Industry Report
20 November 2008 (No. of pages: 43)
Singapore Small Caps Singapore: Capital goods
Negative Chris Sanda, CFA (65) 6321 3085
[email protected]
From irrational greed to irrational fear Summary As at 11 October 2007, the share prices of more than one-in-five Singapore-listed stocks had more than doubled during the year. About a year later, more than one-in-14 stocks on the Singapore Stock Exchange have a negative enterprise value (EV). Of the 57 negative-EV stocks as at 14 November 2008, we ask: which have undeservedly low valuations and which are value traps? We profile JES International (JES SP, S$0.12, Not rated), Cacola (CCF SP, S$0.075, 1), Changtian Plastic (CPC SP, S$0.11, Not rated), China Paper (CPAP SP, S$0.15, Not rated), Sinostar PEC (SSTAR SP, S$0.08, Not Rated) and Advanced Holdings (ADV SP, S$0.10, Not rated). Our top small-cap pick: Oceanus (OCNUS SP, S$0.16, 1). This abalone farmer has good earnings visibility, strong free cash flow, and attractive valuations, in our view. Recent rating upgrades and downgrades: Man Wah – 2 (Outperform) to 1 (Buy); HTL International – 4 (Underperform) to 5 (Sell); Sitra Holdings International – 4 (Underperform) to 5 (Sell); SMB United – coverage dropped; SunVic Chemical – 2 (Outperform) to 5 (Sell); CWT – 2 (Outperform) to 4 (Underperform); Koda – 3 (Hold) to 5 (Sell); Best World – 2 (Outperform) to 4 (Underperform); Tat Hong – 3 (Hold) to 4 (Underperform). Singapore small caps: valuation summary Stock Cacola Oceanus Man Wah KS Energy Jasper China Essence Lorenzo China Zaino Tat Hong Best World CWT SunVic Koda HTL Sitra China Lifestyle F&B
Price TP (S$) (S$) 0.075 0.45 0.16 0.535 0.155 0.28 0.59 2.35 0.20 0.345 0.305 0.75 0.055 0.09 0.24 0.68 0.60 0.52 0.22 0.24 0.335 0.46 0.15 0.11 0.185 0.14 0.085 0.12 0.08 0.07 0.18 0.22
Rating FYE 1 Dec 1 Dec 1 Mar 2 Dec 2 Mar 2 Mar 2 Dec 2 Dec 4 Mar 4 Dec 4 Dec 5 Dec 5 Jun 5 Dec 5 Dec 5 Dec
FY07 1.1 9.5 6.1 1.9 27.2 4.2 1.7 3.8 3.5 3.4 5.0 5.1 2.4 3.5 12.5 5.2
PER (x) FY08E FY09E 0.9 1.8 3.6 1.5 2.8 2.5 3.0 2.2 n.a. 3.7 2.6 2.6 2.6 2.9 2.5 1.6 3.4 3.3 3.5 3.4 3.0 3.9 1.7 3.5 3.9 6.5 n.a. 9.9 29.8 17.9 4.5 3.8
FY10E 1.5 1.3 2.1 2.2 3.9 2.0 2.0 1.4 3.4 4.2 4.5 3.6 4.8 5.2 6.8 3.2
FY07 neg. EV 6.5 5.0 6.1 81.3 2.9 2.8 0.6 3.3 1.2 4.9 3.5 1.3 1.2 9.5 2.3
EV/EBITDA (x) FY08E FY09E neg. EV neg. EV 2.8 1.1 2.3 1.9 3.7 2.5 132.8 3.0 1.7 1.6 2.9 2.9 0.4 0.3 2.4 2.5 1.3 1.3 2.7 3.9 1.5 1.9 1.9 2.8 2.8. 4.1 13.8 11.5 2.0 1.7
FY10E neg. EV 0.9 1.6 2.3 2.6 1.2 2.4 0.2 2.4 1.4 4.4 1.8 2.2 4.3 6.3 1.5
Dividend yield (%) FY07 FY08E FY09E FY10E 18.8 23.8 12.1 15.4 0.0 0.0 14.1 15.9 3.8 4.8 6.1 7.3 15.3 10.2 10.2 10.2 0.0 0.0 0.0 0.0 2.6 5.1 5.2 6.0 15.5 15.5 15.5 15.5 0.0 7.9 12.4 14.7 7.5 11.3 12.2 11.7 9.1 9.1 9.1 7.3 6.0 9.0 9.0 9.0 1.6 6.0 6.0 6.2 11.7 8.2 4.8 7.0 7.1 0.0 2.4 4.7 1.3 1.6 0.8 1.1 5.5 6.2 6.3 6.4
Source: Company, Daiwa forecasts Note*: Pricing as of 14 November 2008. All companies with non-December fiscal year-ends have actual FY08 figures. EV is based on current shares, last reported net debt and exchange rates assumed in the back of this report.
IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT.
Global Equity Research
Contents Hot topic............................................................................................................................3 Combing through the negative-EV stocks .................................................................3 Top pick with a market cap of less than S$1bn ................................................................7 Oceanus......................................................................................................................7 Key charts & tables...........................................................................................................8 Company section Cacola Furniture (CCF SP) .....................................................................................10 JES International (JES SP) ......................................................................................15 Changtian Plastic (CPC SP) ....................................................................................21 China Paper (CPAP SP) ..........................................................................................26 Sinostar PEC (SSTAR SP) ......................................................................................30 Advanced Holdings (ADV SP) ...............................................................................35
Chris Sanda, CFA (65) 6321 3085
Singapore Small Caps
2
Hot topic Combing through the negative-EV stocks Remember how inexpensive some Indonesian stocks got in 1997 and 1998?
Veteran investors in Asian equities may remember how badly Indonesian stocks were affected in 1997 and 1998 by the respective effects of the Asian currency crisis and the fall of the Suharto regime. The Jakarta Stock Index (JSI) fell from 706.597 on 8 July 1997 to 256.834 on 21 September 1998. In 1998, there were several Indonesian stocks that traded at very low multiples, partly because of large price declines (eg, the ‘P’ in Price/Earnings) and partly because of uncertainty in the quality of earnings (eg, the ‘E’ in Price/Earnings). After that, Indonesian stocks performed very well (eg, the JSI rose by 179.0% from 21 September 1998 to 21 July 1999).
Jakarta Stock Index
FT Straits Times Index
800
4,500
700
4,000
600
3,500 3,000
500
2,500
400
2,000
300
Source: Bloomberg
1-Oct-08
14-May-08
8-Aug-07
26-Dec-07
1-Nov-06
21-Mar-07
14-Jun-06
7-Sep-05
25-Jan-06
1-Dec-04
20-Apr-05
14-Jul-04
8-Oct-03
0 25-Feb-04
0
1-Jan-03
500 29-Oct-91 17-Mar-92 4-Aug-92 22-Dec-92 11-May-93 28-Sep-93 15-Feb-94 5-Jul-94 22-Nov-94 11-Apr-95 29-Aug-95 16-Jan-96 4-Jun-96 22-Oct-96 11-Mar-97 29-Jul-97 16-Dec-97 5-May-98 22-Sep-98 9-Feb-99
1,000
100
21-May-03
1,500
200
Source: Bloomberg
Stocks listed in Singapore are trading currently at very low valuation ratios
In a sense, it seems history is repeating itself, as there are once again stocks with exceptionally low PERs. In this case, the inexpensive stocks are in Singapore. While many of the stocks may deservedly have low valuations, there are also some companies that are relatively high-quality and are trading currently at PERs of less than 2x. We even found 57 companies that have negative EVs (ie, more cash than market cap and debt) as of 14 November 2008. These stocks are listed on the following page.
What do these stocks have in common?
Apart from the size of the stocks, it is difficult to draw any conclusions as to the common industry or geography that binds the group together. Unsurprisingly, all but one of the 57 negative-EV stocks have market caps of less than US$1bn, and only three have a market cap of larger than US$100m. In our view, there does seem to be a slight over-representation of so-called S-chips and companies that have been listed within the past three years.
