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WBL Corporation

SingaporeConglomerates

26 May 2008

The Giant Awakens

BUY

Initiating Coverage

Analyst: Gregory YAP [email protected] (65) 6432 1450 Price $5.28 Target $7.64 ST Index 3,122.15 Historical Chart

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Performance 1m 3m 6m Absolute (%) 3.1 23.9 31.3 Relative (%) 5.3 22.2 42.3 Stock Information Ticker code WEAS.SI WBL SP Market Cap (US$m) 803 52-week high ($) 5.56 52-week low ($) 3.79 Shares issued (m) 210 6m avg. daily vol (US$m) 0.3 Free float (%) 34

♦ Initiate coverage with BUY and $7.64 price target We are initiating coverage on WBL with BUY and a 12-month price target of $7.64. We see long term value in its vast property development landbank in China, where good progress on redevelopment is being made. Management is also closely examining its property assets in other countries, such as the automotive tools of trade in Singapore and investment properties in Malaysia, with a view to redeveloping them if possible; if not, they will be sold.

♦ Now possible to confidently value WBL Despite the failure to merge its two PCB subsidiaries, WBL has not been sitting still. Instead, it has accelerated the streamlining process. In the last 12 months, solid progress has been made in reducing its hotch-potch mix of businesses, to the point where it is now possible to clearly identify each part and attribute a value. Our RNAV model values WBL at $8.49, while our price target factors in a 10% conglomerate discount.

♦ Converting China landbank to cash WBL has declared that it intends to make property development its long term core business. It has substantial landbank in China, Malaysia, Australia and Singapore. Arguably, the value case for WBL revolves around its property business, although it does not at present make up the bulk of its profits. By our estimates, the long term redevelopment value of the landbank is worth S$5.51 a share or 63% of our gross RNAV.

♦ Long term value in “Tools of Trade” Other than the development properties in China, WBL also has some hidden gems in its fixed assets, specifically 25,677 sqm of land in Singapore and almost 10 million sqm of freehold land in Australia that are now being used by going concerns of the group. The Singapore land could potentially be redeveloped into high-yielding projects within 3-4 years, while there is longer term potential for the Australian land as well.

♦ Speculative appeal to WBL as well Fundamentals aside, there is speculative appeal in WBL as well. Tecity, which owns nearly 14% of WBL, recently took over Straits Trading after failing to prevent Raffles Hotel and Robinsons from falling into outside hands. All four entities are ex-OCBC-related companies Tecity CEO Chew Gek Khim’s grandfather Tan Chin Tuan invested in when he headed OCBC, as well as F&N, GE, APB, UE and Bukit Sembawang Estates. Tecity may eventually try to take over WBL as well.

Major Shareholders (%) Year End Sep 30 (S$'m) 2006 2007 2008F 2009F 2010F OCBC (25.8), Third Avenue (17.4) Revenue 2103.5 2063.7 2097.6 2267.9 2518.8 Straits Trading (10.7), Aberdeen (6.3) Pre-tax profit 150.1 3.2 136.9 138.1 176.4 Net profit incl exceptionals 58.9 -20.2 75.8 66.8 88.2 Net profit excl exceptionals 54.4 12.9 44.2 66.8 88.2 Key Indicators EPS (cents) incl exceptionals 28.3 -9.6 36.1 31.8 42.0 ROE (%) 6.7 EPS (cents) excl exceptionals 26.1 6.1 21.1 31.8 42.0 Net gearing (%) 9.4 PER (x) 20.2 86.1 25.1 16.6 12.6 NTA ($) 2.93 EV/EBITDA (x) 5.7 14.0 5.4 5.6 4.4 Interest cover (x) 8.6

