Sunday, November 21, 2010HOVID - TRADING AT A BARGAIN DUE TO PN17 STATUS HOVID BHDPrimary Symbol & Exchange: HOVID7213 - Ordinary Shares - Malaysian Stock Exchange

Price/share @ 19/11/2010 RM:0.15Mkt Cap RMm : 114.31Shares (m): 762.08Par RM: 1.10

SECTOR CLASSIFICATIONMSEB: Consumer ProductsFox Capital: Chemicals

Executive Chairman: Ho Sue San @ David Ho Sue SanManaging Director: Ho Sue San @ David Ho Sue San

KNOWN MAJOR SHAREHOLDER(S) (as at 7/10/2009)Ho Sue San @ David Ho Sue San 49.57%

Tel: 05-5060690Fax: 05-50612157803 1126 Fax. No.: (603) 7806 1387

BACKGROUND

Founded some 70 years ago and famous for the natural herbal beverage Ho Yan Hor Herbal Tea which is a concoction of 24 herbs, Hovid has established itself as the leading manufacturer of pharmaceutical and herbal products in Malaysia. Besides manufacturing its own products under the Hovid brand name, the group also manufactures products on contract manufacture basis for private labels.

Besides being involved in pharmaceutical activities, Hovid is also involved in the commercial extraction of nutrients from palm oil fruits through a patented procedure as well as biodiesel through its previously 58.2% owned subsidiary Carotech Bhd (listed on the ACE Market previously known as the Mesdaq exchange). Carotechs focus is currently on the phytonutrients side of its business as the high CPO prices do not promote palm biodiesel as the renewable energy fuel. Carotechs 3 main phytonutrients products are tocitrienol products marketed under the brand name Tocomin, carotene products marketed under the name Carimin, and phytosterol products, its 2 co-products are palm fatty acid methyl ester and crude glycerine.

LATEST DEVELOPMENT

Hovid was placed under PN17 after its subsidiary, Carotech Bhd, triggered GM3 status on 23/10/2010 when the latters auditor expressed a disclaimer opinion on its financial statements for the FYE 30/6/2010. (On 1/7/2010, Carotech triggered GN5 status after it defaulted on the loan repayment due FY2010).Hovids share price has been bashed down as follows:-

Closing price as at 29/10/2010 = RM0.185/share

Closing price as at 1/11/2010 = RM0.135/ share (high = RM0.14 low = RM0.12)

Latest closing price as at 19/11/2010 = RM0.15/share

POTENTIAL PRICE CATALYST

The main obvious price catalyst is exit from the PN17 classification which may help it to retrace its price before being placed under PN17:

Last closing price as at 19/11/2010 = RM0.15/share

Targeted price (i.e. last closing price before announcement of being classified PN17 status) = RM0.185/share

Potential capital gain = RM0.035/share or 23.3%

Hovid and Carotech were among investors favourites in 2007 and 2008. At that time, Hovid hit a high of RM0.53/share.

Hovid had taken steps to exit the PN17 classification & to prevent the company from being impacted by the financial problem faced by Carotech as follows:-

1) Sell down its stake in Carotech (some 180 million shares in batches) from almost 60%, previously to 38%-45%. During this period, Lembaga Tabung Haji nearly doubled its interest in Carotech to 9.12% comprising 83.24 million shares from 46.24 million shares in August 2010.

2) Waiting for Q2 financial results to help it achieve its plan to exit PN17 status. Hovid went into PN17 classification due to the impact from financially-troubled Carotech because the latter was then a subsidiary, even though the groups pharmaceutical business was doing well and growing. The pharmaceutical business makes about RM15 million to RM20 million profit on its own.

By selling down its stake in Carotech to 38%-45%, Carotech become an associate of Hovid instead of subsidiary, and this development will expedite the lifting of the PN17 classification.

Unlike being a subsidiary where all its financial results including the debt will have to be incorporated into the groups balance sheet, Hovid will now have to take care only of its share of profit or loss in Carotech, and will not be worried by the huge debts of Carotech, estimated to be about RM260 million.

Carotech is no longer a substantial part of Hovid group (with the selldown since August 2010). As a result, Hovids gearing has been reduced to 0.5x or about RM50 million from 2.5x when Carotech was a subsidiary.

Hovids current investment in Carotech is only RM27 million in the book. Assuming even the worst case scenario where Hovid write off the whole investment of RM27 million in Carotech, this will only involve the book cost and has no impact on the cash flow. Moreover, Hovid has not given any guarantee on Carotechs operations.

Assuming Hovid make RM18 million in profit and based on an industry price/earnings multiple of 12x, the share price should be higher than the current level i.e. at 28 sen.

BRIEF INFORMATION ON CAROTECH

Carotechs financial problem was due to external factors beyond its control like the high crude palm oil (CPO) price and soaring oil prices in 2008 and the recession in the United States and Europe at that time. Carotech had also over-expanded when raising its output capacity by some 300% whereas the rise in demand during the recession period was only 15%.

There may be demand in Carotechs business, which will be driven by phytonutrients if it can successfully restructure its debts. Carotech has sought assistance of the Corporate Debt Restructuring Committee to restructure its debt.

Potential for Carotechs nutrient products like tocotrienols is tremendous, given the rising demand for natural and beneficial ingredients in therapeutic and beauty products nationwide.