Singapore Market Focus SMC Monthly - DBS Bank › aics › pdfController.page?pdfpath= › content › … · The Malaysian-based manufacturer of niche cleanroom nitrile gloves and

ed: CK / sa: JC

STI : 2,823.51 FSST Small Cap : 398.07 FSST - Mid Cap : 679.36 Analyst Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team

Key Indices

Current % Chng STI Index 2,823.51 -0.5% FS Small Cap Index 398.07 0.8% USD/SGD Curncy 1.41 2.6% Daily Volume (m) 2,975 Daily Turnover (S$m) 1,514 Daily Turnover (US$m) 1,074

Source: Bloomberg Finance L.P. SMC Top Picks

Source: DBS Bank Prices as of 7 Mar 2016

DBS Group Research . Equity 8 Mar 2016

Singapore Market Focus

SMC Monthly

Refer to important disclosures at the end of this report

Issue No. 3

Sifting out M&A plays

With the STI rebounding by 9.5% since our last issue, our top 5 picks saw an average increase of 14.5%, led by mm2 Asia and OSIM Int’l

We maintain three of our picks for March, but replace mm2 Asia and OSIM with Ezion and Innovalues

OSIM’s recent privatisation offer could lead to a new wave of situational interest in SMCs

Seeking more beta. We continue to favour companies that are projected to report firm earnings growth (or recovery), and these include Japfa (BUY, TP S$0.90), Riverstone Holdings (BUY, TP S$1.30), and China Merchants Pacific (BUY, TP S$1.25). We have removed OSIM Int’l and mm2 Asia, which have re-rated substantially to near our TP of $1.28 and $0.52,respectively. For March, we have added Ezion Holdings (BUY, TP S$0.85), our preferred proxy for a recovery in oil prices and Innovalues Ltd (BUY, TP S$1.01), which is likely to benefit from rising awareness and stricter regulatory standards towards safety and eco-efficiency in automotives.

Potential privatisation or takeover targets. Given the recent wave of privatisation offers in Singapore recently, we highlight several potential names in this regard. For bombed-out names, these include PACC Offshore, Pacific Radiance, Pan-United, Tat Hong and Banyan Tree. There could also be rotational interest into names that are in sectors that have already seen such activity, including Innovalues and Super Group.

SMC Radar: The Stratech Group. While the deployment of FOD Detection Systems have yet to be mandated across airports globally, we believe that the high penalties resulting from lapses in existing FOD detection procedures and greater emphasis on aviation safety should bode well for incumbents such as Stratech Group.

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 1 mth 12 mth Rating

Current China Merchants Hldgs (Pacific)

0.83 1,083 1.25 (8.2) (18.1) BUY

Japfa Ltd 0.53 674 0.90 7.0 0.9 BUY Ezion Holdings 0.64 737 0.85 (6.6) (48.2) BUY Riverstone Holdings Ltd

0.95 509 1.30 (10.7) 68.1 BUY

Innovalues Ltd 0.80 188 1.01 6.7 12.2 BUY

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 1 mth 12 mth Rating

Previous China Merchants Hldgs (Pacific)

0.83 1,083 1.25 (8.2) (18.1) BUY

Japfa Ltd 0.53 674 0.90 7.0 0.9 BUY mm2 Asia 0.49 77.9 0.52 22.8 340.9 BUY Riverstone Holdings Ltd

0.95 509 1.30 (10.7) 68.1 BUY

OSIM International

1.23 661 1.28 18.4 (38.8) BUY

Page 1

Market Focus

SMC Monthly

Review of Feb 16 Picks

No. Security Desc. Sector Beg. Price

(2 Feb)

Last Price

(7 Mar)

% Change

(1M*)

Target Price

(2 Feb)

Catalyst

1 Japfa Ltd Consumer

Goods

0.475 0.525 + 10.5% 0.90 1) Earnings delivery

2) Expansion

3) Recovery in purchasing power

2 China Merchants

Holdings (Pacific)

Industrials 0.800 0.830 + 3.8% 1.45 1) Earnings execution

2) Upcoming final dividend of 3.5 Scts

3 mm2 Asia

Consumer

Services

0.343# 0.490 +42.9% 0.52# 1) Growth in local productions

2) Further expansion into Chinese

market

3) Contribution from recent acquisition

4 OSIM International Consumer

Goods

0.990 1.225 + 23.7% 1.28 1) Earnings recovery

2) Stable dividend payout of 6.0 Scts,

or 6% yield

5 Riverstone Holdings Health Care 1.060 0.945 - 10.8% 1.41 1) Capacity expansion

2) Earnings delivery

3) Strengthening USD vs ringgit

*Refers to change in last price between 2 Feb and 7 Mar

# Price adjusted post completion of share split on 1 Mar

Source: DBS Bank, Bloomberg Finance L.P. Absolute price performance of indices (2 Feb – 7 Mar): STI: 2579.23 to 2823.51 / + 9.5% FSTS Index: 377.54 to 398.07 / + 5.4% FSTM Index: 630.80 to 679.36/ + 7.7% Top picks gained 14.5% on average – outperforming the market

Between 2 Feb and 7 Mar, our picks surged 14.5% on average, outperforming the small-cap index (FSTS Index), mid-cap index (FSTM Index), and STI, which also rebounded by 9.5%, 5.4% and 7.7%, respectively. The outperformance was led by mm2 Asia and OSIM International’s exceptional run-up (whose share prices rose 42.9% and 23.7%,

respectively, since our last issue). During the period, Japfa Ltd also gained 10.5% as it reported 4Q15 earnings which were significantly ahead of expectations. A privatisation offer of S$1.32 for OSIM International was also made by its Chairman and CEO, Mr. Ron Sim.

What happened with Riverstone?

Riverstone Holdings [- 10.8% m-o-m] Riverstone was not spared as the sector continued to be sold down on fears of potential oversupply ahead, and the strengthening ringgit against the USD, which raised concerns of profitability for the rubber glove exporters. The stock is currently trading down 10.8% even as it reported strong earnings in 4Q15 (in spite of the challenges faced during the

quarter) but has held up better than its peers, which have declined between 14% and 18%. Given Riverstone’s strengths in the high-tech and niche cleanroom segment, which is less competitive and price-sensitive, we expect Riverstone’s margins and growth prospects to remain intact in the medium term.

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Market Focus

SMC Monthly

Mar 16: Top 5 Conviction Picks We continue to mainly favour companies that are projected to report firm earnings growth (or recovery), and thus keep three of our five conviction picks. As both OSIM and mm2 Asia have substantially re-rated, we replace them with Ezion Holdings,

which is our preferred proxy for a recovery in oil prices and Innovalues Ltd, which is poised to ride the growing demand for safety and eco-efficient automotive components.

Source: DBS Bank, Bloomberg Finance L.P. Ezion Holdings [EZI SP, TP S$0.85] Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. Following the period of low oil prices and challenging conditions for the O&G sector, Ezion was also hit by asset impairments and losses, and recently reported a net loss of US$63.5m in 4Q15. Looking ahead, we remain optimistic about Ezion’s ability to survive through this downturn with its solid management team, network and assets. Its venture into the offshore windfarm segment – which provides diversification away from the O&G sector, should also help to fuel growth as Ezion continues to win offshore windfarm contracts. We value Ezion based on 0.7x FY16F P/V, and arrive at a 12-month target price of S$0.85. At current prices, this implies a 34% upside potential. Further, we think that its share price could re-rate as its earnings recover with the resumption of service rigs which are currently under repair/upgrades, vessel deliveries, and as new contracts or renewals are secured.

Innovalues Ltd [IP SP, TP S$1.01] We recently iniatiated coverage on Innovalues, a components manufacturer who is the beneficiary of rising awareness and stricter regulatory standards toward safety and eco-efficiency in automotives. As a key supplier to Sensata, a leading producer of autmotive sensors, we expect earnings to grow by 30% from S$23m in FY15 to S$30m in FY17F as Innovalues continues to deepen their partnership to tap into the underpenetrated Chinese automotive sensor market. Beyond 2017, we expect prospects for Innovalues to remain favourable as more of the sample orders it secured in 2014 and 2015 are slated for commercial production. Its potential venture into the industrial segment for sensors could also serve as the next leg of growth. Our target price of S$1.01 for Innovalues is based on 12x blended FY16/17F PE, which implies a 20% discount to larger peers’ blended 15x FY16/17F PE. We expect the counter to re-rate as the Group ramps up on production and as earnings are delivered.

No. Security Desc. Sector Rating Last Price

(7 Mar)

Target Price Upside (%) Catalyst

1 Japfa Ltd Consumer

Goods

BUY 0.525 0.90 71 1) Earnings delivery

2) Expansion

3) Recovery in purchasing power

2 China Merchants

Holdings (Pacific)

Industrials BUY 0.830 1.25 51 1) Earnings execution

2) Prospective dividend of 7 Scts

3 Ezion Holdings

Oil & Gas BUY 0.630 0.85 34 1) Recovery of oil price

2) Vessel deliveries

4 Innovalues Ltd Industrials BUY 0.805 1.01 26 1) Earnings delivery

5 Riverstone Holdings Health Care BUY 0.945 1.30 38 1) Capacity expansion

2) Earnings delivery

3) Strengthening USD vs ringgit

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Market Focus

SMC Monthly

Riverstone Holdings [RSTON SP, TP S$1.30] The Malaysian-based manufacturer of niche cleanroom nitrile gloves and healthcare gloves is a leader in the manufacture of Class 10 and Class 100 cleanroom gloves. It is currently in Phase 3 (of 5) of its expansion plans, and expects to add 1bn gloves in annual production capacity to 6.2bn by end-2016. When the five expansion phases are complete (expected by 2018), total production capacity will be raised to a minimum of 8.2bn gloves p.a. Furthermore, Riverstone could accelerate its capacity expansion plans faster than expected, as it has recently acquired 9.364 acres of land for the construction of a factory and worker hostels. Going forward, we expect capacity expansion to underpin growth, supported mostly by robust long-term global demand for healthcare gloves amid rising healthcare standards and expenditures, and greater awareness of workplace safety. A strengthening US$ vs ringgit will also benefit the company as Riverstone receives c.90% of its revenues in US$, while only c.35% of its costs are incurred in US$. As the sector has recently de-rated, we lowered our 12-month target price to S$1.30 (from S$1.41) after adjusting our target valuation multiple from 20x to 18x blended FY16/17F PE, which is fair given its smaller capacity. China Merchants Holdings (Pacific) [CMH SP, TP S$1.25] The Chinese toll road operator recently completed its Jiurui Expressway acquisition and the acquisition of three toll roads in Guangxi Zhuang Autonomous Region, which should bolster the group’s top and bottom lines in the medium to long term. Looking into 2016, we believe the full-year contributions of the three newly acquired roads in Guangxi, along with modest growth from the existing toll road portfolio, should drive the group’s organic earnings growth at a double-digit pace, which should allow the group to maintain a 7-Sct dividend.

Factoring in lower traffic growth for the toll roads in the Guangxi province (Jiurui, Yangping, Guixing and Guiyang), our FY16 and FY17 forecasts are lowered by 19% and 13% to HK$718m and HK$822m, respectively. Based on DCF valuation with a WACC of 9.8%, we have thus revised our 12-month target price to S$1.25 (from S$1.45 previously). Apart from its strong cash flow generation and long-term growth prospects, we also like the company for its attractive dividend yield of c. 8.4%. We see the stock re-rating as it delivers earnings growth.

Japfa Ltd [JAP SP, TP S$0.90] Shares rallied after Japfa posted a 4Q15 net profit of US$34m that was substantially ahead of the US$14.5m that was expected. Looking forward, we believe the growth drivers are still intact and forecast 23% EBITDA CAGR over the next three years – mainly driven by higher dairy volumes as Japfa intends to double dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. While we expect Japfa’s combined regional DOC output to expand less aggressively by 6% CAGR over the same period, given the curbs on DOC capacity, we think that demand should continue to be driven by population growth and rising per capita income. We think that the market is currently ignoring value contributions from Dairy and its regional Animal Protein subsidiaries, which continue to deliver consistent growth. Thus, we reiterate our BUY call with a SOP-based target price of S$0.90.

Source: DBS Bank

Mk t Price Target EPS CA GR

Cap (S$) Price % 15-17

Company F YE (US$m) 07-Mar (S$) Upside Rcmd 15F 16F 17F 15F 16F 17F 15F 16F 17F 15F 16F 17F 15F 16F (%)

China Merchant Holdings Dec 1,081 S$ 0.83 1.25 51% BUY 10.3x 11.9x 10.4x 0.9x 0.9x 0.9x 7.8x 7.7x 6.7x 6% 7% 8% 6.8% 8.1% 1.0

Japfa Ltd Dec 672 S$ 0.525 0.90 71% BUY 9.2x 6.3x 4.5x 1.0x 0.9x 0.7x 6.7x 5.6x 4.7x 10% 15% 18% 0.0% 0.0% 46.2

Ezion Holdings Dec 735 S$ 0.64 0.85 34% BUY 7.3x 7.4x 6.5x 0.6x 0.6x 0.5x 8.2x 6.7x 6.2x 2% 8% 9% 0.0% 0.0% 8.6

Riverstone Holdings Dec 508 S$ 0.95 1.30 38% BUY 16.1x 13.7x 11.8x 4.2x 3.6x 3.0x 11.3x 9.4x 7.9x 30% 29% 28% 2.3% 2.8% 18.1

Innovales Ltd Dec 190 S$ 0.81 1.01 26% BUY 11.2x 10.7x 8.7x 3.1x 2.7x 2.3x 6.8x 5.9x 4.5x 30% 27% 28% 4.7% 3.8% 14.3

PE (x ) EV /EBITDA (x) (%)

Div Y ield

P/BV (x ) (%)

ROA E

Page 4

Market Focus

SMC Monthly

Riding the privatisation/takeover wave

Potential SMC Privatisation Targets

(All SGX-listed Names Covered by DBS With Market Cap S$50m to S$2bn)

No Security Desc. Last Price

(7 Mar)

Market Cap.

(S$ m)

6M Chg

(%)

12M Chg

(%)

24M Chg

(%)

CY16

P/E#

CY16

P/B #

Major Shareholders’

Stake (%)

1 PACC Offshore 0.370 673.4 15.6 (26.0) - 49 0.45 81.9

2 Pacific Radiance 0.355 257.6 20.3 (49.6) (63.4) - 0.47 74.2

3 Pan-United 0.580 325.9 (16.5) (32.9) (39.5) 16 0.61 61.9

4 Tat Hong 0.430 271.6 (10.4) (40.7) (41.1) 118 0.43 51.9

5 Banyan Tree 0.495 377.9 28.6 (6.6) (22.0) 22 0.62 78.3 # DBS estimates Source: DBS Bank, Bloomberg Finance L.P. We have seen a number of privatisation and takeover offers for Singapore small- & mid-cap companies recently, the most recent of which was the privatisation offer for OSIM International of S$1.32 by its Chairman and CEO, Mr. Ron Sim. In the last six months, there have also been privatisation or takeover offers in the transport and manufacturing sectors. Staying on this theme, we screened for five names in our coverage that fit the following criteria: 1) stocks that have declined by more than 20% over the last six to twenty-four months, 2) very low P/B ratio, and 3) major shareholders owning more than 50% of the company. PACC Offshore: IPO-ed in 2014 at a listing price of S$1.15. The parent – Kuok (Singapore) Ltd (“Kuok Group”) – which owns 81.86% in POSH could be incentivised to buy back the remaining stake and take it private as POSH’s share price has plunged by almost 70% to S$0.37. POSH raised approximately S$375m during the IPO, which was mainly utilised to pare down its debt with various banks. Assuming it has to offer a 30% premium to POSH’s current share price, the Kuok Group will only have to fork out S$160m, or 40% of the new money raised in 2014. A future re-listing may be considered when the O&G cycle turns. Pacific Radiance: The company was listed at $0.90 at the end of 2013, and has since seen its share price plunge by over 60% to S$0.355 currently. Key management owns over 74% of the company and could be tempted to privatise the company as it is trading at just 0.4x P/B currently. Alternatively, the company could also make an attractive M&A target.

Pan-United: The stock has seen a decline of close to 33% in the last 12 months, and is now trading at just 0.6x P/B. With the Ng family owning at least c.62% of the company, privatisation could be a viable option even if a 20%-30% premium to the current share price was to be offered. Tat Hong: Singapore’s largest crane operator, and a leading player in the Asia-Pacific, is currently trading at just 0.4x P/B but over 100x PE as its earnings are being depressed due to the oversupply situation in the market. With major shareholders holding over 50% in the company, it is possible for Tat Hong to emerge as a privatisation or takeover candidate. Banyan Tree: A leading hospitality brand, Banyan Tree has recently reported a record loss in 2015 but is still expected to remain profitable in 2016. At 0.6x P/B, major shareholders which collectively own over 78% of Banyan Tree could look to privatise the group. Of this 78, the Qatar Investment Authority owns 27.1% while the Chairman owns over 37%, so a takeover attempt by one of the major shareholders cannot be ruled out.

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Market Focus

SMC Monthly

60

70

80

90

100

110

120

S T I Inde x FS T S Inde x FS T M Inde x

Broad Singapore SMC Market in review: Moving into positive territory in Feb-16

Rolling 2-year relative performance

Source: DBS Bank, Bloomberg Finance L.P. After its shaky start into 2016, Singapore's equity market rebounded slightly last month, with the Straits Times Index (STI), FTSE Mid Cap Index (FSTM Index) and FTSE Small Cap Index (FSTS Index) making modest gains of 1.4%, 3.8% and 0.2% m-o-m, respectively, in February. The broad Singapore equity market ended the month in positive territory on the back of expectations of central banks standing ready to further ease monetary policies, the pullback in the USD, the rebound in oil prices off 12-year lows of under US$28/bbl in mid-January to almost US$36/bbl by end-Feb, and the attractive valuations of the Singapore market that stimulated bargain-hunting activities This was evidenced by the uplift in the STI and FSTS’s average traded volume of c. 9.1% and c. 4.5% m-o-m, respectively:

Feb-16

Avg Daily Value

Avg Daily Volume % Chg (1m)

(S$ m) (m shares) Value Volume

STI Index 0.86 340.96 12.8% 9.1%

FS Small Cap Index

0.06 160.46 8.9% 4.5%

FS Mid Cap Index

0.18 212.98 (2.0%) (5.9%)

Source: DBS Bank, FTSE

Feb-16 Closing

Price % Chg (1M)

STI Index 2666.51 1.4%

FS Small Cap Index

380.19 0.2%

FS Mid Cap Index

655.40 3.8%

Jan-16 Closing

Price % Chg (1M)

STI Index 2629.11 (8.8%)

FS Small Cap Index

379.29 (6.0%)

FS Mid Cap Index

631.33 (5.4%)

Basic Materials, 2.56

Consumer Goods, 6.09

Consumer Services, 11.8

Financials, 50.81

Health Care, 2.28

Industrials, 18.66

Oil & Gas, 3.47

Technology, 2.57

Utilities, 1.77

FTSE ST Small Cap Industry Breakdown

Consumer Goods, 7.46

Consumer Services, 7.87

Financials, 48.23

Health Care, 4.1

Industrials, 25.25

Oil & Gas, 1.31

Technology, 0.92

Telecommunications, 1.46

Utilities, 3.41FTSE ST Mid Cap Industry Breakdown

Page 6

Market Focus

SMC Monthly

Source: DBS Bank, Bloomberg Finance L.P.

Best and worst performing SMCs in DBS’s coverage in February

Top performers within our coverage include recently-initiated names Trendlines Group and mm2 Asia, which have increased by c.30% on average in February. Decent portfolio growth masked by poor earnings – Trendlines Group (+32.2% m-o-m). Trendlines is a seed-stage investor in medical device developers and agriculture technology start-ups which was listed on 26 Nov 2015. The share price did well over the last month as it recovered from a low of S$0.14 in end-Jan. While its portfolio value recently grew by 12% y-o-y, mainly from the incorporation of five new portfolio companies in FY15, earnings remained poor, and should remain so until Trendlines successfully exits from its existing investments (portfolio companies). The group is currently in talks with investment banks to explore M&A opportunities for three of its most valuable portfolio companies. If successful, we believe that its share price could re-rate to our target of S$0.28, which is based on 1.1x FY16F P/B. Premier movie producer makes UnUsUaL acquisition. (+26.8% m-o-m). In early Feb, mm2 entered into an agreement to acquire a 51% stake in UnUsUaL Group for S$26m, which comes with a net profit guarantee for three years at S$5m per year. With this synergistic acquisition and as mm2 leverages onto UnUsUaL’s capabilities and vast network, we believe that mm2’s near-term earnings and position in Asia will be further enhanced. Going forward, as further earnings-accretive acquisitions are made and the demand for its local productions gains traction, we think that its share price could trade closer to our target PE of 17x FY Mar17F EPS, or S$0.52.

Meanwhile, counters that reported weak operating performances during the recent results season, such as Pan-United and Mermaid Maritime, were sold down. Tough times taking a toll on Mermaid Maritime (-13.3% m-o-m). Operating results in 4Q15 were weakened by seasonality and the challenging price environment, but earnings were also further dragged down by one-off asset impairment charges – consistent with management’s earlier guidance. Mermaid Maritime’s outstanding orderbook also fell by 46% from US$473m in end-FY14 to US$255m as at end-FY15. As the new order outlook remains challenging in the subsea services segment, we retain our negative stance on the counter. We currently have a FULLY VALUED call with a target price of S$0.09. Slower outlook for ready-mixed concrete (RMC) – Pan-United Corporation (-8.5% m-o-m). The demand situation and competition have led to lower-than-expected margins, particularly in the basic building resources (BBR) segment, which resulted in earnings missing our expectations by more than 30% in 4Q15. While we expect a softer outlook for RMC ahead, largely due to a decline in construction demand in 2015 (and thus lower construction output in 2016), we believe that the stock’s downside could be protected by its prospective dividend yield of c.5.8%. We currently have a HOLD call on the counter, with target price of S$0.57.

-20% -10% 0% 10% 20% 30% 40%

Mermaid Maritime

Tat Hong Holdings

Overseas Education Limited

Cosco Corporation

Pan-United Corp

Ezra Holdings

Super Group

mm2 Asia

Banyan Tree

Trendlines Group

Page 7

Market Focus

SMC Monthly

Page 8

SMC Radar The Stratech Group Limited (S$0.035, STGL SP) Stratech Group is a leading provider of security and surveillance technology systems. It is banking on its flagship product – the iFerret group of intelligent airfield/runway surveillance and foreign object & debris detection systems – to drive the expansion of the company. Trading at 68x FY15 PE, Stratech will need to secure sizeable revenue and earnings growth to maintain and/or improve its current lofty valuations. Originally incorporated as Stratech Systems Limited in 1989

and listed on the SGX in 2000, the company embarked on an extensive restructuring process in October 2014 to reposition itself for growth. Stratech Systems Limited was subsequently delisted and became an indirect wholly-owned subsidiary of The Stratech Group Limited (“Stratech Group”) – which was relisted on the Mainboard on 6 April 2015.

The Stratech Group is principally engaged in the surveillance and security solutions business, where it develops and delivers large-scale complex, real-time, mission critical systems to both the public and private sectors, especially for the aerospace and defence industries. Beyond aviation and defence, the company’s technologies are also deployed to other various industries, including financial services, government, healthcare, homeland security and transportation. The group’s core competencies can be broadly classified as:

(a) Technology-intensive IT division This division comprises expertise in computing vision systems and intelligent transport systems. Under the computing vision systems segment, Stratech integrates advanced video analytics and electro-optics sensor technology to provide surveillance and security solutions such as airfield surveillance, rapid airfield damage assessment, security access control, maritime surveillance, flight path monitoring and advanced weapon scoring for the aerospace, land transport, maritime surveillance and security industries. Key iVision products include the iFerret™ Foreign Object & Debris (FOD) Detection System, iVACS® Under Vehicle Scanning System, Super BullsEye® II Advanced Weapon Scoring System and VIPS® (Vessel Identification and Positioning System).

The intelligent transport systems business is focused on the strategic development of transportation systems alongside transport operators and governments. Key iTS products include the iBCS™ Next-Generation High Security Border Crossing System and Vehicle Entry Permit System (VEPS) for Immigration and Customs Authorities.

(b) E-Systems Projects and Services Division – Stratech works closely with private corporations and government agencies to develop innovative and high-value applications.

According to the company, its Dynamic Pricing & Secure Payment System, which powers the Land Transport Authority of Singapore’s Online Certificate of Entitlement Open Bidding

System, is the largest known dynamic pricing engine in the world which provides critical real-time information to millions of users in an open but highly secure environment.

Due to lower project activity, Stratech posted weaker revenues of S$2.1m and a net loss of S$3.7m in 1H16, as earnings are mainly driven by projects. However as the group has since commenced work on recent wins (which typically takes 1-2 years to complete), we expect higher activity levels and thus improvement in earnings from 1H17 onwards.

While earnings is likely to remain volatile in the near term due to the nature of the business, we think that careful execution of projects and ongoing focus on the expansion of the order book could help grow a steady earnings stream over the medium to long term. At A Glance Issued Capital (m shrs) 1,567 Market Cap (S$m/US$m) 55/40 Major Shareholders (%)

Chew Khien Meow David 34.0 Free Float (%) 65.8 Avg Daily Vol (m shrs) 27.7

Forecasts and Valuation FY Mar (S$ m) 2012# 2013# 2014# 2015 Turnover 5.8 2.5 11.1 16.5 EBITDA (8.9) (5.9) 4.9 2.8 Pre-tax Profit (12.1) (9.4) 1.5 0.7 Net Profit (12.1) (9.4) 1.5 0.7 EPS (S cts) (0.77) (0.6) 0.09 0.05 EPS Gth (%) - (22.5) (115.6) (44.4) Net DPS (S cts) - - - - BV Per Share (S cts) 0.1 0.1 0.4 0.4 PE (X) (4.2) (5.4) 34.3 68.5 P/Cash Flow (X) (0.3) (0.1) 0.1 (0.5) EV/EBITDA (X) (5.5) (8.5) 9.1 17.4 Net Div Yield (%) - - - - P/Book Value (X) 46.3 40.7 8.4 7.6 Net Debt/Equity (X) CASH CASH CASH CASH ROA (%) (47.2) (38.4) 7.6 4.5

ROE (%) (1495.8) (839.2) 24.6 11.1

# FY12-FY14 Financials : Stratech Systems Limited

Source: Bloomberg Finance L.P., DBS Bank

50100150200250300350400450500550600650700

0.00

0.10

Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

Stratech Group Ltd/The (LHS) Relative STI Index (RHS)

Relative IndexS$ Relative IndexS$

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Market Focus

SMC Monthly

Page 9

Stratech’s flagship product, the iFerret™ Group of intelligent Airfield/Runway Surveillance and Foreign Object & Debris (FOD) Detection Systems, is capable of detecting debris as small as 4cm in size – even if under 16mm/hr of rainfall. Certified by the United States Federal Aviation Administration (FAA) in Mar 2012 and granted the Buy American Waiver in May 2012, the iFerret™ is one of three FAA-approved fixed-base FOD systems, but is the only one that provides high definition and colour panoramic views of the entire runway. Designed to operate passively with zero emission and interference with existing airport and aircraft systems, the iFerret™ has since been deployed at three of the world’s Top 10 airport hubs. Unlike competing systems such as Tarsier and X-Sight which are radar-based, the iFerret™ relies on high-end electro-optical sensors and is thus immune to common radar-related problems such as radar blind spots, radar clutter, rainfall, multipath reflections and false alarms arising from “radar flash”.

With more than 7,400 IATA-registered commercial international airports around the world, the group estimates the market size of FOD Detection Systems for runways alone to be close to US$67bn, and this could even double when prospective deployments extend beyond runways (such as taxiways and aprons), and when systems are upgraded to incorporate other airfield surveillance capabilities.

We see higher adoption of cost-effective airport ground surveillance systems ahead given the high costs and penalties (including repairs and maintenance, lost productivity, flight delays and cancellations) that could potentially arise following FOD incidents. It is estimated that up to US$13bn is lost annually due to FOD-related incidents.

Given the tight regulations, technological demands in product

development and stringent certification process, incumbents in the FOD market benefit from high barriers to entry. Furthermore, with IP protection in place and its first mover-advantage in the adoption of sensors, we believe that Stratech is best positioned to benefit from a take-off in the FOD market.

Key risks include: (1) failures arising from the application of

Stratech’s systems could result in catastrophic consequences – which may significantly impair the group’s reputation, (2) inability to innovate and perform ahead of industry standards could render Stratech’s products obsolete and (3) delays in the issue of tenders and award of contracts.

