jun. We believe the property development segment would boost KSH’s bottomline over the next few years. We have assumed S$6.3m pre-tax earnings contribution from four of KSH’s property development projects, namely Lincoln Suites (Khiang Guan, off Newton Road), Cityscape @ Farrer Park (Mergui Road), The Boutiq (along Killiney Road) and Development 26 (at Geylang Lor. 26).

CapitaMalls Asia Limited – Forays into Suzhou retail scene (POEMS)

Buy (Maintained)

Closing Price S$1.20

Target Price S$1.76 (+46.7%)

CMA to develop largest mall in Suzhou via 50:50 JV, costs Rmb6,740 mil

Strategically located in Suzhou Industrial Park CBD, with direct metro line access

Spent ~$2.3bil YTD, surpassed its target of $2bil investment in 2011

Maintain Buy with fair value unchanged at S$1.76

CMA to develop Suzhou’s largest retail mall

CMA had on 28 Sept 2011, through its wholly-owned subsidiary, entered into a conditional agreement with SIPJUD, to jointly develop (50:50) a prime development comprising a shopping mall and two 20-storey office towers in Suzhou Industrial Park Central Business District. The total development cost of the 310,000sqm project is expected to be about Rmb6,740 mil (S$1,275 mil). That works out to ~Rmb22,000 sqm per GFA. Assuming average rental of Rmb200psm and Rmb150psm for the retail and office space respectively, we estimate the project could provide ~7-8% gross yield on cost after gestation period. The JV is subject to relevant government approvals.

Poise to be the commercial hub of the city

The subject development is next to Jinji Lake, strategically located in the heart of the western CBD of the SIP and near traditional city centre in Suzhou, and has the potential catchments of about 700,000 from both the SIP and the traditional city centre. The development will be directly connected to two metro lines, Line 1 (operational by next year) and a future Line 6, that will further extend the potential catchment to the 10.5mil residents in Suzhou. The subject retail mall aims to cater to both mid-upper and high-end shoppers, mall positioning will be similar to ION Orchard in Singapore.

Demonstrate the ability to acquire asset in prime location

We believe the latest JV demonstrates again CMA’s ability in securing prime assets in key cities of China, by leveraging on its established branding and retail expertise. Post acquisition, CMA has committed to total investment of ~$2.3bil YTD, surpassed its target of $2bil investment in 2011. We estimate CMA to reverse from the current net cash position to 0.22x geared by end-FY11, and still has room for another $2bil spending in FY12 before reaching 0.4x geared. That is before monetizing some of the stabilized assets in its stable.

Maintain Buy with fair value unchanged at $1.76

We expect the latest JV to contribute positively to its RNAV upon completion in 2015, but has minimal impact currently (<1 cent). Our RNAV estimates remain unchanged at $2.07, and fair value is thus maintained at $1.76, with the same 15% discount to RNAV applied to account for the current weak sentiment in the market due to debt concerns in developed countries. We maintain our Buy recommendation on CMA given its strong retail mall development pipeline and great exposure to retail consumption growth in developing countries.

CapitaMalls Asia: Buying a 50% stake in Suzhou mall (OCBC)

Buying 50% of mall in Suzhou Industrial Park. CMA announced yesterday that it would acquire 50% of a shopping mall project in the Suzhou Industrial Park (SIP), in partnership with the master developer of the SIP CBD. Based on its 50% share, CMA would invest ~RMB 3.37b (S$637m) into the project with 50% debt financing. The mall is expected to have 310k sqm GFA (250k retail, 60k offices) and would be completed in 3-4 years. We understand from management that the SIP authorities awarded the stake to CMA despite other interested parties offering higher prices because CMA had a strong track record of mall management. See exhibits 1-7 for more details of Suzhou site.

Likely little effect on share price and RNAV. We believe that the market would be neutral on this acquisition, given macro headwinds and a fairly rich development cost ~RMB 22k psm GFA. Assuming average rents of RMB 220/sqm for retail and RMB170 for office at completion and a cap rate of 5.0%, we believe the price paid is fair but we see little accretion to CMA's RNAV at this juncture. Nevertheless, with CMA's gross retail asset exposure in China exceeding that in Singapore at time of completion for the Suzhou mall, it is likely that CMA's share price would be increasingly driven by the retail outlook in China, especially Shanghai.

Possible capital recycling over FY12-13. We estimate this acquisition would bring CMA's outstanding capital commitment up to ~S$2.7b over the next three years. Looking ahead, our numbers suggests CMA could enter into a phase of capital recycling over FY12-13, especially if management wishes to continue in an active acquisition stance while staying under 30% net gearing. However, divestments would also hinge on the overall market outlook ahead, as low unit prices/rich yields for CMT and CRCT could be obstacles to attractive divestment prices for CMA's mature assets.

Impending dual listing on HKex. CMA also updated this morning that it has received approval-in-principle from the Stock Exchange of Hong Kong. We understand that management is currently in discussion with several major shareholders about transferring their shares to the HKEX to achieve a reasonable float and liquidity there. The listing date is expected to be on 18 Oct 2011.

Maintain BUY. We update our model with latest assumptions and lower our fair value estimate to S$1.54 versus S$1.67 previously, mainly due to lower prices of its REITs holdings. Possible upside catalysts are divestments of mature assets and re-calibration of market expectations for a crisis scenario. Maintain BUY.

BEYONICS (Lim&Tan)

S$0.171-BEYO.SI

􀁺 As warned by management, the company swung into a loss of $7.4mln from a profit of $77,000 last year. The loss widened from quarter ago’s loss of $2mln.

􀁺 The loss was attributed to 14% decline in sales for the quarter as well as the year reflecting weaker demand from hard disk drive customers as well as the weaker US$.

􀁺 Lower capacity utilization rate coupled with high manufacturing and SG&A costs as well as impairment charges resulted in 4Q loss of $7.4mln, dragging full year into a loss of $17.5mln against profit of $7mln last year.

􀁺 The loss eroded shareholders from $297mln to $263mln.

􀁺 Due to the loss, last year’s 0.5 cents dividend was discontinued.

􀁺 While the stock has already declined 34% from its 2010 high and 71% from its 2007 high, we would still avoid it as in 2009 when the company’s profit hit an all time low of $4mln, it had traded down to 0.2x price to book versus its current price to book of 0.35x.

CapitaMalls Asia Limited - Going into Suzhou! (DBSVickers)

BUY S$1.20 STI : 2,708.13

Price Target : S$ 2.51

• Developing its first project in Suzhou via a 50/50 joint venture

• Ready catchment when it is operational in 2015/16

• Slightly accretive to RNAV with a target IRR of 11-13%; maintain BUY and S$2.51 TP

Maiden venture into Suzhou. CMA has announced it is entering into a 50/50 joint venture with Suzhou Industrial Park Jinji Lake Urban Development Co Lts (SIPJUD) to develop and own a shopping mall with 250,000sm GFA and 2 office towers totalling 60,000sm GFA. SIPJUD is owned by the Suzhou Industrial Park (SIP) government and is the master developer of the SIP Central Business District known as Suzhou Centre. The deal is subject to approval by the Chinese government. The site is in the West Jinji Lake CBD, which is located in the heart of the western CBD of the SIP and near the traditional city centre in Suzhou. It is surrounded by offices and high-end residential apartments with an immediate population catchment of 700,000 and will be directly connected to Metro Line 1 (operational by next year) and the future Metro Line 6 from basement 1.

Expect to achieve an IRR of 11-13%. The entire development is expected to cost RMB6,740m (S$1,275m), of which CMA's share will be RMB3,370m (S$637m). This translates to cRMB21,742 psm of GFA. We believe this is an attractive investment given the large population base and high GDP per capita of Suzhou, which is 2.5x that of Shanghai. Retail sales have been growing by c.17% y-o-y. Management targets to achieve a project IRR of 11-13% and the development cost will be spread progressively over the next 4 years. Meanwhile, gearing is expected to head up slightly to over 20% by end of the year.

Maintain BUY. We continue to like CMA for its pan-Asian exposure and its ability to deploy its balance sheet into higher yielding opportunities. The latest purchase will further CMA’s presence in China with 12 malls in the East China area. We estimate that this development could add 2-3Scts to current RNAV of S$2.29. No change to S$2.51 TP, which is already pegged at a premium to RNAV.

Lian Beng Group: Launching sale of industrial building (DMG)

(BUY, S$0.36, TP S$0.71)

Lian Beng Group (LBG) is launching the sale of its freehold industrial building at Mandai and developing part of the plot of land for a workers’ dormitory. LBG, with an effective stake of 55% in the Mandai property, would likely secure the two construction contracts. We estimate LBG’s earnings to be boosted by ~S$1.8m each year from the dormitory (excluding any management fees payable to an external party for managing the dormitory) and ~S$2.7m from the sale of its units in the industrial building (assuming 100% sold). However, we are not adjusting our earnings estimates at this point in time as any significant contribution would probably kick-in only from 2H 2012. Trading at a mere 3.6x prospective P/E, we believe it has the capacity to trade up to 7x for a TP of S$0.71. Maintain BUY.