WBL Corporation 26 May 2008

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Ready to go We are initiating coverage on WBL Corporation with a BUY recommendation and a 12-month price target of S$6.79. Despite the aborted merger of the two PCB subsidiaries MFS (Singapore) and MFI (USA) in 2006-2007 (due mainly to a downturn in the handset industry which made the terms of the merger unrealistic), WBL has not been sitting still. Backed by a supportive turnaround by the PCB segment, which currently chips in the bulk of revenue and earnings, management has accelerated the streamlining process. In the last 12 months, solid progress has been made in cutting down its hotch-potch businesses, with at least one announcement related to operational streamlining every other month, to the point where it is now possible to separate each part and attribute a value. We also see tremendous long term value in WBL’s vast property development landbank in China, Singapore, Malaysia and Australia, which management is in the process of converting into cash through the timely launches of high-end residential projects, starting with China. Management is also re-examining its long-held investment assets in other countries, with a view to redeveloping them if possible, such as the automotive tools of trade in Singapore and investment properties in Malaysia. Wobbly start The first initiative by WBL’s management under CEO Tan Choon Seng after he came onboard in Dec 2004, was to privatise Wearnes International (WIL), the automotive distribution business of the group (for marques such as Jaguar, Bentley, Volvo and Renault). WIL is important to WBL for its strong cashflow (as it is primarily a trading company with high turnover and little capex) which enabled it to pay consistent dividends. Following that move, the next low-hanging fruit was quite obviously the merger of two substantial but redundant businesses – MFI (or Multi-Fineline Interconnect), its US-listed flexible PCB business (but with manufacturing operations in China), and MFS, a similar business listed in Singapore (also with significant operations in China). That attempt was derailed because of a downturn in PCB industry fundamentals that made it no longer sensible to proceed on the terms offered. But WBL has cleaned up nicely Since then however, WBL has cleaned up and sold off the majority of its other non-core businesses that it did not see any future in, such as biomedical, Wearnes Technology Solutions and water treatment, as well as major non-performing operations such as the precision engineering business in Thailand and the technology solutions group (eg Bluetooth, IC design, etc). All non-recurring charges related to the diposals have already been recognised as at 2Q08.


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Figure 1: Significant corporate actions in last 24 months Date Action Details

Mar 2008 Liquidation/dissolution of Wearnes Technology Sdn Bhd, Wealco Malaysia, Wearnes Healthnet and Summer Palace Development

Feb 2008 Appointed KPMG as judicial manager of Wearnes Precision Thailand

Dec 2007 Completed sale of Kowloon property Sold for HK$223m against valuation of HK$168m, realised gain of S$21.4m

Nov 2007 Completed sale of biomedical businesses WBL Peking University Biotech and Wearnes Biotech& Medicals

Oct 2007 Ceased operations of Wearnes Precision Thailand Took asset impairment charge of $26.6m in 3Q07, retrenchment cost of $2.1m in 4Q07

Aug 2007 Dissolved FIA Ltd, a dormant subsidiary

Aug 2007 Made Shenyang Huaxin Int'l Realty a 100% subsidiary Acquired 7% stake for US$1.4m; acquisition to facilitate development of Mumashan site

Aug 2007 Sold non-core water treatment businesses Sold 80% stake in EPD Puretronics and EPD USA's water assets for US$2.5m

Aug 2007 Announced sale of Kowloon property Sold for HK$223m against valuation of HK$168m, realised gain of S$26.3m

Aug 2007 Sold off non-core agricultural businesses in China Sold 51% stake in Wuhan Speedling for RMB3m

Sold 50% stake in Tongcheng Medicinal Plants for RMB0.6m

Jun 2007 Entered JV with GIC Real Estate to develop Shenyang New SummerPalace site WBL will own 40% of the JV

May 2007 Announced sale of Wearnes Biotech & Medical Disposed 100% stake in Wearnes Biotech & Medicals for $2.1m

Apr 2007 Announced sale of WBL Peking University Biotech Disposed 43% stake in WBL Peking University Biotech (aka Wearnes Beida) for S$19.9m

Apr 2007 Made Summer Palace Management a 100% subsidiary Acquired 51% remaining stake for $11.8m Mar 2007 Dissolved EdgePoint Networks, a dormant subsidiary Feb 2007 Sold SW Parts & Service Sdn Bhd Disposed 30% stake for RM0.7m Oct 2006 Sold venture capital business OCBC, Wearnes & Walden

Aug 2006 Closed down loss-making electronics component subsidiary in China Hollingsworth Electronics Anqing; closure impact of $2.6m in 2Q06

Mar 2006 Dissolved Wearnes Computer Systems Europe, a dormant subsidiary

Mar 2006 Announced cash or shares general offer by Mflex for MFS Cash offer of S$1.15, or 0.0145 new Mflex shares foreach MFS share

Jan 2006 Announced voluntary delisting of automotive trading subsidiary Wearnes International Cash offer price of S$1.35 a share

Source: Company

While there are some non-core businesses within the group that we believe

management will want to rationalise eventually, we believe it is not in any hurry at the moment. First, WBL is more likely than not to realise extraordinary gains than losses as these are profitable concerns. Second, they are currently benefiting from an upcycle in their industries, as well as internal improvements. In our view, these parts include: - The oil & gas group under Applied Engineering and 50/50 joint venture SPC

Wearnes, and - The construction and building materials group under Polytek, Wealco and

Welmate Lastly, WBL still have some investments in Speedling (100%), Chrontel (38%), GIH (22%) and RFNet (20%) – assets that are still being reviewed, either because they are still in a start-up phase but not scaling up or loss-making. At some point, they may be sold or written down but we believe the carrying value is minimal. The latest carrying value (end-Mar 2008) of associate company investments is about $60m but we believe the bulk is related to 45%-owned Shanghai Olympic Gardens and GIH (probably more than 80%), both of which are profitable. Investments in Chrontel and RFNet combined are likely to be only about $12-15m.