As Stratech is in the midst of expanding the market reach of its flagship products, its earnings are mostly non-recurring and largely driven by project wins, which means revenue and earnings can be lumpy. Stratech is currently trading at 68x FY15 PE and was loss-making in the first half of FYE Mar 2016. It will need to secure sizeable revenue and earnings growth to maintain and/or improve its current lofty valuations.

iFerret™ Operations Workflow

Source: Company

FY15 Breakdown of Revenue (S$m)

Source: Company, DBS Bank

FY15 Geographical Breakdown of Revenue (%)

Source: Company, DBS Bank Paul YONG, CFA +65 6682 3712 [email protected] Singapore Research Team

Singapore12%

Hong Kong29%

USA6%

UAE53%

Others0%

S$0.8 m, 5%

S$15.7 m, 95%

e-Systems Technology-intensitve IT

Page 9

Market Focus

SMC Monthly

Page 10

APPENDICES

Page 10

Market Focus

SMC Monthly

Page 11

APPENDIX (1) FSTS & FSTM Indices

Top 5 Performing Sectors - FSTM Top 5 Performing Sectors - FSTS

ICB Sector No. of

Constituents

Net Market Cap % Chg

ICB Sector No. of

Constituents


(S$ m) (1m) (S$ m) (1m)

Construction& Materials 1 932 13.5

Forestry & Paper 1 78 14.6

General Industrials 1 1,5333 11.3

Gas., Water & Multiutilities 1 299 12.4

Travel & Leisure 1 758 9.5 Leisure Goods 1 255 9.4

Media 1 476 7.2

Real Estate Investment & Services

6 1,191 8.3

Health Care Equipment & Services

2 2,129 7.1

Food Producers 5 677 6.0

Bottom 5 Performing Sectors - FSTM Bottom 5 Performing Sectors - FSTS

ICB Sector No. of

Constituents


ICB Sector No. of

Constituents


(S$ m) (1m) (S$ m) (1m)

Media 1 822 (4.8) Financial Services

1 125 (20.0)

Industrial Engineering

2 2,175 (3.6) Chemicals 1 25 (17.7)

Oil Equipment, Services & Distribution

1 679 (2.9) General Retailers

6 620 (13.2)

Travel & Leisure

5 3,266 (1.6) Industrial Engineering

8 971 (8.7)

Real Estate Investment & Services

4 1,875 (2.0) Technology Hardware & Equipment

1 101 (7.4)

Source: DBS Bank, FTSE

Page 11

Market Focus

SMC Monthly

Page 12

APPENDIX (2) SMC Screener: Ranked by Investment Metrics*

Top 10 Prospective Dividend Yield (FY16 DBS Estimates)

Company Name (%) Cache Logistics Trust 9.9

Croesus Retail Trust 9.6

Religare Health Trust 9.4

Cambridge Industrials 9.1

IREIT Global 9.0

Soilbuild Business Space REIT 8.8

China Merchants 8.8

Mapletree Greater China Commercial Trust 8.5

Frasers Commercial Trust 8.1

Keppel Infrastructure Trust 8.1

Grand Total 8.9

Top 10 Potential Upside (DBS Estimates of 12-month TP)

Company Name (%) Japfa Ltd 80.0

Yoma Strategic Holdings 75.3

Ezion Holdings 70.1

China Merchants 61.3

Centurion Corporation 59.5

Midas Holdings 54.7

Perennial Real Estate Holdings 50.9

Banyan Tree 49.6

ARA Asset Management 48.9

Trendlines Group 42.1 Average 59.2

Lowest P/B (FY16 DBS Estimates)

Company Name (x) Ezra Holdings 0.14

Vard Holdings 0.31

Mermaid Maritime 0.32

PACC Offshore Services Holdings 0.38

Pacific Radiance Ltd 0.40

Tat Hong Holdings 0.41

Noble Group 0.45

Nam Cheong 0.45

Ezion Holdings 0.46

Courts Asia 0.52 Average 0.38

Lowest P/E (FY16 DBS Estimates)

Company Name (x) Noble Group 5.34

Ezion Holdings 5.72

Japfa Ltd 5.86

Centurion Corporation 6.97

Courts Asia 7.21

mm2 Asia 7.30

CSE Global 7.80

Bumitama Agri 9.19

Trendlines Group 10.66

Innovalues 10.73 Average 7.68

Top 10 Net Cash to Share Price (FY15 DBS Estimates of Net Cash to Last Price)

Company Name (%) Trendlines Group 26.6

OSIM International 24.2

Venture Corporation 14.4

Super Group 13.1

Sheng Siong Group 9.8

CSE Global 9.6

ARA Asset Management 9.1

iFAST Corporation 8.9

CITIC Envirotech 7.8

Riverstone Holdings 5.1 Average 12.8

Top 10 2-yr EPS CAGR (FY15-17 DBS Estimates)

Company Name (%) Indofood Agri 300.8

Trendlines Group 297.6

Perennial Real Estate Holdings 160.5

Banyan Tree 92.3

Frasers Hospitality Trust 70.8

Petra Foods 65.0

Midas Holdings 56.3

mm2 Asia 51.3

Noble Group 51.1

Del Monte Pacific 47.1 Average 119.3

* based on 29 Feb 2016 prices Source: DBS Bank, Bloomberg Finance L.P.

Page 12

Market Focus

SMC Monthly

Page 13

APPENDIX (3) DBS SMC Universe (as at 29 Feb 2016) Breakdown by Sector Breakdown by Rating

Source: DBS Bank

SMC Universe (US$50m to US$2bn market cap)

S/n Security Description Rating Market

Cap (S$ m)

Last Price

(Feb 16)

Target Price

(12 month)

Upside /

Downside

P/E

FY16

P/E

FY17

P/B

FY16

EPS Growth

(%, FY16)

1 Mapletree Industrial Trust BUY 2,758 1.545 1.62 5% 14.6 13.4 1.2 -0.6

2 Raffles Medical HOLD 2,513 4.370 4.30 -2% 34.2 32.4 3.9 5.9

3 Mapletree Greater China Commercial Trust

BUY 2,501 0.910 1.11 22% 15.1 14.9 0.8 13.0

4 SMRT HOLD 2,469 1.620 1.50 -7% 24.8 25.7 2.6 -5.6

5 Mapletree Logistics Trust BUY 2,422 0.975 1.15 18% 12.7 12.3 1.0 4.0

6 SPH REIT HOLD 2,398 0.945 0.99 5% 19.7 19.0 1.0 3.6

7 M1 HOLD 2,371 2.530 2.60 3% 13.4 13.6 5.3 -1.0

8 Venture Corporation BUY 2,259 8.160 9.00 10% 13.6 13.0 1.2 7.9

9 Noble Group HOLD 2,255 0.345 0.32 -8% 5.3 3.9 0.4 66.7

10 Frasers Centrepoint Trust BUY 1,821 1.985 2.04 3% 18.2 17.9 1.1 -2.0

11 Keppel Infrastructure Trust BUY 1,793 0.465 0.56 20% 52.3 57.3 1.4 26.2

12 Ascott Residence BUY 1,754 1.130 1.33 17% 18.0 18.0 0.8 6.0

13 Starhilll Global REIT BUY 1,625 0.745 0.84 12% 13.5 13.0 0.8 -28.4

14 CITIC Envirotech HOLD 1,568 1.390 1.55 12% 25.7 21.5 1.7 47.9

15 Perennial Real Estate Holdings

BUY 1,449 0.875 1.32 51% 17.2 2.6 10.0 3.7

16 Petra Foods HOLD 1,430 2.340 2.21 -5% 36.5 24.4 5.2 82.1

17 Parkway Reit BUY 1,428 2.360 2.50 6% 18.6 18.3 1.4 6.2

18 China Merchants BUY 1,391 0.775 1.25 61% 10.9 9.6 0.8 -11.0

19 Bumitama Agri BUY 1,316 0.750 0.96 28% 9.2 7.2 1.9 52.7

20 Sheng Siong Group BUY 1,286 0.855 1.01 18% 21.1 21.1 5.2 7.1

21 CDL Hospitality Trust BUY 1,266 1.280 1.54 20% 13.5 13.5 0.8 -3.0

22 China Everbright Water BUY 1,235 0.475 0.64 35% 13.5 11.1 0.9 24.5

23 CapitaLand Retail China Trust

BUY 1,202 1.425 1.69 19% 14.2 13.9 0.8 4.1

24 Far East Hospitality Trust HOLD 1,139 0.635 0.63 -1% 17.3 17.7 0.7 -8.0

25 Frasers Hospitality Trust BUY 1,067 0.780 0.83 7% 18.4 18.3 0.9 189.0

26 ARA Asset Management BUY 1,052 1.055 1.57 49% 12.7 12.2 1.9 -7.3

27 Super Group BUY 970 0.870 0.91 4% 19.2 18.0 1.8 4.0

28 Frasers Commercial Trust BUY 968 1.230 1.53 24% 14.4 14.1 0.8 -10.5

29 Keppel DC Reit BUY 932 1.055 1.14 8% 14.0 14.8 1.1 18.3

30 Japfa Ltd BUY 882 0.500 0.90 80% 5.9 4.2 0.8 52.9


44

19

5

BUY

HOLD

FULLY VALUED

10%

9%

3%

4%

18%

10%

3%

34%

4% 2%3%

Consumer Goods

Consumer Services

Financials

Health Care

Industrials

Oil & Gas

Real Estate

REITS

Technology

Telecommunications

Utilities

Page 13

Market Focus

SMC Monthly

Page 14

SMC Universe (US$50m to US$2bn market cap)

S/n Security Description Rating Market

Cap (S$ m)

Last Price

(Feb 16)

Target Price

(12 month)

Upside /

Downside

P/E

FY16

P/E

FY17

P/B

FY16

EPS Growth

(%, FY16)

31 Ascendas Hospitality Trust BUY 862 0.770 0.77 0% 24.2 24.3 1.1 2.9

32 OUE Commercial REIT HOLD 851 0.660 0.65 -1% 20.2 19.2 0.7 65.3

33 OSIM International BUY 823 1.110 1.28 15% 12.1 11.6 2.0 2.8

34 Ascendas India Trust BUY 815 0.880 0.91 4% 15.1 13.1 1.3 2.6

35 Ezion Holdings BUY 798 0.500 0.85 70% 5.7 5.0 0.5 3.4

36 Yoma Strategic Holdings BUY 772 0.445 0.78 75% 19.6 - 0.9 50.3

37 Cache Logistics Trust BUY 755 0.845 0.96 14% 11.0 10.7 1.0 10.7

38 Religare Health Trust HOLD 738 0.925 0.97 5% 14.3 13.5 1.0 9.5

39 Riverstone Holdings BUY 730 0.985 1.30 32% 14.3 12.3 3.8 19.8

40 Cosco Corporation FULLY VALUED

683 0.305 0.24 -21% nm nm 1.0 nm

41 Cambridge Industrials HOLD 681 0.525 0.61 16% 10.8 10.6 0.8 1.0

42 Soilbuild Business Space REIT

BUY 663 0.710 0.84 18% 12.8 12.4 0.9 5.5

43 Del Monte Pacific HOLD 641 0.330 0.35 5% 11.0 6.0 1.2 17.6

44 Indofood Agri BUY 614 0.440 0.52 18% 11.9 6.4 0.6 759.6

45 PACC Offshore Services Holdings

HOLD 562 0.310 0.28 -11% 41.4 19.4 0.4 -44.5

46 Croesus Retail Trust HOLD 494 0.775 0.86 11% 12.9 13.2 0.8 87.2

47 IREIT Global BUY 429 0.700 0.77 10% 12.1 12.8 1.1 29.9

48 Banyan Tree BUY 358 0.470 0.70 50% 21.4 6.8 0.6 16.7

49 iFAST Corporation BUY 331 1.270 1.45 14% 24.2 20.2 4.0 13.4

50 Midas Holdings BUY 323 0.265 0.41 55% 11.9 10.8 0.5 121.7

51 Pan-United Corp HOLD 302 0.540 0.57 5% 15.1 14.7 1.1 -10.8

52 Centurion Corporation BUY 278 0.370 0.59 59% 7.0 8.1 0.7 23.6

53 Innovalues BUY 263 0.810 1.01 25% 10.7 8.7 2.7 6.0

54 Tat Hong Holdings HOLD 260 0.415 0.52 25% 150.3 105.0 0.4 nm

55 CSE Global HOLD 235 0.455 0.46 1% 7.8 7.6 0.9 -1.8

56 Pacific Radiance Ltd FULLY VALUED

215 0.300 0.25 -17% nm nm 0.4 nm

57 Nam Cheong FULLY VALUED

210 0.100 0.07 -34% nm 69.6 0.5 nm

58 Ezra Holdings HOLD 188 0.064 0.08 25% nm nm 0.1 nm

59 Vard Holdings FULLY VALUED

181 0.153 0.13 -16% nm nm 0.3 nm

60 Overseas Education Limited

HOLD 174 0.420 0.56 33% 15.6 11.8 1.1 -24.9

61 Courts Asia BUY 168 0.320 0.44 39% 7.2 7.0 0.5 7.4

62 Mermaid Maritime FULLY VALUED

147 0.104 0.09 -12% 73.0 nm 0.3 -71.2

63 Trendlines Group BUY 100 0.197 0.28 42% 10.7 9.5 0.8 1309.4

64 mm2 Asia BUY 98 0.450 0.52 16% 7.3 5.9 2.1 84.2


Page 14

Market Focus

SMC Monthly

Page 15

COMPANY PROFILES

Page 15

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: YM

BUY Last Traded Price: S$0.84 (STI : 2,837.00) Price Target : S$1.25 (50% upside) Potential Catalyst: Earnings growth and execution Analyst Paul YONG CFA +65 6682 3712 [email protected]

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2014A 2015A 2016F 2017F Revenue 2,019 2,208 2,700 2,943 EBITDA 1,900 2,029 2,416 2,617 Pre-tax Profit 1,348 1,296 1,423 1,602 Net Profit 739 597 718 822 Net Pft (Pre Ex.) 675 597 718 822 EPS (S cts) 10.9 7.8 7.0 8.0 EPS Pre Ex. (S cts) 9.9 7.8 7.0 8.0 EPS Gth (%) 7 (28) (11) 15 EPS Gth Pre Ex (%) 6 (21) (11) 15 Diluted EPS (S cts) 10.9 7.8 7.0 8.0 Net DPS (S cts) 7.0 7.0 7.0 7.0 BV Per Share (S cts) 93.6 94.2 93.9 95.3 PE (X) 7.7 10.7 12.0 10.5 PE Pre Ex. (X) 8.4 10.7 12.0 10.5 P/Cash Flow (X) 4.7 4.5 15.7 5.0 EV/EBITDA (X) 6.0 8.0 7.7 6.8 Net Div Yield (%) 8.3 8.3 8.3 8.3 P/Book Value (X) 0.9 0.9 0.9 0.9 Net Debt/Equity (X) 0.4 0.6 0.6 0.5 ROAE (%) 11.6 6.3 7.4 8.4 Earnings Rev (%): - - - Other Broker Recs: B: 2 S: 0 H: 0

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Growing Greatness Acquisitions to drive bottom line expansion. The recently completed acquisitions of Jiurui Expressway and three toll roads in Guangxi Zhuang Autonomous Region should propel the group’s top and bottom lines in the medium to long term. We project CMHP’s core earnings will grow by nearly 50% from HK$675m in 2014 to HK$1,004m by 2017F, driven by contribution from these recent acquisitions. Value-accretive acquisitions a potential catalyst. Over the last four years, the group has acquired six expressways, disposed off a Class 1 highway (Yuyao Highway), and its property development business in New Zealand, which have streamlined and expanded its core expressway business. We believe the group will continue to look for expressway acquisitions to expand its business, which could be a catalyst for a re-rating of its share price. Consistent and attractive dividend yields. CMHP has been consistently paying attractive dividends to its shareholders (7Scts per share per annum in the last two years). We project CMHP will maintain 7Scts payout for FY15 and FY16 (<85% payout), translating into an attractive dividend yield of >8%. Valuation:

Our 12-month target price of S$1.45 is based on DCF valuation with WACC of 9.8%, and offers >50% upside. We see the stock re-rating as it delivers earnings growth. Key Risks to Our View:

Exposure to Chinese economy and regulatory risks. Key risks for the group are a) its 100% exposure to the Chinese economy and Rmb, b) its earnings would be negatively impacted if toll rate tariffs are revised downwards. At A Glance Issued Capital (m shrs) 1,795 Mkt. Cap (S$m/US$m) 1,498 / 1,090 Major Shareholders China Merchants Group (%) 75.9 Liu Qiang (%) 6.0 Free Float (%) 18.1 3m Avg. Daily Val (US$m) 0.33 ICB Industry : Industrials / Industrial Transportation


Singapore Company Guide

China Merchants Hldgs (Pacific) Version 3 | Bloomberg: CMH SP | Reuters: CAEP.SI Refer to important disclosures at the end of this report

87

107

127

147

167

187

207

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

Relative IndexS$

China Merchants Hldgs (Pacific) (LHS) Relative STI INDEX (RHS)

Page 16

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

China Merchants Hldgs (Pacific)

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

New road acquisitions to help drive revenue growth. We project the group’s total revenue to grow from HK$2,019m in FY14 to HK$3,033 by 2017F, or c. 50%, driven largely by contribution from newly acquired roads Jiurui E’way (acquired end-2014), Guiyang E’way, Guixing E’way and Yangping E’way (all three were acquired end-2015). Revenue contribution from these four roads is expected to amount to HK$954m in 2017F or 31.5% of group revenue. Meanwhile, revenue from the more mature Yongtaiwen E’way and Ningbo-Beilun Port E’way are expected to increase at a modest pace. Expect modest traffic volume growth for mature roads, and stronger growth for younger roads. For mature roads like the Yongtaiwen E’way and Ningbo-Beilun Port E’way, we are projecting 3%-4% per annum growth in traffic volumes in the medium to long-term while for the younger, newly acquired roads, traffic volume growth is projected (by independent traffic consultants) to range from the mid-teens to over 20% per annum over the next few years, driven by rapid economic growth in the less developed regions of Jiangxi and Guangxi, as well as increased connections to these roads over time. Beyond 2017, traffic on these young roads are still projected to grow at least in the high single digits to low teens. Stable earnings contribution from JV roads. We expect contribution from the group’s two jointly controlled roads Guiliu E’way and Guihuang Highway, to be stable at between HK$294m to HK$303m over the next few years, as these are fairly mature roads with predictable cash flows and earnings. No rate hike assumed in our projections. Toll rates are determined at the provincial level, and while toll road companies can propose changes to toll rate schemes to the respective provincial government, the final decision lies with the provincial government. Although there have been instances of rate hikes in recent years in various provinces, we have not assumed any rate hikes for any of the group’s toll roads in the short or long term. This represents upside risk to our long term revenue forecasts, and ultimately DCF-based valuation for CMHP. 14% net profit CAGR over 2014 to 2017F. Driven by steady growth in revenue, we project the group’s EBIT to grow by 54% from HK$1,121m in 2014 to HK$1,729m in 2017F. Coupled with stable contribution from jointly controlled roads, this should drive net earnings to grow by c. 50% from HK$675m in 2014 to HK$1,1004m by 2017F.


0

500

1,000

1,500

2,000

2,500

3,000

3,500

2014 2015F 2016F 2017F

Revenue by toll road (HK$m)

Yongtaiwen E'way Ningbo-Beilun Port E'way

Jiurui E'way Guixing E'way

Guiyang E'way Yangping E'way

50.0

51.0

52.0

53.0

54.0

55.0

56.0

57.0

58.0

0.0200.0400.0600.0800.0

1,000.01,200.01,400.01,600.01,800.02,000.0

14 15F 16F 17F

EBIT vs EBIT Margin

EBIT (LHS) HK$m EBIT Margin (RHS) %

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2014 2015 2016 2017

Contribution from JV Roads (HK$m)

Subsidy Income Guiliu E'way Guihuang E'way

Page 17


Company Guide


Balance Sheet:

Comfortable gearing position following recent rights issue to fund acquisitions. The group recently completed a rights issue that raised S$599.5m in gross proceeds (>99% was taken up by the parent company, China Merchants Group), which will be used to partially fund the Rmb3.04bn acquisition of three toll roads in Guangxi. With the remainder of the consideration to be funded by debt, we estimate that the group’s net debt to equity ratio will rise from 0.36x at the end of 2014 to 0.59x by end-2015F. Thereafter, we project net gearing to subsequently fall to 0.51x by end-2016 and 0.42x by end-2017 on positive free cash flow generation from its toll road operations. Share Price Drivers:

Earnings improvement to drive share price re-rating. Following the acquisition of the three roads in Guangxi, we project CMHP’s core earnings to improve 20% in 2016F to HK$853m, and 18% in 2017F to HK$1,004m. In EPS terms, this translates to a 12% decline (due to dilution from the rights issue) to 8.4Scts in 2016F and 18% growth in 2017F to 9.9Scts. A sustained improvement in earnings could drive a re-rating of its share price. Value-accretive acquisitions a potential catalyst. Over the last four years, the group has acquired six expressways, disposed off a Class 1 highway (Yuyao Highway), and its property development business in New Zealand, which has streamlined and expanded its core expressway business. We believe the group will continue to look for expressway acquisitions to expand its business, which could be a re-rating catalyst for its share price. Key Risks:

Exposed to China’s growth. CMHP's core earnings are derived entirely from its toll road operations in China, which leaves it vulnerable to China's country risks. As the group's functional currency is the Rmb, EPS in S$ terms is subject to SGD-Rmb volatility. Regulatory changes could affect earnings. Any downward revision in tariff rates would hurt the group's bottom line and cash flows. Company Background

China Merchants Holdings (Pacific) currently operates eight toll roads in China, with a total length of 576km, in four different provinces (Zhejiang, Guangxi Zhuang Autonomous Region, Jiangxi and Guizhou) in the country. It is majority-owned by China Merchants Group.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

HK$

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013A 2014A 2015A 2016F 2017F

Avg: 10.8x

+1sd: 12.6x

+2sd: 14.3x

‐1sd: 9.1x

‐2sd: 7.4x6.6

8.6

10.6

12.6

14.6

16.6

Mar-12 Mar-13 Mar-14 Mar-15

(x)

Avg: 1x

+1sd: 1.12x

+2sd: 1.24x

‐1sd: 0.87x

‐2sd: 0.75x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


(x)

Page 18


Company Guide


Income Statement (HK$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 1,886 2,019 2,208 2,700 2,943 Cost of Goods Sold (841) (907) (910) (1,087) (1,135) Gross Profit 1,045 1,113 1,298 1,613 1,808 Other Opng (Exp)/Inc (60) 8 (88) (136) (158) Operating Profit 985 1,121 1,210 1,477 1,650 Other Non Opg (Exp)/Inc 22 24 22 22 18 Associates & JV Inc 248 264 233 233 226 Net Interest (Exp)/Inc (154) (125) (168) (308) (293) Exceptional Gain/(Loss) 49 64 0 0 0 Pre-tax Profit 1,150 1,348 1,296 1,423 1,602 Tax (253) (289) (338) (326) (373) Minority Interest (283) (320) (361) (380) (406) Preference Dividend 6 0 0 0 0 Net Profit 620 739 597 718 822 Net Profit before Except. 571 675 597 718 822 EBITDA 1,731 1,900 2,029 2,416 2,617 Growth Revenue Gth (%) 30.6 7.1 9.3 22.3 9.0 EBITDA Gth (%) 35.4 9.8 6.7 19.1 8.3 Opg Profit Gth (%) 32.3 13.8 7.9 22.1 11.7 Net Profit Gth (Pre-ex) (%) 48.2 18.2 (11.6) 20.2 14.6 Margins & Ratio Gross Margins (%) 55.4 55.1 58.8 59.7 61.4 Opg Profit Margin (%) 52.2 55.5 54.8 54.7 56.1 Net Profit Margin (%) 32.9 36.6 27.1 26.6 27.9 ROAE (%) 12.1 11.6 6.3 7.4 8.4 ROA (%) 4.6 4.7 2.4 3.1 3.7 ROCE (%) 6.3 6.2 3.9 5.2 6.0 Div Payout Ratio (%) 50.3 56.4 96.0 94.5 82.5 Net Interest Cover (x) 6.4 9.0 7.2 4.8 5.6


Page 19


Company Guide


Quarterly / Interim Income Statement (HK$ m)

FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 532 494 537 549 628 Cost of Goods Sold (260) (219) (221) (214) (256) Gross Profit 272 276 316 335 372 Other Oper. (Exp)/Inc (16) (13) 22 (18) (79) Operating Profit 255 263 338 316 292 Other Non Opg (Exp)/Inc 6 6 6 5 5 Associates & JV Inc 45 64 64 64 42 Net Interest (Exp)/Inc (34) (33) (28) (28) (79) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 272 299 379 357 261 Tax (70) (74) (89) (90) (85) Minority Interest (71) (82) (95) (99) (84) Net Profit 131 142 195 168 92 Net profit bef Except. 131 142 195 168 92 EBITDA 272 299 379 357 261 Growth Revenue Gth (%) 0.7 (7.1) 8.6 2.2 14.4 EBITDA Gth (%) (29.3) 9.9 26.9 (6.0) (26.9) Opg Profit Gth (%) (23.9) 2.9 28.7 (6.4) (7.7) Net Profit Gth (Pre-ex) (%) (37.8) 8.4 37.1 (13.7) (45.6) Margins Gross Margins (%) 51.1 55.8 58.8 61.0 59.2 Opg Profit Margins (%) 48.0 53.2 63.0 57.7 46.5 Net Profit Margins (%) 24.7 28.8 36.3 30.7 14.6

Balance Sheet (HK$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 188 209 427 410 392 Invts in Associates & JVs 1,927 1,702 1,585 1,558 1,531 Other LT Assets 9,285 12,429 20,799 20,150 19,464 Cash & ST Invts 1,448 1,049 2,144 980 856 Inventory 1 1 1 1 1 Debtors 71 200 238 238 238 Other Current Assets 512 0 0 0 0 Total Assets 13,432 15,591 25,193 23,337 22,482 ST Debt 249 402 3,556 556 556 Creditor 482 633 2,096 1,096 1,096 Other Current Liab 807 660 411 411 411 LT Debt 3,419 3,845 5,757 7,757 6,757 Other LT Liabilities 713 1,121 1,215 1,215 1,215 Shareholder’s Equity 5,109 6,374 9,546 9,690 9,834 Minority Interests 2,652 2,556 2,611 2,611 2,611 Total Cap. & Liab. 13,432 15,591 25,193 23,337 22,482 Non-Cash Wkg. Capital (706) (1,093) (2,269) (1,269) (1,269) Net Cash/(Debt) (2,220) (3,198) (7,170) (7,333) (6,458) Debtors Turn (avg days) 13.7 36.1 39.4 32.2 29.5 Creditors Turn (avg days) 482.4 556.9 2,213.9 992.2 969.8 Inventory Turn (avg days) 0.8 0.9 1.0 0.8 0.8 Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 1.3 0.7 0.4 0.6 0.5 Quick Ratio (x) 1.0 0.7 0.4 0.6 0.5 Net Debt/Equity (X) 0.3 0.4 0.6 0.6 0.5 Net Debt/Equity ex MI (X) 0.4 0.5 0.8 0.8 0.7 Capex to Debt (%) 0.5 1.2 2.6 0.2 0.2 Z-Score (X) 1.2 1.0 0.6 0.8 0.9


Three new roads acquired in 2015

Page 20


Company Guide


Cash Flow Statement (HK$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 1,101 1,348 1,296 1,423 1,602 Dep. & Amort. 477 506 566 684 722 Tax Paid (198) (337) (211) (326) (373) Assoc. & JV Inc/(loss) (248) (264) (233) (233) (226) Chg in Wkg.Cap. (28) 88 3 (1,000) 0 Other Operating CF 2 (131) 4 0 0 Net Operating CF 1,107 1,209 1,426 548 1,725 Capital Exp.(net) (17) (50) (246) (17) (18) Other Invts.(net) 0 (695) (3,671) 0 0 Invts in Assoc. & JV 76 104 50 50 50 Div from Assoc & JV 234 373 170 209 203 Other Investing CF 0 0 0 0 0 Net Investing CF 293 (269) (3,696) 242 235 Div Paid (427) (754) (954) (953) (1,084) Chg in Gross Debt (839) (607) 1,114 (1,000) (1,000) Capital Issues 0 25 3,258 0 0 Other Financing CF 0 0 0 0 0 Net Financing CF (1,266) (1,335) 3,418 (1,953) (2,084) Currency Adjustments 58 (5) (54) 0 0 Chg in Cash 193 (400) 1,094 (1,163) (125) Opg CFPS (HK cts) 104.8 93.0 105.2 84.7 94.4 Free CFPS (HK cts) 100.7 96.2 87.3 29.1 93.4


Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 04 May 15 1.09 1.35 BUY

2: 25 Jun 15 1.08 1.54 BUY

3: 10 Aug 15 1.03 1.45 BUY

4: 13 Oct 15 0.93 1.45 BUY

5: 06 Nov 15 0.97 1.45 BUY

6: 29 Feb 16 0.78 1.25 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

45

6

0.72

0.77

0.82

0.87

0.92

0.97

1.02

1.07

1.12

1.17

Mar-15 Jul-15 Nov-15

S$

Acquisition of three toll roads in Guangxi

Page 21

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: JC

BUY Last Traded Price: S$0.57 (STI : 2,837.00) Price Target : S$0.85 (51% upside) Potential Catalyst: Oil price recovery, vessel delivery Where we differ: In line Analyst Pei Hwa Ho +65 6682 3714 [email protected]

What’s New 4Q15 swung into losses with US$93m impairment

charges and share of Ausgroup’s losses

Trimmed FY16/17 earnings by 30-33%, after adjusting for delivery schedules and temporary rate reduction

Windfarm venture taking off; diversifying from bleak O&G sector

Proposed 1-for-5 bonus warrants issue

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 387 351 429 533 EBITDA 309 267 310 339 Pre-tax Profit 226 38 109 123 Net Profit 224 37 108 121 Net Pft (Pre-Ex, Aft Pref Div)* 179 95 100 114 EPS (S cts) 19.5 3.2 9.3 10.4 EPS Pre Ex, Aft Pref Div (S cts) 15.6 8.3 8.6 9.8 EPS Gth (%) 26 (84) 191 12 EPS Gth Pre Ex, Aft pref div (%)

21 (47) 3 14

Net DPS (S cts) 0.1 0.0 0.0 0.0 BV Per Share (S cts) 95.8 97.8 107.7 117.5 PE (X) 2.9 17.7 6.1 5.4 PE Pre Ex, Aft Pref Div (X) 3.6 6.8 6.6 5.8 P/Cash Flow (X) 3.0 3.1 2.9 2.5 EV/EBITDA (X) 6.4 8.0 6.4 6.0 Net Div Yield (%) 0.2 0.0 0.0 0.0 P/Book Value (X) 0.6 0.6 0.5 0.5 Net Debt/Equity (X) 0.9 1.1 0.9 0.9 ROAE (%) 24.1 2.1 8.4 8.7 Earnings Rev (%): 0 0 Consensus EPS (S cts): 11.3 13.9

Other Broker Recs: B: 10 S: 1 H: 1


Diversifying away from O&G Maintain BUY on Ezion with a TP of S$0.85, based on 0.7x FY16 P/BV. We remain optimistic on Ezion’s ability to survive through this downturn with its solid management team, network and assets. Re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts. 4Q15 hit by asset impairments. Ezion reported a net loss of US$63.5m in 4Q15 due largely to asset impairments of US$81m for its own fleet and US$12m share of associate losses from Ausgroup. Core earnings were also weaker than expected with gross margins contracting 26.8ppt y-o-y and 5.1ppt q-o-q to 23.8%. We trim our FY16/17 estimates by 30-33%, factoring in a bigger charter rate cut from 15-20% to 20-25%. Successful takeoff of windfarm plan. China has set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed. A liftboat could facilitate installation of 200MW offshore wind capacity a year. Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China. Ezion has signed a MOU with one of the top five IPPs in China to speed up the installation of offshore windfarms using liftboats. Valuation: We value Ezion based on 0.7x FY16 P/BV, arriving at a target price of S$0.85. This implies a 50% upside potential. Key Risks to Our View: Rate reduction and contract terminations We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 3%. We have prudently assumed a 20% rate reduction in FY16 and a further 5% in FY17. Five service rigs are due for charter renewals in FY16. Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region. Competition might be keener ahead with more new entrants attracted to the growing liftboat market.