Launching industrial building units for sale and developing workers’ dormitory. In 4Q 2011, LBG will be launching the sale of its industrial building units located on part of its S$67m, 200k sqf Mandai property, of which it owns 55%. In addition, LBG is developing another portion into a 4,700-bed workers’ dormitory. The development plans for the third parcel is yet to be confirmed. The usage of the land is as follows: dormitory ~42%, industrial building ~37% and third parcel ~21%.

Earnings impact. Based on 45% net margins (the 3-year historical average of its JV partner Centurion Corporation), a 70% occupancy rate and S$180 rental rate per worker per month, we estimate LBG’s earnings to grow by an additional S$1.8m per year from the dormitory business. This excludes any fees payable to the dormitory operator to manage the facility. For its industrial units, assuming asp of S$650 psf and costs of S$583 psf, we estimate earnings arising from the project to come in at ~S$2.7m on 100% of the units sold. In addition, LBG is likely to secure the construction project of the facilities.

Attractively valued at 3.6x FY12 P/E. Construction of the dormitory and industrial building would only be only be completed within 12-15 months and 15-18 months respectively. Any significant contribution from construction is likely to kick-in from 2H 2012. Thus, we are maintaining our earnings estimates for now.

Keppel Corp: Shipyard secures three contracts for S$142m (DMG)

(BUY, S$7.94, TP S$11.03)

Small order wins; maintain BUY. Keppel has secured three contracts for conversion works with a total value of S$142m. Latest contract wins lifted YTD order wins to S$7.9b and outstanding order book to S$9.64b. We maintain our FY11-13F EPS estimates and SOTPderived TP of S$11.03. Keppel Corp currently trades at 10x FY12F P/E and 1.9x FY11F P/B. We remain positive on the stock: (1) we are comfortable with our prospective EPS estimates given high outstanding order book; (2) Petrobras could spring a surprise by finally awarding the remaining newbuild contracts for 21 deepwater rigs by end of this year. The orders are largely ignored by the market given persistent delays. Maintain BUY.

All three contracts to complete in 2012: (1) The first contract is for a fast-track conversion of a

LNG carrier, Tenaga Empat, into a Floating Storage Unit (FSU) for MISC Berhad. The FSU will operate in the Melaka LNG Import Terminal and the project is expected to complete in 2Q12. (2) The second contract is for the modification and upgrading of the FSO Massongo for Dixstone Holding. Work on the project will start in 4Q11 and complete by 3Q12. (3) The third project is the conversion of the tanker Umbe into a FPSO unit for Bumi Armada. The conversion is the seventh major project undertaken by Keppel for Bumi Armada. Work on the project is expected to complete in 4Q12.

Valuation: SOTP-derived TP of S$11.03. Keppel Corp currently trades at 10x FY12F P/E and 1.9x FY11F P/B. Historically, the stock traded at a low of 4x forward P/E during the global financial crisis and a peak of 22x in the last rig newbuild upcycle. We see favourable risk reward at this price but expect the stock to remain volatile due to market concerns on the European debt crisis.

China Minzhong - Play the valuation gap (DBSVickers)

BUY S$0.895 STI : 2,708.13

Upgrade from HOLD

Price Target : 12-Month S$ 1.28 (Prev S$ 2.03)

Reason for Report : Company update

Potential Catalyst: Higher sales of high margin products

DBSV vs Consensus: Below consensus on more conservative farmland acquisition

• Sell-down overdone. Current valuation gap unjustifiable

• Fundamentals remain intact

• Farmland acquisitions and sales of high margin products to drive growth

• Lowered TP to $1.28 to reflect cautious mood. Still 43% upside deserves upgrade to Buy

Attractive current valuation. In our view, MINZ is oversold. MINZ’s share price has fallen 52% from its peak of S$1.85 in 28 February 2011. The stock currently trades at 3.8x FY12 PE and 0.7x FY12 P/BV, at about –2 standard deviation from its average valuations of 7x PE and 1.3x P/BV.

Fundamentals are intact.4QFY 06/11 and FY06/11 results were within expectations. Going forward we expect fundamentals to be intact supported by favourable operating environment. Based on China’s latest CPI data, vegetable prices increased 0.1% yoy. Amid steady demand, there is no sign of vegetable prices falling. Volume demand from customers should remain resilient to the slowdown in general market conditions as MINZ is an upstream producer of staple food in fresh and processed vegetables.

Growth via sales of high margin products and farmland acquisition. Key growth drivers going forward would be increasing sales of high margin black fungus and king oyster mushrooms as they ramp up production, as well as from farmland acquisitions.

Upgrade to Buy, TP S$1.28. In view of the strong earnings visibility, the current valuation gap is unjustifiable. Based on lowered target valuation of 5.5x FY12 PE (in line with valuation of S-chip companies under our coverage), we revised our TP to S$1.28, representing P/BV of 1.0x. With an attractive 43% upside to our TP, we upgrade the stock to BUY.

Neptune Orient Lines Ltd (KimEng)

Background: Neptune Orient Lines (NOL) is a Singapore-based global shipping and transportation company. Its shipping line arm, APL, provides container shipping, terminal services and intermodal operations. Its logistics business, APL Logistics, engages in international end-to-end logistics services and solutions.

Recent development: NOL’s August freight rate slid by 20% YoY to US$2,559/FEU but was flat MoM. This came in below market expectation as a result of (1) weaker rates in the Asia-Europe trade and (2) increased mix of short-haul intra-Asia route. However, shipping volumes of 235,200 FEU remained relatively robust, led by growth (+8.0% YoY) in the major trade lanes.

Key ratios…

Price-to-earnings: nm

Price-to-NTA: 0.76x

Dividend per share / yield: na

Net cash/(debt) per share: (S$0.358)

Net gearing: 30.0%

Share price S$1.135

Issued shares (m) 2,583.264

Market cap (S$m) 2,932.00

Free float (%) 32.1%

Recent fundraising activities June 09: Raised US$0.96b via a 3-for-4 rights issue @ $1.30

Financial YE 31 December

Major shareholders Temasek Holdings (67.3%); JF Asset Management (0.71%)

YTD change -47.9%

52-wk price range S$2.40-0.98

Our view

Huge capex commitment. NOL has approximately US$2.9b of vessel installment payments until 2014, which will be financed through a combination of bonds and committed ship financing. As of 1 July 2011, it still has about US$1.0b of the US$1.5b MTN programme yet to be utilised. Based on our ballpark estimates, net gearing will increase to about 0.65x in FY12.

Another rights issue on the cards? In June 2009, NOL did a major 3-for-4 rights issue (RI) whereby Temasek agreed to sub-underwrite the entire proposed RI. Management believes the net proceeds of about US$0.96b have helped to strengthen the group’s balance sheet at the time (net gearing before the equity raising was 0.45x), as well as provide financial flexibility to acquire any potential distressed assets.

Inexpensive valuation but can wait further. While the stock currently trades at a relatively undemanding 0.76x FY11E P/B, we do not think it is time to buy yet given the uncertain economic outlook. During the 2008 global financial crisis, it has traded briefly to a trough P/B of 0.4x.

Singapore Press Holdings (KimEng)

Event

Singapore Press Holdings (SPH) will announce its full-year results on 12 October 2011. We expect revenue to come in at $1,228.0m (-11% YoY) and net profit of $358.2m (-28% YoY). The recent market meltdown has seen its forward yield increase to an attractive 6.6%. However, we think the stock is oversold as the market seems to have factored in a steep drop in its media earnings. Upgrade to BUY from HOLD with a lower target price of $4.17, based on a total return of 17.9%.

Our View

In view of the global economic uncertainties, we cut our print ad growth assumptions to -2% for FY Aug12 and -5% for FY Aug13, from 5% and 6% respectively. Newsprint costs should start to soften as well, usually with a time lag of about 12 months from the beginning of a slowdown, thereby mitigating the impact of a slide in revenue.

SPH’s current share price indicates that the market has already factored in an earnings decline of around 15% for its media business. The sharpest contractions recorded in the past decade were 15.4% in FY Aug01 and 15.9% in FY Aug02. Nevertheless, the stable income stream from its investments in retail malls should help limit the negative earnings swing. We estimate rental revenue from Paragon and Clementi Mall to contribute about 15% to group revenue by FY Aug13.

SPH has a track record of paying dividends out of its deep reserves, even during periods of crises. Our DPS forecasts of 25 cents for FY Aug12 and FY Aug13 represent a payout of 112-116%, which is still a relatively low ratio compared to that in 2000-04.