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Notes: - Applied Engineering (100% equity) is a fabricator of steel pressure vessels,

heat exchangers and other equipment supporting the petrochemical, oil and gas industries in Singapore and Malaysia.

- SPC Wearnes (50%) distributes bottled and bulk LPG to companies, households and factories in Singapore.

- Polytek (100%) distributes laundry and boiler equipment, toilet compartments and washroom accessories. Benefiting from boom in construction activities ahead of IR.

- Wealco (100%) and Welmate (100%) distribute construction and industrial equipment, and consumable building materials, respectively.

- Speedling (100%) is basically a producer of agricultural transplants, such as ornamental flowers and vegetables, and horticultural products.

- Chrontel is a San Jose-based IC chip designer supplying TV-Out interface solutions.

- Global Investment Holdings is a Taiwan financial services company. - RFNet is a Singapore-based ODM house specialising in radio frequency

wireless products. In addition, WBL has been patiently obtaining land use rights to more than 1 million sq meters of land in China that had prevented it from converting the land to more profitable use. We understand from the management that such rights have been obtained, with the exception of one remaining site in Suzhou near Lake Taihu. The acquisition of the rights primes WBL as a beneficiary of the favourable demand & supply economics that will continue to drive the Chinese property market in the long term, despite near-term ups-and-downs. WBL currently has three high-end residential projects under development in Suzhou, Shanghai and Chongqing. While most are nearing completion, it has identified and prepared at least two more high-end residential projects that should be launched this year and next year, depending on market conditions. Maiden contributions are expected by 2009. Now converting China landbank to $$$ WBL has declared that it intends to make property development its long term core business. It has substantial landbank in China, Malaysia, Australia and Singapore (more than 11m sq m) that management has said is not for sale, unless there is little redevelopment potential, such as the agricultural land under Speedling in the USA and China. Arguably, the bulk of the value case for investing in WBL revolves around its property development and investment activities, although it does not at the present point in time make up the bulk of its profits. By our estimates, the long term redevelopment value of WBL’s property landbank is worth S$5.51 a share or 63% of our gross RNAV for the group. We like management’s conservative approach in China. WBL focuses on areas where there are no runaway price bubbles, such as Liaoning, Shenyang, Sichuan, Suzhou and Shanghai, places where it also has strong connections with the local authorities. Financial criteria includes a project IRR of over 18%. If management considers a project to be of high risk or too big for it to take on alone, it will also take on partners.


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Figure 2: Projects under development Project Site area (sqm) Stake (%) Eff book value (S$'m) Dev surplus (S$'m) Shanghai Olympic Garden Ph 3 116,760 45 13.7 3.8 Shenyang Orchard Manor Ph 2 47,607 55 5.2 0.8 Chongqing Lakeside Garden Ph B3-2 20,153 50 4.2 1.2 Suzhou Horizon Resort Ph 3 44,000 47 16.9 3.1 Total 228,520 40.0 8.8

Source: Company, KE estimates

WBL currently has four high-end residential projects under development in China. - Shanghai Olympic Garden (condominium), - Orchard Manor in Shenyang (villas), - Lakeside Garden in Chongqing (landed housing) and - Horizon Resort in Suzhou (landed housing). Shanghai Olympic Garden is a high-end condominium project that WBL first launched in 2000, with a total of about 5,800 units and 45% equity in the project. Currently in the third and final phase, WBL sold about 400 units in 2007, a number that it has already equalled this year. It is benefiting from strong demand and property prices in Shanghai, achieving an average price of RMB12,000 psm. Orchard Manor in Shenyang consisted of 40 villas in Phase 1 and 30 villas in the current Phase 2, with an average unit size of 350-400 sqm. Phase 1 is fully sold while Phase 2 is half sold at an average price of RMB13,000-14,000 psm. Although WBL only has 55% equity in the project, we understand that 11 of the remaining 15 units is fully owned (due to conversion of shareholders’ loans). Lakeside Garden in Chongqing is a high-end landed residential project (eg semi-detached, terrace housing, etc) about 30 minutes from downtown Chongqing via a new highway, targeted at city dwellers. The project is expected to be completed by 2009. According to management, half the units have already been sold. Originally launched at RMB7,000 psm (our assumption for the RNAV), a recent relaunch has achieved RMB10,000 psm. Horizon Resort in Suzhou is also a high-end landed residential project first launched in 2003. Currently in Phase 3, about 1,800 units have been built to-date. We have assumed RMB13,000 psm.