At A Glance Issued Capital (m shrs) 1,595 Mkt. Cap (S$m/US$m) 901 / 656 Major Shareholders (%) Thiam Keng Chew 14.1 Prudential 10.5

Commonwealth Bank Of Austr 9.0 Free Float (%) 51.3 3m Avg. Daily Val (US$m) 4.6 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Ezion Holdings Version 3 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report

69

119

169

219

269

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2


Relative IndexS$

Page 22


Company Guide

Ezion Holdings

WHAT’S NEW

4Q15 dragged by asset impairments

Incurred impairment charges of US$81m and US$12m share of Ausgroup’s losses. As guided in its profit warning last week, Ezion reported a net loss of US$63.5m in 4Q15 due largely to asset impairments amounting to US$81m for its own fleet. In addition, Ezion equity accounted for US$12m losses from its 20%-owned associate - Ausgroup in 4Q15.

Margin contraction. Core earnings were also seemingly weaker than expected, with gross margin contracting 26.8ppt y-o-y and 5.1ppt q-o-q to 23.8%. We understand that there were US$5-6m mobilisation costs for two switching units which are borne by Ezion. Otherwise, gross margins would have been >30%. As a result, full-year PATMI fell 80% to US$36.8m.

Earnings revisions. We trim our FY16/17 estimates by 30-35% after adjusting for delivery schedule and factoring in a bigger temporary rate reduction from 15-20% to 20-25%.

Net gearing stood at 1.1x as of end-2015, similar to last quarter. Ezion does not declare any dividend this year to conserve cash to ride through the industry downturn

1-for-5 bonus warrants. Separately, Ezion proposed 1-for-5 bonus warrants issue exercisable within four years from issuance date at an exercise price of S$0.50 (last closing price). This could enlarge the share cap by up to 20%. If fully exercised, Ezion would receive gross proceeds of c.S$162m,

which would be utilised for investment, debt repayment and working capital purposes. This is subject to shareholders' approval at AGM on 22 Apr.

Key takeaways from briefing:

1. The impairments made in 4Q15 should suffice if O&G market does not deteriorate further. This has taken into account the lower cashflow in the near term, receivables impairments, and asset redeployment.

2. While resisting outright rate reduction/long-term charters at reduced rates, Ezion extended some discounts to customers as a form of “temporary relief”.

3. Ezion will defer deliveries of six newbuild rigs by up to 12 months in view of the market condition, with consent from customers and yards.

4. On the back of a protracted period of low oil prices, Ezion intends to redeploy a number of existing units for offshore windfarm installation and convert some units into Mobile Offshore Production Unit (MOPU), which are seeing rising demand.

5. Ezion could also adopt the “asset light” strategy by tapping on the potential supply from speculatively built liftboats in China.

Quarterly / Interim Income Statement (US$m)

FY Dec 4Q2014 3Q2015 4Q2015 % chg yoy % chg qoq

Revenue 105 86.2 84.8 (19.0) (1.7) Cost of Goods Sold (51.7) (61.3) (64.6) 24.9 5.4

Gross Profit 52.9 25.0 20.2 (61.8) (19.1) Other Oper. (Exp)/Inc (7.8) 2.68 (2.4) (69.2) nm

Operating Profit 45.2 27.6 17.8 (60.6) (35.6) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 8.16 9.03 (3.0) nm nm Net Interest (Exp)/Inc (5.6) (5.9) (5.6) (0.4) 4.8 Exceptional Gain/(Loss) 35.8 0.0 (72.3) nm nm

Pre-tax Profit 83.5 30.8 (63.1) nm nm Tax 0.18 (0.4) (0.5) nm 7.5 Minority Interest 0.02 0.0 0.0 nm nm

Net Profit 83.7 30.3 (63.5) nm nm Net profit bef Except. 47.9 30.3 8.73 (81.8) (71.2) EBITDA 82.7 73.1 50.1 (39.4) (31.5) Margins (%)

Gross Margins 50.6 29.0 23.8 Opg Profit Margins 43.2 32.1 21.0 Net Profit Margins 80.0 35.2 (74.9)

Source of all data: Company, DBS Bank

Page 23


Company Guide

Ezion Holdings


Earnings Drivers:

Charter-backed fleet expansion. Since the delivery of its first liftboat, the Lewek Leader, in Jan 2010, Ezion has expanded its fleet rapidly to 26 service rigs. Based on the existing schedule, management expects another 2/7/2 units to come on stream by in 2016/17/18. All the vessels under construction have already secured back-to-back contracts and will start contributing to earnings upon delivery to customers. Rate reduction an uncertainty. While we expect sequential improvement from the maiden contribution of the 10 new service rigs to be delivered this year and resumption of the 10 vessels currently under repair at yards, the pace of earnings growth is dependent on the magnitude of rate reduction. With oil price plunging to sub-US$30, rate renegotiation is inevitable. Against this backdrop, we have factored in a 20-25% discount in 2016-2017. Pick-up in offshore logistic revenue. Ezion’s Australian offshore logistic fleet comprises 10 tugs and 30 ballastable barges. Ballastable barges, which have specially reinforced decks, have been modified to carry heavy offshore platforms and jackets. Demand for such high-end vessels has fallen off the cliff since 4Q14, with the construction of major Australian LNG projects coming to an end. This was exacerbated by depressed oil prices that have discouraged customers from exercising charter options after the initial term of 18 months. We estimate overhead costs to be around US$20m a year, taking into account depreciation, crew costs and interest expense. Upside potential would come from a stronger-than-expected demand or disposal of the fleet, which has a carrying value of around US$250m. However, we believe it is not easy to find buyers in the current climate. Contract wins from windfarm expansion to fuel growth. During the peak of its contract wins, Ezion won 12/9/7 new charter contracts in 2012/13/14 respectively. The contracting pace is expected to slow down, constrained by Ezion’s stretched balance sheet. But the unexpected collapse in oil prices has accelerated the decline as some customers have held back the award of new contracts or have negotiated down charter rates. We believe demand will continue to grow in this region as liftboats/service rigs are in early stages of the industry cycle, to substitute workboats and barges that are traditionally used to support offshore production platforms. Ezion enjoys first-mover advantage to tap the industry’s growth. In addition, its recent venture into offshore windfarm could be a medium-term growth engine as well.

Total fleet

Operating fleet


18

21

27

37 37

0.0

4.7

9.3

14.0

18.7

23.4

28.0

32.7

37.4

2013A 2014A 2015A 2016F 2017F

18 18 17

37 37

0.0

7.5

15.1

22.6

30.2

37.7

2013A 2014A 2015A 2016F 2017F

Page 24


Company Guide

Ezion Holdings

Balance Sheet: High net gearing of 1.1x; backed by long-term charters. Solid order backlog of approx. US$2bn translates into revenue coverage of >3x, 1.5x its net debt of US$1.3bn. Risks of defaults and cancellations are low, given its reputable clientele base that consists largely of NOCs and IOCs. Sound financial health. Net debt/EBITDA is expected to hover around 5.0x in 2016. Current ratio of c.1.0x indicates Ezion’s ability to service short-term financing needs that may arise. Ezion should be able to meet its interest payments with c.3x net interest coverage ratio.

Share Price Drivers: Oil price rebound. Oil price is a leading indicator and key re-rating catalyst for O&G sector as the market has widely priced in the weak earnings and new lower norm of oil prices. We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential. Vessel deliveries. Besides the delivery rescheduling, 10 of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades. The resumption of these rigs in 2016 should drive earnings recovery. In addition, Ezion is expected to take delivery of 2/7/2 vessels in 2016/17/18, driving growth into 2017. Key downside risk is a rate reduction greater than the 20-25% factored into our model. New contracts/renewals at good rates. Securing new/renewal of charter contracts at good rates would alleviate concerns over contract cancellations and rate reductions and thus lower the risk premium ascribed to the company.

Key Risks: Rising interest rates. About 60-70% of its debts have been swapped to fixed rates, lowering the sensitivity. We estimate that every 100-bp increase in interest rates could reduce Ezion's net profit by approximately 4%. Rate reduction and contract terminations. Five service rigs are due for charter renewals in FY16. In terms of termination, the Mexican contracts appear to be at risk as these consist of the few units that are deployed for drilling and PEMEX has exercised early termination clauses on a couple of drilling rigs last year and is facing liquidity crunch because of the oil price collapse. Keener competition. The rising acceptance and growing demand for liftboats have attracted new entrants to the market. We estimate that there are c.20 new liftboats currently under construction to be delivered largely in 2017. We believe demand growth should outpace supply growth in the under-penetrated Asia-Pacific region.

Company Background Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East regions. Ezion had a total of 26 service rigs delivered and 18 service rigs in operation as of end-2015. The fleet is expected to grow to 28 vessels by end-2016 and 35 by end-2017.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015A 2016F 2017F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2013A 2014A 2015A 2016F 2017F


US$

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015A 2016F 2017F

Avg: 11.5x

+1sd: 14.5x

+2sd: 17.5x

‐1sd: 8.5x

‐2sd: 5.5x4.5

6.5

8.5

10.5

12.5

14.5

16.5

18.5


(x)

Avg: 2.25x

+1sd: 3.3x

+2sd: 4.35x

‐1sd: 1.2x

‐2sd: 0.15x0.1

0.6

1.1

1.6

2.1

2.6

3.1

3.6

4.1

4.6


(x)

Page 25


Company Guide

Ezion Holdings

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Total fleet 18.0 21.0 27.0 37.0 37.0 Operating fleet 18.0 18.0 17.0 37.0 37.0

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Offshore Logistics Support 111 88 19 7 2 Liftboats & jackup rigs 171 299 332 422 530 Marine supply base 0 0 0 0 1 Total 282 387 351 429 533 Operating profit (US$ m) Offshore Logistics Support 34 24 (5) (15) (15) Liftboats & jackup rigs 93 162 120 129 150 Marine supply base 0 0 0 0 0 Others (8) (8) 15 8 8 Total 119 179 130 122 143 Operating profit Margins Offshore Logistics Support 30.6 27.6 (26.0) (220.4) (630.4) Liftboats & jackup rigs 54.6 54.2 36.2 30.5 28.3 Marine supply base N/A N/A N/A N/A 0.0 Total 42.3 46.2 37.1 28.4 26.8

Income Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 282 387 351 429 533 Cost of Goods Sold (149) (191) (233) (287) (364) Gross Profit 133 196 118 142 169 Other Opng (Exp)/Inc (14) (17) (9) (21) (27) Operating Profit 119 179 109 122 143 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 31 28 23 31 32 Net Interest (Exp)/Inc (7) (17) (22) (43) (52) Exceptional Gain/(Loss) 20 36 (72) 0 0 Pre-tax Profit 163 226 38 109 123 Tax (3) (2) (2) (1) (1) Minority Interest 0 0 0 0 0 Net Profit 160 224 37 108 121 Net Profit before Except. 141 188 109 108 121 Preference Dividend (8) (9) (14) (8) (8) Net Pft Pre-Ex, Aft Pref Div 133 179 95 100 114 EBITDA 195 309 267 310 339 Growth Revenue Gth (%) 77.7 37.1 (9.1) 22.2 24.2 EBITDA Gth (%) 115.7 58.3 (13.6) 16.0 9.3 Opg Profit Gth (%) 108.5 49.9 (38.9) 11.5 17.3 Net Profit Gth (%) 103.4 39.4 (83.6) 194.5 12.1 Net Pft Pre-Ex Aft Perf Div Gth (%) 103.1 34.8 (46.7) 4.7 14.0

Margins & Ratio Gross Margins (%) 47.2 50.7 33.6 33.2 31.8 Opg Profit Margin (%) 42.3 46.2 31.1 28.4 26.8 Net Profit Margin (%) 56.9 57.9 10.5 25.3 22.8 ROAE (%) 27.2 24.1 2.1 8.4 8.7 ROA (%) 9.4 8.6 0.8 3.3 3.7 ROCE (%) 7.8 7.5 3.7 4.2 4.9 Div Payout Ratio (%) 0.6 0.5 0.0 0.0 0.0 Net Interest Cover (x) 17.5 10.7 5.0 2.8 2.8


Page 26


Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$ m)

FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 105 90 90 86 85 Cost of Goods Sold (52) (49) (59) (61) (65) Gross Profit 53 42 31 25 20 Other Oper. (Exp)/Inc (8) (4) (5) 3 (2) Operating Profit 45 38 26 28 18 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 8 8 9 9 (3) Net Interest (Exp)/Inc (6) (5) (6) (6) (6) Exceptional Gain/(Loss) 36 0 0 0 (72) Pre-tax Profit 84 41 29 31 (63) Tax 0 0 0 0 0 Minority Interest 0 0 0 0 0 Net Profit 84 41 29 30 (64) Net profit bef Except. 48 41 29 30 9 Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 48 41 29 30 9

EBITDA 83 76 68 73 50 Growth Revenue Gth (%) 10.2 (13.8) (0.1) (4.3) (1.7) EBITDA Gth (%) 2.9 (8.3) (9.8) 6.9 (31.5) Opg Profit Gth (%) (6.8) (16.3) (31.4) 6.7 (35.6) Net Profit Gth (%) 70.0 (51.0) (29.4) 4.8 nm Margins Gross Margins (%) 50.6 46.1 34.9 29.0 23.8 Opg Profit Margins (%) 43.2 41.9 28.8 32.1 21.0 Net Profit Margins (%) 80.0 45.5 32.2 35.2 (74.9)

Balance Sheet (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 1,464 2,136 2,284 2,223 2,341 Invts in Associates & JVs 194 173 204 235 266 Other LT Assets 5 14 12 12 12 Cash & ST Invts 166 372 230 180 150 Inventory 0 0 0 0 0 Debtors 107 160 193 187 213 Other Current Assets 107 128 186 186 186 Total Assets 2,043 2,981 3,108 3,021 3,168 ST Debt 223 288 375 375 375 Creditor 69 70 116 107 142 Other Current Liab 84 69 109 104 104 LT Debt 863 1,208 1,230 1,057 1,055 Other LT Liabilities 4 33 36 36 36 Shareholder’s Equity 800 1,313 1,241 1,341 1,455 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 2,043 2,981 3,108 3,021 3,168 Non-Cash Wkg. Capital 60 148 153 161 153 Net Cash/(Debt) (920) (1,125) (1,375) (1,252) (1,280) Debtors Turn (avg days) 106.5 125.9 183.4 161.6 136.9 Creditors Turn (avg days) 181.0 288.9 345.8 317.0 228.6 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.2 0.2 0.1 0.1 0.2 Current Ratio (x) 1.0 1.5 1.0 0.9 0.9 Quick Ratio (x) 0.7 1.2 0.7 0.6 0.6 Net Debt/Equity (X) 1.1 0.9 1.1 0.9 0.9 Net Debt/Equity ex MI (X) 1.1 0.9 1.1 0.9 0.9 Capex to Debt (%) 67.3 34.9 23.8 6.7 19.8 Z-Score (X) 0.9 0.9 0.8 0.9 1.0


Page 27


Company Guide

Ezion Holdings

Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 163 226 38 109 123 Dep. & Amort. 45 103 135 158 165 Tax Paid (2) (2) (4) (7) (1) Assoc. & JV Inc/(loss) (31) (28) (23) (31) (32) Chg in Wkg.Cap. (5) (62) (32) (2) 8 Other Operating CF (15) (23) 94 0 0 Net Operating CF 155 214 209 228 263 Capital Exp.(net) (731) (522) (382) (97) (283) Other Invts.(net) 22 (19) (4) 0 0 Invts in Assoc. & JV (19) 15 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (5) 6 8 0 0 Net Investing CF (733) (520) (378) (97) (283) Div Paid (1) (1) (1) 0 0 Chg in Gross Debt 532 290 180 (173) (2) Capital Issues 97 272 (87) 0 0 Other Financing CF (14) (30) (38) (8) (8) Net Financing CF 614 530 54 (181) (10) Currency Adjustments (6) (18) (27) 0 0 Chg in Cash 31 206 (142) (50) (29) Opg CFPS (US cts.) 11.3 17.5 15.2 14.4 15.9 Free CFPS (US cts.) (40.5) (19.5) (10.9) 8.2 (1.2)



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 14 May 15 1.19 1.50 BUY

2: 19 May 15 1.13 1.50 BUY

3: 21 May 15 1.08 1.50 BUY

4: 22 Jun 15 1.09 1.50 BUY

5: 17 Aug 15 0.66 1.00 BUY

6: 18 Sep 15 0.72 1.00 BUY

7: 26 Oct 15 0.74 1.00 BUY

8: 13 Nov 15 0.66 1.00 BUY

9: 16 Nov 15 0.66 1.00 BUY

10: 15 Dec 15 0.57 1.00 BUY

11: 17 Dec 15 0.60 1.00 BUY12: 11 Jan 16 0.57 1.00 BUY13: 14 Jan 16 0.55 1.00 BUY14: 18 Jan 16 0.50 1.00 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 25 Jan 16 0.51 1.00 BUY16: 01 Feb 16 0.50 1.00 BUY17: 10 Feb 16 0.50 1.00 BUY18: 15 Feb 16 0.51 1.00 BUY19: 22 Feb 16 0.52 1.00 BUY20: 23 Feb 16 0.50 0.85 BUY21: 02 Mar 16 0.52 0.85 BUY

12

3

4

56

78

910

11

12

13

14

15

16

17

18

19

20

210.46

0.56

0.66

0.76

0.86

0.96

1.06

1.16

1.26


S$

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ed: TH / DT

BUY (Initiating Coverage) Last Traded Price: S$0.81 (STI : 375.72) Price Target : S$1.01 (26% upside) Potential Catalyst: Earnings delivery Analyst Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F Revenue 108 114 128 148 EBITDA 24.7 33.7 36.0 43.1 Pre-tax Profit 17.4 26.2 27.9 34.5 Net Profit 15.8 23.0 24.4 30.0 Net Pft (Pre Ex.) 15.8 23.0 24.4 30.0 EPS (S cts) 4.89 7.12 7.55 9.29 EPS Pre Ex. (S cts) 4.89 7.12 7.55 9.29 EPS Gth (%) 81 45 6 23 EPS Gth Pre Ex (%) 144 45 6 23 Diluted EPS (S cts) 4.89 7.12 7.55 9.29 Net DPS (S cts) 2.00 3.80 3.02 3.72 BV Per Share (S cts) 21.9 25.5 30.0 35.6 PE (X) 16.4 11.3 10.7 8.7 PE Pre Ex. (X) 16.4 11.3 10.7 8.7 P/Cash Flow (X) 10.7 9.6 7.5 7.2 EV/EBITDA (X) 9.6 6.8 5.9 4.5 Net Div Yield (%) 2.5 4.7 3.8 4.6 P/Book Value (X) 3.7 3.2 2.7 2.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 24.8 30.0 27.2 28.3 Consensus EPS (S cts): 7.30 8.10 9.30 Other Broker Recs: B: 3 S: 0 H: 0 ICB Industry : Industrials ICB Sector: Industrial Engineering Principal Business: Precision Components and Parts


At A Glance Issued Capital (m shrs) 325 Mkt. Cap (S$m/US$m) 262 / 190 Major Shareholders (%) Goh Leng Tse 21.3 Ong Tiak Beng 9.6 Koh Boon Hwee 6.8

Free Float (%) 54.8 3m Avg. Daily Val (US$m) 0.40

DBS Group Research. Equity 7 Mar 2016

Singapore Company Focus

Innovalues Ltd Bloomberg: IP SP | Reuters: INNV.SI Refer to important disclosures at the end of this report

Going big on sensors Initiate with BUY with 26% upside to TP of S$1.01;

Beneficiary of automotive megatrend towards safety and

eco-efficiency. Innovalues is a beneficiary of raising awareness and stricter regulatory standards on safety and emissions, as it is a key supplier to Sensata, a leading global producer of automotive sensors. As Innovalues taps into the underpenetrated Chinese automotive sensor market alongside Sensata, we project earnings to grow by 30% from S$23m in FY15 to S$30m in FY17F on 30% revenue growth (from S$114m in FY15 to S$148m in FY17) and modest improvement in margins.

Beyond the automotive segment, the long-term multi-

sector application potential of sensors also bodes well for

Innovalues. Beyond automotives, the global smart sensor market is expected to grow at a 9.9% CAGR from c.US$80bn in 2013 to nearly US$154bn in 2020. Through partnerships with Sensata and TE Connectivity, leading producers of sensors, Innovalues also hopes to venture into the industrial segment, which could be the next leg of growth.

Cost advantages and focus on operating efficiency and

productivity improvements to drive earnings. Innovalues’ ability to customise machines and tools in-house enables the company to operate more efficiently than its peers. As its ongoing automation efforts are subsequently rolled out, we expect a boost to EBIT margins from 19% in FY15 to 22% in FY17F on enhanced productivity.

Valuation:

Our 12-month TP of S$1.01 offers potential upside of 26%. Our TP of S$1.01 for Innovalues is based on 12x blended FY16/17F PE, which implies a discount of 20% to peers' average PE of c.15x blended FY16/17F earnings. Its share price should re-rate as the Group ramps up on production and as earnings growth is delivered. Key Risks to Our View:

Slowdown in global automotive sales could weigh on AU segment. As the automotive segment makes up a significant proportion of Innovalues’ business, a significant slowdown in the global auto market could weigh on the segment’s outlook.

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2564

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Relative IndexS$

Innovalues Ltd (LHS) Relative FSTOG INDEX (RHS)

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Page 2

Company Focus

Innovalues Ltd

SWOT Analysis

Strengths Weakness Long-standing manufacturing partner of leading automotive and office automation players. Proven track record and superior in-house tooling capabilities. High barriers to entry due to capex requirements.

Demand for office automation products is less predictable. Revenue from four key clients accounted for almost 70% of FY15 revenue.

Opportunities Threats Greater demand for sensor content in vehicles. Multi-sector application potential of sensors. Potential for greater operational efficiency and productivity amidst ongoing automation efforts.

Susceptibility to global economy and local policies. Slowdown in global auto sales. Competition for skilled labour.

Source: DBS Bank

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Page 3

Company Focus

Innovalues Ltd

Company Background

Long-standing manufacturer of customised precision parts to leading AU and OA players. Founded in 1997, Innovalues Limited initially specialised in the manufacture and assembly of customised precision machining parts, components, electronics and mechanical devices for the Office Automation (OA), Hard Disk Drives (HDD) and Automotive (AU) Industries. However, following tough operating conditions and stiffening competition for the HDD sector, Innovalues gradually divested the segment from FY09 to focus on its primary OA and growing AU segments. Later in FY11, in anticipation of a poor outlook for the OA business, Innovalues undertook another strategic decision to reposition itself – redeploying existing machinery toward the growing AU business instead, which became the company’s key engine for growth. Between FY10 and FY15, the AU segment grew strongly at 16.2% CAGR, offsetting weakness in the legacy OA business, and driving overall net revenue growth at CAGR of 2.5% over the same period.

Fig. 1: Sales Trend

Source: Company, DBS Bank Today, backed by almost two decades of experience, Innovalues not only manufactures precision components for the AU and OA sectors, but also provides complementary, surface treatment services such as Electroless Nickel plating and Zinc Phosphating, and remains a long-standing manufacturing partner to leading global AU and OA players such as Sensata, Hilite and HP, which in turn have major automobile manufacturers such as Mercedes-Benz and the Volkswagen Group as customers. Manufacturing facilities spanning c.50,000 sqm. Innovalues is headquartered in Singapore but operates manufacturing facilities in Johor (Malaysia), Ayutthaya (Thailand) and Song Jiang (China). Despite operating solely within Asia, the Group also delivers solutions to customers from other geographies, including the US, Brazil and Mexico. To better service OA client, HP, and to mitigate rising labour costs, Innovalues recently completed the shift of its OA operations out of China and back to Malaysia in 3Q15. Going

forward, expansion will likely be focused on operations in Johor and Ayutthaya.

Fig. 2: Manufacturing Facilities

Geographical Presence Area (sqm)

Malaysia Innovalues Precision Sdn Bhd 14,676

Facility 1- Pasir Gudang (AU) 11,121 Facility 2 – Pasir Gudang (OA) 2,255 Warehouse – Pasir Gudang (OA)* 1,300

Innovalues Precision (Kluang) Sdn Bhd 8,826 Facility 3A – Kluang (AU) 4,413 Facility 3B – Kluang (OA) 4,413

Innovalues Precision Microtech Sdn Bhd 3,900 Facility 4 – Pasir Gudang (AU & OA) 3,900

Thailand Innovalues Precision (Thailand) Ltd 10,400

Facility 5 – Ayutthaya (AU) 10,400#

China Innovalues Auto Precision (Shanghai) Co., Ltd 9,469

Facility 6 – Songjiang (AU) 9,469 Innovalues Industry (Shanghai) Co., Ltd 2,056

Facility 7 – Songjiang (AU)* 2,056 Innovalues Technology (Shanghai) Co., Ltd 500

Facility 8 – Songjiang (AU) 500

* In 3Q15, Innovalues completed the relocation of OA operations from Songjiang, Shanghai back to Pasir Gudang, Malaysia

# Total area of 36,800 m2, with built-up area of 10,400 m2


Fig. 3: Revenue by Geography* (2015, %)

*based on customers’ location, not end-demand

Source: Company, DBS Bank Core business. Innovalues has two key product segments: (1) Automotive segment which manufactures precision

automotive components that cater primarily to the areas of (a) Safety/Control, (2) Energy-saving, and (3) Environmental Protection.

0.0%

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5.7%

Thailand, 6.7%

PRC, 59.1%

USA, 18.3%

Brazil, 0.2%

Mexico, 6.5%

Germany, 2.6%

Others, 0.4%

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Page 4

Company Focus

Innovalues Ltd

These components include the micro-fused strain gage, engine and transmission valves, automotive pressure transducers, and cylinder pressure sensors.

Fig. 4: Automotive (AU) Products

Source: Company

(2) Legacy office automation segment which focuses on the manufacture of rod carriages and printing rollers, as well as roller assemblies.

Fig. 5: Office Automation (OA) Products

Source: Company

In addition, the Group also provides complementary, value-added surface treatment services in Malaysia and China, which can enhance the physical properties of both the AU and OA component parts. However, Innovalues does not own a plating licence in Thailand. According to the company, due to environmental concerns and stringent regulations, only one other manufacturer (apart from Innovalues) is licensed to operate a surface treatment facility in Song Jiang.

More favourable revenue mix. Innovalues’ revenue mix has changed significantly over the years, from an AU to OA ratio of about 0.8:1 in FY10 to almost 4:1 in FY15. Over the same period, revenue has also grown 18% from c.S$96m to c.S$114m in FY15. Meanwhile, the sale of component parts to other industries remained insignificant, at S$0.4m or 0.4% of FY15 revenues.

These other industries supported by Innovalues include Oil & Gas, Home Appliances, and Infrastructure.

Fig. 6: FY15 Revenue Breakdown by Segment (%)

Source: Company, DBS Bank Optimal utilisation for AU, but room for improvement for OA segment. In FY15, assuming a 7-day work week, Innovalues’ AU facilities were operating at an average utilisation rate of c.85% – which implies that the Group was essentially operating at full AU capacity. According to management, 85% is optimal as it provides the company with the flexibility to cater to spikes in near-term demand from key customers, when necessary. The utilisation rate for the OA segment was estimated to be between 30-40% for FY15, primarily due to Innovalues’ decision to move its OA operations back to Malaysia. Given the completion of the move in 3Q15, and the progressive ramp-up in production for HP’s new printer which was secured in FY15, we expect better utilisation of OA facilities in FY16 and beyond. Material lead time provides buffer and reduces risk when expanding AU capacity. Further, we think that with a 12-month order book, the buffer between the lead time for procurement of raw materials and time required by the company to construct additional capacity provides Innovalues with better visibility and control over future expansion needs.

