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Investors’ Corner
Investors' Corner | 22 September 2008

Price – $4.18 Target – $3.90

Our HK/China property analysts believe that the next 12 months will be a differentiating period for the China property market. In terms of regions, we believe that Bohai, Yangtze River Delta, and Chongqing would outperform, while areas like Guangdong, Beijing, Wuhan and Fujian would see further corrections. We expect a 20% decline in Guangzhou in the next 12 months, 10-15% in Chengdu, flat for central Shanghai. Capitaland bought several large sites costing almost $1b in 2007 near the peak of the cycle. We are particularly concerned about Farrer Court and Char Yong Garden, which we believe could potentially require provisions with break-even prices of $1,350 psf and $2,500 psf vs selling prices of $1,200 psf and $2,200 psf, based on our estimates. We are cutting our RNAV by 10% to $4.90 to reflect: 1) 10-20% decline in prices for its residential projects in China; 2) lower selling prices and higher construction costs in Singapore and potential provisions; and 3) lower P/E multiple of 10x for its AUM business. Reiterate SELL. – Citi Investment Research (05 Sep)

Chip Eng Seng Corp
Price – $0.265 Target – $0.47

Chip Eng Seng (CES) clinched $156m design and build contract from HDB for design and construction of residential buildings with a carpark and community facilities. Its strong order books of $843m as at Sep 08, expected to be recognised over the next two to three years. We expect gross margins to be relatively stable as raw material prices increase will be protected by fluctuation clauses for public projects, which account for about 75% of the Group’s existing order books. We continue to value CES using sum-of-the-parts valuation method, valuing its construction business at unchanged 5x FY08F construction earnings and revaluing CES’s unsold property developments. We have revalued all of CES’s unsold development projects at lower than recently transacted price to assume 100% sales in current market. Despite a 25% discount factor to SOTP valuation to incorporate risk of rising labour cost, diesel and steel prices, CES is still trading at a steep discount to our target price. Maintain BUY. – Westcomb (05 Sep)

Penguin Int’l
Price – $0.125 Target – $0.14

Penguin International is being transformed from a ferry operator to an integrated marine and offshore services provider. In the last two years, they have successfully clinched shipbuilding, ship chartering and ship management/operation contracts in the Middle East. Penguin is acquiring more AHTS and offshore support vessels to support the buoyant offshore activities. However, capital intensive fleet expansion program may lead to more debt or share dilution as well as sales and leaseback arrangement to raise capital. In addition, renewal of fleet may also boost earnings through the disposal of vessels, given the current high steel and aluminium price. Volatility in material costs (steel, aluminium and oil) and forex may also affect revenue and margins. We forecast FY08 revenue to grow 17% to $94.9m and earnings to drop 38% to $4.8m due to lower exceptional gain. Based on 30% discount to the projected FY09 NTA of $0.20, we arrive at a target price of $0.14. Maintain HOLD. – SIAS Research (08 Sep)

Biosensors Int’l Group
Price – $0.52 Target – $1.02

Last week, Biosensor’s LEADERS clinical trial results at nine months succeeded in showing that it was non inferior (of equivalence) to the J&J Cypher sirolimus-eluting stent in terms of the primary end point of cardiac death, myocardial infarction (MI), and target vessel revascularization (TVR). We are aware that Biosensors face risks with bigger companies like J&J, Medtronic, Abbott and Boston Scientific as they have 1) stronger balance sheets; 2) Capabilities to bundle and discount products; 3) Capabilities to give big research grants for clinical centres and to clinicians and; 4) Able to embark and sustain a price war. Analysing the various industry interactions and data, we are positive on the overall future for Biosensors. More news flow at TCT 2008 in Oct 08 will help provide greater visibility to Biosensors’ end purchasers – the clinicians. As long as Biosensors’ cost cutting and sales/marketing execution continue to be on track, we are confident that they will be able to meet guidance and become a rising force to be reckoned with in the DES industry. Maintain BUY. – OCBC Investment (09 Sep)

Datapulse Technology
Price – $0.175 Target – $0.21

We expect software sales to pick up strongly again in FY10 and with Datapulse’s healthy balance sheet and commitment to the optical disc business, it stands to gain and capture more market share as its peers exit the market. In fact, management said that it has been approached by several potential new customers from ASEAN, especially in Malaysia and Thailand, as their existing suppliers are facing difficulties or exiting the business. The gaming sector is making its importance felt, driven largely by Microsoft’s Xbox-related gaming software business. With a much bigger installed base for X-box game consoles, the group is starting to see more orders from Microsoft as well as second and third party software customers. Datapulse is also doing more bundling of accessories for Microsoft, whereby the latter consigns accessories such as guitars, drums and microphones. We understand that selling prices and margins for this business exceed the traditional DVD-ROM business. We have raised our FY09-10 EPS forecast by about 5% to factor in our higher sales assumptions. Maintain BUY. – CIMB-GK (09 Sep)

Raffles Medical Group
Price – $1.04 Target – $1.01

We found that private hospital admissions tend to be correlated with the economy. Valuation premium for Raffles Medical Group (RMG) reached a high of c. 65% in mid-07 on positive view of the healthcare sector such as an ageing and rising population, promoting Singapore as a medical hub, and Temasek Holdings and Qatar Investment Authority become shareholders. Realistically, as global economic growth slows, we think admissions growth could slow, as consumers become more careful in their spending. For private healthcare providers, we could see slower growth as consumers opt for public hospitals instead, opt for less costly procedures or wards, delay or opt out of elective surgeries, and a slowdown in foreign patients. Notwithstanding the above, we should see growth from RMG as it increases its operational beds, albeit slower from our earlier assumptions, and effects of operational efficiencies. We downgrade our recommendation to HOLD. – DBS Vickers (09 Sep)

SC Global Developments
Price – $0.77 Target – $1.02

SC Global announced that it has sold all the 30 units released in Phase 1 of the Martin No. 38 development at an average ASP of $2,130psf. The ASP achieved so far is ahead of the group’s earlier announced expected price of $2,000psf and above our current assumption of $1,800psf. Breakeven for this development is estimated at $1,162psf. Assuming the higher ASP for the entire development, the group should rake in better than expected revenue and would have locked in about 57% of the entire development cost. The stronger profit flow would also add 6cts to our current RNAV. Sales response at the mid-market project is encouraging and would enable the group to convert its landbank to sales thus improving cashflow. However, take up at the two earlier launched projects – Hilltops and The Marq on Paterson Hill had remained relatively unchanged at 13% and 41% sold to date, indicating that the high-end segment remains challenging. Maintain HOLD. – DBS Vickers (09 Sep)

Singapore Exchange
Price – $6.37 Target – $5.20

Securities market turnover remained weak in Aug-08, averaging a daily $1.20b. We are cutting our assumption of FY09 securities market average daily turnover from $1.77b to $1.45b. We are also lowering our FY10 assumption from $2.02b to $1.49b. We recognize that futures clearing revenue continues to be robust. 4QFY08 futures clearing revenue was up 27.3% YoY, and accounted for 22% of operating revenue. The star performer was the CNX Nifty Index accounted for 22.5% of the 4Q08 futures volume traded, up from only 0.4% in 4Q07. In the recent FY08 results release, Singapore Exhange (SGX) declared a final dividend of $0.29/share. We believe SGX could experience significant share price weakness after the ex-dividend date. Despite our assumed steady futures trading volume, the weakness for the securities market turnover value necessitate our lowering of FY09 net profit forecast to $337.8m. Our FY10 net profit forecast has also been cut to $348.5m, from $405.9m. SELL. – DMG & Partners (09 Sep)

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