Figure 3: Projects to be launched soon Project Site area (sqm) Stake (%) Eff book value (S$'m) Dev surplus (S$'m) Chengdu Mumashan (former Theme Park) 364,000 100 8.0 57.0 Shenyang New Summer Palace 33,473 40 30.0 19.9 Total 397,473 38.0 76.9


Within the next 12 months, WBL intends to launch two more projects in Chengdu and Shenyang. - Chengdu, Mumashan, on site of former theme park (landed housing) - Shenyang New Summer Palace (landed housing) Mumashan in Chengdu is currently a 364,000 sqm plot of land located 14km from downtown Chengdu, equivalent to Upper Bukit Timah in Singapore. The completion of a new 8-lane highway to the city has cut travel time from 45 minutes to just 20 minutes, so WBL can market the project to city dwellers. The plan calls for 1,300-1,400 units of semi-detached and terrace housing, as well as walk-up apartments. Government approval for land use conversion has been approved,


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but WBL will need to pay a conversion fee. In our projections, we have modelled a an average selling price of RMB8,000 psm and revenue recognition over FY09-12. This project is likely to be launched in 2H 2008. New Summer Palace in Shenyang is currently a 33,473 sqm site located along the primest street in Shenyang, opposite the Sheraton Hotel. WBL has partnered with GIC Real Estate in a 40% JV to develop a high-density residential project. With an approved plot ratio of 7-8x, total GFA could be more 2.5m sf. Further, an MRT station is being constructed just up the road. The project will include condominium units, a shopping centre and serviced apartments. We have assumed the project to be launched only in 2009.

Figure 4: Landbank in China

Site area

(sqm) Stake

(%) Eff book

value (S$'m) Eff market

value (S$'m) Land price assumed

(RMB psm) Shenyang (Orchard Manor future phases) 66,359 55 3.7 28.5 4,000 Chongqing (Lakeside Garden future phases) 82,638 50 3.2 40.4 5,000 Chongqing (City Garden) 42,536 29 4.8 12.1 5,000 Suzhou (Horizon Resort commercial component) 6,225 47 2.1 4.0 7,000 Suzhou (Lake Taihu) Portion A 333,018 33 12.8 150.4 7,000 Suzhou (Lake Taihu) Portion B (incl in Tools of Trade) 432,800 100 4.3 592.2 7,000 Total 963,576 30.9 827.5


Other than the projects discussed above, WBL also has access to almost a million

sqm of land elsewhere in China, namely Chongqing, Shenyang and Suzhou. However, note that WBL cannot redevelop a third of the landbank at the moment, specifically a 766,000 sqm combined site near Lake Taihu in Suzhou, which is currently used by subsidiary Suzhou Future Agriworld (83-owned). Existing assets on the land, which is zoned for tourism use, include an agrotech theme park. The theme park is not breaking even at the moment. While WBL has technically obtained approval for residential conversion, it has not yet received a building permit. In addition, WBL has sold part of its interest in another portion of the site but it has an buyback option, which would inflate the total China not yet commenced landbank by another 433,000 sqm. For our RNAV, we have separated the two portions and valued them accordingly. Long term value in “Tools of Trade”

Other than the development properties in China, WBL also has some hidden gems in its fixed assets, specifically 25,677 sqm of land along Leng Kee Road (16,362 sqm) and Alexandra Road (9,315 sqm) currently used by two subsidiaries, SM Motors and Malayan Motors, as automotive showrooms and service workshops for Jaguar, Bentley, Bugatti and Volvo. The land is currently zoned light industrial with a plot ratio of 2.5x. However, there is the possibility of government rezoning with a subsequent rise in plot ratio to at least 4.0x (which is the plot ratios of current surrounding properties), which would yield a GFA of 700,000 sf and 400,000 sf, respectively. Assuming an average of 1,200 sf per unit, WBL could potentially build more than 900 condominium units on both sites. But until a rezoning actually happens, we have assumed only the open market value of these sites (as appraised by Knight Frank in Feb 2006) and not potential redevelopment surplus. Also, Pacific Silica, WBL’s 75%-owned sand mining subsidiary in Australia, operates the largest approved reserve (23 million tons) of fine to medium silica sand in southeast Queensland. Currently, the mine is still in operation, yielding WBL S$2-3m of dividends annually, hence management is perfectly content to own this asset. Most significantly, the mine sits on almost 10 million sqm of freehold land near Brisbane, including 750 meters of private beach. There are