Chris Sanda, CFA (65) 6321 3085
Singapore Small Caps
3
Negative-EV stocks listed on the Singapore Stock Exchange Ticker YZJ SP HLF SP CMILK SP JES SP CSPORT SP LHL SP MR SP SBD SP THK SP AP SP CPC SP CPAP SP PERT SP LAP SP SICON SP SSTAR SP FUXC SP ORIC SP QFENG SP CERAT SP IPC SP OSI SP IDT SP ADV SP TREK SP SKYP SP AEI SP SHC SP CCF SP ITRR SP INFO SP CNGI SP CPOW SP PDS SP JSH SP OUHUA SP SSC SP MIT SP INN SP NIP SP UMS SP SUNR SP RTL SP STP SP AZEUS SP AMDA SP DAYEN SP PLAS SP OCL SP MENR SP GMAG SP SBT SP PLC SP SPP SP SRAY SP SINX SP ONI SP
Name Yangzijiang Shipping Hong Leong Finance China Milk JES International China Sports Int'l Longcheer Mediaring Singapura Finance Thakral Auric Pacific Changtian Plastic China Paper Hldg Pertama Hldg Lion Asiapac Sino Construction Sinostar PEC Fuxing China Oriental Century Qian Feng Fabric China Eratat IPC Corp Ltd Ocean Sky Intl IDT Hldgs Singap Advanced Holdings Trek 2000 Intl Sky China Petrol AEI Corp SHC Capital Ltd Cacola Furniture Interra Resource Informatics C&G Industrial China Powerplus Powermatic Data China Jishan Ouhua Energy Sim Siang Choon Manufacturing Integration Inno-Pac Hldgs Nippecraft Ltd Unionmet Sing Sunright Ltd Rotol Singap Ltd Star Pharmaceuticals Azeus Systems Armarda Group Dayen Environmental Plastoform Hldg Oculus Mirach Energy General Magnetic Sinobest Plato Capital SP Corp Sunray Holdings Singxpress Ltd Oniontech Ltd
Mkt. cap (S$m) 1,518.4 994.7 262.2 139.9 107.8 103.1 84.2 83.0 78.4 75.4 72.6 66.3 58.6 54.7 54.0 51.2 48.0 39.9 36.8 35.3 34.4 34.0 33.4 30.4 29.7 26.5 26.1 26.1 25.9 25.7 25.1 23.4 21.2 19.1 18.1 17.2 16.9 16.6 16.3 15.8 14.7 13.5 13.4 12.9 12.0 11.6 10.2 10.1 10.1 8.7 8.0 7.8 7.7 7.0 6.7 4.1 3.4
EV (S$m) (60.2) (145.1) (144.4) (130.1) (11.5) (12.6) (1.2) (11.6) (20.6) (21.4) (42.9) (15.9) (4.0) (12.9) (32.4) (59.8) (25.0) (10.5) (7.7) (22.9) (12.2) (1.1) (53.4) (18.0) (2.4) (2.8) (0.6) (9.8) (27.9) (3.0) (4.6) (67.6) (39.5) (20.6) (1.2) (4.9) (11.4) (0.9) (0.5) (3.0) (14.1) (3.4) (1.4) (16.8) (2.3) (10.9) (2.3) (3.2) (4.8) (9.2) (0.2) (3.0) (2.2) (3.0) (2.4) (4.3) (4.5)
EV/mkt cap (%) (4.0) (14.6) (55.1) (93.0) (10.6) (12.2) (1.5) (14.0) (26.2) (28.4) (59.1) (24.0) (6.7) (23.6) (59.9) (116.8) (52.1) (26.3) (21.1) (65.0) (35.4) (3.3) (159.9) (59.2) (8.0) (10.4) (2.3) (37.7) (107.7) (11.7) (18.2) (288.8) (186.1) (108.0) (6.9) (28.2) (67.3) (5.4) (2.9) (19.0) (95.5) (25.1) (10.0) (130.5) (19.4) (93.4) (22.8) (32.0) (47.8) (105.5) (2.1) (38.9) (29.2) (43.2) (35.1) (104.4) (133.4)
Source: Bloomberg and Daiwa calculations for JES, CPC, CCF, CPAP, SSTAR and ADV Note: Prices as of 14 November 2008
Chris Sanda, CFA (65) 6321 3085
Singapore Small Caps
4
Negative EVs may indicate bargains, in our view
What does ‘negative EV’ mean? Since most of the stocks are micro-cap stocks, many institutional investors may find it difficult to find stocks that they could add to their portfolios. However, individual investors and dedicated small-cap funds may find some hidden gems in the list.
