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What To Make Of 6 Local Small Caps In Forbes Asia’s Best Under A Billion
Corporate Digest | 03 July 2015
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By: Tan Jia Hui
Articles (82) Profile

While blue chips and large capitalisation (cap) stocks are often the ones that make headlines or steal the limelight, smaller cap firms, some which offer stable earnings coupled with growth potential, should not be overlooked.

The Forbes Asia’s Best Under A Billion list highlights 200 top-performing Asia-Pacific companies “with less than US$1 billion in sales and consistent top- and bottom-line gains” according to information on the website.

In the 2015 edition (with an estimated 17,000 firms screened), six Singapore companies made the cut, up from three in 2014.

A summary of these six companies is presented below.

Industry: Construction ; Hock Lian Seng Holdings, Wee Hur Holdings
Construction players, Hock Lian Seng Holdings (HLS) and Wee Hur Holdings, both made the cut. Looking beyond the persistent weakness in the local real estate market, both companies have their own merits, helping them stand out.

HLS is a civil engineering specialist that is also involved in building and construction, and later expanded into property development and investment.

The company’s net profit margin has trended up in the past five years with a mean of 22 percent. Its return on equity (ROE) averaged 26 percent over this period. HLS boasts a strong balance sheet, with net cash of $173.3 million (cash minus total debt), representing more than 70 percent of its market cap. It had a $440 million order book as of 31 March, with projects extending into 2020.

On the other hand, Wee Hur’s roots began in construction, and has since diversified into property development as well as the dormitory business.

While Wee Hur’s top and bottom lines look lumpy, typical of a construction company, it recorded a rather impressive five-year average ROE of 31.7 percent. The group’s expansion into the dormitory business through a 60 percent-owned joint venture is also a positive catalyst. Geographically, the group has planned projects in Australia, which may help offset the lacklustre performance in Singapore.

Industry: Healthcare; Cordlife Group
With greater recognition of stem cells treatment, easier access for cord blood storage coupled with rising affluence, parents (particularly in Asia) are increasingly willing to fork out the fees for such services.

Cordlife Group is one such service provider, offering umbilical cord blood and cord lining banking services in Singapore, Hong Kong, India and internationally (mainly in Asian markets).

Singapore, the firm’s largest market, has a penetration rate for cord blood storage services of 22 percent, with Cordlife having an estimated market share greater than 60 percent. In comparison, other Asian counterparts like India, Indonesia and the Philippines – in which the firm also has presence – has penetration rates of less than 1 percent, providing potential for high-growth.

The group also has its eyes on the Chinese market, with plans to license technologies to hospitals and launch new screening services.

Investment merits include exposure to both mature and growing markets with strong presence in existing markets, recurring revenue stream (through its deferred payment scheme for storage services) and new products and services in the pipeline.

Risks include Cordlife’s high leverage position – debt-to-equity ratio of 89.6 percent pursuant to China Cord Blood Corporation (CCBC) convertible notes deal – though management has guided that part of the proceeds from the sale of its stake in CCBC to Golden Meditech, if successful, will be used to deleverage the company. Advances in field of medicine could also reduce the usefulness of cord blood as alternative treatments become available.

Industry: Healthcare; Q&M Dental Group (Singapore)
With 71 dental outlets in Singapore, Q&M is a familiar brand name that could be spotted in almost every neighbourhood in Singapore.

Besides targeting the local market, the group has also expanded its reach into Malaysia and China, banking on the growth in demand of private dental services in these markets.

Between 2010 and 2014, the company’s top and bottom lines registered a compounded annnual growth rate (CAGR) of 26.6 percent and 20.7 percent to $100.3 million and $8.6 million respectively, largely driven by inorganic growth through acquisitions.

Q&M has been on an aggressive buying spree in recent months, having announced deals to acquire stakes in at least 17 dental clinics (local and overseas) since May. With a FY15 forward price to earnings (P/E) ratio of 46.9 times, the recent deals provide relatively attractive valuations between 9.9 times and 15.1 times P/E.

With a P/E of 53.8 times as compared to local peers’ average of 45.7 times, Q&M might seem pricy in terms of valuation. However, the group offers investors exposure to a specialised segment in healthcare services as well as to the growing dental healthcare market in China.

Q&M’s diversification across the value chain, into the manufacturing and distribution of dental equipment and supplies is also a plus point. On the other hand, downside risks include over aggressive expansion, cost pressure (particularly in Singapore) and also under performance in target markets.