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long term plans to redevelop it into private residential property but only when the sand is exhausted, likely to be sometime in the next decade. Still, a valuation done by KPMG and Jones Lang LaSalle in Mar 2006 put the present value of the sand resources and underlying real estate at A$57-62 million. We have incorporated the average (A$59.5m) in our RNAV. Technology poised to do better Other than property, Technology (mainly the flexible PCB manufacturing businesses under MFI and MFS, but also includes precision engineering in China and system integrator O’Connor’s) is likely to remain one of WBL’s core businesses for the foreseeable future. We expect the Technology division to do better in FY08 on (1) lack of impairment charges related to business closure and (2) improved performance of the flexible PCB operations. MFI was hit badly in 2006 and 2007 by the market share troubles of its then-biggest customer Motorola. At that time, Motorola accounted for more than 90% of revenue. MFI turned around in 2007 after it diversified its customer base. Today, 95% of its revenue now comes from four major customers - Sony Ericsson, Research In Motion (the maker of the BlackBerry smartphone), Apple and Motorola. While Motorola is still the largest customer, the other three combined should be at least 30% of sales, as MFI’s policy is to announce its customers’ identities only after it contributes more than 10% of sales. Notably, MFI has not lost any share of Motorola’s business but simply experienced less volume when Motorola’s sales dropped. MFI staged a strong recovery in 1H08. Sales surged 36% YoY to almost S$500m while net profit more than tripled. While 3Q is expected to be flat sequentially, MFI management was optimistic 4Q would be better due to new programs ramping up and gross margin expected to be at the high end of 10-15%. MFI is currently the largest supplier of FPCs to Sony Ericsson and the sole supplier to RIM. MFS will continue to see margin compression and the adverse impact of a poor current product mix (ie lack of new products, lack of high volume programs) which has led to underutilised capacity. Forward performance is uncertain at this point, and we understand there may be a management restructuring soon. However, MFS’s underperformance should not prevent the Technology division as a whole from doing better than last year. In 2007, the division was affected by losses and impairment charges related to the closure of the Thailand precision engineering business. That business ceased operations in Sep 2007.


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We value WBL at S$7.64 Figure 5: WBL valuation model Effective Market value of Market value Stake Valuation Share Effective stake Per share % of (%) mtd Currency px ($'m) ($) RNAV Listed subsidiaries, associates & equity investments MFS 55.8% Mkt value S$ 0.30 109.3 0.52 5.9 MFI 59.6% Mkt value US$ 19.56 289.8 1.38 15.8 UE 9.8% M value S$ 3.93 85.5 0.41 4.7 Unlisted major businesses Automotive 100% 6x PE 52.9 0.25 2.9 Precision Engineering 99% 6x PE 10.0 0.05 0.5 EMS 99% 6x PE 6.2 0.03 0.3 O'Connor's 100% 6x PE 6.7 0.03 0.4 Trading - Welmate, Wealco, Polytek, Applied Engineering, etc 100% 6X PE 63.0 0.30 3.4 Pacific Silica (sand mining operation in Australia) 75% Valuation 58.7 0.28 3.2 Non-core biz - Speedling 100% Nominal 0.0 0.00 0.0 - Chrontel 38% Nominal 0.0 0.00 0.0 - GIH 22% Nominal 0.0 0.00 0.0 - RFNet 20% Nominal 0.0 0.00 0.0 Total Non-property Interests 682.3 3.25 37.1 Property interests Development property surplus - Projects under dev/To be launched 85.8 0.41 4.7 Effective market value of undeveloped landbank 827.5 3.94 45.0 Effective market value of "Tools of Trade" 85.4 0.41 4.6 Development property book - excl projects under dev/to be launched 78.0 0.37 4.2 Investment property book - excl "Tools of Trade" 79.0 0.38 4.3 Property RNAV 1,155.7 5.51 62.9 Gross RNAV 1,838.0 8.76 100.0 Less Net Debt (57.6) (0.27) Net RNAV 1,780.4 8.49 Conglomerate discount (10%) (178.0) (0.85) Target Price 1,602.4 7.64

NOTE: Land average prices are from Kim Eng HK property analyst, and do not take into account built-up area, tenure of land or plot ratio. Source: KE estimates