Negative EV also illustrates market pessimism
We also think that the list is interesting as an illustration of the overall market psyche. We performed a market-price analysis back on 11 October 2007. At that time, we noticed that there were many small-cap stocks whose share prices were doubling. From 1 January 2007 to 11 October 2007, more than one-in-five Singapore-listed stocks had doubled their share prices. We think this illustrates how ‘exuberant’ the market was at that time. Barely more than a year later, it is a stark contrast. As share prices have declined since last year, an increasing number of stocks has started reaching negative EV. We wondered how common it was to have negative EV. As of 1 October 2008, it was 24. As of 29 October 2008, through the worst part of the STI’s decline in 2008, that number nearly tripled to 65. With the recent rebound of the stock market, the number of negative EV stocks has shrunk to 57 (equal to about one in 14 active stocks on the Singapore exchange). Also, only 19.0% of Singapore-listed stocks have outperformed the STI year-to-date in 2008. It almost goes without saying that 2008 has been a very bad year for small caps. In the year-to-date, about half the total active number of stocks on the STI have lost more than half their value, and more than one-in-seven have lost more than 75% of their value. While Singapore does not have a ‘VIX’ index to tell how much fear is in the market, we think that this is highly illustrative.
Singapore stock performance % of stocks that had following returns (%): Over 300% 200-300% 100-200% Everything else Lost 50-66% Lost 66-75% Lost over 75%
2002 0.2 2.4 0.2 85.0 8.6 2.4 1.2
2003 1.5 11.1 1.5 84.0 1.1 0.0 0.8
2004 0.0 1.5 0.0 86.0 9.6 2.2 0.5
2005 0.3 2.1 0.3 86.1 9.0 1.3 0.7
2006 To 11 Oct 07 1.8 2.9 9.1 14.3 1.8 2.9 84.5 79.2 1.3 0.6 0.1 0.1 0.4 0.0
1 Jan 08 - 14 Nov 08 0.0 0.0 0.0 48.6 20.0 14.9 16.5
SGX mainboard stocks % of stocks that outperformed the STI
2002 56.6
2003 64.1
2004 19.2
2005 30.3
2006 To 11 Oct 07 1 Jan 08 to 14 Nov 08 41.2 56.1 19.0
Source: Bloomberg Note: Stock list subject to survivorship bias as performance is based on stocks as of 11 October 2007 for stock performance prior to 11 Oct 2007. Stocks’ performances from 1 January 2008-14 November 2008 are based on active stocks listed as of 14 November 2008.
Why do these stocks have negative EV?
We characterise negative-EV companies into three different types. We call the first type of companies the ‘deservedly cheap’. These stocks are characterised as generating losses, having weak fundamental outlooks, and/or unattractive businesses. For example, a cash pile might evaporate after several years of losses. Other times, a company will have cash, but plans to invest this in a business that has low returns, thereby turning a 1.0x PBR cash asset into a working asset that may be worth less than a 1.0x PBR.
Beware of stocks that have low valuations for reasons that are not apparent
We call the second type of companies the ‘cheap for hidden reasons’. In our experience, whenever one does a screen of ‘cheap’ stocks, there are companies for which the market has already factored in a lower share price for some reason that the casual observer might not recognise readily.