Action & Recommendation

Following our last update on SPH in July, we are lowering our FY Aug12/13 earnings forecasts by a further 5-13%. This makes us one of the most conservative brokers on the Street with respect to this stock. Potential land acquisitions for retail property projects using its war chest of $1.3b in cash is a key stock catalyst. But the economic uncertainty posed by the European debt crisis remains a big risk. We upgrade our rating to BUY from HOLD with a target price of $4.17.

Singapore Technologies Engineering Ltd: Right on track (OCBC)

Small but meaningful acquisition. Singapore Technologies Engineering Ltd (STE) announced on 20 Sep 2011 that its American subsidiary Vision Technologies Aerospace Inc. agreed to wholly acquire DRB Aviation Consultants, Inc. (DRB Aviation) for US$1.45m (~S$1.75m). Apart from strengthening STE's cabin interior engineering capability, DRB Aviation is a Federal Aviation Administration (FAA - the American aviation authority) designee in issuing minor Supplementary Type Certificates (STCs) for avionics and interiors projects. While it is possible for STE to develop this FAA designation in-house, management reckons this acquisition is both faster and more cost effective. Alterations to an aircraft's certified layout require an approved STC and STE used to outsource STC certification of its aviation cabin engineering projects. With this acquisition, the STC certification process could be done within the STE Group.

S$68m contract win from MINDEF. STE announced on 13 Sep 2011 that its subsidiary ST Kinetics won a S$68m contract from the Singapore Ministry of Defence (MINDEF) to supply its new generation of Spider Light Strike Vehicles (Spider LSV). Delivery is expected to take place over 2013-14. While the contract value is small relative to the size of a conglomerate like STE, this contract win illustrates STE's ability to continue developing new products.

CPIB investigations. STE announced on 12 Sep 2011, that Patrick Lee, the CFO of the holding company of the group's American business interests, Vision Technologies Systems, Inc. (VT Systems), was arrested by Singapore's Corrupt Practices Investigation Bureau (CPIB). Lee was not charged in court, subsequently released on bail and granted permission by the CPIB to leave Singapore. STE believes this is in relation to certain transactions that happened when Lee was the financial controller at ST Marine. Since then, Lee has taken a leave of absence while the CPIB's investigations and STE's internal inquiry continue. STE Group's financial controller Raphael Chin has been appointed as acting CFO of VT Systems. Management believes this arrangement will not have any material impact on the operations of the STE Group.

Maintain BUY. Since our last report on 9 Sep 2011, the FTSE Straits Times Index has fallen 5.5% to 2,701 points. During the same time, STE displayed its defensive nature as its share price only fell slightly by 0.3%.. Given STE's strong order book of S$10.8b, its 90% dividend payout ratio and that recent news developments do not have a material impact on STE's resilient earnings, we retain our fair value estimate of S$3.37 per share. As the fair value still represents 14.6% upside to our fair value, we maintain our BUY call.

China Minzhong Food Corp - Good-quality S-chip (CIMB)

OUTPERFORM Maintained

S$0.86 @28/09/11

Target: S$1.22

Food & Beverages

• Maintain Outperform and target price of S$1.22. We see value emerging from MINZ’s 31% decline since Dec 10, led by broader concerns over S-chips’ corporate governance. At 3.6x CY11 P/E and 0.8x P/BV, MINZ offers good value, we believe, considering its defensive earnings in this economic climate as well as earnings momentum. We resume coverage with new earnings forecasts, an unchanged Outperform rating and a S$1.22 target price, based on 4.8x CY12 P/E, a 30% premium to the FTSE ST China Index (vs. its average 43% premium this year). We anticipate stock catalysts from continued strong quarterly results and a switch to a Big-4 auditor by FY13.

• Inelastic vegetable demand. MINZ’s earnings grew even during the recession of 2009, as vegetable demand is relatively inelastic. We expect consumer behaviour to be no different in another recession. We project a 3-year earnings CAGR of 32%, powered by farmland expansion. This should be achievable considering its 46% earnings growth in the past recession with less farmland growth.

• Conservatively geared at 0.1x. MINZ had net-cash positions in the past two years. Its cash conversion cycle also shortened from 60 days to 39, comparing well with its competitor China Green’s 101 days. Further, the transparency of its capex plans and full disclosure of farmland assets differentiate it from the other S-chips.

Recession-proof earnings

Sales to increase on the back of inelastic vegetable demand. MINZ is a leading integrated vegetable processor in China, with both vegetable-processing capabilities and its own cultivation bases. Its fresh vegetables are sold domestically while its processed vegetables are exported. An extensive processing platform allows the company to offer more than 100 types of processed vegetables. Global economic uncertainties notwithstanding, vegetable demand should remain strong, backed by: 1) ageing populations in developed markets which would require more fibre intake; and 2) the Chinese government’s pro-farming policies.

MINZ’s sales, in fact, had more than doubled from 2008 to 2010, the period of the global financial crisis. The growth was fuelled by its processed-vegetable exports. We have projected sales growth of 23.3% to Rmb2.4bn for FY12. Our estimates are conservative, given the company’s average sales growth of 45% through the crisis.

Supported by higher number of cultivation bases. MINZ acquired 21,366 mu of vegetable farmland in 2010. This should be ready for cultivation this year. Although the crops will not fully mature until 2013, the land would almost double its total farmland available for cultivation to 58,627 mu. This expansion is motivated by excess demand, with the additional capacity believed to be easily absorbed by the market because of MINZ’s demand-driven business.

We project Rmb703.5m of cultivation sales for FY12 and Rmb1,675m of processed sales, up 38% and 26% yoy respectively. Our projections are based on conservative estimates of Rmb12,000 yields per mu for its cultivation business and the assumption that processed revenue will be 2.4x higher than cultivation sales, using the average sales mix of the past three years. MINZ’s FY11 yields per mu were Rmb14,100.

Gross margins to climb with higher value mix. Increased sales of king oyster mushrooms and black fungi should raise its gross margins as these vegetables have much higher margins than the other vegetables. Gross margins have already improved from 40% to 41% this year with the aid of these vegetables. Production capacity for king oyster mushrooms is expected to increase to 15 tonnes in FY12 from eight tonnes while that for black fungi is expected to increase to 22 tonnes from 15 tonnes.

Assurance of a strong balance sheet

Corporate-governance concerns may continue to hang over S-chips, but we see the following differentiators for MINZ: 1) the transparency of its capex plans. Management discloses committed amounts in each quarter, together with the disbursements made. This data is summarised in Figure 5 below; and 2) full details of its farmland assets:their tenures, land sizes and addresses. In comparison, China Green, its closest competitor, does not disclose details of its farmland assets.

Faster cash collection. MINZ’s cash conversion cycle shortened from 60 to 39 days in FY11, aided by quicker trade receivables and longer trade payables. In comparison, China Green’s cash conversion cycle was 107 days. We like its ability to convert sales to cash much quicker than its competitors, especially given current economic and business uncertainties.

Net gearing of 0.1x. A conservatively geared balance sheet gives us confidence, should another recession occur. Current debt of Rmb327m can be comfortably paid with less than two years of operating cash flows, in our estimation.

Valuation and recommendation

S-chip selldown. We see no fundamental reason for MINZ to shed 31% since Dec 10, particularly as its FY11 earnings had jumped 29.4% yoy, for a 46% CAGR since 2007. Its rock-bottom valuations, we believe, could be linked to the broad sell-off of Chinese companies not owned by the state, which are perceived to be riskier.

Good-quality S-chip! YTD, the FTSE ST China Index has retreated 33%, mirrored by MINZ’s share-price decline. The index is now at 3.7x P/E vs. MINZ’s 3.6x. We argue that MINZ deserves a premium to its S-chip peers for the following reasons: 1) we expect its FY12 EPS to increase to S$0.25 from S$0.20 vs. a 67% decline projected by consensus for its peers; and 2) a more conservative gearing of 0.1x vs. 0.2x for its peers. MINZ has been in net-cash positions for the past two years.

Target price of S$1.22, based on 4.8x CY12 P/E. We observe that MINZ has been trading at a 43% premium on average to the other S-chips. Its earnings outlook for FY12 is expected to be strong and we have conservatively ascribed a 30% premium to S-chips’ current valuations of 3.6x P/E to arrive at our target price at S$1.22 (4.8x CY12 P/E). At current valuations of 3.6x CY11 P/E and 0.8x P/BV, we believe downside is minimal. We see an opportunity to accumulate the stock, anticipating catalysts from continued strong quarterly results and a switch to a Big-4 auditor by FY13.

CapitaMalls Asia Ltd - Accretive acquisition in Suzhou (CIMB)

NEUTRAL Maintained

S$1.21 Target: S$1.34

Mkt.Cap: S$4,682m/US$3,612m

Property Devt & Invt

S$1.27bn JV in Suzhou mixed development

We expect accretion, but only just. CMA has announced a conditional agreement with a government-linked entity in Suzhou, SIPJUD, for a 50% stake in a mixed development in Suzhou Centre. The attributable price of S$637m values the completed mall at Rmb22+psm GFA with expected cap rates of 8-9%. We believe the project has a good location and strong positioning, with the price suggesting upside once it is completed in 2015. We expect CMA to clinch the deal. The positives, however, will not swing valuations, in our view. No change to our earnings estimates but our target price has been lowered from S$1.36 to S$1.34 (still on a 30% discount to RNAV) on lower valuations for its listed vehicles. We remain Neutral, still because of rising risk premiums in China and yield gestation. Reversal of these conditions could provide possible re-rating catalysts.