Speculative side to WBL as well Other than the fundamental improvements, there could be some speculative appeal as well in WBL. While Tecity, the family investment company of the late Tan Sri Dr Tan Chin Tuan (Chairman of WBL in 1974-1983), was bidding for tin mining company Straits Trading earlier this year, Kambau Pte Ltd, a company affiliated to Tecity and the Tan Foundation, emerged as a shareholder of WBL, with 6.5m WBL shares or 3.1%. By itself, that would not have been very interesting but the web of crossholdings between Tecity, Straits Trading, Kambau, WBL and United Engineers raises the speculative appeal several notches. WBL owns 9.8% of United Engineers, in which the Tan family also has a strong interest. In fact, Kambau owns 7.9% of UE’s preference shares and Straits Trading owns 12.1% of UE’s ordinary shares. So it appears that there is now stronger incentive for Tecity to keep WBL close to its chest. Adding Kambau’s 3.1% stake to the 10.7% of WBL stock already owned by Straits Trading, Tecity now has control over nearly 14% of WBL. So what does Tecity intend with to do with WBL? We think she will eventually launch a takeover, plain and simple. The media has made much speculation and analysis into what Chew Gek Ghim, CEO of Tecity and the lawyer-granddaughter of Tan Chin Tuan, intends to do with Straits Trading and the other companies that


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her grandfather invested in and helped to build up into blue chip names during the 1980s-1990s when he headed OCBC. But one just has to look at Tecity’s corporate moves in the past few years for a strong hint. Ever since OCBC began to divest its stakes in non-core associate companies this century, Tecity has attempted to gain control over Raffles Hotel and retailer Robinsons when it looked like those companies would end up in outside hands, as they eventually did (Raffles Holdings sold its hotel assets to Colony Capital LLC and Robinsons was taken over by the UAE-based conglomerate Al-Futaaim Group). By simple extension, one could conclude that Miss Chew is now trying to keep as much of her grandfather’s legacy within family hands as possible. Other than Raffles and Robinsons, Tan Chin Tuan was also linked to Fraser & Neave, Malayan Breweries (now Asia Pacific Breweries), insurer Great Eastern, Straits Trading, United Engineers, WBL and Bukit Sembawang Estates.


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WBL In The Early Years The story of WBL in Singapore started in 1906 when a young Australian, Theodore James Benjamin Wearnes, opened a secondhand automotive dealership in Orchard Road. By 1911, it became the agent for Ford cars in the Straits Settlements and Malayan States. In 1912, the company was publicly listed as Wearne Brothers Ltd.

In the ensuing years, Wearne acquired franchises for Morris, Renault, Buick, Daimler, Rover, Rolls Royce and Bentley, as well as property in Orchard Road. At one point, Wearne was even assembling Ford cars in Singapore and before World War Two, operated an air service between Singapore, KL and Penang. After WW2 (1960-70s), it diversified into heavy machinery and equipment for the industrial, agriculture and construction industries.

The baton was passed into local hands in 1974 when Tan Sri Dr Tan Chin Tuan, the Chairman of OCBC Bank at the time, became Chairman. He found Wearne struggling due to the oil crisis and competition from Japanese carmakers. To save the company, he shut down the car assembly plant, cut borrowings and costs, and gave up the Ford franchise in 1981. By his retirement in 1983, Wearne was healthy again.

In the 1980s and 1990s however, WBL (as renamed in 1994) accelerated its diversification activities. It was during this period that WBL embarked on a venture capital model, investing in many companies ranging from technology (personal computers, hard disk drives, Internet startups, wireless solutions, flexible PCBs, etc) to biomedicine to real estate in China and other parts of the region. WBL Now

Following a restructuring program initiated in 2005 by present Group CEO Tan Choon Seng, an ex-Compaq and HP VP, WBL’s interests are now classified in the following reporting categories: - Technology - Automotive - Real Estate and other Investments