Industry: Software & Services; Silverlake Axis
An IT software solutions and services provider, Silverlake Axis is perhaps most well-known for servicing clients in the banking industry. According to the firm, 40 percent of South-East Asia’s top 20 largest banks run its integrated banking system – notable names include United Overseas Bank, Oversea-Chinese Banking Corporation and CIMB Group.

Since 2012, shares in the company have more than tripled in value. Boasting net margins between 36.1 percent and 49.7 percent from FY10 to FY14 and yearly dividend payout since FY04, it is not hard to see why it has been a favorite amongst investors.

A large portion of the firm’s revenue is recurring in nature providing earnings visibility, through maintenance and enhancement services rendered (42 percent of FY14 revenue). Furthermore, Silverlake Axis has a strong net cash position of RM327.1 million as of 31 March.

However, it is good to note that that there has been a recent sell down of the group’s shares, after allegations of accounting irregularities surfaced on the web (the alleged post has since been removed).

While the company has rejected the accusations, and share price has since partially recovered, analysts seem less upbeat on the stock (1 ‘Sell’, 3 equivalent of ‘Hold’, 1 ‘Buy’), possibly due to the lack new order wins or any other positive catalysts.

Industry: Telecommunications; Pacific Century Regional Developments
After briefly reviewing the six firms, Pacific Century Regional Developments (PCRD), stands out as perhaps the most interesting. I have to admit though, that I have never looked at the company’s stock before writing this article.

Calling PCRD a telecommunication services company is perhaps quite misleading. The group is actually an investment holding firm owned by Richard Li, son of Hong Kong’s richest man, Li Ka-Shing.

In its 2014 annual report, the company reported its “most significant assets” as the 21.8 percent stake it holds in Hong Kong-listed PCCW (PCRD’s main income contributor), which in turns hold a 63.1 percent stake in HKT (previously known as Hong Kong Telecom).

Besides the impressive 29.3 percent CAGR recorded on net profit in the last four financial years, talks surrounding the stock in recent days is speculation of a possible privatisation deal. There has been a run up in PCRD’s share price since January, from approximately $0.27 to $0.46 as at 29 June close.

With aggressive management share buyback since April 2014, PCRD’s free float stands at 11.2 percent, just 1.2 percent shy of the 10 percent limit that triggers a suspension in trading, according to data available on Singapore Exchange’s website.

A report on website, Stock Research Asia, worked out an underlying fair value of $0.54 for the group’s stock (based mainly on the value of its stake in PCCW and holdings of Share Stapled Units in HKT).

However, for investors tempted to jump on the bandwagon, do note that the share price has already risen quite substantially and there is no guarantee that a privatisation deal will eventually materialise.

Armed with a bachelor in mathematics, Jia Hui keeps close tabs on the oil & gas, and manufacturing sectors in Singapore.

Please click here for more information about this author.

Wee Hur Hldgs  -- -- --   
Business: Engages in the development of real estate projects. [FY17 Turnover] Building construction (74.3%), investment property (25.7%)

Insight: Aug-18, 1H18 revenue tripled to $214.4m as a resul... Read More
Hock Lian Seng Hldgs  -- -- --   
Business: [FY18 Turnover] Civil engineering (97.1%), property development (2.8%), investment properties (0.1%).

Insight: May-19, 1Q19 revenue rose 15.3% contributed mainly... Read More
Cordlife Group  0.455 -0.020 -4.21%   
Business: Co is in the business of cord lining banking and holds the largest market share of private cord blood banks in Singapore, Indonesia and the Philippines.

Insight: Feb-19, 18M18 revenue increased 13% to $12.1.m mai... Read More
Q&M Dental Group (S'pore)  -- -- --   
Business: Co is a private dental healthcare provider in Asia. [FY18 Turnover] Primary healthcare (93.1%), dental equipment & supplies distribution (6.9%)

Insight: May-19, 1Q19 total revenue inched up 4.2% to $29.9... Read More
Silverlake Axis  0.500 -- --   
Business: Provides software solutions & svcs. [FY18 Turnover] Maintenance & enhancement svcs (M&E) (72.7%), software licensing (10.1%), software project svcs (6.7%), insurance processing (5.4%), credit & cards processing (3.4%), sale of software & hardware (1.7%).

Insight: Feb-19, 1H19 revenue jumped 27.8% to RM336.2m due ... Read More
Pacific Century Regional Developments  0.340 +0.010 +3.03%   
Business: Co provides business management and consultancy services.

Insight: May-18, 1Q18 revenue declined marginally by 2.4% t... Read More

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