Strategically located. The proposed 50:50 JV is for a prime site located in the western CBD of Suzhou Industrial Park (SIP). The development is said to have around 250k sq m GFA of retail space and 60k sq m GFA of office space when completed in 2015. Our conversations with management suggest that the project possesses some strong location attributes. The completed property will have direct metro connection at the basement, which would result in high traffic-pass through. In fact, this is supposed to be the only mall with direct train connectivity. The development will be an hour’s drive from Shanghai and 30 minutes by train from Shanghai’s Hongqiao Airport. Flanked by residential and office buildings, management also believes that the development is one of only three organised shopping malls in the city. SIPJUD will be developing the remaining office and hotel components under the JV agreement, which are expected to further boost the asset value of the mixed development.

8-9% yield target should be easily achievable. Based on the purchase price of Rmb22k psm GFA (Rmb31k psm NLA), we see upside for CMA’s yield target of 8-9% by 2015 on completion. CMA guides that comparable retail rents are currently Rmb200-250 psm NLA, which should comfortably meet management’s cap-rate forecasts. Historically, the group managed to achieve 5-7% yoy growth for its Tier-2 malls, a reflection of its asset-management capabilities. Management has an IRR target of the mid-teens on a leveraged basis. It plans to build a mall offering necessity and luxury products.

How did this deal come about? Without going into specifics, management believes that it was the group’s expertise in managing retail malls that had won over the Suzhou government. The success of its Singapore malls was probably one main factor. It guides that there had been other offers for this asset, some at higher prices. CMA has been negotiating for this deal since the beginning of the year, which could explain the attractive pricing.

Funding. If approved, CMA will fund its 50% share of the development through debt and internal resources, at a proposed loan-to-value ratio of 40-50%. On a look-through basis, we estimate that its net gearing will rise from 55% to 60% by 2013, which is within CMA’s comfort level. Borrowing costs have gone up for the group, from 10-20% discounts to PBoC rates in the past to 10-20% premiums. At the project level, we expect eventual NPI yields to still show positive carry.

Valuation and recommendation

Muted accretion for now; maintain Neutral. The deal is now pending Suzhou government approval. However, we expect it to go through and have factored in accretion of 1.5% for RNAV. This is offset by lower valuations for its stakes in listed entities. Our target price thus drops from S$1.36 to S$1.34, still based on a 30% discount to RNAV. After acquiring the Suzhou site, CMA will have stakes in 55 malls in China. Around 59% (by NAV) is due for operations by end-2011, up from 43% in 1H11. This is encouraging, but is unlikely to swing valuations just yet, in our view. We remain Neutral, still because of rising risk premiums in China and yield gestation. Reversal of these conditions could provide re-rating catalysts.

Olam International - Dragged by the markets (DBSVickers)

HOLD S$2.35 STI : 2,701.17

Price Target : 12-Month S$ 2.15 (Prev S$ 2.55)

Reason for Report : Company update, forecasts and TP revisions

Potential Catalyst: Gabon urea project in 1QCY12

DBSV vs Consensus: Lower FY12F-13F earnings due to lower volume growth forecasts

• FY12F-13F earnings raised by 8-13% on commodity price adjustments and changes in FX rates

• DCF-based valuation cut to S$2.15 with higher ERP of 10.5% from 6.5% previously

• Applying peak ERP seen in 2008 GFC would imply a further 32% downside in share price

• Hold. More upside when financing closing for Gabon urea project materializes (expected 1QCY12)

FY12F-13F earnings raised by 8-13%, after we imputed new debt syndication, sugar milling acquisition, higher commodity price estimates and changes in FX rate forecasts; while our volume growth assumptions remain unchanged, except for slightly higher Confectionary & Beverage segment. We expect Olam to deliver 44% y-o-y growth in FY12F core net profit, followed by flat growth in FY13F on lower FX gains. Our forecasts are below consensus, as we employed lower volume growth rates relative to historical performance.

Valuation reduced. Despite higher earnings estimates, we have lowered our TP by 16% to S$2.15 due to use of higher equity risk premium (ERP) in our DCF calculations (WACC 10.5%, Rf 2.2%, B 1.3, TG 3%). Implied ERP movements since 2000 have empirically shown that risk aversion heightens ahead of weak GDP growth. Since Jun11, implied ERP in Singapore stock market have indeed priced-in expectations of slower GDP growth ahead. Based on our inhouse GDP growth forecast, we now impute ERP of 10.5% from 6.5%.

Worst-case scenario explored. Trough DCF valuation based on peak ERP of 14.4% during the 2008 global financial crisis could see a 32% downside from current share price to S$1.59.

Maintain Hold with 9% downside to revised TP. In the absence of any acquisitions, we do not foresee any potential catalysts until 1QCY12, when its Gabon urea project is expected to secure financial closing.

ST Engineering Ltd - Right on track (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$2.94

Fair Value: S$3.37

Small but meaningful acquisition. Singapore Technologies Engineering Ltd (STE) announced on 20 Sep 2011 that its American subsidiary Vision Technologies Aerospace Inc. agreed to wholly acquire DRB Aviation Consultants, Inc. (DRB Aviation) for US$1.45m (~S$1.75m). Apart from strengthening STE's cabin interior engineering capability, DRB Aviation is a Federal Aviation Administration (FAA - the American aviation authority) designee in issuing minor Supplementary Type Certificates (STCs) for avionics and interiors projects. While it is possible for STE to develop this FAA designation in-house, management reckons this acquisition is both faster and more cost effective. Alterations to an aircraft's certified layout require an approved STC and STE used to outsource STC certification of its aviation cabin engineering projects. With this acquisition, the STC certification process could be done within the STE Group.

S$68m contract win from MINDEF. STE announced on 13 Sep 2011 that its subsidiary ST Kinetics won a S$68m contract from the Singapore Ministry of Defence (MINDEF) to supply its new generation of Spider Light Strike Vehicles (Spider LSV). Delivery is expected to take place over 2013-14. While the contract value is small relative to the size of a conglomerate like STE, this contract win illustrates STE's ability to continue developing new products.

CPIB investigations. STE announced on 12 Sep 2011, that Patrick Lee, the CFO of the holding company of the group's American business interests, Vision Technologies Systems, Inc. (VT Systems), was arrested by Singapore's Corrupt Practices Investigation Bureau (CPIB). Lee was not charged in court, subsequently released on bail and granted permission by the CPIB to leave Singapore. STE believes this is in relation to certain transactions that happened when Lee was the financial controller at ST Marine. Since then, Lee has taken a leave of absence while the CPIB's investigations and STE's internal inquiry continue. STE Group's financial controller Raphael Chin has been appointed as acting CFO of VT Systems. Management believes this arrangement will not have any material impact on the operations of the STE Group.

Maintain BUY. Since our last report on 9 Sep 2011, the FTSE Straits Times Index has fallen 5.5% to 2,701 points. During the same time, STE displayed its defensive nature as its share price only fell slightly by 0.3%.. Given STE's strong order book of S$10.8b, its 90% dividend payout ratio and that recent news developments do not have a material impact on STE's resilient earnings, we retain our fair value estimate of S$3.37 per share. As the fair value still represents 14.6% upside to our fair value, we maintain our BUY call.

SINO GRANDNESS (Lim&Tan)

S$0.42-SIGR.SI

􀁺 Sino Grandness will be issuing Rmb100mln zero coupon convertible bonds due in Oct’2014 via issue manager Sun Hun Kai Investments. We understand that several Taiwanese and Hong Kong funds will be subscribing to the convertible bonds.

􀁺 While convertible bonds have caused problems for S-Chips in the pass due to early redemptions we note that the terms set out for Sino Grandness will likely be viewed favourably as the convertible bonds do not have an early redemption option (can only be redeemed in Sept’2014) and can only be converted into shares of 100% wholly owned subsidiary Garden Fresh HK (the fruit and beverage division) and not into new shares of the publicly listed entity.

􀁺 CB holders can decide if they want to convert their holdings into shares one month before Oct 2014.

􀁺 The maximum and minimum dilution of Garden Fresh HK would be 19.9% and 6.7% depending on the financial performance of the subsidiary.

􀁺 Garden Fresh HK is targeting to increase their profit to more than Rmb140mln in 2012 and more than Rmb250mln in 2013, up from Rmb70-80mln this year.

􀁺 The estimated net proceeds of Rmb80mln would be used to expand their production facilities as well as increase their sales and promotional activities.