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Figure 6: Major businesses & operating subsidiaries Category Business Active subsidiaries Stake (%) Technology FPC MFS Technology Ltd 56 Flex Solutions Singapore 55 Multi-Fineline Electronix 60 Aurora Optical 55 Precision Engineering Wearnes Precision Pte Ltd 99 Wearnes Precision Shenyang 99 EMS Wearnes Cambion UK 99 Wearnes Components Shenyang 99 Wearnes Electronics Malaysia 97 Wearnes Electronics Shenyang 67 Wearnes Electronics Zhongshan 95 Wearnes Global Co 85 Wearnes Hollingsworth Shenyang 80 Systems Integration O'Connor's Brunei 100 O'Connor's Engineering 100 O'Connor's Singapore 100 Automotive Volvo SM Motors 100 Chevrolet Starsauto 50 Renault Wearnes Automotive Pte Ltd 100 Volvo in Malaysia Wearnes Automotive Sdn Bhd 100 Volvo in HK Wearnes Motors 100 Property Development Chengdu Huaxin International Realty 100 Shanghai Wearnes Property Development 100 Shenyang Huaxin International Realty 100 Shenyang Huaxin International City 55 Shanghai Olympic Garden Property Dev 45 Investment Chengdu Wearnes Technology 99 Qingdao Wearnes Technology 99 Suzhou Wearnes Technology 99 Wearnes Technology Shenyang 80 Wearnes Technology Shenzhen 99 Property management Chongqing Property Management 60 Shenyang Huaxin Property Management 71 Suzhou Huaxin Int'l Property Management 79 Trading Oil & gas Applied Engineering 100 Industrial equipment Polytek Engineering 100 Wearnes Brothers 1983 100 Wealco 100 Building materials Welmate 100 Others Sand mining Pacific Silica 75 Agrotechnology Speedling Inc 100 Guangdong Speedling 100 Kunming Speedling 90 Shanghai Speedling 51 Shenyang Speedling 51 Suzhou Speedling 99 Yunnan Speedling 100 Zibo Speedling 51 Integrated circuits Chrontel 38 Financial services Global Investment Holdings (GIH) 22 ODM house RFNet Technologies 20

Source: Company

The major difference between WBL of the present day and a few years back,

when we last covered the stock, is that it is now much easier to understand the company’s businesses. Despite the hiccups along the way, the present management has patiently unravelled the original hotch-potch mix of businesses and focused the group into a few core businesses that can now be separately tracked and valued by investors. Technology The Technology Division comprises four businesses: - Flexible printed circuits (FPC), - Precision engineering (PE), - Electronic manufacturing services (EMS), and - Systems integration (SI)


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The FPC Group consists of Nasdaq-listed Multi-Fineline Electronix (MFI) and Singapore-listed MFS Technology (MFS). Both are major players that specialise in the design and manufacture of FPCs as well as the related assembly: parts that go into colour display modules used in handsets and other portable devices. MFI was hit badly in 2006 and 2007 by the market share troubles of its then-biggest customer Motorola. At that time, Motorola accounted for more than 90% of revenue. MFI turned around in 2007 after it diversified its customer base. Today, 95% of its revenue now comes from four major customers - Sony Ericsson, Research In Motion (the maker of the BlackBerry smartphone), Apple and Motorola. While Motorola is still the largest customer (more than 25% of sales), the other three combined should be at least 30% of sales, as MFI’s policy is to announce its customers’ identities only after it contributes at least 10% of sales. Notably, MFI has not lost any share of Motorola’s business but simply experienced less volume when Motorola’s sales dropped. MFS however continues to labour under the weight of margin compression and lack of high volume programs that resulted in capacity underutilisation. In 2Q08, it incurred a S$2.7m net loss despite breaking even in 1Q08. Forward performance is uncertain at this point, and we understand there may be a management restructuring soon. Precision Engineering now consists of only the Shenyang-based operation, following the closure of the Thailand plant late in 2007. The Shenyang factory, the largest precision manufacturing and die-casting facility in Liaoning province, services automotive customers such as Bosch and Visteon. It specialises in aluminum die-casting, extrusion and precision machining for personal computers, electronics and automobile industries, with supporting processes in electro-deposit paint, powder coat and chemical treatment. PE is now a profitable contributor following the closure of the Thai facility, albeit small. Electronic Manufacturing Services (under subsidiaries such as Wearnes Components, Wearnes Cambion, Wearnes Hollingsworth and Wearnes Electronics), provides PCB assembly services in China (Shenyang, Zhongshan), Malaysia and UK, on a consignment basis. EMS is profitable as a whole. It basically serves one major customer, Tyco International, which is a diversified global company involved in electronic security, alarm monitoring, fire-fighting equipment, water purification and flow control solutions. WBL does 90% of Tyco’s security tags and labels worldwide. In addition, WBL also assembles parts for EPCOS, a German-listed supplier of electronic components for cellular phones. Systems Integration. O’Connor’s has a well-established brand for advanced content application and solutions for the following core areas: (1) Security & Surveillance, (2) Broadcasting & Multimedia, and (3) Communications and Information Technology. Life Sciences & Medical Laboratory is an area currently under development, and recently, O’Connor’s was selected to provide laboratory furniture and fittings by a Singapore medical school. O’Connor’s has an strong presence in Asia, with operations in Singapore, Malaysia, Thailand and representative offices in Vietnam and projects and partners in Bangladesh, Sri Lanka, Mongolia and other parts of Asia. Automotive The Automotive business has long been a WBL mainstay. WBL started out as an automotive distributor in Singapore and Malaya a century ago. Since then, it has leveraged on its expertise and distribution network to add additional prestigious