Fig. 7: Buffer Reduces Uncertainty and Risk

Estimated time to: Order delivery 12 months

Procure raw materials 7 – 8 months

Expand capacity 3 – 4 months

Source: Company Three pillars of cost efficiency. Innovalues has historically been able to obtain favourable allocations from leading customers as it is among the lowest-cost producers of AU and OA precision parts. The Group has been increasingly cost efficient over the years, owing to: (1) Ability to customize machines, (2) In-house tooling capabilities, and (3) Provision of surface plating services

AU78.7%

OA21.0%

Others0.4%

OA Plotter / Wide Format Printer

OA Shafts and Roller Assemblies

Rod Carriage Pins Printing rollers Photocopy rollers Label dispenser rollers Bearing assembly Rubber-to-plastic to-metal assembly

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Page 5

Company Focus

Innovalues Ltd

Customisation of machines and superior in-house tooling capabilities allows for more efficient operations vs peers... Innovalues procures standard machines from Japan, and works alongside the Japanese manufacturers to customise these machines according to their tooling needs. Although the cost tends to vary quite substantially with the size and requirements of the tool, the overall in-house tooling cost for customised machines is much cheaper - at approximately 1/3 that of off-the-shelf models (typically purchased by competitors in the US and EU). As a result, Innovalues’ average cost of investments in procuring and customising both basic machine and the more complex multi-spindle machines are only at a fraction of their average retail price of about US$600k and US$1.2m, respectively, when purchased off the shelf. Also, as Innovalues customise its tools in-house, it enjoys a longer tool life. On average, the Group is able to produce up to 15,000 pcs per tool as compared to 5,000 pcs when using a standard, off-the-shelf tool. ...coupled with the provision of complementary surface treatment services... Surface treatment services improve the hardness, wear-resistance and ability of component parts to withstand corrosion. As a complementary, value-added service, the provision of surface treatment services allows Innovalues to generate higher revenue per product, thus expanding gross margins. Although surface plating is only applied to 30% of Innovalues’ products currently, we expect better utilisation ahead as fears of the potential environmental impact from failure to treat toxic waste prior to air or water emissions, has led to the increasing reluctance of governments to award surface treatment licences. ...have led to a surge in gross margins. Leveraging on its three pillars of cost efficiency, depressed raw material prices, revenue growth, more favourable revenue mix, and provision of value-added services, Innovalues has successfully expanded its gross margins from 14% in FY10 to almost 31% in FY15.

Fig. 8: Average Gross Margins of Segments

Segment

Gross Margins

Automotive 29 – 31%

Office Automation 26 – 28%

Source: Company, DBS Bank Going forward, amidst ongoing cost management efforts, more aggressive expansion into the AU business and better utilisation of plating facilities, we expect the Group to comfortably maintain gross margins between 30-31%.

Cost Structure Raw materials and labour are key costs. Innovalues has a fairly stable cost structure, of which cost of sales form the majority (>85% in FY15). Raw materials, such as aluminium, stainless steel and brass, which made up c.30% of FY15 revenues, have traditionally been the largest cost component for Innovalues. As raw materials are procured from qualified, client-designated vendors, Innovalues has largely been able to pass on cost increases to customers, which helps to protect margins. Innovalues incurred additional lay-off costs in FY15 due to the relocation of OA operations from China (which has undergone a period of double-digit wage growth) back to Malaysia. With a more favourable labour-mix following the completion of the relocation in 3Q15, and better efficiencies from the expected completion of ongoing automation efforts in China and Thailand around 3Q16, we expect the Company’s labour cost component to decline to more stable levels of around 7.5% to 8.4% of sales from FY16 and beyond. Fig. 9: Breakdown of Costs (FY15, %)

Source: Company, DBS Bank Collaborative long-term relationships with major customers reduces marketing needs. Rather than to aggressively diversify its customer base, Innovalues has focused primarily on deepening existing relationships with long-standing AU and OA clients - expanding its manufacturing portfolio in the process, and have thus been able to keep marketing and distribution costs low. In FY15, distribution expenses made up less than 2% of the Company’s total sales. Net margin expansion helped by emphasis on efficiency. Innovalues takes a three-pronged approach to the maximisation of operational efficiency:

(1) Enhancement of production processes (2) Continuous Control Improvement (3) Material Wastage Management

Marketing and distribution Cost

2.2%

Administration Expenses12.2%

Raw Materials37.1%

Depreciation7.4%

Utilities and Others41.1%

Cost of Sales85.6%

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Page 6

Company Focus

Innovalues Ltd

Decrease in earnings mainly due to the overall decline in the demand for products across all sectors caused by the global economic slowdown.

Due to the Thailand flood, half of operations in Innovalues’ Thailand plant were halted. In addition, flood-related charges (i.e. impairments, write-offs and restorations) amounted to S$13.6m.

As a result of its ongoing efforts toward greater operational efficiency and productivity enhancements, Innovalues has drastically increased its output value per worker. Fig. 10: Increase in Output Value per Worker

Productivity Metrics

FY10

FY15

Improvement

No. of workers

2,600 1,500 +42%

Production days per component

7 3 +57%

Output per worker S$ Output per worker increased by 93%


The greater cost savings arising from higher operational efficiencies and productivity gains among workers have resulted in a leaner and more efficient structure, as reflected by the EBIT and net profit margin of c.19.0% and 20.2% in FY15, up from c.1.8% and 1.3% respectively in FY10.

Fig. 11: Expansion of Operating and Net Margins (to 2017F)

Source: Company, DBS Bank With the machines for the OA segment being almost fully depreciated, and as more automation initiatives are gradually rolled out going forward, we expect resultant efficiencies to lift both operating and net margins to c. 22% and c. 20% respectively by FY17F. Net beneficiary of a stronger USD. Innovalues generates surplus in US$ as it receives more than 90% of its revenues in US$ while only c.30% of overall costs are incurred in US$. A stronger dollar against SGD would be positive for the Group’s earnings. All else constant, the strengthening of the US$ by 1% should lift net profit by c.1.8%. We’ve assumed lower positive forex going forward.

Management & Strategy Managed by founder. Close to 20 years after Innovalues was established, the founder – Mr Goh Leng Tse, remains actively involved in the business’s manufacturing operations. Under his leadership, together with the rest of the management team, the Group was able to navigate through challenging conditions such as the global financial crisis in 2008/09 and the severe flood in Thailand in 2011. Over the last decade, earnings have grown from S$10.1m in FY05 to S$23.0m in FY15, which represents a 10-year CAGR of 8.6%. Fig. 12: Delivering Earnings at 10-year CAGR of 9.3%


Dual strategy of both efficiency and growth. To ensure the stability of its earnings, Innovalues focuses on both top-line and bottom-line performance. By maintaining consistent standards of manufacturing and delivery, the Group remains a reliable source of component parts to key clients, and has been able to progressively grow the size of its contribution to their overall needs. For instance, Innovalues benefitted from a key client’s decision in FY15 to shift procurement of parts away from a less-consistent, existing supplier in Mexico. The continuous enhancement of production processes and streamlining of cost structure over the years have also fed through to the bottom line, as net margins expanded from 9.5% in FY05 to 20.2% in FY15, and as earnings more than doubled over the last decade – outpacing sales growth. No dividend policy.... While Innovalues does not have a fixed dividend policy, dividend payouts have hovered around c.30% of free cash flows in previous years but rose to 60% in FY15 as net profits surged 45.5% over the year. At time of announcement, this represented a yield of c. 5%.

Fig. 13: Historical Dividend Payouts (% of FCF)

FY11 FY12 FY13 FY14 FY15 20% 28% 27% 33% 60%

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Company Focus

Innovalues Ltd

Fig. 14: Key Management Team

Name Position Company Tenure

Profile

Goh Leng Tse CEO/ Chairman/ Founder

19 years Over two decades of experience in the precision turned-parts industry, and leads while taking a hands-on approach to the development of Innovalues’ business and manufacturing operations

Chairman of the Board but also sits in the Audit Committee, Remuneration Committee and Nominating Committee

Holds Diploma in Business Management from the Singapore Institute of Management

Pung Tong Seng, Steven

Executive Director

15 years Responsible for Innovalues’ marketing and business development functions Carries about 20 years of experience working with MNCs such as Micropolis (S)

Ltd and Iomega Pacific Pte Ltd in the electronic and hard disk drive industries Holds an MSc in Total Quality Management from the Sheffield Hallam University

Soo King Teng Group

Financial Controller/ Company Secretary

6 years Promoted to Group Financial Controller in 2011 and is responsible for overseeing the financial and accounting functions of the Group

Has more than 15 years of accounting and finance experience across various industries

Holds a professional accountancy qualification from the Association of Chartered Certified Accountants, UK and is a Chartered Accountant of the Institute of Singapore Chartered Accountants

Ho Beng Joo Senior Project Manager

14 years Responsible for the Group’s sales, engineering and quality control functions Has more than 30 years of experience in metal machining and quality control,

including 20 years in the aerospace industry Holds a Diploma in Production Technology from German Singapore Institute

Source: Company

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Page 8

Company Focus

Innovalues Ltd

Industry Prospects Fig. 15: Cumulative Annual Growth (Decline) in Production of Passenger Vehicles (2010 – 2015F)

Source: International Organization of Motor Vehicle Manufacturers (OICA), World Bank, DBS Bank Uneven distribution of growth across markets. Following the greater shift in production from developed to developing nations, and the varying conditions impacting consumption patterns across regions, the key automotive markets have and are experiencing uneven distributions of growth in both production and demand. For instance, the temporary purchase tax cut for vehicles (1.6 litre and smaller) implemented in China in October 2015 led to a c.18% surge in sales, while car sales in Russia were hit by the recession, plummeting c.45% over two years . Fig. 16: Est. Production and Sales in Key Markets

Production of Passenger Vehicles

Market 2015F

Production*

3yr CAGR Global Share (%)*

China 21.2m +10.9% 31%

Europe 18.4m +1.8% 27%

Japan 7.5m -4.3% 11%

*estimated

*as at 1H15

Source: OICA, DBS Bank

Given the uneven regional sales growth, profitability of the auto industry should depend on broad global demand patterns – which we think should remain close to the aggregate level estimated for 2012 to 2015 of about 2.2% p.a. With future demand growth likely to be modest, manufacturers with wider geographical reach, such as Innovalues, are better positioned to compete in a global setting. Drivers of changing automotive trends. In recent years, the greater scrutiny of governments and regulators on the automotive sector, coupled with shifts in consumer behaviour, have transformed the priorities of auto manufacturers. Areas of increasing regulatory concern include the environmental compatibility and availability of safety-related features in motor vehicles. Meanwhile, the neutralising of differentiation among vehicles have shifted buying power to consumers, putting greater pressure on automakers to meet their demands for more high-tech and high-end features. Importance of environmental protection. The release of and increasing concentration of greenhouse gases have impacted both the environment and economy, and could result in more severe consequences if left unmanaged. The European Automobile Manufacturers’ Association (ACEA) estimates that every litre of petrol/gasoline or diesel used produces close to 2.3kg or 2.7kg of CO2 respectively.

Sales of Passenger Vehicles

Market 1H15 Sales 3yr CAGR Global Share (%)*

China 10.1m +9.9% 30%

Europe 8.5m -0.4% 26%

US 3.8m +0.9% 12%

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Company Focus

Innovalues Ltd

Governments have thus been placing greater emphasis on the environmental impact of automotives, particularly fuel consumption and CO2 emissions, and have rolled out both incentives and penalties aimed at influencing buying decisions and usage patterns, which forces car manufacturers to offer more fuel-efficient cars. According to The Economist, regulators in the US are aiming for fuel-economy standards of 54.5 mpg by 2025, while regulators in China, Europe, India and Japan hope to reach standards of at least 55 mpg by 2020. Fig. 17: Increased Fuel Economy Standards for Environmental Protection

Source: International Council on Clean Transportation (ICCT) Fig. 18: Increased Emission Standards for Environmental Protection

Source: International Council on Clean Transportation (ICCT) No substitute for safety. In addition to their role in influencing fuel efficiency in automotives, governments have also been paying closer attention to in-vehicle safety. In 2015, vehicle recalls hit an all-time high of 51.2m vehicles (over 900 separate recalls) for the second consecutive year as regulators cracked down on safety defects. Governments are also increasingly mandating safety-related components. In 2011, the US mandated Electronic Stability

Control (ESC) systems – which uses multiple sensors to detect loss of steering control and automatically applies brakes to stabilise vehicles. According to the Insurance Institute for Highway Safety, this program has proven to be one of the most effective safety technologies, and could reduce fatal single-vehicle crash risk and fatal multiple-vehicle crash risk by 29% and 20% respectively. Following its adoption in the US, Europe and Korea have also mandated the use of ESC programs in all vehicles by 2014 and 2015 respectively. ESC penetration is low in China as it has yet to be mandated by the authorities, which could represent a substantial future opportunity for components manufacturers. Further, the regulatory impact from government scrutiny over safety and emissions, and increasing preference for telematics features have also led to the surge in demand for automotive sensors. The number of automotive sensors used in vehicles has been trending upwards due to: (1) Rising safety and emission standards and regulations

To ensure compliance to safety and emission standards, auto manufacturers have introduced additional safety features such as electronic stability control, occupant weight force sensing, and tyre pressure monitoring. Sensors, which facilitate communication between these applications and the vehicle or other external devices, have thus been playing an increasingly important role as more applications and electronic content are installed per vehicle.

(2) Growing preference for telematics features

A wide range of telematics features (supported by sensors) such as automatic crash notification, roadside assistance, automatic parallel parking, vehicle health diagnostics and vehicle locator have been increasingly introduced in newer vehicle models (especially higher-end varieties) as auto manufacturers seek to differentiate their products. The rising popularity of telematics and infotainment systems have thus also supported the growth of sensor content in automotives. Advent of the electric vehicle (EVs). While the market for electric vehicles is still at a relatively early stage, the International Energy Agency (IEA) estimates that there could be 20m on the road (or 2% of projected passenger cars) by 2020, from c.665,000 globally or <0.1% of total passenger cars in 2014, as governments invest in more sustainable and environmentally- friendly transportation systems. Due to the sophistication of EVs, as compared to traditional models which run on internal combustion engines, they are fitted with higher sensor content (by more than 50% on average) to ensure reliable performance. With more sensors installed in each successive generation of EVs, we think the outlook and market potential of these higher-tech vehicles bodes well for Innovalues in the long run.

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Company Focus

Innovalues Ltd

Growth Prospects Greater regulatory scrutiny on safety and eco-efficiency in automotives. Tighter regulations for safety and emissions, especially post the Volkswagen emission scandal, should lift demand for eco-efficient automotive components. Drawing on the Group’s existing product portfolio (such as the Greener Automotive transmission / engine), engineering capabilities for quality automotive safety systems, and energy-saving and environmental protection features, Innovalues is well positioned to harness the expected increase in demand for such automotive content to grow its AU segment. To support growth in its AU business, management has guided for capex (60% developmental, 40% maintenance) of S$5-6m in FY2016. However, we expect capex to increase slightly from FY2017 and beyond, as Innovalues gears up for the commercial production of newly qualified components. Growing samples with PO indicative of stronger production pipeline in 2016 and 2017 and beyond. We estimate that between 2010 and 2015, the number of samples with purchase orders (PO) grew at 20% CAGR to c.300 in 2015. As close to 70% of these samples (mostly AU components) should eventually move towards commercial production two to three years after sample submissions, we expect stronger growth in the AU segment from 2H16 onward.

Fig. 19: Projected No. of Samples with PO (FY10-FY15)


Tapping on China’s growth. Innovalues has historically contributed close to 30% of some of Sensata’s component needs. In Feb 2016, Sensata identified China as a key driver of its growth, given:

(1) Low penetration rate of automotives

With a penetration rate of less than seven auto vehicles per 100 people in China vs 58-79 vehicles per 100 people in Europe and North America respectively, we think there is substantial headroom for the gap to narrow, helped by the cut in purchase tax, and rising affluence in smaller cities.

Fig. 20: Penetration Rate of Autos (Per 100 People)

Source: Sensata, DBS Bank

(2) Higher expected adoption of sensor units

Further, we estimate that current sensor content per vehicle in China is under US$10, as compared to c.US$40 per vehicle in North America and Europe. As consumer preferences mature, we believe that the growth in demand for more sensor-rich applications in China should gradually bring sensor content in Chinese vehicles up to current penetration levels observed in the West. Assuming no end-market growth in automotives in China, Sensata estimates that the following applications could grow between 3-13% CAGR ahead:

Fig. 21: Estimated Sensor Unit Growth

Source: Sensata, DBS Bank With growing exposure to this small but fast-growing market, as well as the potential arising from greater scrutiny over safety and eco-efficiency in automotives, we believe that Innovalues’ AU segment should grow between 13% to 18% p.a. from 2015 to 2017.

Venturing beyond the auto market – industrial sensors. The key benefits smart sensors provide to vehicle operators, such as vehicle efficiency, safety and lower prices, have led to the rising adoption of sensors in automotives. Between 2013

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Gas Direct Injection 8%

Electronic Stability Control 4%

Dual Clutch 13%

Tyre Pressure Sensing 9%

Advanced Transmissions 3%

Advanced HVOR Operator Controls 12%

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Company Focus

Innovalues Ltd

and 2020, BCC Research estimates that the global sensor market, largely driven by demand for automotive sensors, will grow at a 9.9% CAGR from US$79.5bn in 2013 to nearly US$154.4bn in 2020. Beyond automotives however, Innovalues has been working alongside TE Connectivity, one of the largest connectivity and sensor companies, in the manufacture of industrial sensors. While current contribution from this segment is relatively insignificant at only c.0.4% of FY15 revenue, vast potential remains in the industrial segment, as it is estimated to represent more than 30% of the global sensor business.

Fig. 22: Potential Areas of Focus for Industrial Sensor Business

Source: Company, DBS Bank In the longer term, as one of Sensata’s main component suppliers, we think Innovalues could potentially benefit from Sensata’s recent acquisition of CST’s sensing portfolio – which provides growth and diversification opportunities for both Sensata and Innovalues outside of the automotive-sensing segment. Given the multi-application potential of smart sensors beyond the automotive and industrial sector, to the medical, agricultural and aerospace industries, the sensing business presents untapped opportunities for Innovalues and widens its addressable market if it can successfully grow its range of sensors to cater to these new segments. Continuous focus on operational efficiency and productivity enhancement. Over the years, Innovalues has consistently invested in the enhancement of its operating efficiency. As part of its automation efforts, Innovalues expects to take receipt of a new batch of fully-automated machines in 2H15 for its Shanghai operations. If the Group successfully automates its operations in Shanghai, we think there could be further scope for reduction of headcount in China by c.20%. If it materialises, we expect operating margins to be lifted from 19% in FY15 to 22% in FY17 as the improved productivity should help mitigate the impact of potential wage hikes.

Profile of Key Clients (1) Sensata Technologies

Segment: AU Est. Contribution to Innovalues’ AU Revenue:

35-40%

(2) Hilite International

Segment: AU Est. Contribution to Innovalues’ AU Revenue:

20-25%

(3) TE Connectivity (Including Measurement Specialties)

Segment: AU / Others Est. Contribution to Innovalues’ AU Revenue:

10-15%

(4) HP

Segment: OA Est. Contribution to Innovalues’ OA Revenue:

60-65%

Source: Companies, DBS Bank

Page 39

Page 12

Company Focus

Innovalues Ltd

Key Risks

Slowdown in automotive sales. As the auto segments makes up a significant proportion of Innovalues’ business (c.78% of FY15 revenue), a significant slowdown in global auto market could weigh on the business’ outlook. However, as Innovalues is likely to place greater emphasis on auto demand in China, in line with Sensata’s strategy for 2016 and beyond, we think that the company should benefit from favourable demand conditions, helped by favourable policies, and as the current penetration rate of autos remain low at less than seven per 100 people. Key client risk. Over the years, Innovalues has substantially grown the size of its AU portfolio alongside leading AU players such as Hilite, Sensata and TE Connectivity. As more than 70% of its AU revenues are from its three key AU clients, Innovalues remains susceptible to the business direction and performance of these key customers. Potential brain drain in manufacturing. As the automotive industry advances, industry players (including automotive components suppliers) will have to deliver continuous improvements and innovation to meet the future needs of the industry. While this may not be an immediate concern, the inability to appeal to and retain workers with cutting-edge electronic manufacturing and IT skills, especially with rising competition for talent from technological firms, could hamper Innovalues’ progress on the technological advancement and innovation front in the longer term.

Page 40

Page 13

Company Focus

Innovalues Ltd

Segmental Forecasts Expect weaker 1H16 for AU business... We think that the AU segment will likely be weaker in 1H16 as Innovalues works alongside a key client in the management of inventory, which had weighed on 4Q15 revenues but should recover from 2Q16 onwards. We project the AU segment to make up 79% and 80% of Group revenue in 2016 and 2017 respectively. ...but expect stronger ramp-up in production from 2H16 and beyond. As Innovalues partners with Sensata to ride the growth potential in the fast-growing Chinese auto sensor market, and as the Company starts to ramp up production on samples approved in 2014 and 2015, we expect the AU business to deliver stronger growth from 2H16 and beyond. Innovalues is also in talks with HP to further ramp up production for the manufacture of rollers (project won in 2015) for its new printer. If it materialises, production volumes for this project will likely double in 2016. Assume slight decline in gross margins in 2016. As gross margins were partly bolstered to 30.7% in 2015 by positive forex movements, we expect a modest decline in gross margins in 2016 as we assume lower positive forex going forward. Key Assumptions

FY Dec 2012 2013A 2014A 2015A 2016F 2017F AU Revenue (S$ m) 61.5 76.3 87.8 89.5 101 119

OA Revenue (S$ m) 29.4 22.5 20.1 23.8 26.0 28.3

Operating Profit Margin (%) 2.63 7.10 15.2 19.0 20.4 22.0

Capital Expenditure (S$ m) 12.2 3.90 4.66 5.59 6.01 7.01

Tax Rate (%) 1.56 5.48 9.01 12.3 12.5 13.0

Segmental Breakdown

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Revenues (S$m)

Automotive (AU) 61.5 76.3 87.8 89.5 101 119

y-o-y growth -- 24.0% 15.1% 1.9% 13.0% 18.0%

Office Automation (OA) 29.4 22.5 20.1 23.8 26.0 28.3

y-o-y growth -- (23.5%) (10.5%) 19.4% 9.0% 9.0%

Others 0.92 0.56 0.55 0.41 0.49 0.59

Total 91.8 99.3 108 114 128 148

Gross Profit (S$m)

Automotive (AU) 9.84 14.9 23.7 27.7 31.3 37.6

y-o-y growth -- 51.2% 59.3% 17.0% 13.0% 19.9%


y-o-y growth -- (0.2%) 43.3% 43.1% 5.2% 12.9%

Others 0.44 0.27 0.31 0.21 0.26 0.30

Total 13.7 18.5 28.8 34.9 38.9 46.1

Gross Profit Margins (%)

Automotive (AU) 16.0 19.5 27.0 31.0 31.0 31.5


Others 48.4 48.6 55.7 52.0 52.0 50.0

Total 14.9 18.6 26.6 30.7 30.5 31.1 Source: Company, DBS Bank

Sensitivity Analysis 2015

USD/SGD +/- 1% Net Profit +/- 1.8% Wage rate +/- 1% Net Profit +/- 0.4%

As reinvestment allowances were fully utilised in 2013, we expect the effective tax rate to increase to 13% by 2017.

Expect stronger growth from 2H16 and beyond.

Page 41

Page 14

Company Focus

Innovalues Ltd

Financials – Income Statement Expect modest margin improvement ahead. Innovalues achieved record margins (gross, operating and net) in FY15, helped by favourable exchange conditions, low raw material prices and ongoing drive towards operational efficiency. As the Group continues to focus on cost management and the enhancement of operating efficiency and productivity, we expect further operating margin expansion from 19.0% in FY15 to 22.0% in FY17F, and modest net margin improvement from 20.2% in FY15 to 20.3% in FY17F. Earnings to grow on stronger production pipeline and higher efficiency. We project Innovalues to achieve better sales growth as sample orders secured in 2014 and 2015 are progressively due to come on stream, and as the Group strengthens its partnership with Sensata to tap into growth opportunities in the lucrative Chinese sensing market. Together with projected efficiencies from the ongoing automation efforts, we expect earnings to grow by c.30.5% from FY15 to FY17F.

Income Statement (S$m)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Revenue 91.8 99.3 108 114 128 148

Cost of Goods Sold (78.1) (80.8) (79.6) (78.8) (88.7) (102)

Gross Profit 13.7 18.5 28.8 34.9 38.9 46.1

Other Opng (Exp)/Inc (11.3) (11.5) (12.4) (13.4) (12.9) (13.5)

Operating Profit 2.41 7.05 16.5 21.6 26.0 32.6

Other Non Opg (Exp)/Inc 1.59 0.66 1.27 4.83 2.00 2.00

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc (1.0) (0.8) (0.4) (0.2) (0.1) (0.1)

Exceptional Gain/(Loss) 12.6 2.25 0.0 0.0 0.0 0.0

Pre-tax Profit 15.6 9.18 17.4 26.2 27.9 34.5

Tax (0.2) (0.5) (1.6) (3.2) (3.5) (4.5)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 15.4 8.68 15.8 23.0 24.4 30.0

Net Profit before Except. 2.80 6.43 15.8 23.0 24.4 30.0

EBITDA 11.4 15.0 24.7 33.7 36.0 43.1

Growth

Revenue Gth (%) 4.6 8.2 9.2 4.8 12.2 16.2

EBITDA Gth (%) 11.8 31.5 64.7 36.3 6.6 20.0

Opg Profit Gth (%) nm 192.5 133.4 31.0 20.5 25.5

Net Profit Gth (Pre-ex) (%) nm 129.8 146.1 45.5 6.0 23.1

Margins & Ratio

Gross Margins (%) 14.9 18.6 26.6 30.7 30.5 31.1

Opg Profit Margin (%) 2.6 7.1 15.2 19.0 20.4 22.0

Net Profit Margin (%) 16.7 8.7 14.6 20.2 19.1 20.3

ROAE (%) 33.2 15.9 24.8 30.0 27.2 28.3

ROA (%) 18.5 10.1 17.6 23.1 21.6 22.6

ROCE (%) 3.5 9.1 22.7 28.9 26.5 27.8

Div Payout Ratio (%) 24.9 44.4 40.9 53.4 40.0 40.0

Net Interest Cover (x) 2.5 9.1 47.1 133.1 253.7 450.5 Source: Company, DBS Bank

Margins Trend

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

2013A 2014A 2015A 2016F 2017F

Operating Margin % Net Income Margin %

Page 42

Page 15

Company Focus

Innovalues Ltd

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q201 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 27.9 27.9 29.1 29.5 28.2 26.9

Cost of Goods Sold (19.4) (19.4) (20.1) (20.7) (20.2) (17.8)

Gross Profit 8.47 8.47 9.01 8.84 8.02 9.06

Other Oper. (Exp)/Inc (3.5) (3.5) (3.1) (3.3) (3.5) (3.5)

Operating Profit 4.97 4.97 5.89 5.57 4.55 5.53

Other Non Opg (Exp)/Inc 1.04 1.04 0.48 1.03 3.13 0.21

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc (0.1) (0.1) (0.1) (0.1) 0.0 0.0

Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 5.94 5.94 6.32 6.54 7.66 5.71

Tax (0.5) (0.5) (0.8) (0.6) (1.0) (0.9)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 5.44 5.44 5.53 5.90 6.72 4.85

Net profit bef Except. 5.44 5.44 5.53 5.90 6.72 4.85

EBITDA 7.87 7.87 8.25 8.50 7.69 5.73

Growth

Revenue Gth (%) 8.3 (2.2) 4.4 1.5 (4.4) (4.8)

EBITDA Gth (%) 16.5 20.2 4.9 3.0 (9.5) (25.4)

Opg Profit Gth (%) 24.2 23.5 18.5 (5.5) (18.2) 21.4

Net Profit Gth (Pre-ex) (%) 16.9 30.4 1.6 6.8 13.7 (27.7)

Margins

Gross Margins (%) 25.6 30.4 31.0 29.9 28.4 33.7

Opg Profit Margins (%) 14.1 17.8 20.2 18.9 16.1 20.6

Net Profit Margins (%) 14.6 19.5 19.0 20.0 23.8 18.1

Revenue Trend


-20%

-15%

-10%

-5%

0%

5%

10%

15%

0

5

10

15

20

25

30

35

3Q

20

13

4Q

20

13

1Q

20

14

2Q

20

14

3Q

20

14

4Q

20

14

1Q

20

15

2Q

20

15

3Q

20

15

4Q

20

15

Revenue Revenue Growth % (QoQ)

Net profit fell y-o-y due to an exceptionally strong 4Q14 - 1Q and 4Q have traditionally been weak quarters, and as inventory held on behalf of a key client was pushed back.