􀁺 The positives are that the company is raising funds without immediate dilution and at zero coupon to help them expand their beverage business while potential dilution will only come in Oct 2014 and it is at most 20% at the subsidiary level (Garden Fresh HK).

􀁺 We have a BUY on Sino Grandness.

Transcu Group (KimEng)

Background: Transcu was formed after the 2008 reverse takeover of cinema hall operator Eng Wah Organisation. The RTO was effected via an issue of 1.6b new shares, effectively diluting the original shareholders to less than 10% and giving the new Japanese owner majority control of the restructured company. Today, Transcu can best be described as a life sciences and biomedical company. It focuses on three key areas – transdermal drug delivery systems, specialised cosmetic products and green fuel technologies.

Key development: Our last update on Transcu was in February this year when we gave it one chilli, the lowest rating we have ever had on a stock since we started the Hot Stock series. In June, trading on the stock was suspended on cash flow concerns and it has remained so as the company sought to restructure itself.

Our view

Ample warning signs. In February, we warned that Transcu’s cash flow was under pressure, and as at December last year, current liabilities exceeded current assets by 2.5x. We also said “the company has been in the red and severely diluting minority shareholders since IPO. A recent rights issue has given it a reprieve… until end-1H2011. However, this may be its last chance”. We were proven prescient when the company suspended trading of its shares in June after it warned of immediate cash flow concerns and that it might be placed on the SGX watch list for having recorded three consecutive years of pre-tax losses.

CEO to play white knight but with stiff conditions. Transcu’s substantial shareholder and CEO, Mr Akihiko Matsumura, has proposed a cash reprieve for the company via a US$7m shareholder loan. In return, however, it will have to give up its exclusive distribution rights for its green fuel technology products such as the NEFS fuel system for the markets of China and Russia, the thermal solutions technology as well as the renewable energy technology. Each step of the proposal is subject to shareholders’ approval and the recommendation of the IFA.

Key ratios…

Price-to-earnings: na (loss-making)

Price-to-NTA: na (current liabilities exceed current assets)

Dividend per share / yield: na (no dividends since RTO)

Share price (S$) na (suspended)

Issued shares (m) 2,784.5

Market cap (S$m) na

Free float (%) 75.9

Recent fundraising activities (capital markets only) Jan 11: 1-for-3 rights issue at $0.02 per rights share, and $0.04 exercise for accompanying warrants

Dec 09: Equity line facility of up to S$72m with YA Global Master

Oct 09: 320m new shares @ $0.096

Mar 09: Equity-linked structured notes up to S$80m (due 2014)

Feb 09: 25m new shares @ $0.25

Financial YE 31 March

Major shareholders CEO Akihiko Matsumura (24.1%)

Sarin Technologies (KimEng)

Event

Sarin launched its Light Performance Technology (LPT) system, the Sarin D-LightTM, last week at the Hong Kong Jewellery & Gem Fair 2011. This is a first step towards rolling out LPT as the next revenue driver, after the successful GalaxyTM system. While there are uncertainties in the near term, we remain positive on its long-term prospects. Maintain BUY with the target price adjusted to $1.42, purely for USD/SGD exchange rate changes.

Our View

According to Rapaport, a leading resource for the diamond industry, the Hong Kong jewellery fair attracted an average traffic with a lot of price discoveries going on among buyers and sellers. The polished market hopes for price stability and signs that the demand in the Far East would compensate for any potential sluggishness in the West. With the fourth-quarter holiday season coming up and robust demand emanating from China and India, we do not expect a major falloff in polished sales.

Polished inventories are said to be low and rough inventories, high. This suggests that manufacturing activities should persist in order to meet polished demand. Manufacturers have

long-term interests to invest in yield-enhancing equipment, being the party with the most tightly-squeezed margins in the value chain. Therefore, while equipment sales could face near-term headwinds, we believe any jitteriness would soothe if demand going into the fourth quarter holds steady, giving manufacturers the confidence to invest in capital equipment. In our view, sales momentum for Sarin should still be sustained for 3Q11 while the risk lies in 4Q11.

The market sell-off has prompted Executive Director Avraham Eshed to accumulate 427,000 shares at $0.87-0.91 per share over August-September from the open market. Sarin also engaged in a series of share buybacks from mid-September with 430,000 shares purchased so far at $0.79-0.825 per share, a sign of confidence in the company.

Action & Recommendation

We see no compelling reason to change our revenue forecast for now but we present a sensitivity analysis of our forecast relative to a fall in equipment sales. A 40% drop in equipment sales, for example, would result in our target price falling to $0.96, based on 16x PER. Maintain BUY with a target price of $1.42.

Marco Polo Marine Ltd - More yet to come (AmFraser)

LAST CLOSE: S$0.380

BUY

FAIR VALUE: S$0.505

Previous FV: S$0.505

Strong order flow, financial position stronger than market expects, expect new OSVs to be bought soon and add to FY12 profits.

New contracts: MPM yesterday announced that it has secured a ship upgrading project worth S$8.5m. We expect this contract to be performed and completed in FY12.

In the month of September alone, in addition to this ship upgrade contract, MPM has also secured a S$10.5m contract to build five 300-foot barges and a S$3.4m contract to build 8 offshore barges.

Leverage is already lower than market thinks: Even though on paper MPM’s 3Q2011 net gearing appears to be 49.6% (which for a shipping company is not high anyway), a closer look into the accounts informs us that its net gearing is actually far lower.

As explained in our last update “Strong profits yet trading below book value”, MPM’s in this year sold two 8,000bhp AHTS vessels and reflagged many of its tugs and barges to its associated company PT BBR. This has increased the Other Current Assets account to $79m from $3m at the start of the year.

Upon delivery of these vessels to PT BBR, these receivables and the debt attributable to each vessel will be taken off MPM’s books. We expect a significant portion of these to happen by 4Q2011, such that net gearing should fall to about 24% (depending on other sources/uses of cash, but debt overall should fall to about S$50m), or generally below FY2010 levels.

TDR will raise S$10m: The company’s portion of the TDR will be 25m new shares, which at current prices will raise about S$10m. The influx of this S$10m will immediately reduce net gearing by a further 9.2% to the 15% region. Since the balance sheet is already deleveraging via the asset sales, we expect this S$10m not to be used to pay off borrowings but to purchase new OSVs.

Low leverage plus incoming cash, hence expect vessel purchases soon: With cash coming in from two sources (recent vessel sales and TDR proceeds) and a sharply deleveraging balance sheet, MPM will be in a very good position to execute the strategy as we have described in our initiation report “Agile strategist in changing environment”.

Currently, OSVs offer the highest margins among its segments of shipbuilding, ship repairs, tugs and barges, and OSVs. Vessel prices worldwide are still low due to macroeconomic worries, and our understanding of management strategy and their previous actions lead us to believe that there will be further OSV purchases soon. These OSVs will likely already have charters, which would allow them to immediately contribute to MPM’s net profits upon purchase.

Watch this company, more yet to come: Given the following factors: i) Natural deleveraging; ii) Cash inflows; iii) Cheap assets worldwide; iv) Strong shipbuilding operations; iv) High oil prices sustaining global exploration & production activities in offshore oil and gas, we remain positive on MPM’s prospects. Its third drydock should also be coming online soon.

In recent weeks, MPM’s share price has jumped from $0.33 to $0.40, outperforming the general market which has remained stubbornly down. Even at today’s $0.38, we see potential for upward revisions if MPM continues to win new building/repair/conversions/upgrading projects for its shipyard, and upon announcement of new OSVs that immediately raise the bottom line. For these reasons, we retain our BUY call and FV of $0.505.

Leader Environmental Technologies (KimEng)

Background: Leader Environmental Technologies (LeaderEnv) is a Singapore-based investment holding company with a 100% interest in China-based Jilin Anjie Environmental. Anjie provides environmental protection solutions for industrial wastegas and wastewater emissions in China.

Recent development: The company posted an impressive 80.7% YoY increase in 1H11 net profit but 2H11 performance would be more critical as more than 80% of its earnings are made during this period. Share price has dived by 47% since our last write-up in May this year, with no negative developments. On the contrary, the stock was recently named as one of Forbes’ Asia’s 200 Best Under a Billion.

Key ratios…

Price-to-earnings: 3.0x

Price-to-NTA: 0.67x

Dividend per share / yield: S$0.0188 / 3%

Net cash/(debt) per share: S$0.059

Net cash as % of market cap: 45.9%

Share price S$0.128

Issued shares (m) 491.612

Market cap (S$m) 62.9

Free float (%) 40.6%

Recent fundraising activities July 10: IPO – 91m new and 25.5m vendor shares @ S$0.21

Apr 11: Placement – 50m new shares @ S$0.25

Financial YE 31 Dec

Major shareholders Lim Baiyin (42.4%), Venstar Investment (3.8%)

YTD change -41.8%

52-wk price range S$0.120-0.325

Our view

No lack of projects. Management said there is no lack of projects in the market and the company can afford to be selective, choosing better-margin projects with favourable payment terms. It also mentioned that it has made good progress in securing new orders and would make a separate update on its orderbook figure. Its last orderbook update was RMB153.7m in May this year.