We believe there are some stocks that are truly inexpensive
The third type is the proverbial baby that has been thrown out with the bathwater. Almost all stocks in Singapore have recorded significant declines during the year and some have been pushed down to very inexpensive prices regardless of fundamentals, due we believe to redemptions, forced selling and fear. This is not to
Chris Sanda, CFA (65) 6321 3085
Singapore Small Caps
5
say that this group of stocks will be unaffected by the global economic downturn, but negative EV is fairly dramatic, and we believe that fundamentals would have to be quite distressed in order to justify such valuations. We narrowed the list of 57 down to 18
Ideally, one should separate the 57 into those three groups, with the idea to try and eliminate the first and second group to get to the third group. We start by eliminating any company that has generated a net loss in any of its past eight quarters, or did not have any quarterly data available. This narrowed the list of 57 down to 28. We then removed any company where we were subjectively concerned about corporate-governance issues. This narrowed the list down to 18 (‘List of 18’).
The ‘List of 18’ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Ticker YZJ SP HLF SP CMILK SP JES SP CSPORT SP AP SP CPC SP CPAP SP PERT SP SSTAR SP ORIC SP CERAT SP IPC SP ADV SP CCF SP CNGI SP AZEUS SP AMDA SP
Company Yangzijiang Ship Hong Leong Finance China Milk JES International China Sports Auric Pacific Changtian Plastic China Paper Pertama Sinostar PEC Oriental Century China Eratat IPC Corp Advanced Hldgs Cacola Furniture C&G Industrial Azeus Systems Armarda Group
Key businesses Ship building Financial services Bull semen/Dairy cows Ship building Athletic apparel manufacturer Food/Property development Adhesive tape manufacturer Paper manufacturer Singapore's Harvey Norman Propylene refinery Education company Athletic apparel manufacturer Property/education Industrial process engineering Furniture Textiles Technology IT consultancy
Key market PRC Singapore PRC PRC PRC Singapore PRC PRC Singapore PRC PRC PRC Singapore PRC PRC PRC Singapore Singapore
Mkt cap EV/Mkt cap Profiled in (S$m) (%) this report? 1,518.4 (4.0) 994.7 (14.6) 262.2 (55.1) 139.9 (93.0) Yes 107.8 (10.6) 75.4 (28.4) 72.6 (59.1) Yes 66.3 (24.0) Yes 58.6 (6.7) 51.2 (116.8) Yes 39.9 (26.3) 35.3 (65.0) 34.4 (35.4) 30.4 (59.2) Yes 25.9 (107.7) Yes 23.4 (288.8) 12.0 (19.4) 11.6 (93.4)
Source: Bloomberg and Daiwa calculations for JES, CPC, CCF, CPAP, SSTAR and ADV Note: pricing date as of 14 November 2008. Advanced Holdings did not report a loss in any of its eight prior reporting periods. The company did report an implied loss on 1Q07 results after subtracting 2Q07 results from the announced 1H07 results. We do include Advanced Holdings because of the lumpy nature of its business.
We highlight six negative-EV stocks
In theory, the ‘List of 18’ includes those companies that are included in the second and third group. We actively cover one of the companies and can say that it belongs to the third group. We do not cover the other 18, and thus cannot give an opinion as to their investment merit. However, we did contact several companies in an effort to get more information, and perhaps give investors a headstart in performing due-diligence. We highlight a total of six companies at the back of this report.
Chris Sanda, CFA (65) 6321 3085
Singapore Small Caps
6
Top pick with a market cap of less than S$1bn Oceanus PRC consumer stock with earnings visibility Our top pick
Oceanus is one of our top small-cap picks because of what we regard as its low valuation, high earnings visibility and relatively low operational risk.
Oceanus is an abalone farmer
Oceanus is a PRC-based abalone farmer. We think it stands out from other companies because of its earnings visibility. That is, we believe that we can relatively accurately predict the company’s future earnings because we believe we understand all the key earnings drivers – speed of abalone growth, number of abalone per tank, number of future tanks, and unit costs to grow abalone. We do not expect a high degree of variability in the key variables that we are less certain about (ie, market value per abalone).