Page 43

Page 16

Company Focus

Innovalues Ltd

Financials – Balance Sheet Declining PPE as Group becomes increasingly efficient. PPE has been trending downwards from S$43.3m in FY12 to S$34.9m in FY15, mostly due to Innovalues’ increasing ability to customise inexpensive standardised machines in-house, thus incurring lower capital expenditures as compared to annual depreciation charges. Healthy balance sheet. Innovalues’ net cash position has strengthened significantly from S$5.2m in FY12 to almost double y-o-y from S$13.9m in FY14 to S$30.7m in FY15. All else constant, our projections show that Innovalues should be able to fund management’s planned capital expenditures of S$6m in FY16 internally, and that cash balance will continue to rise. Balance Sheet (S$m)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 43.3 39.6 38.0 34.9 33.0 31.4

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0

Other LT Assets 0.0 0.33 0.38 0.38 0.38 0.38

Cash & ST Invts 14.3 13.4 24.6 32.5 51.5 68.8

Inventory 13.9 12.7 8.38 10.1 10.9 12.6

Debtors 15.8 17.9 23.9 25.6 26.2 30.5

Other Current Assets 0.0 0.0 0.0 0.0 0.0 0.0

Total Assets 87.3 83.9 95.3 103 122 144

ST Debt

1.54 1.15 1.18 1.02 1.02 1.02

Creditor 12.2 14.3 15.2 15.3 17.2 19.8

Other Current Liab 14.0 6.68 6.50 3.94 5.95 6.96

LT Debt 7.56 4.83 1.79 0.78 0.78 0.78

Other LT Liabilities 0.07 0.01 0.0 0.0 0.0 0.0

Shareholder’s Equity 52.0 56.9 70.7 82.4 97.1 115

Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 87.3 83.9 95.3 103 122 144

Non-Cash Wkg. Capital 3.52 9.63 10.6 16.4 14.0 16.3

Net Cash/(Debt) 5.17 7.39 21.7 30.7 49.7 67.0

Debtors Turn (avg days) 63.7 61.9 70.4 79.5 74.1 69.8

Creditors Turn (avg days) 60.9 65.8 74.2 78.0 73.5 72.1

Inventory Turn (avg days) 72.9 66.2 53.0 47.2 47.5 45.9

Asset Turnover (x) 1.1 1.2 1.2 1.1 1.1 1.1

Current Ratio (x) 1.6 2.0 2.5 3.4 3.7 4.0

Quick Ratio (x) 1.1 1.4 2.1 2.9 3.2 3.6

Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH

Capex to Debt (%) 133.8 65.3 157.0 311.3 335.0 390.7 Source: Company, DBS Bank

Asset Breakdown

Net Fixed Assets -34.5%

Assocs'/JVs -0.0%

Bank, Cash and Liquid

Assets -30.3%

Inventory -10.0%

Debtors -25.3%

Page 44

Page 17

Company Focus

Innovalues Ltd

Financials – Cash Flow Statement Operating cashflow of S$27m in FY15. Innovalues has consistently generated positive operating cashflow over the years. In FY15, the Group recorded operating cashflow of S$27m on improved financial performance – up 50% from S$18m in FY13. Dividend payout of 53.7% in FY15 but likely to be closer to 40% ahead. Supported by higher operating cashflows, the Group declared dividends of 3.8 Scts in FY15, up from 2.0 Scts a year ago. Based on share price of S$0.835 on the date of dividend announcement (18 Feb 2016), this represents a c.4.6% yield. Despite expectations of a growing cash hoard, we think dividend payouts will likely be closer to normalised levels of c.40% ahead as Innovalues would likely prefer to retain financial flexibility in case of higher-than-expected capital expenditures, as it expects to benefit from new orders in the near-to-medium term following Sensata’s new acquisitions of Schrader and CST.

Cash Flow Statement (S$m)

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 15.6 9.18 17.4 26.2 27.9 34.5

Dep. & Amort. 7.42 7.32 7.01 7.33 7.97 8.55

Tax Paid (0.3) (0.5) (1.2) (1.8) (3.5) (4.5)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (6.2) (6.1) (1.0) (5.8) 2.42 (2.3)

Other Operating CF 9.09 8.12 2.11 1.11 0.0 0.0

Net Operating CF 25.6 18.0 24.3 27.0 34.8 36.3

Capital Exp.(net) (12.2) (3.9) (4.7) (5.6) (6.0) (7.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.04 (0.3) 0.0 0.09 0.0 0.0

Net Investing CF (12.1) (4.2) (4.7) (5.5) (6.0) (7.0)

Div Paid (1.9) (3.8) (3.9) (8.5) (9.8) (12.0)

Chg in Gross Debt (8.9) (10.4) (4.2) (5.4) 0.0 0.0

Capital Issues 0.0 0.25 0.29 0.36 0.0 0.0

Other Financing CF (1.0) (0.8) (0.4) (0.3) 0.0 0.0

Net Financing CF (11.8) (14.8) (8.1) (13.7) (9.8) (12.0)

Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0

Chg in Cash 1.63 (1.0) 11.5 7.81 19.0 17.3

Opg CFPS (S cts) 10.00 7.52 7.84 10.2 10.0 11.9

Free CFPS (S cts) 4.22 4.40 6.09 6.63 8.90 9.06 Source: Company, DBS Bank

Capital Expenditure

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2013A 2014A 2015A 2016F 2017F


S$m

Expect dividends to be closer to normalised levels of c.40% ahead.

Page 45

Page 18

Company Focus

Innovalues Ltd

Valuation We initiate coverage with a BUY rating and 12-month target price of S$1.01. This is based on 12x blended CY16/17F PE, which represents a c.20% discount to larger peers’ (Venture Corp, NGK Insulators, TE Connectivity and Sensata) PE of 15x blended CY16/17F earnings.

Fig. 23: Innovalues’ Average Discount to Larger Peers* (P/E)

*based on both internal/consensus estimates

Source: Bloomberg Finance L.P , DBS Bank

Innovalues has historically traded at a discount to its larger listed peers and its discount to its peers’ average has been trending downwards over the past 12 months, from above 40% in Feb 2015 to c.20% in Feb 2016. We believe this is because Innovalues has delivered faster earnings growth vs peers over the past year.

In addition, Innovalues’ PEG ratio of 0.7 is the lowest among peers, which provides support for further upside.

Assuming a 20% discount due to its smaller market cap and scale, we believe that Innovalues should be valued at 12x FY16/17F PE, similar to its average historical valuation

of 12x PE. We believe this is reasonable given Innovalues’ higher 2-year EPS CAGR of 14.3% vs the peer group average of 7.5%.

Fig. 24: Innovalues' Forward PE Band (x)

Source: DBS Bank Fig. 24: Innovalues, PB Band (x)

Source: DBS Bank

0%

10%

20%

30%

40%

50%

60%

A v g : 5 .7 x

+ 1 s d : 8 .6 x

+ 2 s d : 1 1 .6 x

‐1 sd : 2 .8 x

-0 .1

1.9

3.9

5.9

7.9

9.9

11 .9

13 .9

F e b -1 2 F eb -1 3 Fe b - 1 4 F e b -1 5

( x )

Av g : 1 .4 4 x

+ 1 s d : 2 . 5 3 x

+ 2 s d : 3 . 6 2 x

‐ 1 s d : 0 . 3 5 x

-0 .6

-0 .1

0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

F e b -1 2 F eb -1 3 Fe b - 1 4 F e b -1 5

( x )

Source: DBS Bank, Thomson Reuters

Mkt Cap EPS CA GR PEG ROE CrntCompany US$m Crnt F orw (CY15-CY17) Rat io Hist Crnt Y ield

VENTURE CORP SGD 7.82 1,538 12.4 11.6 9% 1.3 1.2 1.2 8.5% 6.4%NGK INSULATORS JPY 2070.00 6,012 12.4 11.5 9% 1.4 1.7 1.6 12.1% 1.8%

TE CONNECTIV ITY USD 57.61 21,297 14.1 12.7 11% 1.3 2.6 2.7 18.3% 2.4%

SENSATA USD 34.60 5,894 19.0 16.7 1% 17.7 4.7 3.1 25.9% 0.0%A v erage 14.5 13.1 2.6 2.1 16.2% 2.6%

INNOVALUES SGD 0.81 186 10.7 8.7 14% 0.7 n.a. 2.6 26.8% 4.6%

Last Px– – - PER – – - Price- to-Book

Page 46


BUY Last Traded Price: S$0.54 (STI : 2,837.00) Price Target : S$0.90 (68% upside) Potential Catalyst: Consistent quarterly earnings delivery Where we differ: No comparison available Analyst Ben Santoso +65 6682 3707 [email protected]

What’s New 4Q15 earnings ahead of expectations on strong

contribution from Japfa Comfeed Dairy 4Q15 EBITDA was also ahead on higher

yield, offsetting weak raw milk prices in China FY16F/17F earnings raised by 36%/19%; TP

unchanged on lower cash forecast; maintain BUY

Price Relative

Forecasts and Valuation FY Dec (US$m) 2015A 2016F 2017F 2018F Revenue 2,787 3,279 3,615 3,933 EBITDA 251 358 452 547 Pre-tax Profit 112 213 298 386 Net Profit 64.7 108 150 195 Net Pft (ex. BA gains) 64.0 108 150 195 Net Pft (Pre Ex.) 70.3 108 150 195 Net Pft Gth (Pre-ex) (%) (1.5) 52.9 39.8 29.7 EPS (S cts) 5.04 8.38 11.7 15.2 EPS Pre Ex. (S cts) 5.48 8.38 11.7 15.2 EPS Gth Pre Ex (%) (2) 53 40 30 Diluted EPS (S cts) 5.04 8.38 11.7 15.2 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 52.2 60.6 72.3 87.5 PE (X) 10.6 6.4 4.6 3.5 PE Pre Ex. (X) 9.8 6.4 4.6 3.5 P/Cash Flow (X) 2.7 nm 3.1 2.2 EV/EBITDA (X) 6.9 5.6 4.8 4.1 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.0 0.9 0.7 0.6 Net Debt/Equity (X) 0.7 0.8 0.7 0.5 ROAE (%) 9.7 14.8 17.6 19.0 Earnings Rev (%): - - - Consensus EPS (S cts): 8.5 11.9 Other Broker Recs: B: 1 S: 0 H: 0


Growth drivers intact 4Q15 earnings ahead of expectations. Excluding changes in fair value of biological assets (net of tax) and one off gain from bonds buyback, the group posted 4Q15 net earnings of US$34m (+227% y-o-y; +141% q-o-q) – substantially ahead of US$14.5m that was expected. For the year, Japfa’s core net profit came in at US$64m (+11% y-o-y) against expectations of US$44m Japfa Comfeed delivered strong results. 4Q15 EBITDA of US$65m (+93% y-o-y; -2% q-o-q) indicated better-than-expected ASP for both DOC and broilers. At the same time, the group continued to deliver steady contribution from poultry feed business, despite lower than expected 3.301k MT of output – against our forecast of 3.641m MT. The strong results from Japfa Comfeed were partly offset by sequentially weaker contribution from Vietnam, Myanmar and India operations, which collectively booked 4Q15 EBITDA of US$7m (-47% y-o-y; -11% q-o-q). Growth drivers intact. Japfa is forecast to book EBITDA (excluding biological asset gains/loss and FX gains/losses) CAGR of 23% between FY15 and FY18F – mainly driven by higher dairy volumes. Japfa intends to double dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. In the Animal Protein segment, we expect Japfa’s combined regional DOC output to expand less aggressively by 6% CAGR over the same period, given curbs in DOC capacity. Demand will continue to be driven by population growth and rising per capita income. Valuation: Our SOP-based TP (pegged to forward EV/EBITDA) is unchanged at S$0.90. Japfa Comfeed will remain the largest contributor, although the group’s Dairy segment will increasingly have a more meaningful contribution. Our BUY rating for the counter is reiterated. Key Risks to Our View: Japfa’s share price is driven by DOC, broiler and China raw milk price movements and to a certain extent, by USD/IDR exchange rate. A strong recovery in the group’s ASP and/or Rupiah would boost Japfa’s share price higher than our fair value, and vice versa. At A Glance Issued Capital (m shrs) 1,765 Mkt. Cap (S$m/US$m) 944 / 687 Major Shareholders (%) Rangi Management Limited 52.6 Morze International Limited 16.0 Tasburgh Limited 7.2

Free Float (%) 24.2 3m Avg. Daily Val (US$m) 0.22 ICB Industry : Consumer Goods / Food Producers



Japfa Ltd Version 4 | Bloomberg: JAP SP | Reuters: JAPF.SI Refer to important disclosures at the end of this report

34

54

74

94

114

134

154

174

194

214

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Aug-14 Jan-15 Jun-15 Nov-15

Relative IndexS$

Japfa Ltd (LHS) Relative STI INDEX (RHS)

Page 47


Company Guide

Japfa Ltd

WHAT’S NEW

Forecasts, TP revisions

4Q15 earnings ahead of expectations. Reported 4Q15 earnings came in at US$46.8m (from a loss of US$13.9m in 4Q14); reported FY15 earnings was US$65.7m (+107% y-o-y). Excluding changes in fair value of biological assets (net of tax) and one off gain from bonds buyback – but including recurring translation FX gains (losses) – the group posted 4Q15 net earnings of US$34m (+227% y-o-y; +141% q-o-q) – substantially ahead of US$14.5m that was expected. For the year, Japfa’s core net profit came in at US$64m (+11% y-o-y) against expectations of US$44m. The strong performance was driven primarily by higher EBITDA from Animal Protein which contributed US$222m in FY15 vs. our estimate of US$212m. FY15 Dairy EBITDA which contributed US$61m was also ahead of US$56m expected. A final DPS of 0.5 S cents is proposed. Japfa Comfeed delivered strong results. For the year, we understand DOC sales volumes were flat for both broiler and layer DOC – as a consequence to slower parent stock replacement and government mandated culling from Oct15 (given oversupply since 2H14). However, broiler sales volume of 670k MT was in line with 662k MT expected. 4Q15 EBITDA of US$65m (+93% y-o-y; -2% q-o-q) hence indicated better-than-expected ASP for both DOC and broilers. At the same time, the group continued to deliver steady contribution from poultry feed business, despite lower than expected 3.301k MT of output – against our forecast of 3.641m MT. The strong results from Japfa Comfeed were partly offset by sequentially weaker contribution from Vietnam, Myanmar and India operations, which collectively booked 4Q15 EBITDA of US$7m (-47% y-o-y; -11% q-o-q).

Dairy performance boosted by volume. During the quarter raw milk production in China spiked to 84.1m kg from 73.4m kg in 3Q15 and just 56.3m kg in 4Q14, mainly on the back of full utilisation of farm 5 and higher yields of 36.5kg/day vs. 34.7 kg/day in 3Q15 (due to seasonally higher temperatures) and 35.7 kg/day in 4Q14. Notwithstanding lower raw milk ASP in China y-o-y, 4Q15 EBITDA margin had likewise expanded to 18.9% from 11.1% in 3Q15 and 13.1% in 4Q14. Seasonally lower contribution in Consumer Food. Consumer Food segment’s contribution sequentially declined in 4Q15, reflecting start-up costs in Vietnam, translation into USD as well as a drop in frozen food sales, which was partly compensated by a 30% jump in UHT sales during the year. FY15F/16F earnings raised 36%/19%, after we imputed higher DOC/broiler ASP, stronger Rupiah, offset by higher local corn prices in Indonesia and reduced DOC sales volume. We now expect FY16F broiler and layer DOC ASP to remain flat at 613m chicks. We have imputed FY16F DOC ASP of Rp4,500/bird, live broiler ASP of Rp17,100/kg and poultry feed price of Rp6,800/kg to account for higher breakeven costs. Average raw milk price in China is maintained at RMB4.10/kg this year. BUY call, TP of S$0.90 maintained. We reiterate our BUY call, as we believe the counter continues to lag its subsidiary’s market value and our assigned value. We believe the market is also ignoring value contributions from Dairy and its regional Animal Protein subsidiaries, which continue to deliver consistent growth. Post revisions, our TP is maintained at S$0.90/share – as higher EBITDA is offset by lower forecast for ending cash balance.

Page 48


Company Guide

Japfa Ltd



Revenue 705 695 712 0.9 2.4

Cost of Goods Sold (580) (557) (559) (3.5) 0.4

Gross Profit 126 138 153 21.4 10.4

Other Oper. (Exp)/Inc (79.2) (72.5) (77.5) (2.2) 6.8

Operating Profit 46.7 65.8 75.3 61.2 14.3

Other Non Opg (Exp)/Inc (7.3) (21.2) 7.87 nm nm

Associates & JV Inc 0.0 0.0 0.0 nm nm

Net Interest (Exp)/Inc (19.6) (17.2) (15.2) 22.6 11.8

Exceptional Gain/(Loss) (35.0) (9.3) 13.8 nm nm

Pre-tax Profit (15.3) 18.1 81.7 nm 350.5

Tax (1.2) (7.7) (6.8) 459.4 (12.1)

Minority Interest 2.57 (2.4) (28.2) nm nm

Net Profit (13.9) 7.99 46.7 nm 485.2

Net profit bef Except. 21.1 17.3 33.0 56.3 91.1

EBITDA 61.1 92.0 95.1 55.6 3.4

Margins (%)

Gross Margins 17.8 19.9 21.5

Opg Profit Margins 6.6 9.5 10.6

Net Profit Margins (2.0) 1.1 6.6

Source of all data: Company, DBS Bank SOP valuation

Source: DBS Bank estimates

CY16F Target Holdco CY16F CY16F CY16F Proport ion Stake Equit yJapfa Limited EBITDA CY16F discount Net Net EV Net debt of net debt value

(US$ m) EV/EBITDA EV/EBITDA (US$ m) (US$ m) (US$ m)Dairy 103.6 9.0 0% 9.0 932.2 107.4 12% 61.9% 510.6Animal Protein (JPFA) 160.5 7.0 20% 5.6 898.6 472.8 58.0% 247.0Animal Protein (ex JPFA) 81.4 7.0 0% 7.0 569.7 229.9 100.0% 339.8Consumer Foods 9.6 10.0 0% 10.0 96.1 71.9 8% 100.0% 24.2Aggregate value 355.1 7.0 2,496.7 882.0 100% 1,121.6

(+) Cash 63.1(-) Borrowings 945.1Net debt 882.0

Number of shares (m) 1,765Equity value/share (US$) 0.64Equit y value/share (S$) 0.90FY16F earnings (US$ m) 107.5Implied FY16F PER based on TP 10.4FY15-18F earnings CAGR 0.45PEG 0.23

80%

Page 49


Company Guide

Japfa Ltd


Earnings Drivers:

DOC capacity expansion in Indonesia. Hampered by oversupply in FY14-15, Japfa’s DOC production in Indonesia is expected to remain flat in FY16F as a result of the government-mandated cull of c.640k Parent Stock (Japfa’s estimated share of 4m culled between Oct15 and Dec15). Feedmill capacity expansion on hold in Indonesia. Capital expenditure in poultry feedmill capacity is likewise expected to remain on hold until capacity utilisation rates are in excess of 90%. However, we expect continued expansion in fish and shrimp feeds. Volatility of raw material costs (as well as changes in government regulations with regards to importation of raw materials) and exchange rates may adversely affect profitability, if Japfa is unable to pass on cost pressures. Expansion of Animal protein operations in Vietnam, India and Myanmar. The group is expanding its geographical operations in Vietnam for both poultry and swine segments; swine profitability in Vietnam should improve in FY16 on the back of improved genetics. The group’s Myanmar operations expanded poultry operations into Mandalay in FY15, and we expect improved earnings following the purchase of the remaining 15% minority interest. Japfa’s operation in India is only marginally increasing its geographical presence, with some increase in feedmill capacity there. More dairy farms. The group intends to expand its dairy business in China through continued replication of its successful business model. The fifth farm of the first five-farm hub in Shandong province was completed early in FY15. A second five-farm hub was initially planned for construction between FY14 and FY18 in Inner Mongolia. However, so far only Farm 6 has started milking at end of FY15 and full milking is expected by end of this year. We understand construction of Farm 7 has been delayed due to weaker-than-expected raw milk prices. Japfa is also expanding its dairy capacity in Malang, East Java to hold an additional 9,000 heads (completed at end FY15). Expansion of beef cattle feedlot. Japfa has a beef cattle feedlot in Shandong province with production capacity of 10,000 heads per annum. The bull calves produced by Japfa’s five dairy farms in Shandong will be the livestock input into the new beef cattle feedlot in China. In Indonesia, imports of cattle are subject to government approvals and regulations, including quotas. Further investment in high-growth Consumer Food brands. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam, as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats.

Raw & fresh milk output (k MT)

Broiler sales (mn birds)

Consumer foods volume (k MT)

China raw milk price (CNY/kg)

Average USD/IDR rate


224

307

457

567598

0

75

151

226

302

377

453

528

604

2014A 2015A 2016F 2017F 2018F

351 352 351

396422

0

86

172

258

344

2014A 2015A 2016F 2017F 2018F

7782

8895

102

0

21

41

62

83

104

2014A 2015A 2016F 2017F 2018F

4.9

4 4.1 4.14 4.18

0.00

0.62

1.24

1.86

2.47

3.09

3.71

4.33

4.95

2014A 2015A 2016F 2017F 2018F

11,879

13,392 13,635 13,703 13,703

0

2,800

5,600

8,400

11,200

2014A 2015A 2016F 2017F 2018F

Page 50


Company Guide

Japfa Ltd

Balance Sheet:

Japfa’s net debt-to-total equity ratio came in at 68% by end of FY15 and is conservatively forecast to increase to 84% by end FY16F on lower cash level. We expect the group to refinance the outstanding Rp1.5tr notes (due 2017) with increased principal amount and repay the USD notes (due 2018) as a way to reduce its USD debt exposure.

Share Price Drivers:

DOC oversupply issues. The Indonesian poultry industry is dominated by a few players, which collectively control more than 75% of the market. Overinvestment and/or miscalculated demand often lead to depressed DOC and broiler prices on top of an already volatile market. Changes in prices would have an instant impact on Japfa’s profitability even with cuts in PS numbers. Hence, we believe completion of nationwide PS culling would send a positive signal to share prices. Rupiah movements. Japfa’s USD bonds have created translation FX losses in Japfa’s subsidiary, Japfa Comfeed, together with Rupiah depreciation YTD. Hence, Rupiah movements would impact reported earnings.

Key Risks:

Outbreak of diseases. Outbreak of diseases affecting livestock would have material effect on the group's business and financial status. Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than expected price growth Movements in raw material costs and currencies. Japfa is exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power caused delays in passing on raw material costs. Changes in regulations. Changes in government regulations/licensing/interventions/price or volume controls may adversely affect Japfa’s profitability. Vulnerable to liquidity and credit risks

Company Background

Japfa Ltd is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia, Vietnam, Myanmar, India and China. The group is the second largest poultry feed and DOC (day-old-chicks) breeder The group is involved in production of animal feeds, poultry breeding, poultry commercial farms, beef cattle feedlots, swine breeding, swine commercial farms, dairy farms as well as frozen and ambient temperature consumer food products.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.2

1.2

1.2

1.3

1.3

1.3

1.3

1.3

1.4

1.4

1.4

0.00

0.20

0.40

0.60

0.80

1.00

2014A 2015A 2016F 2017F 2018F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2014A 2015A 2016F 2017F 2018F


US$

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2014A 2015A 2016F 2017F 2018F

Avg: 9.1x

+1sd: 14.2x

+2sd: 19.2x

‐1sd: 4.1x

-0.8

4.2

9.2

14.2

19.2

24.2


(x)

Avg: 0.86x

+1sd: 1.03x

+2sd: 1.2x

‐1sd: 0.69x

‐2sd: 0.52x

0.4

0.6

0.8

1.0

1.2

1.4


(x)

Page 51


Company Guide

Japfa Ltd

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Raw & fresh milk output 224 307 457 567 598 Broiler sales (mn birds) 351 352 351 396 422 Consumer foods volume 77.4 82.3 87.9 94.5 102 China raw milk price 4.90 4.00 4.10 4.14 4.18 Average USD/IDR rate 11,879 13,392 13,635 13,703 13,703

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (US$m) Dairy 223 247 375 484 541 Animal protein 2,513 2,434 2,684 2,889 3,124 Consumer foods 211 105 220 242 268 Total 2,947 2,787 3,279 3,615 3,933 EBITDA (US$m)

Dairy 70.4 56.4 104 151 189 Animal protein 205 229 242 291 347 Consumer foods 9.10 9.16 9.61 10.2 11.0 Total 285 295 355 452 547 EBITDA Margins (%)

Dairy 31.5 22.8 27.6 31.2 35.0 Animal protein 8.2 9.4 9.0 10.1 11.1 Consumer foods 4.3 8.7 4.4 4.2 4.1 Total 9.7 10.6 10.8 12.5 13.9

Income Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 2,947 2,787 3,279 3,615 3,933 Cost of Goods Sold (2,441) (2,267) (2,636) (2,846) (3,039) Gross Profit 506 520 642 768 893 Other Opng (Exp)/Inc (315) (304) (354) (386) (419) Operating Profit 191 217 288 383 475 Other Non Opg (Exp)/Inc 1.62 (31.9) 1.86 (0.9) (0.9) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (79.2) (67.2) (77.0) (84.0) (87.6) Exceptional Gain/(Loss) (40.2) (5.6) 0.0 0.0 0.0 Pre-tax Profit 73.7 112 213 298 386 Tax (14.5) (20.2) (42.6) (59.5) (77.2) Minority Interest (28.0) (27.1) (62.8) (87.8) (114) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 31.2 64.7 108 150 195 Net Profit before Except. 71.4 70.3 108 150 195 Net Pft (ex. BA gains) 51.8 64.0 108 150 195 EBITDA 255 251 358 452 547 EBITDA (ex. BA gains) 263 292 355 452 547 Growth Revenue Gth (%) 9.3 (5.4) 17.6 10.3 8.8 EBITDA Gth (%) 12.3 (1.9) 42.8 26.4 21.1 Opg Profit Gth (%) (5.1) 13.2 33.0 32.8 24.1 Net Profit Gth (Pre-ex) (%) 101.1 (1.5) 52.9 39.8 29.7 Margins & Ratio Gross Margins (%) 17.2 18.7 19.6 21.3 22.7 Opg Profit Margin (%) 6.5 7.8 8.8 10.6 12.1 Net Profit Margin (%) 1.1 2.3 3.3 4.2 5.0 ROAE (%) 5.8 9.7 14.8 17.6 19.0 ROA (%) 1.5 2.9 4.6 5.6 6.4 ROCE (%) 8.2 8.9 11.1 12.8 13.8 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 2.4 3.2 3.7 4.6 5.4


Page 52


Company Guide

Japfa Ltd


FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 705 676 704 695 712 Cost of Goods Sold (580) (568) (582) (557) (559) Gross Profit 126 107 122 138 153 Other Oper. (Exp)/Inc (79.2) (75.7) (77.9) (72.5) (77.5) Operating Profit 46.7 31.5 44.1 65.8 75.3 Other Non Opg (Exp)/Inc (7.3) (13.3) (5.2) (21.2) 7.87 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (19.6) (16.9) (18.0) (17.2) (15.2) Exceptional Gain/(Loss) (35.0) 7.39 (17.5) (9.3) 13.8 Pre-tax Profit (15.3) 8.62 3.44 18.1 81.7 Tax (1.2) (3.6) (2.0) (7.7) (6.8) Minority Interest 2.57 2.02 1.52 (2.4) (28.2) Net Profit (13.9) 7.00 2.96 7.99 46.7 Net profit bef Except. 21.1 (0.4) 20.5 17.3 33.0 EBITDA 61.1 50.3 63.3 92.0 95.1 Growth Revenue Gth (%) (10.1) (4.2) 4.2 (1.3) 2.4 EBITDA Gth (%) 3.3 (17.7) 25.8 45.3 3.4 Opg Profit Gth (%) 7.4 (32.6) 40.2 49.3 14.3 Net Profit Gth (Pre-ex) (%) 67.7 nm nm (15.6) 91.1 Margins Gross Margins (%) 17.8 15.9 17.3 19.9 21.5 Opg Profit Margins (%) 6.6 4.7 6.3 9.5 10.6 Net Profit Margins (%) (2.0) 1.0 0.4 1.1 6.6

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 834 835 941 1,065 1,181 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 310 331 496 579 663 Cash & ST Invts 287 148 63.1 86.1 193 Inventory 598 609 616 665 710 Debtors 151 132 159 175 190 Other Current Assets 148 157 225 276 322 Total Assets 2,327 2,213 2,500 2,846 3,260 ST Debt 476 330 530 627 420 Creditor 233 260 231 250 267 Other Current Liab 25.0 20.3 30.5 39.9 49.7 LT Debt 507 510 448 433 719 Other LT Liabilities 91.4 83.2 81.4 79.9 78.3 Shareholder’s Equity 662 671 778 928 1,123 Minority Interests 332 338 401 489 603 Total Cap. & Liab. 2,327 2,213 2,500 2,846 3,260 Non-Cash Wkg. Capital 639 618 738 826 907 Net Cash/(Debt) (697) (693) (915) (974) (947) Debtors Turn (avg days) 17.7 18.5 16.2 16.8 16.9 Creditors Turn (avg days) 32.9 40.9 34.9 31.6 31.8 Inventory Turn (avg days) 87.5 100.1 87.1 84.2 84.7 Asset Turnover (x) 1.4 1.2 1.4 1.4 1.3 Current Ratio (x) 1.6 1.7 1.3 1.3 1.9 Quick Ratio (x) 0.6 0.5 0.3 0.3 0.5 Net Debt/Equity (X) 0.7 0.7 0.8 0.7 0.5 Net Debt/Equity ex MI (X) 1.1 1.0 1.2 1.0 0.8 Capex to Debt (%) 29.8 21.7 20.6 25.8 24.7 Z-Score (X) 2.2 2.1 2.2 2.2 2.4


Page 53


Company Guide

Japfa Ltd

Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 73.7 112 213 298 386 Dep. & Amort. 62.2 65.8 67.8 70.5 73.9 Tax Paid (37.8) (20.2) (42.6) (59.5) (77.2) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (88.4) 11.8 (227) (117) (104) Other Operating CF 0.12 0.09 0.0 0.03 0.04 Net Operating CF 125 254 (15.7) 220 313 Capital Exp.(net) (293) (182) (202) (274) (282) Other Invts.(net) 0.01 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (5.9) (3.6) (2.9) (2.9) (3.0) Net Investing CF (299) (186) (205) (277) (285) Div Paid (3.7) 0.0 0.0 0.0 0.0 Chg in Gross Debt 68.1 (132) 137 81.9 79.9 Capital Issues 198 0.0 0.0 0.0 0.0 Other Financing CF (27.3) (75.3) (2.0) (2.0) (1.9) Net Financing CF 235 (207) 135 79.9 78.0 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 61.6 (139) (84.8) 23.0 107 Opg CFPS (US cts.) 16.6 18.9 16.4 26.3 32.5 Free CFPS (US cts.) (13.1) 5.62 (16.9) (4.2) 2.48

Source: Company, DBS Bank Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 04 May 15 0.46 0.54 HOLD

2: 02 Jul 15 0.39 0.46 HOLD

3: 10 Aug 15 0.32 0.46 BUY

4: 18 Aug 15 0.31 0.46 BUY

5: 16 Sep 15 0.30 0.46 BUY

6: 28 Oct 15 0.40 0.46 BUY

7: 03 Nov 15 0.46 0.90 BUY

8: 02 Dec 15 0.50 0.90 BUY

9: 10 Dec 15 0.49 0.90 BUY

10: 17 Dec 15 0.49 0.90 BUY

11: 25 Jan 16 0.45 0.90 BUY12: 01 Mar 16 0.51 0.90 BUY13: 02 Mar 16 0.51 0.90 BUY