Acquiring state-owned power plants. LeaderEnv attempts to smooth its revenue stream by undertaking OOT and O&M contracts for its recurring revenue as opposed to lumpy EPC projects. It is awaiting regulatory approval to acquire four state-owned desulphurization systems, which would help kick-start its OOT business.

Improved balance sheet but negative operating cash flow. While recent placement has improved its balance sheet strength, we note the relatively large negative operating cash flow of RMB69m in 1H11. This was because of the large working capital outlay under unbilled contracts work-in-progress and prepayments to suppliers. LeaderEnv attributed this to an increase in business activities.

Magnitude of sell-down uncalled for. The magnitude of the sell-down is uncalled for, in our opinion. Valuation has turned rather attractive with the stock trading at FY10 PER of only 3.0x, 0.7x book value and net cash making up 46% of market cap. Dividend yield, though not particularly enticing, is quite decent at 3.0%.

Singapore Airlines (KimEng)

Event

Singapore Airlines’ (SIA) share price has been surprisingly resilient, trading in an upward pattern since its recent low. The stock has gained 8.5% since last Thursday, while the STI has slumped by 4.0%. Loads and traffic have remained relatively resilient, while declining oil prices could provide a significant respite to the airline’s operating costs. Share buybacks have also supported its price. While we anticipate risks to traffic, we retain our full-year forecasts for now and keep our target price at $14.40. Reiterate BUY.

Our View

As we go into SIA’s busiest quarter, passenger traffic and loads year-to-date have remained steady, with monthly traffic higher by an average of 3.6% over the previous year. While its passenger load factor has slipped slightly due to capacity addition, it is still healthy at between 76% and 80%. SIA also remains committed to expansion and has placed orders for eight B777-300s and leased 15 A330s. Its order of 20 B787 Dreamliners will commence delivery in 2014. The airline also continues to recruit cabin crew.

However, we caution that SIA’s loads are at risk if we enter into a prolonged economic downturn. Its premium passenger travel is highly dependent on business from financial institutions and potential downsizing and lower budgets from this business sector may affect traffic and yields significantly.

One clear respite is lower oil prices. While the current spread between crude oil and jet fuel remains unusually high due to a product supply mismatch, the price trend is likely to be downwards. Our sensitivity analysis indicates that every US$10 reduction in the average jet fuel cost will boost net earnings by S$350m. However, the rising greenback is negative as a significant proportion of costs (including fuel) are denominated in US dollars, while the largest proportion of revenues is in Singapore dollars.

SIA has also been buying up its own shares, which has provided significant support. Since July, it has purchased 10.2m shares at $10.51-14.20 per share. Under the current buyback mandate, there is still headroom for the airline to purchase a further 49.6m shares, which can easily be funded with its S$6b cash.

Action & Recommendation

Our target price remains at $14.40, based on 1.2x P/B. The stock’s 2008 trough valuation was a P/B of 0.8x, translating to an implied floor of $9.50. We believe SIA’s balance sheet will enable it to weather the storm, as has happened several times before.

ComfortDelGro: DTL: short-term pain, long-term gain (DMG)

(BUY, S$1.315, TP S$1.70)

Some pain before the gain in DTL profitability; lowering TP. Though we are positive on CD’s award of the DTL in the long run, we believe it will incur initial start up losses. We expect DTL to be loss making up to 2019, before turning profitable. We reduce our FY13 earnings forecast by 5%, and lower our DCF-derived TP to S$1.70 (from S$1.81 previously). Maintain BUY. We continue to favour CD over SMRT for its more attractive valuation with FY12 P/E of 11.3x, as well as its overseas growth potential.

Recall that NEL took three years to breakeven. We believe it is normal for a train operator to incur losses during its initial running phase. NEL opened in 2003 but only became profitable in 2006. We expect ridership for DTL to take time to reach steady state, while additional staff may have to be trained before actual operations commence. CD will also have to pay a license charge which will add on to cost. These will be negative for earnings at the start.

Overall positive on operations. Expecting DTL to be profitable once operations stabilise. A key positive for DTL is its over 150k sqft of GFA, which is more than 4 times NEL’s. Rental income for NEL formed a significant 18% of CD’s FY10 rail operating profit so we expect rental from DTL to be a key contributor to rail profitability going forward as well. Jan – Aug 11 ridership growth for bus and rail continues to be strong at 6.7% and 14.8% YoY respectively.

DTL a booster to future earnings, but lower value in the short term. We lower our DCF derived TP (WACC 9.4%, terminal growth rate 1.5%) to S$1.70 as we factor in initial years of operation losses from DTL stages 1 – 3. However, we are positive on profit contribution for DTL in the longer term. CD has also indicated that it will maintain its dividend payout ratio of at least 50% of earnings. We continue to like CD for its (1) attractive valuations, trading at FY12 P/E of 11.3x (versus SMRT’s CY12 P/E of 16.0x), and (2) its overseas growth potential.

MIDAS (Lim&Tan)

S$0.40-MIDS.SI

􀁺 2 months after Wenzhou’s high speed train collision which killed 40 passengers, 2 metro trains have collided in Shanghai yesterday, injuring more than 500 passengers.

􀁺 The same reason was cited as the first accident, being the failure of a signalling device made by a joint venture between a Chinese and French company when the first train stalled, causing another to rear-end into it.

􀁺 And what’s likely to bring even more controversy into the situation is that Reuters reported that some railway staff beat to death a victim of the metro train crash after the victim and another passenger argued with them over the accident.

􀁺 The railway ministry had put a stop to new orders for high speed trains amidst investigations over Wenzhou’s crash 2 months ago and Midas and its customers were counting on the metro train projects to help fill the void.

􀁺 Unfortunately, the latest metro train accident means that the worse may not be seen for the railway industry where stocks including Midas have already lost between 60-70% of their stock market value this year.

Singapore Airlines Limited - Initiate with BUY - Catch a safe flight (OCBC)

Initiating Coverage

BUY

Current Price: S$11.40

Fair Value: S$12.59

Cutthroat competition has intensified. Positioned as a premium airline, SIA has always faced tough competition in the aviation industry. Middle Eastern carriers, such as Emirates, Qatar Airways and Etihad Airways, are now competing head-on with SIA in premium air travel. Yet despite SIA’s status as a premium airline, it is also susceptible to the competition from rapidly growing low-cost carriers (LCCs) around the region. To top it all, Qantas is now planning a new Asia-based full-service carrier. Qantas is deciding between Kuala Lumpur and Singapore as the new carrier’s base. If Singapore is chosen as the base for this new airline, SIA will face new competition in its core segment at its backyard.

Competition is not new to SIA. SIA has faced competition from global legacy airlines, LCCs and Middle Eastern carriers for years and it has emerged relatively unscathed. For example, despite the presence of competition the Group in FY11 made earnings of S$0.90 per share, up more than 400% from the crisis-hit FY10. Looking back further, FY11 net earnings was also 2.9% higher than in FY09. In addition, SIA has successfully maintained its standing as a premium carrier and has probably the strongest balance sheet among airlines to weather downturns.

Potential growth from new wholly-owned LCC. SIA has not experienced much growth over the last few years. This is most evident by a falling capital expenditure as a percentage of sales and a rising dividend payout ratio. SIA is currently planning the launch of a wholly-owned subsidiary LCC in May 2012. The new carrier will be operated independently and managed separately from the flagship Singapore Airlines and it will operate medium-to-long haul flights. This new venture could provide the group its next leg of growth, if cannibalisation effects can be minimised. With Singapore-based LCCs mostly focused on short-to-medium haul flights to regional destinations, SIA could potentially develop a new business segment with its new LCC.

Initiate with a BUY. SIA’s share price has fallen 27% from this year’s peak in Jan 2011, along with the rest of the aviation sector. While the threat of recession is very real, the market seems overly eager to price a recession into SIA’s share price. Instead, we believe that a fairer approach is to use an adjusted ex-net cash P/B multiple of 1.01x, or one standard deviation below historical average, to derive a fair value of S$12.59 per share, representing an upside of 10.5%. And we initiate coverage on SIA with a BUY.

Tiger Airways: Progressing into Indonesia (DMG)

(SELL, S$0.87, TP S$0.62)

Tiger Airways has signed a share subscription agreement for its proposed 33% stake in PT Mandala Airlines of Indonesia. Mandala is currently undergoing a financial restructuring process. Post restructuring, the largest shareholder in the airline would be the Saratoga Group with a 51% stake while the remaining 16% will be held by previous shareholders and creditors. The Saratoga Group is a private equity firm with over US$2b in AUM. We note that the airline will still need to gain regulatory approvals before flight operations can commence. The Group expects the process to take 90 days. Pending regulatory approval and further details, we make no change to our estimates. Maintain SELL with TP of S$0.62, pegged at 2x FY12F P/B.