Its valuation is attractive, in our view
Based on our earnings forecasts and the 14 November 2008 share price of S$0.16, the stock trades at a PER of 1.5x on our FY09 EPS forecast, and at an EV/EBITDA multiple of 1.1x on our FY09 forecasts.
Our initiation report is still current and relevant
For more information on Oceanus, please see our initiation report published on 17 June 2008 (Hail to the New King of Abalone). We believe this report is still relevant for investors, even though it was published in June. We have published two follow-up reports, on 29 July 2008 and 22 October 2008, after the company’s 2Q08 and 3Q08 results. We have not made any adjustments to our earnings forecasts since we initiated coverage of the stock.
Chris Sanda, CFA (65) 6321 3085
Singapore Small Caps
7
Key charts & tables Singapore small caps: recent changes in recommendations, target prices and/or forecasts Ticker MWH SP KST SP CCF SP CLF SP TAT SP BEST SP SVC SP SMB SP CWT SP JASP SP KST SP SVC SP HWA SP KODA SP LOREN SP MWH SP SITRA SP SMB SP CCF SP
Company Man Wah KS Energy Cacola China Lifestyle Tat Hong Best World SunVic SMB United CWT Ltd Jasper KS Energy SunVic HTL Koda Lorenzo Man Wah Sitra SMB United Cacola Furniture
Date of change 14-Nov-08 14-Nov-08 14-Nov-08 13-Nov-08 13-Nov-08 11-Nov-08 11-Nov-08 7-Nov-08 4-Nov-08 29-Oct-08 29-Oct-08 22-Oct-08 3-Oct-08 3-Oct-08 3-Oct-08 3-Oct-08 3-Oct-08 3-Oct-08 3-Oct-08
Rating 1 2 1 5 3→4 2→4 5 Dropped 2→4 2 2 2→5 4→5 3→5 2 2→1 4→5 2→3 1
Target price (S$/share) 0.29→ 0.28 2.35 0.66→ 0.45 0.24 → 0.22 2.01 → 0.52 0.88 → 0.24 0.11 n.a. 1.33 → 0.46 0.59 → 0.345 2.35 0.49 → 0.11 0.32 → 0.12 0.47 → 0.14 0.305 → 0.09 0.59 → 0.29 0.145 → 0.07 0.395 → 0.155 0.66
% change in forecasts FY08E FY09E FY10E (14.7) (14.9) (14.9) (11.7) 0.0 0.0 (26.4) (66.8) (65.4) (12.5) (11.3) (1.0) 0.0 (13.6) (29.3) (19.5) (31.9) (64.5) (14.9) (0.8) 0.5 n.a. n.a. n.a. (41.0) (5.5) (0.1) n.a. (34.2) (22.7) (4.7) (3.2) (2.7) (15.5) (65.8) (45.1) 0.0 0.0 0.0 0.0 (67.2) (51.1) (45.2) (61.3) (41.9) 0.0 0.0 0.0 (51.1) (83.8) (76.4) 0.0 (15.5) (41.5) 0.0 (8.4) 0.0
Source: Daiwa
Chris Sanda, CFA (65) 6321 3085
Singapore Small Caps
8
Singapore small caps: leaders and laggards (one-month performance) Mid caps (US$0.2-1.0bn) Top % gainers (mid caps) % Sino-Environment 72.0 People's Food 43.0 Synear Food Hldg 37.5 Hyflux Ltd 36.2 Ascott Residence 34.1 Pine Agritech 33.3 China Zaino Intl 33.3 Evergro Properties 33.3 Epure International 31.7 SC Global Developments 26.7
Δ 0.295 0.185 0.06 0.47 0.15 0.025 0.06 0.055 0.065 0.12
Close 0.705 0.615 0.22 1.77 0.59 0.1 0.24 0.22 0.27 0.57
Small caps (