1

2

34

5

67

8

9

10

11

12

13

0.26

0.31

0.36

0.41

0.46

0.51

0.56


S$

Page 54


HOLD Last Traded Price: S$0.34 (STI : 2,837.00) Price Target : S$0.28 (19% downside) (Prev S$0.28) Potential Catalyst: Spike in oil prices, M&A / privatisation Where we differ: More conservative on 2016 earnings outlook Analyst Suvro SARKAR +65 6682 3720 [email protected] Singapore Research Team

What’s New Non cash impairments lead to losses in 4Q/ FY15

Uncertainty remains on contracts for the 2 SSAVs

Balance sheet is relatively strong

Final dividend of 0.5Sct declared

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 234 281 237 288 EBITDA 106 90 91 112 Pre-tax Profit 56 (129) 10 21 Net Profit 53 (131) 10 21 Net Pft (Pre-Ex) 53 17 10 21 EPS (S cts) 4.0 (9.9) 0.7 1.6 EPS Pre Ex (S cts) 4.0 1.3 0.7 1.6 EPS Gth (%) (41) nm nm 113 EPS Gth Pre Ex (%) (20) (67) (45) 113 Net DPS (S cts) 1.5 0.5 0.5 0.5 BV Per Share (S cts) 91.7 80.5 80.7 81.8 PE (X) 8.5 nm 46.2 21.7 PE Pre Ex (X) 8.5 25.6 46.2 21.7 P/Cash Flow (X) 7.5 6.4 4.4 4.1 EV/EBITDA (X) 9.4 11.0 11.5 8.5 Net Div Yield (%) 4.3 1.4 1.4 1.4 P/Book Value (X) 0.4 0.4 0.4 0.4 Net Debt/Equity (X) 0.5 0.5 0.6 0.5 ROAE (%) 5.1 (11.5) 0.9 1.9 Earnings Rev (%): 0 0 Consensus EPS (S cts): 2.6 3.9 Other Broker Recs: B: 2 S: 0 H: 3


SSAV contracts remain a key risk OSV segment is relatively strong, but will face inevitable headwinds.. POSH’s OSV operations have been relatively resilient versus peers owing to longer term contracts – we estimate 65-70% utilisation rate as of end-2015. Nonetheless, we expect continued pressure on both day rate and utilisation fronts in the coming quarters. Accommodation division performing well but SSAVs create downside risk. The accommodation division has assumed increased importance of late, accounting for 61% of gross profit in FY15. Gross margins for the division were also robust at about 40%. However, there remains downside risk from uncertainty surrounding the first SSAV, whose contract with Petrobras is ending in March this year with no renewal proposed yet, and the second SSAV, whose delivery date is before end of 1H16 and has yet to secure a contract. Cutting forecast numbers in light of industry weakness. We have further lowered our utilisation and day rate assumptions for POSH’s OSV vessels going forward, and pushed out the contract for the second SSAV to FY17. We are also more cautious on contributions from JV/ associates, especially from Indonesia. Hence, we have reduced our FY16 and FY17F earnings by 73% and 41% to US$10m/ US$21m respectively. Valuation:

Despite the risk to earnings and impairments on assets in FY15, POSH’s balance sheet remains relatively strong with net gearing of only 0.5x and it has also managed to refinance existing loans on attractive terms. Thus, we maintain our HOLD call with a target price of S$0.28, based on a 0.4x P/BV multiple. Key Risks to Our View:

Failure to secure charter contracts for the SSAVs. Our model now assumes the first SSAV is renewed in 2Q16 at lower rates and that the second SSAV is chartered out only in 2017. If employment for these vessels is not secured on time, there could be further downside risk to earnings. At A Glance Issued Capital (m shrs) 1,812 Mkt. Cap (S$m/US$m) 616 / 448 Major Shareholders (%) Kuok (Singapore) Limited (%) 81.9 Free Float (%) 18.1 3m Avg. Daily Val (US$m) 0.09 ICB Industry : Oil & Gas / Oil Equipment; Services & Distribution



PACC Offshore Services Holdings Version 3 | Bloomberg: POSH SP | Reuters: PACC.SI Refer to important disclosures at the end of this report

25

45

65

85

105

125

145

165

185

205

0.2

0.4

0.6

0.8

1.0

1.2

Apr-14 Sep-14 Feb-15 Jul-15 Dec-15

Relative IndexS$

PACC Offshore Services Holdings (LHS)

Relative STI INDEX (RHS)

Page 55


Company Guide

PACC Offshore Services Holdings

WHAT’S NEW

4Q15 results review

Non cash items drag POSH into the red. POSH reported a large headline net loss of US$150m in 4Q15, largely stemming from goodwill and asset impairments amidst challenging industry conditions. The group’s share of losses from JV/ associates also included a US$5.5m asset impairment impact. Stripping out these one-off non-cash items at both the POSH and JV level, we estimate POSH would have made US$4.3m net profit in 4Q15, which would bring core net profit for FY15 to US$17.5m vs. the US$131m loss reported for FY15. All segments profitable at gross level. Unlike some of its peers in the OSV business, POSH managed to remain profitable at the gross level. Gross margins for the OSV segment remained flat q-o-q at 13.6%. OSV fleet utilisation for FY15 stood at 69% (vs. 84% in FY14). The main profit driver, however, remains the Accommodation segment, with gross margins of close to 40%. While overall utilisation in the accommodation division was around 60%, the higher spec accommodation vessels and SSAVs were 100% utilised on term contracts. No visibility offered on SSAV contracts. The uncertainties regarding the Accommodation segment’s two SSAVs remain:

the first SSAV is coming off contract with Petrobras in March this year and has not secured an extension yet; management indicated that discussions with Petrobras are ongoing but day rates would be lower if the SSAV’s contract is successfully extended. Meanwhile, the second SSAV is due for delivery before the end of 1H16 after several rounds of deferrals, and still has not secured a contract; discussions are underway with various parties. But financing risks lowered. On a positive note, POSH has secured around US$1bn in bank loan facilities in 2016. About half of this will be used to refinance existing loans, which were largely revolving credit facilities. As the new facilities include about S$462m of longer term facilities with a 5-7 year tenor, this reduces future refinancing risks to a large extent. The undrawn portion can be used to fund working capital and capex needs, as well as M&A activities. Outstanding capex requirements amount to US$117m in FY16 for 12 vessels and another US$44m for 2 vessels in FY17; with the new facility in place, POSH does not have any near-term cash crunch to worry about. Financing cost for the new facility remains low – comparable to previous rates (i.e. around 2%).



Revenue 55.8 80.4 71.8 28.7 (10.7)

Cost of Goods Sold (49.3) (62.0) (54.6) 10.7 (11.9)

Gross Profit 6.47 18.4 17.2 165.7 (6.5)

Other Oper. (Exp)/Inc (7.2) (4.3) (4.0) (44.4) (7.8)

Operating Profit (0.7) 14.1 13.2 nm (6.1)

Other Non Opg (Exp)/Inc 0.0 0.76 1.44 nm 90.1

Associates & JV Inc (5.0) 0.87 (12.4) (148.8) nm

Net Interest (Exp)/Inc (2.3) (2.6) (2.7) (16.1) (1.8)

Exceptional Gain/(Loss) 0.0 0.0 (148) nm nm

Pre-tax Profit (8.0) 13.1 (149) nm nm

Tax (2.0) (0.5) (0.8) (57.8) 66.5

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit (10.0) 12.6 (150) nm nm

Net profit bef Except. (10.0) 12.6 (1.2) 87.6 nm

EBITDA 6.75 31.8 18.7 176.7 (41.3)

Margins (%)


Opg Profit Margins (1.3) 17.5 18.4

Net Profit Margins (17.8) 15.6 (208.4)


Page 56


Company Guide



Earnings Drivers:

Four key vessel segments. POSH, one of the largest Asia-based providers of offshore support vessels, is the result of the M&A of several companies in the industry. There are four key business segments now: 1) Offshore supply vessels (OSV), 2) Transport & Installation (T&I), 3) Offshore Accommodation (OA), and 4) Harbour Services and Emergency Response (HSER). Thus, while POSH has a more diversified business mix than peers, but other than the HSER segment, it is still rather dependent on the level of offshore oil & gas activity, and in turn, oil prices. Being part of the Kuok Group has its advantages. POSH is a member of the Kuok Group, a respected conglomerate with diversified investments in commodities, hospitality, logistics, real estate and shipping, among others. We believe this brings three key advantages to POSH: i) Ready access to affiliated shipyards of the Kuok Group, which enables POSH to achieve faster turnaround times for newbuilds and better manage maintenance and refurbishment costs; ii) Lower financing costs; and iii) Access to the Kuok Group’s global network and connections to open new markets and expand business. SSAVs are a bold bet. The economics of these accommodation units are very attractive, owing to niche market dynamics, but finding continuous employment for these deepwater-capable high-spec vessels could be challenging given that low oil prices have curtailed interest in deepwater E&P. We think that the two SSAVs could account for over 50% of group profits if they are fully employed. The first SSAV is coming off contract with Petrobras in March 2016, while the second has had its delivery date deferred to around mid-2016, with no contract in place. We will continue to watch for news of contract renewals/fixtures for these two units. OSV division will struggle to remain profitable. OSV owners across the board have seen sharp declines in utilisation and day rates in 2015, with some companies even reporting 40-50% utilisation and AHTS day rates below US$1.00/bhp. POSH has been relatively successful in placing vessels in the spot market in FY15, which has helped bolster utilisation rates to around 70%, but there is no guarantee this performance can be repeated in 2016. Given the state of the industry, we expect performance of POSH’s OSV division to deteriorate in FY16. Associate/ JV income has taken a hit. POSH recorded US$9.5m in share of losses from JV/ associates in FY15, including US$5.5m asset impairments. The major contributor to these losses is its Indonesian JV, which operates high spec AHTS vessels, and will continue to be affected by a slowdown in exploration activities in Indonesia following the oil price decline.

OSV fleet utilisation (%)

T&I fleet utilisation (%)

Acco fleet utilisation (%)

HSER fleet utilisation (%)


87 86.6

67.2

60.4 60.3

0.0

11.0

22.0

32.9

43.9

54.9

65.9

76.9

2013A 2014A 2015A 2016F 2017F

74.5

63.6

49.546.1 46.4

0.0

15.2

30.4

45.6

60.8

76.0

2013A 2014A 2015A 2016F 2017F

85

60.2 59.4 58.363.7

0.0

17.3

34.7

52.0

69.4

86.7

2013A 2014A 2015A 2016F 2017F

43.8

49.9 50 50 50

0.0

6.3

12.6

18.9

25.3

31.6

37.9

44.2

50.5

2013A 2014A 2015A 2016F 2017F

Page 57


Company Guide


Balance Sheet:

Relatively strong balance sheet should support capex commitments. POSH has deferred the delivery date of some newbuildings by about a year, which we feel is prudent amidst the volatile oil & gas environment. The company now has about US$161m of remaining committed capex for 14 vessels in its orderbook, which are scheduled for delivery up to mid-2017. The group’s strong balance sheet relative to its peers – with a net gearing of only 0.51x as of end-FY15 – and lack of near term refinancing issues leave headroom for additional debt to fund capex requirements; we anticipate net gearing to hover around 0.5x levels in FY16/17.< Refinancing issues sorted. inancing issues sorted. POSH has secured around US$1bn in bank loan facilities in 2016, about half of which will be used to refinance existing revolving credit facilities. As the new facilities include about S$462m of longer term facilities with a 5-7 year tenor, this reduces future refinancing risks to a large extent. The undrawn portion can be used to fund working capital and capex needs, as well as M&A activities. Financing cost for the new facility remains low – comparable to previous rates (i.e. around 2%).


Higher amount of offshore oil activity as a result of higher oil prices. POSH’s business is essentially a function of offshore activity. Higher oil prices are the key catalyst here, which will spur companies to invest in more capex offshore, resulting in more operational rigs as well as rig installations, increasing demand for POSH’s offshore support vessels across the oilfield lifecycle. Announcement of contract extension/fixture for the first and second SSAVs. As mentioned earlier, the successful deployment of the two SSAVs would be a significant boost to earnings, and hence, the announcement of contract wins and contract extensions for the SSAVs would be key catalysts to look out for. We are currently assuming that the first SSAV is renewed by Petrobras in 2Q16 at lower rates and that the second SSAV is chartered out in early 2017.

Key Risks:

Lack of contract wins for the two SSAVs. The worst-case scenario here is that the second SSAV is delivered sometime this year, and both SSAVs are uncontracted in 2017. Such a scenario would be detrimental to the share price performance.

Company Background

PACC Offshore Services Holdings Ltd. (POSH) is the largest Asia-based international operator of offshore support vessels and one of the top five globally. It operates a combined fleet of about 110 vessels (including JV vessels).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

2013A 2014A 2015A 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2013A 2014A 2015A 2016F 2017F


US$

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2013A 2014A 2015A 2016F 2017F

Avg: 41.1x

+1sd: 45.4x

+2sd: 49.6x

‐1sd: 36.8x

‐2sd: 32.5x

26.5

31.5

36.5

41.5

46.5

51.5


(x)

Avg: 0.71x

+1sd: 1.1x

+2sd: 1.5x

‐1sd: 0.32x

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6


(x)

Page 58


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F OSV fleet utilisation (%) 87.0 86.6 67.2 60.4 60.3 T&I fleet utilisation (%) 74.5 63.6 49.5 46.1 46.4 Acco fleet utilisation (%) 85.0 60.2 59.4 58.3 63.7 HSER fleet utilisation (%) 43.8 49.9 50.0 50.0 50.0

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Offshore Support Vessels 120 141 136 93 90 Transportation & 65 38 27 28 29 Accommodation 29 31 93 96 146 HSER 22 24 24 22 23 Total 237 234 281 237 288 Gross Profit (US$ m) Offshore Support Vessels 30 31 13 (4) (3) Transportation & 20 12 5 3 4 Accommodation 14 11 36 35 47 HSER 8 3 4 2 2 Total 72 57 58 36 50 Gross Profit Margins (%) Offshore Support Vessels 25.3 21.9 9.6 (4.3) (3.4) Transportation & 30.2 32.4 16.9 12.0 15.0 Accommodation 47.3 35.5 38.6 36.4 32.1 HSER 37.4 12.6 18.0 10.0 10.0 Total 30.5 24.4 20.7 15.3 17.5


FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 237 234 281 237 288 Cost of Goods Sold (165) (177) (223) (201) (238) Gross Profit 72 57 58 36 50 Other Opng (Exp)/Inc (13) (23) (23) (16) (20) Operating Profit 59 34 35 20 30 Other Non Opg (Exp)/Inc 11 46 4 2 2 Associates & JV Inc 1 (14) (10) 1 1 Net Interest (Exp)/Inc (13) (11) (10) (13) (13) Exceptional Gain/(Loss) 19 0 (148) 0 0 Pre-tax Profit 77 56 (129) 10 21 Tax (4) (3) (2) 0 0 Minority Interest 0 0 0 0 0 Net Profit 73 53 (131) 10 21 Net Profit before Except. 54 53 17 10 21 Preference Dividend 0 0 0 0 0 Net Pft Pre-Ex, Aft Pref Div 54 53 17 10 21 EBITDA 108 106 90 91 112 Growth Revenue Gth (%) (2.3) (1.4) 20.0 (15.5) 21.5 EBITDA Gth (%) 18.4 (1.7) (14.8) 0.3 23.5 Opg Profit Gth (%) 28.0 (43.0) 3.9 (43.6) 52.6 Net Profit Gth (%) 37.1 (27.4) nm nm 113.4 Net Pft Pre-Ex Aft Perf Div Gth (%)

35.1 (1.8) (67.2) (44.5) 113.4

Margins & Ratio Gross Margins (%) 30.5 24.4 20.7 15.3 17.5 Opg Profit Margin (%) 25.0 14.4 12.5 8.4 10.5 Net Profit Margin (%) 30.9 22.7 (46.6) 4.1 7.2 ROAE (%) 9.6 5.1 (11.5) 0.9 1.9 ROA (%) 4.6 2.9 (7.3) 0.6 1.2 ROCE (%) 3.8 1.9 2.1 1.2 1.8 Div Payout Ratio (%) 0.0 36.6 N/A 66.8 31.3 Net Interest Cover (x) 4.6 3.1 3.4 1.5 2.4


Assuming both SSAVs are chartered

Utilisation rates will be weak hereon

Impairment of goodwill + asset impairment

Page 59


Company Guide



FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 56 58 71 80 72 Cost of Goods Sold (49) (50) (57) (62) (55) Gross Profit 6 8 14 18 17 Other Oper. (Exp)/Inc (7) (5) (9) (4) (4) Operating Profit (1) 3 5 14 13 Other Non Opg (Exp)/Inc 0 1 1 1 1 Associates & JV Inc (5) (1) 3 1 (12) Net Interest (Exp)/Inc (2) (3) (3) (3) (3) Exceptional Gain/(Loss) 0 0 0 0 (148) Pre-tax Profit (8) 0 6 13 (149) Tax (2) 0 0 (1) (1) Minority Interest 0 0 0 0 0 Net Profit (10) 0 6 13 (150) Net profit bef Except. (10) 0 6 13 (1) Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) (10) 0 6 13 (1)

EBITDA 7 16 24 32 19 Growth Revenue Gth (%) (16.7) 3.2 23.3 13.2 (10.7) EBITDA Gth (%) (74.0) 130.6 55.7 31.3 (41.3) Opg Profit Gth (%) nm nm 81.6 177.1 (6.1) Net Profit Gth (%) nm nm 28,995.2 105.9 nm Margins Gross Margins (%) 11.6 13.9 20.4 22.9 23.9 Opg Profit Margins (%) (1.3) 4.9 7.1 17.5 18.4 Net Profit Margins (%) (17.8) 0.0 8.6 15.6 (208.4)


FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 1,038 1,114 1,278 1,351 1,293 Invts in Associates & JVs 211 241 100 100 101 Other LT Assets 304 300 180 180 180 Cash & ST Invts 11 12 14 19 22 Inventory 1 2 1 1 1 Debtors 68 77 94 53 52 Other Current Assets 141 126 68 68 68 Total Assets 1,774 1,871 1,734 1,771 1,716 ST Debt 507 261 560 148 68 Creditor 62 70 69 57 68 Other Current Liab 40 27 43 40 40 LT Debt 300 300 0 462 462 Other LT Liabilities 0 0 0 0 0 Shareholder’s Equity 864 1,214 1,061 1,064 1,078 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 1,774 1,871 1,734 1,771 1,716 Non-Cash Wkg. Capital 108 108 50 24 13 Net Cash/(Debt) (797) (548) (546) (591) (508) Debtors Turn (avg days) 101.3 112.7 110.7 112.7 66.6 Creditors Turn (avg days) 160.4 176.0 157.2 173.1 143.2 Inventory Turn (avg days) 10.3 4.9 3.7 2.0 1.7 Asset Turnover (x) 0.1 0.1 0.2 0.1 0.2 Current Ratio (x) 0.4 0.6 0.3 0.6 0.8 Quick Ratio (x) 0.1 0.2 0.2 0.3 0.4 Net Debt/Equity (X) 0.9 0.5 0.5 0.6 0.5 Net Debt/Equity ex MI (X) 0.9 0.5 0.5 0.6 0.5 Capex to Debt (%) 48.3 13.8 45.7 23.1 3.9 Z-Score (X) 0.5 0.8 0.4 0.6 0.8


Impairment of goodwill + asset impairment

Net gearing maintained at decent levels despite asset impairments

Weaker operational performance + impairment losses

Page 60


Company Guide



FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 77 56 (129) 10 21 Dep. & Amort. 37 39 61 68 79 Tax Paid (2) (1) (3) (3) 0 Assoc. & JV Inc/(loss) (1) 14 10 (1) (1) Chg in Wkg.Cap. 21 (2) (16) 29 11 Other Operating CF 2 (46) 147 0 0 Net Operating CF 135 60 70 102 110 Capital Exp.(net) (390) (77) (256) (141) (21) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (28) (11) 206 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 13 (9) 0 0 0 Net Investing CF (405) (97) (50) (141) (21) Div Paid (7) 0 (20) (6) (6) Chg in Gross Debt 282 (247) (1) 50 (80) Capital Issues 0 296 (2) 0 0 Other Financing CF 5 (11) 5 0 0 Net Financing CF 280 39 (18) 44 (86) Currency Adjustments 0 0 0 0 0 Chg in Cash 10 2 2 5 3 Opg CFPS (US cts.) 7.7 3.4 4.7 4.1 5.4 Free CFPS (US cts.) (17.2) (1.0) (10.3) (2.1) 4.9



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 06 May 15 0.46 0.50 HOLD

2: 01 Jul 15 0.43 0.50 HOLD

3: 10 Aug 15 0.34 0.41 HOLD

4: 18 Sep 15 0.33 0.35 HOLD

5: 26 Oct 15 0.36 0.35 HOLD

6: 04 Nov 15 0.36 0.35 HOLD

7: 16 Nov 15 0.34 0.35 HOLD

8: 11 Jan 16 0.30 0.35 HOLD

9: 18 Jan 16 0.29 0.35 HOLD

10: 25 Jan 16 0.30 0.29 HOLD

11: 01 Feb 16 0.30 0.29 HOLD12: 10 Feb 16 0.30 0.29 HOLD13: 15 Feb 16 0.28 0.29 HOLD14: 22 Feb 16 0.29 0.28 HOLD


1 2

34

5

6

7 8

9

10

11

12

13

14

0.26

0.31

0.36

0.41

0.46

0.51


S$

0.5Scts dividend declared for FY15

Page 61

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: AS

FULLY VALUED Downgrade from HOLD

Last Traded Price: S$0.33 (STI : 2,837.00) Price Target : S$0.25 (23% downside) (Prev S$0.25) Potential Catalyst: Spike in oil prices, better earnings execution Where we differ: More conservative on day rates, margins Analyst Suvro SARKAR +65 6682 3720 [email protected]

What’s New Net loss of US$2.6m reported for 4Q15

OSV division reported gross losses

Subsea vessel segment still in the red as well

Management expects 2016 to remain challenging

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 172 122 123 135 EBITDA 71 32 20 32 Pre-tax Profit 68 5 (25) (16) Net Profit 68 4 (25) (16) Net Pft (Pre-Ex, Aft Pref Div)*

67 5 (25) (16)

EPS (S cts) 12.9 0.7 (4.8) (3.0) EPS Pre Ex, Aft Pref Div (S cts)

12.7 1.0 (4.8) (3.0)

EPS Gth (%) 20 (94) nm 36

EPS Gth Pre Ex, Aft pref div (%)

27 (92) nm 36

Net DPS (S cts) 3.1 1.0 0.0 0.0 BV Per Share (S cts) 81.1 78.3 73.6 70.5 PE (X) 2.5 44.8 nm nm PE Pre Ex, Aft Pref Div (X) 2.6 31.5 nm nm P/Cash Flow (X) 2.8 7.0 nm 14.2 EV/EBITDA (X) 5.7 16.7 32.7 20.7 Net Div Yield (%) 9.4 3.0 0.0 0.0 P/Book Value (X) 0.4 0.4 0.4 0.5 Net Debt/Equity (X) 0.5 0.9 1.3 1.3 ROAE (%) 17.0 0.9 (6.3) (4.2) Earnings Rev (%): nm nm Consensus EPS (S cts): 3.9 6.0 Other Broker Recs: B: 4 S: 2 H: 2


Outlook remains bleak for now OSV segment officially in the doldrums. PACRA’s OSV segment has seen fleet utilisation drop from 64% in 3Q15 to mid-30% in 4Q15; day rates have taken a hit as well. The segment is in a gross loss position for the first time in its listed history, and we do not see any signs of a significant improvement in 2016, as oil prices remain low and demand for OSVs remain muted. Management expects FY16 to remain a difficult year. Subsea vessel utilisation could rebound gradually. At a utilisation rate of ~35% in 4Q15, mostly from work on short-term jobs, the subsea vessel segment recorded gross losses. However, maintenance work will always be required, as oil companies are unlikely to risk safety issues resulting from maintenance lapses. We expect the segment to achieve modest profitability by 2017, with utilisation improving to ~50%. Tweaking our assumptions to account for deterioration in industry fundamentals. We have lowered our utilisation and dayrate assumptions for the OSV segment going forward, imputing a 40-50% utilisation rate, day rates of around US$1.00/bhp for AHTS vessels, and US$15,000/day for small PSVs. Higher interest expense from increased borrowings is also expected to weigh on profitability. Hence, we are now expecting overall net losses of US$25m and US$16m in FY16 and FY17 respectively; we factor in some improvement in the OSV market from 2H16 onwards.

Valuation:

We lower our P/BV valuation peg to 0.35x (compared to 0.4x for OSV peer POSH) to reflect the weaker operating performance and higher net gearing of close to 1x. Downgrade to FULLY VALUED with lower TP of S$0.25. FY15 final dividend of 1Sct will likely only be a temporary support. Key Risks to Our View:

A sharp spike in the oil price – albeit unlikely in our view – could result in uplift in utilisation and day rates for vessels, boosting earnings and the share price. At A Glance Issued Capital (m shrs) 716 Mkt. Cap (S$m/US$m) 233 / 169 Major Shareholders (%) Yoke Min Pang 67.7 Weng Vai Mok 6.6

Free Float (%) 25.7 3m Avg. Daily Val (US$m) 0.12 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist



Pacific Radiance Version 3 | Bloomberg: PACRA SP | Reuters: PACI.SI Refer to important disclosures at the end of this report

32

52

72

92

112

132

152

172

192

212

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

Nov-13 May-14 Nov-14 May-15 Nov-15

Relative IndexS$

Pacific Radiance (LHS) Relative STI INDEX (RHS)

Page 62


Company Guide

Pacific Radiance

WHAT’S NEW

No respite from industry downturn

Net loss in 4Q15 – the first since listing in 2013. PACRA reported a net loss of US$2.6m in 4Q15 – its first quarterly net loss since listing in 2013. Performance was below expectations as revenue dropped sharply by 36% q-o-q to only US$21.7m, resulting in a gross loss of US$3.4m. This was offset mainly by gains related to disposal of vessels totaling ~US$7m. Both the OSV and subsea segments were in a gross loss position in 4Q15.

OSV segment sees red on a gross level for the first time.

Utilisation rates at the OSV segment plummeted to the mid-30% region in 4Q15, down from 64% in 3Q15 and 50% in 4Q14. This was partially a result of the monsoon season affecting operations, with 4Q traditionally being a weak quarter, although the y-o-y utilisation numbers – which are down substantially – point to deterioration in the market. Additionally, with PACRA seeing day rates in the AHTS markets at below US$1.00/bhp currently, we think the fundamentals do not look encouraging at this point in time.

Subsea vessel segment remains disappointing. PACRA’s subsea vessels saw utilisation rates in the high 20% range in

4Q15, down slightly from the low 30% seen the quarter prior. The Inspection, Repair and Maintenance (IRM) story – that oil companies can only defer maintenance expenditure for so long – has so far not played out as well as hoped. We think this is likely due to some oversupply in the subsea vessel market despite IRM work requirements staying resilient, based on subsea tree age and installations (as a proxy). In any case, PACRA has sold one of its DSVs to associate PT Jawa Tikamuri, generating a US$5.2m gain in 4Q15; the vessel will be able to take advantage of the better demand-supply subsea dynamics in Indonesia and has secured a 3-year contract with Pertamina, with a minimum of 100 days of work per year specified under that contract, although PACRA will not be able to fully enjoy the takings of this contract as the vessel is now majority-owned by PT Jawa Tikamuri.

Final dividend of 1Sct declared. This is lower than the 3Scts declared for FY14, which is understandable given the poor outlook; cash is king in this environment. 1Sct represents a 3.3% dividend yield.

Gearing has increased. The group ended FY15 with net gearing of 0.9x, compared to 0.5x at end-FY14. This is mainly due to higher borrowings to support US$160m capex in FY15. Operating cash flows remained positive overall in FY15.



Revenue 37.2 33.8 21.7 (41.6) (35.7)

Cost of Goods Sold (33.9) (26.6) (25.1) (26.1) (5.6)

Gross Profit 3.27 7.19 (3.4) nm nm

Other Oper. (Exp)/Inc (1.2) (7.4) (5.0) 324.6 (32.8)

Operating Profit 2.10 (0.3) (8.4) nm nm

Other Non Opg (Exp)/Inc (0.6) 6.61 5.23 nm (20.9)

Associates & JV Inc 3.32 (0.1) 2.42 (26.9) nm

Net Interest (Exp)/Inc (2.6) (3.2) (2.9) (11.1) 9.8

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit 2.22 3.06 (3.6) nm nm

Tax 3.95 (1.5) 0.84 (78.7) nm

Minority Interest (1.1) 0.08 0.21 nm 169.6

Net Profit 5.05 1.67 (2.6) nm nm

Net profit bef Except. 5.05 1.67 (2.6) nm nm

EBITDA 12.2 13.4 5.68 (53.2) (57.7)

Margins (%)

Gross Margins 8.8 21.3 (15.5)

Opg Profit Margins 5.6 (0.7) (38.5)

Net Profit Margins 13.6 4.9 (11.9)


Page 63


Company Guide

Pacific Radiance


Earnings Drivers:

Utilisation of young and diverse fleet of offshore support vessels is the key. The group’s fleet of wholly owned OSVs has an average age of just around 5 years – significantly younger than the industry average. The fleet ranges from high-end sophisticated vessels such as Diving Support Vessels (DSVs) for shallow water subsea work and large Anchor Handling Tug Supply (AHTS) vessels with hybrid propulsion systems to ocean tug and barge vessels, allowing the group to support clients over a wide variety of operations throughout the oil & gas life cycle. The challenge is to ensure overall fleet utilisation levels stay around 70% or higher to ensure good margins and returns on capital. Currently though, the fleet is operating close to or below breakeven levels as a result of lesser work available due to a downturn in the oil & gas industry. Supply chain control keeps costs low. The group has a long track record of managing and supervising vessel construction at third-party shipyards with direct oversight in the third-party shipbuilding process which gives some measure of control over the supply chain. Established relationships with competent third-party shipyards and suppliers of equipment ensure quality and timeliness. In addition, complementary businesses such as the marine equipment business allow greater control over the assembly of deck equipment. Thus, it may still be able to make better margins on some OSV charters compared to its peers during this downturn. Growth prospects from cabotage-protected markets like Indonesia and Malaysia have been derailed. PACRA’s tie-ups with foreign partners, which allow it access to markets with cabotage laws that boost charter rates and utilisation levels, have seen red ink in recent quarters, as these markets have inevitably been hit by the oil price rout. Reforms in Indonesia have also been more lip service than action, prolonging the persistent lack of investment due to overly high levels of bureaucracy. Upstream investment has also been curtailed due to uncertainty over the fate of production sharing contract expiries. As for Malaysia, Petronas, the national oil company, recently announced an additional RM50bn cut to its capex and opex budgets from 2016-2019, setting the stage for a long winter for oil services companies. Newbuild vessel pipeline could exacerbate utilisation issues. PACRA is expecting to take delivery of 4 vessels into its own fleet in 2016 for a total capex of more than US$100m, of which US$30-40m will be paid in cash and the remainder using bank debt secured by the vessels. With no major delays expected in the delivery schedule, this could weigh on the fleet utilisation problem in the near term.