Easing concerns of over-capacity. We view progress made in Indonesia positively although this is just the start of an uphill battle. Regulatory approvals will need to be secured after which Tiger will be facing a tough market. Nevertheless, our concerns of overcapacity and the probability of aircraft deferment will be eased. Tiger plans to increase its fleet in Singapore from 14 to 20 while maintaining its fleet in Australia at eight. It has two aircrafts leased to Philippines SEAIR. It plans to end FY12 with 35 aircrafts hence we believe its plans to allocate its five additional A320s to Indonesia.

Conflicting statements on Thai Tiger. It was reported in the press that Thai Airways Chairman briefed reporters that it will not be extending its MOU with Tiger Airways to set up Thai-Tiger now that it has obtained regulatory approvals for its own LCC, dubbed Thai Smile which is set to launch in July 2012. However, Tiger Airways later made an SGX announcement that talks are still in the works. At this point in time, we are doubtful Thai Tiger will materialise which is a blow to Tiger as Thailand represents a more lucrative market compared to Indonesia, given the under penetration of the LCC market.

Rotary Engineering (KimEng)

Background: Rotary Engineering provides engineering, procurement, construction and maintenance (EPCM) services specialising in the oil and gas industry. It builds and maintains various process plants and modules for the petrochemical industries in Singapore and for offshore locations such as the Middle East.

Recent development: Despite the uncertain environment, Rotary achieved some S$110m in new contract wins over the past three months. However, its stock price has not been spared the market sell-down, with the counter declining by 30% in just the past two months. Its ADR over-the-counter listing in the US market has not done much to quell the flight, with the units trading in line with the local shares.

Key ratios…

Price-to-earnings: 10.1x

Price-to-NTA: 1.2x

Dividend per share / yield: 3.8cts / 6.3%

Net cash per share: $0.062 (including customer deposits)

Net debt as % of market cap: 10%

Share price S$0.595

Issued shares (m) 567.9

Market cap (S$m) 337.9

Free float (%) 60.2%

Recent fundraising Nil

Financial YE 31 December

Major shareholders REL Investments – 29.1%

YTD change -41.7%

52-wk price range S$0.595-1.09

Our view

More traction locally. Among the contracts Rotary has secured over the past three months is an EPC contract with Taiwan-based Chang Chun Group for its initial S$500m investment to build a petrochemical plant. Other notable wins are a S$13m tankage project and additional S$3m in maintenance works for Chevron. We see more scope for new Jurong Island contracts, especially with the opening up of the Banyan sector.

S$850m orderbook. Rotary’s orderbook is estimated at about S$850m, with around 90% of this still in Saudi Arabia. Given its established client base, we expect the company to gain further traction from the ongoing development and new investments at Jurong Island and Saudi Arabia, where it has a good track record for its projects there.

Uncertainty ahead. Due to the nature of its orderbook, Rotary is forecast to see a dip in earnings in FY11. The risk is that contract durations are relatively short, with the current orderbook lasting until the end of next year and new projects may be put on hold if global economic conditions worsen.

Valuations attractive, sentiment not. Rotary’s share price has lost 40% of its value since the beginning of the year, trading at just 6x forward PER. But we have yet to see any major detriment to earnings. Negative sentiment towards the stock would likely persist due to the cyclical nature of the industry that it operates in.

Biosensors International (KimEng)

Event

We initiate coverage on Biosensors International with a BUY rating and a SOTP-based target price of $1.49, implying 25% upside. The company has progressed from a high-risk start-up to one poised for high growth. With BioMatrixTM, the world’s first commercially available biodegradable drug-eluting stent, to spur its growth, we expect EPS to multiply at 63% CAGR over FY Mar12-14. Approval of the product by China’s State Food and Drug Administration would add a new impetus to the share price.

Our View

BioMatrixTM is the first biodegradable drug-eluting stent (DES) of its kind to be commercially available in the world. Backed by 10 years of R&D efforts and three years of positive clinical trial data, it is slated to lift Biosensors to a higher plane as the company gains market share in key regions worldwide.

With the acquisition of the remainder 50% stake in JW Medical Systems (JWMS), Biosensors stands to benefit fully from the former’s high-growth DES business in China. More importantly, it can now tap on JWMS’s strong distribution network to market its BioMatrixTM DES. JWMS accounted for almost one-quarter of the market share of China’s medical device market in 2009. With the full acquisition, Biosensors can expect JWMS to contribute about one-third of its net profit in FY Mar13.

Terumo Corporation of Japan licenses the BioMatrixTM technology from Biosensors and produces its version of the DES under the Nobori brand. In return, it pays a royalty to Biosensors. Terumo claimed to have won 30% of the Japanese market share two months after the product launch. We expect licensing fees to quadruple from US$17m in FY Mar11 to US$66m in FY Mar12 and to grow strongly until the licensing agreement expires in 2016.

Action & Recommendation

Biosensors is a growth stock in the defensive healthcare sector. It has outperformed vis-à-vis the STI, falling only 12.8% since 1 August 2011 compared to the 17.3% decline in the index. Based on its price-to-sales ratio, the stock is trading at a lower valuation than when there were more uncertainties. We expect EPS to grow by 90% in FY Mar12 and 42% in FY Mar13. Our SOTP-based target price of $1.49 implies FY Mar12 PER of 18.7x and FY Mar13 PER of 11.0x. Initiate with BUY.

Hyflux: Paring fair value to S$1.81 - Maintain BUY (OCBC)

Stock likely oversold. Since reporting a slightly muted set of 1H11 results in early Aug, Hyflux Ltd's share price has taken quite a tumble, falling some 23% to hit a low of S$1.50 yesterday. As a recap, Hyflux saw its 1H11 revenue fall 18% to S$197.9m, while net profit fell 35% to S$21.9m. While we had expected the negative knee-jerk reaction, we believe that the sell-down over the past few weeks has been slightly overdone. This as the market is currently only ascribing a forward PER of 13.6x to the stock, which is already below one standard deviation (SD) below its mean of 21.0x. Although the stock has previously fallen to as low as 10x forward PER (-2SD from the mean) during the global financial crisis, we note that the situation is slightly different now.

Order book is stronger than before. For one, the company's order book has improved significantly since then. As of end-Jun, its order book stood at S$2.1b - also the highest ever recorded - which it expects to deliver through to end 2012; this versus just S$1.48b at end-Dec 2008. We further note that the bulk of the S$1.16b EPC (Engineering, Procurement and Construction) contracts mainly comes from the S$750m TuasSpring project, which in our view, is also a significant improvement in the project risk. Meanwhile, the remaining S$940m comes from O&M (Operation & Maintenance) contracts, which typically stretch up to 25 years. And management intends to focus on beefing up its O&M segment to provide more recurring income to offset its otherwise lumpy EPC revenue.

Clean water is an essential commodity. While Hyflux is taking it slow in MENA at the moment (mainly due to the uncertain political climate), we continue to recognize the potential in that region as the need for clean, potable water would only escalate in the future. According to the World Bank , per capita water availability in MENA will fall by half by 2050, with serious consequences for the region's already-stressed aquifers and natural hydrological systems. Meanwhile, China is another area that holds good potential for Hyflux, as the government intends to double its budget for environmental protection and water resource development to US$450b for 2011 to 2015.

Maintain BUY. Hence even in a downturn, we believe that the water industry should continue to be quite resilient, given that clean water is an essential commodity. Nevertheless, due to the lower overall market, we still see the need to pare our valuation peg from 22.5x to 18x (-0.5 SD from mean) blended FY11/FY12F EPS, bringing our fair value lower from S$2.26 to S$1.81. Maintain BUY.

Sim Lian Group (KimEng)

Background: Contractor-turned-developer Sim Lian expands its footprint in both the public and private housing sectors after three decades in the construction industry. It was the first private developer to partner the government in public housing development via the Design, Build and Sell Scheme (DBSS) and to date, it has the most number of DBSS projects to its credit.

Recent development: Sim Lian reported net profit of $200m for FY Jun11 (up 113% YoY), or $0.235 per share. The stock closed at $0.51 last Friday, implying a PER of just 2.2x, and is below its book value of $0.563. On the back of its strong earnings, it has declared a dividend of 4.8 cents per share, an attractive 9.4% yield.

Our View

$120m from Punggol’s Treasure Trove. Total sales broke the 600 mark, achieving 625 units as of last week, or 71% take-up since the 882-unit project was launched in early September. The average selling price was $866 psf, nearly a 15% discount to The Luxurie one MRT station away. We estimate the total pre-tax profits from this project to be $120m upon fully sold.

Centrale 8 over 40% sold. After causing an uproar in June 2011 when five-room units were launched at up to $880,000, which eventually led to the suspension of the DBSS scheme, the public project has since sold over 40% of its units at an estimated ASP of $620 psf, still the most expensive HDB flats in the primary market.