AHTS/PSV fleet utilisation (%)

DSV fleet utilisation (%)

AWB fleet utilisation (%)

Tugs/ barges fleet utilisation (%)


82 79.8

54.3

4550

0.0

10.4

20.7

31.1

41.4

51.8

62.1

72.5

2013A 2014A 2015A 2016F 2017F

83

57.5

20.8

42.5

50

0.0

16.9

33.9

50.8

67.7

84.7

2013A 2014A 2015A 2016F 2017F

50

61.6

50.648.7 48.7

0.0

12.6

25.1

37.7

50.3

62.8

2013A 2014A 2015A 2016F 2017F

55

6560 60 60

0.0

8.2

16.4

24.6

32.8

41.0

49.2

57.4

65.7

2013A 2014A 2015A 2016F 2017F

Page 64


Company Guide

Pacific Radiance

Balance Sheet:

No big refinancing worries imminent. We expect net gearing to rise to around 1.3x at end-2016 from the current 0.9x as of 4Q15 as a result of higher debt levels taken for incoming newbuild vessels and cash buffer. Nonetheless, given that PACRA’s only unsecured debt (which we deem is less easily refinanceable given the current oil & gas downturn) is its S$100m 4.3% MTN note maturing in August 2018, we do not expect any near term refinancing issues. Furthermore, the company has ~US$100m of committed unsecured revolving credit facilities that has not been tapped on. Nonetheless, it will need to work with banks and bond investors to allow waiver of debt covenants and push out maturity of debts, if possible.


Oil price movements. Oil & gas service stocks typically move in tandem with the oil price. A spike in the oil price would therefore boost the share price. Dayrates and utilisation. PACRA’s utilisation and dayrates across its various vessels are strong drivers of earnings and therefore the share price. Higher utilisation would likely give investors more confidence in the company, but this is also very dependent on the oil price, which affects demand for OSVs. Key Risks:

Counterparty issues. Given the oil price slide, oil majors are looking to cut costs by delaying projects and reducing existing costs. Charter rates could see further downside as companies have opted to prop up utilisation rates by offering discounted rates. There could also be risks of counterparty defaults on charters if the downturn continues for long. Risk of asset impairments. While Pacific Radiance has advantage of low cost fleet, there could be the possibility of asset impairments for own fleet or JV/ associate fleet if the OSV market downturn deepens. Interest rate risks. We believe every 25 bps increase in floating interest rates could impact net profit by about US$1m.

Company Background

Emerging regional OSV player. Pacific Radiance Ltd. is a Singapore-based provider of offshore support vessels (OSVs) for the oil & gas, subsea and related industries. The group currently has a fully owned fleet of about 60 vessels, plus access to another 70 odd vessels through investments in associates in Indonesia and Malaysia. Experienced management team. Executive Chairman Mr. Pang Yoke Min is a veteran in the offshore shipbuilding and chartering space in the region and along with other key members of the management team, brings a long track record and solid reputation and credibility to the table.


Capital Expenditure

ROE (%)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015A 2016F 2017F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

2013A 2014A 2015A 2016F 2017F


US$

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2013A 2014A 2015A 2016F 2017F

Avg: 1.09x

+1sd: 1.65x

+2sd: 2.21x

‐1sd: 0.53x

0.0

0.5

1.0

1.5

2.0

2.5

Nov-13 May-14 Nov-14 May-15 Nov-15

(x)

Page 65


Company Guide

Pacific Radiance

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F AHTS/PSV fleet utilisation 82.0 79.8 54.3 45.0 50.0 DSV fleet utilisation (%) 83.0 57.5 20.8 42.5 50.0 AWB fleet utilisation (%) 50.0 61.6 50.6 48.7 48.7 Tugs/ barges fleet 55.0 65.0 60.0 60.0 60.0

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (US$ m) Offshore Support Services 109 128 107 100 110 Subsea Services 45 33 9 10 12 Complementary Business 14 11 6 13 13 Total 169 172 122 123 135 Gross Profit (US$ m) Offshore Support Services 37 46 30 1 8 Subsea Services 19 4 (6) (2) 2 Complementary Business 3 2 0 1 1 Total 59 51 24 1 12 Gross Profit Margins (%) Offshore Support Services 34.0 35.5 27.9 1.4 7.5 Subsea Services 42.0 11.6 (69.1) (17.3) 20.0 Complementary Business 20.6 15.5 7.0 10.0 10.0 Total 35.0 29.6 19.9 0.8 8.9


FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 169 172 122 123 135 Cost of Goods Sold (110) (118) (98) (122) (123) Gross Profit 59 54 24 1 12 Other Opng (Exp)/Inc (22) (24) (21) (12) (14) Operating Profit 37 30 3 (11) (2) Other Non Opg (Exp)/Inc 16 35 12 0 0 Associates & JV Inc 14 13 3 1 1 Net Interest (Exp)/Inc (13) (9) (12) (15) (15) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 53 68 5 (25) (16) Tax 4 1 (2) 0 0 Minority Interest 0 (1) 0 0 0 Net Profit 57 68 4 (25) (16) Net Profit before Except. 53 67 5 (25) (16) Preference Dividend 0 0 0 0 0 Net Pft Pre-Ex, Aft Pref Div 53 67 5 (25) (16) EBITDA 75 71 32 20 32 Growth Revenue Gth (%) 28.9 2.2 (29.3) 0.9 10.1 EBITDA Gth (%) 60.3 (6.3) (55.0) (36.0) 55.5 Opg Profit Gth (%) 81.6 (17.6) (90.7) nm 84.4 Net Profit Gth (%) 76.4 20.4 (94.4) nm 35.8 Net Pft Pre-Ex Aft Perf Div Gth (%) 64.4 27.0 (91.9) nm 35.8

Margins & Ratio Gross Margins (%) 35.0 31.5 19.9 0.8 8.9 Opg Profit Margin (%) 21.8 17.6 2.3 (8.7) (1.2) Net Profit Margin (%) 33.7 39.7 3.1 (20.4) (11.9) ROAE (%) 19.6 17.0 0.9 (6.3) (4.2) ROA (%) 8.6 8.6 0.4 (2.6) (1.6) ROCE (%) 6.3 4.2 0.2 (1.2) (0.2) Div Payout Ratio (%) 32.7 23.6 134.9 N/A N/A Net Interest Cover (x) 2.8 3.3 0.2 (0.7) (0.1)


Subsea expected to move into positive gross profit territory in 2017.

OSV margins will remain under severe pressure.

Page 66


Company Guide

Pacific Radiance


FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 37 32 35 34 22 Cost of Goods Sold (34) (21) (25) (27) (25) Gross Profit 3 10 10 7 (3) Other Oper. (Exp)/Inc (1) (6) (3) (7) (5) Operating Profit 2 4 7 0 (8) Other Non Opg (Exp)/Inc (1) 0 0 7 5 Associates & JV Inc 3 0 0 0 2 Net Interest (Exp)/Inc (3) (3) (3) (3) (3) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 2 1 4 3 (4) Tax 4 0 (1) (1) 1 Minority Interest (1) 0 0 0 0 Net Profit 5 1 4 2 (3) Net profit bef Except. 5 1 4 2 (3) Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 5 1 4 2 (3)

EBITDA 12 12 13 13 6 Growth Revenue Gth (%) (16.1) (15.2) 10.3 (2.9) (35.7) EBITDA Gth (%) (47.5) (3.8) 11.3 3.3 (57.7) Opg Profit Gth (%) (18.9) 106.6 63.5 nm nm Net Profit Gth (%) (61.4) (82.1) 325.5 (56.6) nm Margins Gross Margins (%) 8.8 32.7 29.2 21.3 (15.5) Opg Profit Margins (%) 5.6 13.7 20.4 (0.7) (38.5) Net Profit Margins (%) 13.6 2.9 11.0 4.9 (11.9)


FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 549 572 606 706 674 Invts in Associates & JVs 44 66 68 69 70 Other LT Assets 0 0 76 76 76 Cash & ST Invts 65 101 43 38 80 Inventory 3 3 1 3 3 Debtors 48 35 25 31 34 Other Current Assets 37 62 97 97 97 Total Assets 746 840 917 1,020 1,033 ST Debt 53 52 80 80 80 Creditor 11 16 14 16 16 Other Current Liab 55 48 60 57 57 LT Debt 240 276 320 450 480 Other LT Liabilities 9 16 26 26 26 Shareholder’s Equity 376 428 413 388 372 Minority Interests 2 4 3 2 2 Total Cap. & Liab. 746 840 917 1,020 1,033 Non-Cash Wkg. Capital 21 36 49 58 61 Net Cash/(Debt) (228) (227) (357) (492) (480) Debtors Turn (avg days) 84.8 87.6 90.4 83.1 87.1 Creditors Turn (avg days) 39.6 55.1 77.4 60.5 64.4 Inventory Turn (avg days) 11.5 13.2 11.0 8.6 13.5 Asset Turnover (x) 0.3 0.2 0.1 0.1 0.1 Current Ratio (x) 1.3 1.7 1.1 1.1 1.4 Quick Ratio (x) 0.9 1.2 0.4 0.4 0.7 Net Debt/Equity (X) 0.6 0.5 0.9 1.3 1.3 Net Debt/Equity ex MI (X) 0.6 0.5 0.9 1.3 1.3 Capex to Debt (%) 37.2 11.2 38.5 24.5 0.0 Z-Score (X) 1.2 1.2 0.9 0.8 0.8


PACRA records its first gross loss since listing.

Debt levels expected to rise to fund newbuild vessels.

We expect net gearing to rise to almost 1.3x at end-2016

Page 67


Company Guide

Pacific Radiance


FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 53 68 5 (25) (16) Dep. & Amort. 25 28 26 30 32 Tax Paid 0 (4) (3) (3) 0 Assoc. & JV Inc/(loss) (14) (13) (3) (1) (1) Chg in Wkg.Cap. (27) 17 15 (6) (3) Other Operating CF (15) (36) (17) 0 0 Net Operating CF 22 61 24 (5) 12 Capital Exp.(net) (109) (37) (154) (130) 0 Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (1) (8) (3) 0 0 Div from Assoc & JV 0 1 1 0 0 Other Investing CF 0 (9) 13 0 0 Net Investing CF (110) (53) (144) (130) 0 Div Paid (7) (11) (18) 0 0 Chg in Gross Debt 13 39 79 130 30 Capital Issues 123 0 0 0 0 Other Financing CF 0 0 (4) 0 0 Net Financing CF 129 28 58 130 30 Currency Adjustments 0 0 0 0 0 Chg in Cash 41 37 (62) (5) 42 Opg CFPS (US cts.) 6.8 6.1 1.3 0.1 2.1 Free CFPS (US cts.) (12.0) 3.4 (17.9) (18.6) 1.7



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 15 May 15 0.64 0.67 HOLD

2: 14 Aug 15 0.36 0.42 HOLD

3: 18 Sep 15 0.34 0.42 BUY

4: 26 Oct 15 0.42 0.42 BUY

5: 16 Nov 15 0.34 0.42 BUY

6: 11 Jan 16 0.31 0.42 BUY

7: 18 Jan 16 0.29 0.42 BUY

8: 25 Jan 16 0.30 0.32 HOLD

9: 01 Feb 16 0.30 0.32 HOLD

10: 10 Feb 16 0.29 0.32 HOLD

11: 15 Feb 16 0.30 0.32 HOLD12: 26 Feb 16 0.31 0.25 FULLY VALUED


1

2

3

4

5

6

7

8

9

10

11

12

0.27

0.37

0.47

0.57

0.67

0.77


S$

Out of this, US$100m for 4 vessels due for delivery in 2016

Page 68

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM

HOLD Last Traded Price: S$0.57 (STI : 2,837.00) Price Target : S$0.57 (-1% downside) (Prev S$0.57) Potential Catalyst: Recovery in constuction activities Where we differ: We are the only broker covering the stock Analyst Alfie Yeo +65 6682 3717 [email protected]

What’s New FY15/4Q15 earnings below on lower margins

Cut FY16F/FY17F earnings by 31-36%

Dividend yield of 5.8% to support share price

Maintain HOLD, TP S$0.57

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2014A 2015A 2016F 2017F Revenue 763 827 789 813 EBITDA 82.6 77.2 77.4 81.5 Pre-tax Profit 43.5 32.6 30.0 31.9 Net Profit 32.4 20.3 20.0 20.6 Net Pft (Pre Ex.) 33.6 22.4 20.0 20.6 Net Pft Gth (Pre-ex) (%) (28.3) (33.4) (10.8) 2.9 EPS (S cts) 5.77 3.63 3.57 3.67 EPS Pre Ex. (S cts) 5.98 4.00 3.57 3.67 EPS Gth Pre Ex (%) (29) (33) (11) 3 Diluted EPS (S cts) 5.72 3.59 3.55 3.65 Net DPS (S cts) 4.25 4.25 3.30 3.30 BV Per Share (S cts) 50.2 50.2 49.5 49.9 PE (X) 9.9 15.7 16.0 15.5 PE Pre Ex. (X) 9.5 14.3 16.0 15.5 P/Cash Flow (X) 12.8 7.6 4.6 6.1 EV/EBITDA (X) 6.8 7.8 7.9 7.5 Net Div Yield (%) 7.5 7.5 5.8 5.8 P/Book Value (X) 1.1 1.1 1.2 1.1 Net Debt/Equity (X) 0.7 0.8 0.8 0.8 ROAE (%) 11.7 7.2 7.2 7.4 Earnings Rev (%): 0 0


Slower RMC outlook Expect stock to trade range bound. We believe that downside for the stock is protected by its 5.8% dividend yield, and share price decline has factored in weak earnings going forward. Upside is limited because RMC outlook for 2016 is expected to decline, yet margins are likely to be squeezed due to softness in ready-mixed concrete (RMC) selling prices. We have factored in a decline in DPS going forward, from 4.3 Scts to 3.3 Scts in view of low-growth outlook and FY15’s earnings decline. Our neutral stance for Pan-United Corp (Pan-United) is also backed by a lower projected construction output of S$32bn and S$34bn for 2016. Lower than expected margins led to FY15/4Q15 earnings disappointment. Revenue (4Q15 – S$203m, 1% y-o-y; FY15 – S$827m, 8% y-o-y) was in line, but earnings (4Q15 – S$2.5m, -32% y-o-y; FY15 – S$22m, -33% y-o-y) missed our expectations. Pan United’s implied RMC selling prices declined by about 6%y-o-y in FY15, which largely led to lower than expected margins in the Basic Building Materials (BBR) segment. RMC demand to slow this year. RMC outlook is likely to be slower this year with BCA’s forecasting a slower 13-15m cbm of RMC (a 6% to 19% decline from 2015), on moderation of on-site construction activities. Valuation:

SOTP valuation methodology. Our target price of S$0.57 is derived from a sum-of-parts valuation of Pan-United. We value its (RMC) business at 10x forward PE at S$0.21, CXP port operations at S$0.43 based on 15x forward port earnings, CCIP port at S$0.14 based on 1x book, and Shipping business, net debt and others at -S$0.21 per share. Key Risks to Our View:

Pan-United’s outlook is based on steady construction activities backed by civil projects in Singapore. Acceleration in private projects may cause a surge in construction demand, leading to better earnings outlook and more upside to its share price. At A Glance Issued Capital (m shrs) 560 Mkt. Cap (S$m/US$m) 319 / 232 Major Shareholders (%) Han Whatt Ng 56.9 Bee Soon Ng 5.0

Free Float (%) 38.1 3m Avg. Daily Val (US$m) 0.03 ICB Industry : Industrials / Industrial Transportation



Pan-United Corporation Version 3 | Bloomberg: PAN SP | Reuters: PANU.SI Refer to important disclosures at the end of this report

86

106

126

146

166

186

206

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2


Relative IndexS$

Pan-United Corporation (LHS) Relative STI INDEX (RHS)

Page 69


Company Guide

Pan-United Corporation

WHAT’S NEW

Results review

4Q15 below expectations as margins disappoint. While revenue of S$203m (+0.9% y-o-y) was within expectations, margins were sharply lower, which resulted in earnings missing our expectations by S$7m (more than 30%). Demand and competition situation had led to lower-than-expected margins, particularly in the Basic Building Resources (BBR) segment.

Revenue in line. 4Q15 and FY15 revenue were within expectations. FY15 revenue growth was led by the port division (S$96m, 18% y-o-y) from the consolidation of CCIP port and BBR division (S$668m, 9% y-o-y) on higher RMC volumes albeit a decline in RMC ASP. According to our calculation, implied RMC selling prices declined by 6% y-o-y in FY15. Shipping revenues declined by 11% y-o-y to S$62m on both lower utilisation and rates.

Higher costs, lower gross margins. Gross margins declined on both a y-o-y and q-o-q basis (to 10.9%) in 4Q15. Full-year gross margins declined to 12% (-2ppt) for FY15. This was a result of lacklustre demand for RMC, competition and higher USD. Nonetheless, RMC market share improved to >37% (from 34% last year). The stronger USD has also led to higher costs of raw materials, further depressing margins. Depreciation expenses were higher from both the port and BBR segment, due to consolidation of CCIP port and new cement silos. As a result, FY15 EBIT margins declined to 5.7% from 7.2% due to BBR segment.

Higher interest costs. Interest cost for the full year was S$14.8m (+12% y-o-y). This was the interest payment for the CCIP acquisition. Net gearing also increased to 0.8x, with the bulk of the S$294m loans used for the port’s acquisition (S$174m). Net margins were therefore sharply lower (4Q15 at 1.2%, FY15 at 2.5%).

Final DPS of 2.8 Scts declared. This brings full-year DPS to 4.3 Scts, according to our expectations. But due to the drop in earnings, the dividend payout ratio from maintaining the DPS is now 117%.

Expect soft outlook. We are expecting a softer outlook. RMC demand going forward is expected to be lower according to BCA’s forecast. This is largely due to a decline in construction demand in 2015, leading to lower construction output for 2016. We expect RMC pricing to stay muted, on the back of slower demand in 2016. At the port level, China’s port throughput is expected to grow by 5-7% and we expect this to impact cargo volumes at both CCIP and CXP. We, however, expect margins to be slightly lower due to higher depreciation from expansion projects at the port.

Cut FY16F/FY17F earnings by 31-36%, lower DPS forecast. 4Q15 earnings had missed our estimates by about 30% as margin decline had been more severe than our expectations. We are cutting our earnings by 31-36% for FY16F/FY17F as we lower our growth outlook on the back of weaker 2016 RMC demand. We factor in continued RMC price and margin declines in our BBR segment forecast and lower operating margins for the port on higher depreciation. We now expect earnings decline in FY16F to be -11%, before recovering by 3% in FY17F. We believe a dividend payout ratio of above 100% is not sustainable and hence lower our DPS assumption to 3.3 Scts, or dividend payout ratio of between 80-90%. In view of its new Malaysia slag facility, we expect loans to increase by another c.S$20m.

Maintain HOLD, SOTP-based TP lowered to S$0.57. We believe share price decline has factored in lower growth and earnings and therefore downside is limited. Furthermore, dividend yield at a lower DPS now stands at c.6%. We believe this will support the share price going forward. We do not see much upside as construction and RMC outlook for 2016 remain sluggish. We will turn positive when we see earnings recovering and RMC demand volumes and prices becoming more robust.

Page 70


Company Guide




Revenue 201 209 203 0.9 (3.1)

Cost of Goods Sold (178) (183) (181) 1.4 (1.5)

Gross Profit 22.9 26.1 22.2 (3.4) (15.1)

Other Oper. (Exp)/Inc (14.8) (12.6) (13.2) (10.5) 4.4

Operating Profit 8.17 13.4 8.95 9.5 (33.3)

Other Non Opg (Exp)/Inc 0.0 (0.2) (0.1) nm 72.2

Associates & JV Inc 1.03 0.59 1.07 4.0 80.0

Net Interest (Exp)/Inc (3.9) (3.5) (3.4) 10.8 1.9

Exceptional Gain/(Loss) (1.1) (0.7) (1.1) (3.9) (67.0)

Pre-tax Profit 4.27 9.68 5.42 26.9 (44.0)

Tax 0.34 (2.6) (1.5) nm (40.3)

Minority Interest (1.0) (1.1) (1.4) 43.4 25.5

Net Profit 3.64 6.00 2.49 (31.6) (58.6)

Net profit bef Except. 4.71 6.67 3.60 (23.6) (46.0)

EBITDA 17.1 21.0 17.1 0.1 (18.5)

Margins (%)



Net Profit Margins 1.8 2.9 1.2


SOTP valuation of PAN

Sum of parts

FY16F Net Profit (S$m) Book value (S$m) Basis FY16 Value (S$ m)

Basic Building Material 12.0 183.5 10.0 PE 120.1

Shipping (1.7) 36.5 0.8 P/BV 29.2

CXP Port 16.0 66.3 15.0 PE 239.6

CCIP Port 77.0 1.01 P/BV 77.0

Others2 105.0 1.0 P/BV 105.0

Add cash/(debt) (254.5)

Total value (S$ m) 316.3

SOTP per share (S$) 0.57

1 Assumes that additional interest cost is borne by CCIP, valuation is compensated by P/BV discount of 1x (vs 1.3x transacted valuation)

2 Owned office space at Suntec Tower, book value of 10% investment in PT Lanna coal mine, financial instruments

Source: DBS Bank

Page 71


Company Guide



Earnings Drivers:

Construction output and RMC demand to moderate in 2016. The Building & Construction Authority (BCA) projected construction output for 2016 to be between S$32bn and S$34bn, slightly lower from S$35bn in 2015. Moderation in on-site construction activities in 2016 should lead to lower construction output and RMC demand for 2016. Singapore construction demand declined in 2015 to S$27.2bn from S$37.7bn in 2014 due to postponement and rescheduling of projects. Private building construction demand fell amid slowing residential property market, while public projects including infrastructure and MRT contracts needed longer preparation times and were rescheduled. Longer-term construction projects in Singapore expected to remain steady. Nonetheless, construction pipeline in Singapore from 2017-2020 remains robust, driven largely by public sector civil engineering projects such as MRT lines (Circle Line 6, Jurong Regional Line, NEL extension, Cross Island Line), North South Expressway, Changi Airport Terminal 5 development phase 1, Deep tunnel sewerage system phase 2. These should support medium- to longer-term RMC demand. Lower RMC demand and average selling prices. The average selling price of RMC in Singapore has been falling due to competition and entry of new players. The current RMC market price is at its weakest in the past four years, and EBITDA margin for the BBR division has contracted from 6.2% in FY14 to 4.1% in FY15. RMC demand in 2016 is expected to be lower at 13-15m cbm versus 16.1m cbm for 2015. We expect selling prices and margins to improve only if the pace of projects and demand for RMC pick up. Port Operations. Port contributed 12% to total revenue in FY15. The acquisition of the adjacent port CCIP in 2014 has helped to increase revenue and EBITDA contribution to the group. However, Pan-United incurs interest charges to the tune of c.S$15m per year as a result of borrowings used to fund the purchase of CCIP. Utilisation rate for the Port division currently stands at about 80%. Headline cargo volumes and throughput grew by 13% y-o-y (includes integration) in FY15. China’s throughput is expected to grow by 5-7% this year. Cost and margins. Key inputs to RMC are sand, granite and cement, which are imported from mainly Japan and Indonesia. Apart from RMC selling prices, margins are also determined by the supply and cost of these inputs. The recent granite ban by Indonesia in 2014 has resulted in higher input costs and lower margins for Pan-United. Based on our estimates, every 1-ppt decline in gross margin results in a c.S$6m decline in net profit.

RMC sales volume (m3)

Implied RMC selling price (S$ / m3)

Singapore RMC and Volumes change

Singapore construction demand

Singapore construction GDP vs net profit


5,3145,125

5,9545,687

5,971

0

800

1,600

2,400

3,200

4,000

4,800

5,600

2013A 2014A 2015A 2016F 2017F

113119

112 110 108

0

24

49

73

97

122

2013A 2014A 2015A 2016F 2017F

-30%

-20%

-10%

0%

10%

20%

30%

40%Ju

n-12

Au g

-12

Oct

-12

Dec

-12

Feb-

13

Apr

-13

Jun-

13

Au g

-13

Oct

-13

Dec

-13

Feb-

14

Apr

-14

Jun-

14

Au g

-14

Oct

-14

Dec

-14

Feb-

15

Apr

-15

Jun-

15

Au g

-15

Oct

-15

Dec

-15

% chg y-o-y

RMC market volume RMC market price

-10%

-5%

0%

5%

10%

15%

05

101520253035404550

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

F

2017

F

S$

bill

ion

Private Sector Public Sector

GDP Growth %

(3.0)

1.5

6.0

10.5

15.0

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15

S$my-o-y (%)

Singapore construction GDP (LHS)

Net profit (RHS)

Page 72


Company Guide


Balance Sheet:

Gearing. As of FY15, the group had borrowings of c.S$300m, and a gearing of 0.8x compared to 0.65x in 1H14. Gearing is likely to rise mainly due to additional capex for the slag facility in Malaysia) in 1H16 before falling in 2H16. Free cash flow from operations will ultimately be used to pare down debt that has largely arisen from the acquisition of CCIP. Share Price Drivers:

Dividend payout. Management is committed to maintaining its current DPS payout which currently stands at 4.3 Scts. Pan-United declares dividends based on a sustainable DPS level, largely supported by strong cash flows from core operations including port, BBR, and quarry. We believe its current dividend yield of 5.8% will lend support to the share price. Lifting of property cooling measures. Pan-United would benefit from more intense construction activities given its dominant market position. Drivers of construction activities including the lifting of private property cooling measures would increase private property development projects and RMC demand. Key Risks:

Uptick in construction sector. Predominantly a RMC business in Singapore, an acceleration in the construction sector in Singapore would improve earnings. The pace of construction projects is currently at best steady, which supports our neutral view. Unforeseen uptick in construction activities would boost earnings and will put our neutral stock view at risk. Interest rate risk. With borrowings of approximately S$300m, Pan-United is vulnerable to a rise in interest rates. We estimate that a 1-ppt increase in interest rate would reduce FY16F profits by c.9%. Political risk. Bans on the export of sand and granite previously by the Indonesian government had caused short supply of raw materials, their price escalation and earnings risks. In mitigating supply risks, Singapore companies are required to procure more from non-traditional sources each year. Company Background

Pan United is Singapore's largest cement and ready-mixed concrete (RMC) supplier with a market share of more than 30%. It also owns a shipping division which has 10 tugs and 12 barges that transport coal, gypsum, sand and aggregates in Southeast Asia. Finally, Pan United owns and runs a port along the Pearl River Delta in Changshu city, Jiangsu Province in China.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.0

1.1

1.1

1.2

1.2

1.3

1.3

0.00

0.20

0.40

0.60

0.80

1.00

2013A 2014A 2015A 2016F 2017F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2013A 2014A 2015A 2016F 2017F


S$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015A 2016F 2017F

Avg: 15.4x

+1sd: 20.4x

+2sd: 25.5x

‐1sd: 10.3x

‐2sd: 5.3x4.7

9.7

14.7

19.7

24.7


(x)

Avg: 1.57x

+1sd: 1.93x

+2sd: 2.29x

‐1sd: 1.21x

‐2sd: 0.85x0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5


(x)

Page 73


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F RMC sales volume (m3) 5,314 5,125 5,954 5,687 5,971 Implied RMC selling price 113 119 112 110 108

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Port 69.0 80.9 96.2 102 111 Shipping 59.6 70.2 62.3 61.4 58.3 Basic Building Materials 599 612 668 626 644 Others 0.0 0.0 0.0 0.0 0.0 Total 727 763 827 789 813 Net Profit Ex EI (S$m)

Port 9.56 12.6 16.4 16.0 18.2 Shipping 1.60 0.57 (2.0) (1.7) (1.9) Basic Building Materials 38.3 24.2 12.3 12.0 10.6 Others (4.9) (5.0) (6.4) (6.4) (6.4) Total 44.6 32.4 20.3 20.0 20.6 Net Profit Ex EI Margins Port 13.9 15.6 17.0 15.6 16.4 Shipping 2.7 0.8 (3.2) (2.7) (3.3) Basic Building Materials 6.4 4.0 1.8 1.9 1.7 Total 6.1 4.2 2.5 2.5 2.5