First to be at Tampines Central. Sim Lian’s upcoming executive condominium (EC) project is

located next to its DBSS project Centrale 8. It paid top dollar for the site’s superior location near Tampines MRT station and holds the record of being the priciest EC site ever bought by a private developer, at $392 psf ppr. We expect the project to launch at $740 psf, a $20 psf premium over ARC at Tampines.

Key ratios…

Price-to-earnings: 2.2x

Price-to-NTA: 0.91x

Dividend per share / yield: $0.048 / 9.4%

Share price S$0.51

Issued shares (m) 851.8

Market cap (S$m) 434.4

Free float (%) 36.8

Recent fundraising activities Nil

Financial YE 30 June

Major shareholders Sim Lian Holdings – 53.2%, Lim Ah Kie – 10.0%

YTD change +53.43%

52-wk price range S$0.27-0.55

Marco Polo Marine (KimEng)

Event

Marco Polo Marine’s (MPM) share price has risen by about 20% from its low of $0.32 last month, buoyed by a slew of new order wins and regulatory approval for its offering of Taiwan Depositary Receipts. The TDR issue will comprise 25m new shares and 26.19m vendor shares held by certain existing investors of the company. Nevertheless, we downgrade the stock to HOLD given that it is currently trading near our newly-revised target price of $0.44.

Our View

If the proposed TDR listing eventuates, the new shares would constitute about 6.8% of MPM’s enlarged share capital. We reckon that part of the net proceeds, estimated to be about S$10m, could be used to reduce the company’s borrowings and lower net gearing which was 50% as at end-June. In a credit tightening environment, the cash injection will also help to improve its working capital position.

MPM announced last week that it has secured a shipbuilding order, worth about $10.5m, to

build five deck cargo barges for its Indonesian associate BBR. The construction of the barges will begin next month at its Batam shipyard with delivery scheduled in July 2012. We estimate MPM has clinched approximately $36.8m worth of newbuild contracts (mostly tugs and barges) in FY Sep11.

The broad market sell-off has prompted management to embark on active insider purchase and share buybacks since March this year. Executive Chairman Lee Wan Tang has bought close to 4.9m shares in the open market at $0.33-0.39 per share. He currently owns almost 57% of MPM, including his deemed interest held by Nautical International.

Action & Recommendation

We trim our FY Sep11/13 EPS estimates by 11-14% mainly for the ship chartering segment in consideration of our cautious view on the O&M sector. Accordingly, our target price slides from $0.50 to $0.44, still pegged at 8x FY Sep12F PER. Downgrade to HOLD on limited upside.

Swiber Holdings: Orders piling up but margins decline (DMG)

(NEUTRAL, S$0.505, TP S$0.50)

Record high order book but profitability challenges remain. Swiber boosted its order book to a record high level of US$932m upon securing a US$155m EPIC project in South Asia. The encouraging news came two weeks after the fund raising announcement, as the group planned to issue convertible preferred stock aiming to finance its working capital needs. While top line growth is anticipated to sustain with more order wins, falling gross margin and rising financing costs remain our key concerns. Following the order win, we have raised FY11 and FY12 PATMI estimates by 16.9% and 14.6% respectively. Maintain NEUTRAL with an unchanged TP of S$0.50 as the group needs cost discipline. Despite that revenue has grown four folds from FY07 to FY11F, core PATMI is expected to stay flat during the same period.

Massive order win and more to come. Swiber landed a US$155m EPIC pipeline deal with a South Asia oil major. It is expected to contribute from 4QFY12 to 2QFY13. YTD order wins escalate to US$587m. We are expecting another US$620m in the next 12 months. According to Upstream, Swiber is currently the frontrunner for two offshore installation projects in Indonesia (US$77m) as well as a sub-sea pipeline in India (US$100m).

Investor to bear more non-tax-deductable costs. Swiber planned to tackle its rising capital needs through a private placement of convertible preferred share. With less seniority, it is expected to yield higher than the group’s convertible bond issued in 2009 (5%) and the Multicurrency note issued in 2011 (5.9%), exerting downward pressure to the already falling PATMI margin, which fell 5.8ppt YoY to 5.2% for 1HFY11.

Tiger Airways Holdings Limited - Vying for a piece of Indonesian gado-gado (CIMB)

UNDERPERFORM Maintained

S$0.87 Target: S$0.54

Mkt.Cap: S$475m/US$366m

Airlines

Subscription for 33% stake in Mandala Airlines

Longer-term positive, but maintain Underperform. As expected, Tiger announced last Friday that it has finalised an agreement to subscribe to 22.6m shares in Mandala Airlines, for a 33% stake. We expect Tiger to park new aircraft delivered in Indonesia, lowering the probability of the deferment of its new fleet. Tiger should also be able expand its route portfolio and improve its fleet efficiency with a new Asian base. However, we maintain our Underperform rating, earnings estimates and target price of S$0.54, still based on 8x CY12 EPS. Share price de-rating could include continuing operating losses in the coming quarters for Australia, potential start-up losses for Mandala, and the dilution impact from its recent rights issue.

The news

New share subscription. Tiger announced last Friday that it had signed a share subscription agreement to take 22.6m shares in Mandala Airlines, representing a 33% stake. The Saratoga Group, an investment holding company with investments in natural resources, energy, infrastructure and consumer goods, will hold a 51% stake with the remaining 16% held by creditors following Mandala’s financial restructuring. This announcement had been more or less expected, since Tiger had signed a term sheet in May for the acquisition. Tiger will “pay” for its investment with in-kind contributions, whereby Tiger provides Mandala with certain services, worth an estimated S$14.6m.

Comments

Lowering probability of new-aircraft deferment. We believe Tiger will park new aircraft delivered in Indonesia, lowering the probability of the deferment of its new fleet. Previously, Tiger had planned to increase its fleet in Singapore from 14 to 20 and maintain its Australian fleet at eight for FY12, on top of two aircraft leased to SEAIR. According to its fleet delivery schedule, it would still be welcoming another five aircraft for its Asian operations. Tiger would have to secure another low cost base to accommodate its five aircraft. Otherwise, it would risk over capacity in Singapore or be forced to defer its fleet delivery. We were previously concerned that Tiger might have to defer its new capacity given that the Thai-Tiger venture is most likely cancelled and its investment in Philippine SEAIR is still facing regulatory roadblocks.

Flying international and domestic routes using up to five A320s initially. The Mandala investment is still subject to regulatory approval, which could take up to 90 days. Tiger plans to commence operations once the investment is completed. Mandala will be adopting Tiger’s low cost carrier model and focus on international and domestic routes, similar to Indonesia AirAsia. Indonesia AirAsia currently operates 20 aircraft vs. Mandala’s potential five.

Stiff competition in Indonesia; losses for next three years? The Indonesian aviation market is booming, but not all players are benefitting equally. The domestic LCCs like Lion Air have a stranglehold on the domestic routes, which Indonesia AirAsia had struggled to break into. As a result, over the past few years, Indonesia AirAsia scaled back on its domestic network to focus on the international routes, particularly from Bali to Perth, and connecting Jakarta to the AirAsia group’s two other hubs i.e. Kuala Lumpur and Bangkok.

We believe that Mandala will follow the same strategy, and focus first on the international routes where the presence of Lion Air and other Indonesian LCCs are thin. As a result, Mandala is expected to give Indonesia AirAsia significant competition on key routes like Bali-Perth where Indonesia AirAsia is reportedly making most of its profits.

Although we expect losses from Mandala in the initial years, Indonesia AirAsia has been recording profits for the past five quarters since 2Q10, suggesting that even with strong domestic competition, it is possible for foreign LCCs to operate profitably, as long as the focus remained with international routes, rather than trying to compete head-to-head with the local LCCs in the domestic sectors. We think Mandala will contribute to Tiger more significantly only three years from now, which is the average breakeven period for start-up airlines, as it may not enjoy economies of scale in the early years, while we expect Indonesia AirAsia and other established players in the market to discount heavily upon Mandala’s entry in order to protect their market shares.

Valuation and recommendation

Maintain Underperform. Tiger’s subscription to a 33% stake in Mandala Airlines lowers the probability of its new-aircraft deferment and should allow Tiger to expand its route portfolio. However, we expect tough operating conditions in Indonesia, while its loss-making Australian operations could continue to put a dampener on its earnings in the coming quarters. We believe Tiger will continue to bleed from its loss-making Australian operations in the coming quarters. While Tiger Australia has increased its daily flights from 16 to 18, we have yet to receive any updates on the potential removal of CASA’s flight restrictions for Tiger, which suggests Tiger might have to endure a longer period of losses. Last, the dilutive impact from its recent rights issue should limit share-price upside in the near term. Maintain Underperform and target price of S$0.54, still based on 8x CY12 EPS, the industry’s historical 4-year forward P/E.