Income Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 727 763 827 789 813 Cost of Goods Sold (611) (656) (728) (696) (715) Gross Profit 117 107 99.0 93.6 98.4 Other Opng (Exp)/Inc (47.3) (51.7) (52.0) (49.9) (52.2) Operating Profit 69.5 55.2 46.9 43.7 46.2 Other Non Opg (Exp)/Inc 0.0 0.0 (0.3) 0.0 0.0 Associates & JV Inc 2.08 2.32 2.69 2.95 2.95 Net Interest (Exp)/Inc (5.0) (12.8) (14.6) (16.7) (17.2) Exceptional Gain/(Loss) (2.2) (1.2) (2.1) 0.0 0.0 Pre-tax Profit 64.4 43.5 32.6 30.0 31.9 Tax (12.3) (7.7) (7.7) (7.1) (8.0) Minority Interest (7.5) (3.4) (4.6) (2.9) (3.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 44.6 32.4 20.3 20.0 20.6 Net Profit before Except. 46.8 33.6 22.4 20.0 20.6 EBITDA 91.0 82.6 77.2 77.4 81.5 Growth Revenue Gth (%) 1.7 4.9 8.4 (4.6) 3.0 EBITDA Gth (%) 3.2 (9.2) (6.6) 0.3 5.3 Opg Profit Gth (%) 5.9 (20.5) (15.0) (6.9) 5.7 Net Profit Gth (Pre-ex) (%) 15.3 (28.3) (33.4) (10.8) 2.9 Margins & Ratio Gross Margins (%) 16.1 14.0 12.0 11.9 12.1 Opg Profit Margin (%) 9.6 7.2 5.7 5.5 5.7 Net Profit Margin (%) 6.1 4.2 2.5 2.5 2.5 ROAE (%) 15.1 11.7 7.2 7.2 7.4 ROA (%) 7.9 5.0 2.7 2.6 2.6 ROCE (%) 12.9 8.8 5.9 5.2 5.3 Div Payout Ratio (%) 53.3 73.7 117.1 92.5 89.9 Net Interest Cover (x) 14.0 4.3 3.2 2.6 2.7


Margins to be muted on lower RMC pricing

Lower RMC volumes on lesser on-site activities in 2016 before recovering in 2017

Lower payout ratio as we believe a 4.3-Sct DPS is unsustainable

Margins lower on loans and higher depreciation

More competitive RMC pricing

Lower RMC pricing

Higher sales mix from better-margin port business

Page 74


Company Guide



FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 201 207 208 209 203 Cost of Goods Sold (178) (183) (181) (183) (181) Gross Profit 22.9 24.4 26.4 26.1 22.2 Other Oper. (Exp)/Inc (14.8) (14.1) (12.1) (12.6) (13.2) Operating Profit 8.17 10.3 14.3 13.4 8.95 Other Non Opg (Exp)/Inc 0.0 0.0 (0.1) (0.2) (0.1) Associates & JV Inc 1.03 0.62 0.41 0.59 1.07 Net Interest (Exp)/Inc (3.9) (3.9) (3.8) (3.5) (3.4) Exceptional Gain/(Loss) (1.1) (0.2) (0.1) (0.7) (1.1) Pre-tax Profit 4.27 6.79 10.8 9.68 5.42 Tax 0.34 (0.8) (2.8) (2.6) (1.5) Minority Interest (1.0) (1.0) (1.1) (1.1) (1.4) Net Profit 3.64 5.02 6.80 6.00 2.49 Net profit bef Except. 4.71 5.20 6.90 6.67 3.60 EBITDA 17.1 18.7 21.5 21.0 17.1 Growth Revenue Gth (%) 2.7 2.9 0.4 0.8 (3.1) EBITDA Gth (%) (22.5) 9.6 14.7 (2.3) (18.5) Opg Profit Gth (%) (46.7) 25.6 39.2 (6.0) (33.3) Net Profit Gth (Pre-ex) (%) (44.2) 10.6 32.7 (3.4) (46.0) Margins Gross Margins (%) 11.4 11.8 12.7 12.4 10.9 Opg Profit Margins (%) 4.1 5.0 6.9 6.4 4.4 Net Profit Margins (%) 1.8 2.4 3.3 2.9 1.2

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 291 449 479 499 496 Invts in Associates & JVs 5.10 5.25 5.76 8.71 11.7 Other LT Assets 5.05 27.2 29.9 29.9 29.9 Cash & ST Invts 79.2 53.9 43.7 64.8 68.6 Inventory 24.4 33.0 28.7 30.7 31.5 Debtors 158 170 166 160 165 Other Current Assets 3.45 4.28 7.10 7.10 7.10 Total Assets 566 743 761 800 810 ST Debt 46.0 25.5 62.1 62.1 62.1 Creditor 121 137 128 139 143 Other Current Liab 12.8 11.0 8.09 12.4 13.3 LT Debt 81.6 243 232 257 257 Other LT Liabilities 11.6 14.0 14.6 14.6 14.6 Shareholder’s Equity 273 282 281 277 279 Minority Interests 19.9 30.8 34.7 37.6 40.9 Total Cap. & Liab. 566 743 761 800 810 Non-Cash Wkg. Capital 51.6 59.0 65.8 46.5 47.5 Net Cash/(Debt) (48.4) (214) (251) (255) (251) Debtors Turn (avg days) 78.0 78.2 74.1 75.5 73.0 Creditors Turn (avg days) 70.9 74.5 69.1 73.4 75.4 Inventory Turn (avg days) 13.9 16.6 16.1 16.3 16.6 Asset Turnover (x) 1.3 1.2 1.1 1.0 1.0 Current Ratio (x) 1.5 1.5 1.2 1.2 1.2 Quick Ratio (x) 1.3 1.3 1.1 1.1 1.1 Net Debt/Equity (X) 0.2 0.7 0.8 0.8 0.8 Net Debt/Equity ex MI (X) 0.2 0.8 0.9 0.9 0.9 Capex to Debt (%) 23.5 10.7 18.1 15.7 9.4


Page 75


Company Guide


Cash Flow Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 64.4 43.5 32.6 30.0 31.9 Dep. & Amort. 19.4 25.1 27.9 30.7 32.3 Tax Paid (11.8) (8.1) (5.8) (2.9) (7.1) Assoc. & JV Inc/(loss) (2.1) (2.3) (2.7) (3.0) (3.0) Chg in Wkg.Cap. 2.94 (29.6) (6.3) 15.0 (1.9) Other Operating CF (4.0) (3.6) (3.6) 0.0 0.0 Net Operating CF 68.8 24.9 42.1 69.9 52.3 Capital Exp.(net) (30.0) (28.6) (53.3) (50.0) (30.0) Other Invts.(net) (85.8) (47.4) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 (0.4) 0.0 0.0 Div from Assoc & JV 3.44 2.78 3.75 0.0 0.0 Other Investing CF 0.0 0.91 0.0 0.0 0.0 Net Investing CF (112) (72.3) (50.0) (50.0) (30.0) Div Paid (22.4) (23.9) (23.9) (23.8) (18.5) Chg in Gross Debt 52.0 45.6 21.8 25.0 0.0 Capital Issues 2.88 (0.8) 0.0 0.0 0.0 Other Financing CF (0.8) (0.6) (1.2) 0.0 0.0 Net Financing CF 31.8 20.3 (3.3) 1.21 (18.5) Currency Adjustments 0.55 1.74 0.98 0.0 0.0 Chg in Cash (11.2) (25.3) (10.2) 21.2 3.78 Opg CFPS (S cts) 11.8 9.71 8.65 9.81 9.67 Free CFPS (S cts) 6.93 (0.6) (2.0) 3.56 3.97



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 14 May 15 0.81 0.85 HOLD

2: 14 Aug 15 0.72 0.68 HOLD

3: 12 Nov 15 0.61 0.61 HOLD

4: 02 Mar 16 0.54 0.57 HOLD


12

34

0.49

0.54

0.59

0.64

0.69

0.74

0.79

0.84

0.89


S$

For Malaysia’s slag facility

Page 76

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:AS

BUY Last Traded Price: S$1.00 (STI : 2,837.00) Price Target : S$1.30 (30% upside) (Prev S$1.30) Potential Catalyst: Capacity growth and earnings execution Where we differ: We are more bullish than consensus

Analyst

Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team What’s New FY15 earnings of RM126.5m within expectations

1st production line of Phase 3 expansion likely to

be commissioned in June/July 2015

DPS of 6.45 sen for FY15

Price Relative

Forecasts and Valuation FY Dec (RM m) 2014A 2015A 2016F 2017F Revenue 399 560 728 860 EBITDA 100 169 208 245 Pre-tax Profit 81.1 144 172 202 Net Profit 71.0 127 152 176 Net Pft (Pre Ex.) 71.0 127 152 176 Net Pft Gth (Pre-ex) (%) 22.4 78.4 19.8 16.4 EPS (S cts) 3.24 5.77 6.91 8.05 EPS Pre Ex. (S cts) 3.24 5.77 6.91 8.05 EPS Gth Pre Ex (%) 19 78 20 16 Diluted EPS (S cts) 3.24 5.77 6.91 8.05 Net DPS (S cts) 1.17 2.18 2.62 3.05 BV Per Share (S cts) 16.9 22.0 26.3 31.3 PE (X) 30.9 17.3 14.5 12.4 PE Pre Ex. (X) 30.9 17.3 14.5 12.4 P/Cash Flow (X) 34.9 17.9 16.3 11.8 EV/EBITDA (X) 21.0 12.2 9.9 8.3 Net Div Yield (%) 1.2 2.2 2.6 3.0 P/Book Value (X) 5.9 4.6 3.8 3.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.4 29.7 28.7 28.0 Earnings Rev (%): 0 0 Consensus EPS (S cts): 6.37 7.28 Other Broker Recs: B: 4 S: 0 H: 2


More room to grow Maintain BUY; TP lowered to S$1.30. We revise FY16F/17F earnings by -2%/+3% on lower USD/MYR forecasts, and as we revise target valuation multiple from 20x to 18x blended FY16/17 PE as the sector has de-rated. While we have reduced our ASPs (in Ringgit terms) as we expect some of the benefits of the strengthening US$ and low raw material costs to be passed on to customers, we have lifted earnings estimates for FY17 after raising margin assumptions slightly to account for a better outlook, product-mix and economies of scale ahead. Strong 4Q results despite challenges. Even as Malaysian glove manufacturers’ sales were pushed back towards the end of 4Q amidst the reduction of their distributors’ inventory lead time from 2-3 months down to 1-2 months, Riverstone still managed to deliver strong growth in 4Q as it ramped up production on its newly commissioned lines. Riverstone’s 4Q15 earnings grew 66.4% y-o-y to RM37.2m, bringing FY15’s net profit strongly up 78% y-o-y to RM126.5m. We remain positive on outlook… as ongoing capacity expansion underpins future growth, and as we see long-term upside from recent land acquisition. Riverstone plans to double its annual capacity from 4.2bn gloves in 2014 to at least 8.2bn gloves by 2018 to support growth in both its cleanroom and healthcare glove segments, which could more than double earnings from RM71m in FY14 to RM176m by FY17. Furthermore, Riverstone is able to grow capacity faster than expected as it recently acquired 9.364 acres of adjoining land for the construction of a factory and worker hostels. Valuation: Maintain BUY; Lower 12-month TP to S$1.30. As larger peers have de-rated to 21x CY16F PE, we revise our target valuation multiple for Riverstone from 20x to 18x blended FY16/17F PE, similar to its 12-month average. Given its smaller capacity, the implied discount of 15% appears fair. As an export play, we also like Riverstone as a beneficiary of a stronger US$ vs RM and its share price should further re-rate as earnings are delivered. Key Risks to Our View: Global economic slowdown. While margins for cleanroom gloves tend to be resilient, demand for these gloves – which makes up c.50% of FY15 revenue, could be threatened in the event of a slowdown in the global economy. At A Glance Issued Capital (m shrs) 741 Mkt. Cap (S$m/US$m) 741 / 539 Major Shareholders (%) Teek Son Wong 50.8 Wai Keong Lee 11.7

Free Float (%) 33.5 3m Avg. Daily Val (US$m) 0.59 ICB Industry : Health Care / Health Care Equipment & Services



Riverstone Holdings Version 3 | Bloomberg: RSTON SP | Reuters: RVHL.SI Refer to important disclosures at the end of this report

82

182

282

382

482

582

682

0.2

0.4

0.6

0.8

1.0

1.2

1.4


Relative IndexS$

Riverstone Holdings (LHS) Relative STI INDEX (RHS)

Page 77


Company Guide

Riverstone Holdings

WHAT’S NEW

FY15 results: Net profit of RM126.5m in line with

expectations.

Record earnings of RM126.5m in FY15. Earnings for FY15 and 4Q15 surged to RM126.5m (+78.4% y-o-y) and RM37.2m (+66.4% y-o-y) respectively – in line with our expectations. This was achieved on the back of the increase in revenue by 40.3% to RM560.2m in FY15 and 37.0% to RM153.455 in 4Q15, as the company benefitted from higher glove demand, and as it ramped up on production following its recent increase in capacity of 1bn gloves to 5.2bn gloves p.a. in 3Q-4Q15.

Revenue growth in 4Q15 appears flat q-o-q, but

demand prospects remain largely intact. Across the industry, Malaysian glove manufacturers’ sales were pushed back towards the end of 4Q amidst the reduction of their distributors’ inventory lead time from 2-3 months down to 1-2 months, which resulted in flat q-o-q revenue growth of 1.9% from RM151m in 3Q15 to RM153m in 4Q15. However, we believe that this is likely to be seasonal and

expect volume growth to recover in 1Q16 as demand prospects remain largely intact.

We assume lower ASPs (in Ringgit terms) as we revise

our USD/MYR forecasts, but remain positive on

earnings momentum ahead. We revise our USD/MYR forecasts from 4.52 to 4.34 for FY16 and FY17, and assume slightly lower ASPs as we expect some of the benefits of the strengthening USD and low raw material costs to be passed on to customers.

While this could weigh on top-line growth, we remain positive on earnings growth ahead due to Riverstone’s cost-plus model, which helps to sustain margins.

Further, as Riverstone expands its production capacity, range of niche, higher-margin products (such as lab gloves) and makes a more aggressive entry into the US market, we expect the Group to benefit from a more favourable product mix and better economies of scale, and have thus raised our margin assumptions slightly for FY17 and beyond.

Quarterly / Interim Income Statement (RMm)


Revenue 112 151 153 37.0 1.9

Cost of Goods Sold (82.4) (103) (105) 28.0 2.8

Gross Profit 29.6 48.0 48.0 62.1 (0.1)

Other Oper. (Exp)/Inc (7.2) (7.9) (8.8) 22.0 10.4

Operating Profit 22.4 40.1 39.2 74.9 (2.2)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 0.0 0.0 0.0 nm nm

Net Interest (Exp)/Inc 0.0 0.0 0.0 nm nm

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit 22.4 40.1 39.2 74.9 (2.2)

Tax (0.1) (4.8) (2.0) 4,226.1 (58.2)

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 22.4 35.3 37.2 66.4 5.4

Net profit bef Except. 22.4 35.3 37.2 66.4 5.4

EBITDA 27.9 47.1 46.2 66.0 (1.9)

Margins (%)



Net Profit Margins 20.0 23.5 24.3


Page 78


Company Guide

Riverstone Holdings


Earnings Drivers:

Growth in global demand for healthcare gloves, at least in near to medium term. The Malaysian Rubber Glove Manufacturers Association (MARGMA) estimates that demand for healthcare gloves is likely to grow at 8-12% p.a. between 2014 and 2020. As a relatively new entrant in the healthcare glove industry and with ambitions to grow revenue from this segment quickly to drive its earnings, we project a ramp-up in Riverstone’s healthcare glove production at a 24.2% CAGR between FY13 and FY17F. Long-term trends also indicate favourable demand prospects. According to MARGMA, the global demand ratio of natural rubber and synthetic (nitrile) rubber gloves shifted from 74:26 in 2009 to 53:47 in 2014. On the back of rising awareness of latex allergies in emerging economies and low cost of the synthetic variety, we expect the ratio to shift away from natural rubber gloves – the preference of customers in the long run. Principally engaged in the manufacture of nitrile gloves, Riverstone could be a beneficiary of the long-run substitution by nitrile gloves. Capacity expansion to underpin growth. To capitalise on the favourable demand growth outlook in both the short and long term, Riverstone will continue to expand its manufacturing capacity to a minimum of 8.2bn gloves by 2018. We expect new production capacities to propel top-line growth at a CAGR of 24.5% between FY13 and FY17F, as they gradually come on stream. Beneficiary of strong US$ vs Ringgit. Riverstone generates a surplus in US$ as it receives c.90% of its revenues in US$, while c.35% of its costs are incurred in US$, and will benefit from a strong US$ versus the Ringgit. All else being constant, strengthening of the US$ by 1% could boost net profit in RM terms by c.1.2%. Greater efficiency from higher automation and larger scale should help to maintain margins. As Riverstone scales up on its production and further automation efforts, we expect net margins to be maintained within the range of 20-21% between FY15 and FY17F, which should support stable growth in net profit from RM58m in FY13 to RM176m in FY17F.

Capital Expenditure (RM$m)

Production Capacity (m gloves)

Cleanroom Gloves (m gloves)

Healthcare Gloves (m gloves)

Utilization Rate


11.5

94.1

50

76

97

0.0

12.2

24.5

36.7

49.0

61.2

73.5

85.7

98.0

2013A 2014A 2015A 2016F 2017F

2,790 2,873

3,942

5,138

6,203

0

1,300

2,600

3,900

5,200

2013A 2014A 2015A 2016F 2017F

795 804

985

1,207

1,458

0

300

600

900

1,200

2013A 2014A 2015A 2016F 2017F

1,995 2,068

2,956

3,930

4,745

0

600

1,200

1,800

2,400

3,000

3,600

4,200

2013A 2014A 2015A 2016F 2017F

0.9 0.9 0.89 0.9 0.9

0.00

0.18

0.36

0.55

0.73

0.91

2013A 2014A 2015A 2016F 2017F

Page 79


Company Guide

Riverstone Holdings

Balance Sheet:

Healthy balance sheet. Riverstone has been in a net cash position over the observed period. Our projections show that Riverstone should be able to fund capital expenditures from 2015 to 2017 internally. Forecast net fixed asset growth at a CAGR of c.14.7% between 2014 and 2017. With capacity expected to nearly double in 2018 from 2014 levels, we project the group’s net fixed assets to jump by c.60% from RM228m in 2014 to RM371m in 2017. Share Price Drivers:

Opportunities for inorganic growth. Due to the stringent requirements for the establishment of cleanroom facilities, Riverstone does not rule out the possibility of acquiring quality cleanroom glove manufacturing companies in the future. Cultivation of new markets for cleanroom products. As cleanroom products are manufactured in controlled environments and are subject to stringent requirements, they are able to deliver much higher margins relative to healthcare gloves. The ability to cultivate new markets for cleanroom products, similar to what Riverstone recently achieved with its diversification into the consumer electronics sector, should help to boost earnings. Key Risks:

Global economic slowdown could impact cleanroom sales. A slowdown in the general economy could lead to declines in discretionary spending and manufacturing activity in the HDD industry. Although Riverstone has been gradually reducing its exposure to HDDs, down from historical highs of up to 70%, they still make up c.50% of Riverstone’s cleanroom portfolio today. Intensifying competition could erode profitability. While we believe that oversupply over the next few years is unlikely, the influx of healthcare gloves beyond 2017 could threaten Riverstone’s market share and pricing power if it fails to advance on the technological front. Company Background

Riverstone Holdings (RSTON SP) is a natural rubber and nitrile (synthetic rubber) glove manufacturer specialising in cleanroom and healthcare gloves. It is also engaged in the manufacture and distribution of other ancillary products such as finger cots, packaging bags and face masks.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

1.3

1.3

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2013A 2014A 2015A 2016F 2017F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

2013A 2014A 2015A 2016F 2017F


RM

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015A 2016F 2017F

Avg: 9.4x

+1sd: 12.2x

+2sd: 15x

‐1sd: 6.6x

‐2sd: 3.8x3.4

5.4

7.4

9.4

11.4

13.4

15.4

17.4

19.4

21.4


(x)

Avg: 2.51x

+1sd: 3.69x

+2sd: 4.87x

‐1sd: 1.34x

‐2sd: 0.16x0.1

1.1

2.1

3.1

4.1

5.1

6.1


(x)

Page 80


Company Guide

Riverstone Holdings

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Capital Expenditure (RM$m) 11.5 94.1 50.0 76.0 97.0 Production Capacity (m gloves) 2,790 2,873 3,942 5,138 6,203 Cleanroom Gloves (m gloves) 795 804 985 1,207 1,458 Healthcare Gloves (m gloves) 1,995 2,068 2,956 3,930 4,745 Utilization Rate 0.90 0.90 0.89 0.90 0.90

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (RMm) Cleanroom Gloves 173 198 274 361 427 HealthcareGloves 173 191 274 356 421 Other Cleanroom 11.2 10.3 11.3 11.9 12.5 Total 358 399 560 728 860 Gross Profit (RMm)

Cleanroom Gloves 65.9 75.4 104 137 162 HealthcareGloves 31.2 33.4 65.9 78.2 88.4 Other Cleanroom 0.74 0.12 0.13 0.14 0.14 Total 97.8 109 170 216 251 Gross Profit Margins (%) Cleanroom Gloves 38.0 38.0 38.0 38.0 38.0 HealthcareGloves 18.0 17.5 24.0 22.0 21.0 Other Cleanroom 6.6 1.1 1.1 1.1 1.1 Total 27.3 27.3 30.4 29.6 29.2

Income Statement (RMm)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 358 399 560 728 860 Cost of Goods Sold (260) (290) (385) (513) (610) Gross Profit 97.8 109 175 216 251 Other Opng (Exp)/Inc (25.2) (27.8) (30.6) (43.3) (49.2) Operating Profit 72.6 81.1 144 172 202 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 72.6 81.1 144 172 202 Tax (14.7) (10.2) (17.8) (20.7) (25.2) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 58.0 71.0 127 152 176 Net Profit before Except. 58.0 71.0 127 152 176 EBITDA 91.6 100 169 208 245 Growth Revenue Gth (%) 15.5 11.6 40.3 30.0 18.1 EBITDA Gth (%) 42.1 9.7 68.4 23.0 17.6 Opg Profit Gth (%) 50.3 11.7 78.0 19.3 17.1 Net Profit Gth (Pre-ex) (%) 46.2 22.4 78.4 19.8 16.4 Margins & Ratio Gross Margins (%) 27.3 27.3 31.2 29.6 29.2 Opg Profit Margin (%) 20.3 20.3 25.8 23.6 23.4 Net Profit Margin (%) 16.2 17.8 22.6 20.8 20.5 ROAE (%) 20.1 20.4 29.7 28.7 28.0 ROA (%) 16.6 17.3 24.7 24.5 24.8 ROCE (%) 19.2 19.7 28.8 28.1 27.5 Div Payout Ratio (%) 38.1 36.1 37.8 37.8 37.8 Net Interest Cover (x) NM NM NM NM NM


Record margins in FY15, helped partly by favourable exchange rate conditions but assume slight decline to more sustainable levels ahead.

Cleanroom gloves tend to enjoy higher margins, and are also more resilient, as compared to healthcare gloves.

Page 81


Company Guide

Riverstone Holdings

Quarterly / Interim Income Statement (RMm)

FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 112 127 129 151 153 Cost of Goods Sold (82.4) (87.0) (90.2) (103) (105) Gross Profit 29.6 40.2 38.8 48.0 48.0 Other Oper. (Exp)/Inc (7.2) (7.3) (6.6) (7.9) (8.8) Operating Profit 22.4 32.9 32.2 40.1 39.2 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 22.4 32.9 32.2 40.1 39.2 Tax (0.1) (5.9) (5.2) (4.8) (2.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 22.4 27.0 27.0 35.3 37.2 Net profit bef Except. 22.4 27.0 27.0 35.3 37.2 EBITDA 27.9 38.8 38.7 47.1 46.2 Growth Revenue Gth (%) 9.1 13.6 1.4 16.8 1.9 EBITDA Gth (%) 14.0 39.5 (0.4) 21.8 (1.9) Opg Profit Gth (%) 13.5 46.7 (2.1) 24.6 (2.2) Net Profit Gth (Pre-ex) (%) 35.5 20.7 (0.1) 30.9 5.4 Margins Gross Margins (%) 26.4 31.6 30.1 31.9 31.3 Opg Profit Margins (%) 20.0 25.9 25.0 26.6 25.6 Net Profit Margins (%) 20.0 21.2 20.9 23.5 24.3

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 153 228 277 317 371 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 12.4 3.11 9.61 9.61 9.61 Cash & ST Invts 114 79.4 129 129 151 Inventory 35.7 42.1 61.2 49.7 62.1 Debtors 62.5 86.7 103 140 172 Other Current Assets 2.50 1.81 6.06 6.06 6.06 Total Assets 381 441 585 651 771 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 39.3 50.4 84.4 56.2 66.7 Other Current Liab 5.58 5.68 7.65 7.65 7.65 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 13.0 13.1 11.7 11.7 11.7 Shareholder’s Equity 323 372 482 576 685 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 381 441 585 651 771 Non-Cash Wkg. Capital 55.8 74.5 78.3 132 166 Net Cash/(Debt) 114 79.4 129 129 151 Debtors Turn (avg days) 61.5 68.2 61.8 60.8 66.1 Creditors Turn (avg days) 66.0 60.4 68.3 53.8 39.6 Inventory Turn (avg days) 50.0 52.4 52.3 42.4 36.0 Asset Turnover (x) 1.0 1.0 1.1 1.2 1.2 Current Ratio (x) 4.8 3.7 3.2 5.1 5.3 Quick Ratio (x) 3.9 3.0 2.5 4.2 4.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 24.7 21.5 15.5 20.4 18.1


Tax claims should be made progressively, but finalised in 4Q when the company has better visibility of earnings.

Margins were bolstered both y-o-y and q-o-q on the back of stronger glove demand, strengthening of the USD against the Malaysian Ringgit, and efficiency gains from greater automation.

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Riverstone Holdings

Cash Flow Statement (RMm)

FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 72.6 81.1 144 172 202 Dep. & Amort. 19.0 19.4 24.8 35.9 43.2 Tax Paid (10.3) (14.8) (18.5) (20.7) (25.2) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (2.1) (25.2) (26.3) (53.3) (34.2) Other Operating CF 0.99 2.32 (2.3) 0.0 0.0 Net Operating CF 80.2 62.8 122 134 185 Capital Exp.(net) (40.0) (75.4) (54.2) (76.0) (97.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (40.0) (75.4) (54.2) (76.0) (97.0) Div Paid (22.5) (25.4) (25.8) (57.4) (66.8) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 30.3 1.00 0.0 0.0 0.0 Net Financing CF 7.86 (24.4) (25.8) (57.4) (66.8) Currency Adjustments 1.89 2.38 7.07 0.0 0.0 Chg in Cash 50.0 (34.6) 49.3 0.80 21.6 Opg CFPS (sen) 3.85 4.01 6.77 8.55 10.0 Free CFPS (sen) 1.88 (0.6) 3.10 2.65 4.03



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 06 Nov 15 1.07 1.24 BUY

2: 04 Jan 16 1.20 1.41 BUY

3: 25 Feb 16 1.00 1.30 BUY


1

2

3

0.54

0.64

0.74

0.84

0.94

1.04

1.14

1.24

1.34


S$

We expect future dividend payouts to remain close to current levels, or payout ratio of c.38%.

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DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expr essed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 8 March 2016 the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities).

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have a proprietary positions in Ascendas Hospitality Trust, Ascendas India Trust, Ascott Residence Trust, Cache Logistics Trust, Cambridge Industrial Trust, CapitaLand Retail China Trust, CDL Hospitality Trusts, Cosco Corporation, Croesus Retail Trust, Ezion Holdings, Ezra Holdings, Far East Hospitality Trust, Frasers Centrepoint Trust, Frasers Commercial Trust, Frasers Hospitality Trust, Indofood Agri Resources, Keppel DC REIT, Keppel Infrastructure Trust, M1, Mapletree Greater China Commercial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Midas Holdings, Noble Group, Parkway Life Real Estate Investment Trust, Sheng Siong Group, SMRT, Soilbuild Business Space Reit, SPH REIT, Venture Corporation , YTL Starhill Global REIT recommended in this report as of 31 Jan 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Ascott Residence Trust, Cache Logistics Trust, Croesus Retail Trust, Far East Hospitality Trust, Frasers Commercial Trust, Frasers Hospitality Trust, Keppel DC REIT, Mapletree Greater China Commercial Trust, Soilbuild Business Space Reit, YTL Starhill Global REIT as of 31 Jan 2016.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of common equity securities of Croesus Retail Trust as of 31 Jan 2016.

5.

Compensation for investment banking services:

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from ARA Asset Management, Cache Logistics Trust, Croesus Retail Trust, Del Monte Pacific, Ezra Holdings, Frasers Commercial Trust, Frasers Hospitality Trust, IREIT Global, Keppel Infrastructure Trust , OUE Commercial REIT, Perennial Real Estate Holdings, Soilbuild Business Space Reit as of 31 Jan 2016.

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for ARA Asset Management,Cache Logistics Trust, Croesus Retail Trust, Del Monte Pacific, Ezra Holdings, Frasers Commercial Trust, Frasers Hospitality Trust, iFAST Corp Ltd, IREIT Global, Keppel DC REIT, Keppel Infrastructure Trust, OUE Commercial REIT, Soilbuild Business Space Reit in the past 12 months, as of 31 Jan 2016.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

6. Directorship/trustee interests:

Woo Foong Pheng (Mrs Ow Foong Pheng), a member of DBS Group Holdings Board of Directors, is a Director of Mapletree Greater China as of 28 Feb 2015.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

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Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from

ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd.

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

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