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marques to the business while making significant inroads with its regional expansion strategy, to the point that it is now the largest distributor of Volvo vehicles (cars and trucks) in the region. Through distributorships in Singapore, Malaysia, Thailand and HK, WBL also markets, distributes and services marques such as Bentley, Jaguar, Renault, Chevrolet, Ford and Mazda.

Figure 7: WBL represents the following marques Country Dealerships/Agencies Singapore Bentley, Chevrolet, Jaguar, Renault, Volvo, Bugatti (Sales Agent) Malaysia Volkswagen, Volvo Thailand Jaguar, Mazda, Volvo Hong Kong Renault, Volvo Indonesia Bentley, Jaguar, Mazda

Source: Company

Figure 8: Major automotive operating subsidiaries

Subsidiary Principal activities Country of operation

Equity stake (%)

SM Motors Distribution and rental of Volvo vehicles Singapore 100 Starsauto Distribution and rental of Chevrolet vehicles Singapore 50 Malayan Motors Dealer for Bentley, Jaguar and Volvo trucks, sales agent for Bugatti Singapore 100 Wearnes Automotive Pte Ltd Distribution and rental of Renault vehicles Singapore 100 Wearnes Automotive Sdn Bhd Distribution and rental of Volvo vehicles Malaysia 100 Wearnes Automotive HK Distribution and rental of Volvo vehicles Hong Kong 100

Source: Company

The automotive distribution business operates on a low margin (1-2% at net level)

but high turnover model, and is of interest to management because of its sentimental value as WBL’s original business. In the long term, WBL will probably want to convert the business into cash. As it stands, WBL is already putting the business under the microscope with a view on how to improve the organic returns from the business as well as the “tools of trade” it utilises, namely the land that its showrooms and service centres sit on. This is where it could get interesting for investors. It recently sold its Volvo showroom in Hong Kong for a tidy gain and is leasing back the space it needs for the showroom from the buyer, as the building had no development potential. However, the Volvo and Jaguar operations in Singapore are operated on two large plots of land along Leng Kee and Alexandra Road, an area that is reasonably close to central Singapore and could conceivably be rezoned and redeveloped into residential or commercial projects that could net a better yield. Redeveloping the land would also introduce a different set of pressures on the auto division’s management as they would then have to think about how to keep the business viable while paying market rates for the space it uses. In the long run, this will have the desired effect of priming the business to be sold, minus the valuable land that it sits on, of course. Real Estate & Other Investments The Real Estate & Other Investments portfolio consists of the following: - Real Estate - Trading - Others Real Estate. WBL has substantial property investments in China and Malaysia that can be redeveloped in the medium term. In China, it has total accessible landbank of 1.2m sqm, including projects currently under development of 0.2m


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sqm, landbank not yet commenced of 0.9m sqm and investment properties. In Malaysia, it has some 50,700 sqm of land currently being used by WBL subsidiaries or rented out. In China, Singapore and Australia, it also has landbank that can be redeveloped in the long term, namely (1) a 432,000 sqm site near Lake Taihu in Suzhou currently occupied by tourism assets, (2) two plots of land (totalling 25,700 sqm) in central Singapore currently occupied by automotive assets and (3) a very large site of nearly 10m sqm in Queensland, Australia that can be redeveloped in 10-15 years’ time (currently occupied by a sand mining asset).

Figure 9: Total accessible landbank (wholly and partially owned) China Site area (sqm) % of total Landbank under development Shanghai Olympic Garden Ph 3 116,760 Shenyang Orchard Manor Ph 2 47,607 Chongqing Lakeside Garden Ph B3-2 20,153 Suzhou Horizon Resort Ph 3 44,000 Total 228,520 18% Landbank have not commenced Chengdu Mumashan (former Theme Park) 364,000 Shenyang New Summer Palace 33,473 Shenyang (Orchard Manor future phases) 66,359 Chongqing (Lakeside Garden future phases) 82,638 Chongqing (City Garden) 42,536 Suzhou (Horizon Resort commercial component) 6,225 Suzhou (Lake Taihu) 333,018 Total 928,249 74% Investment properties Shenyang (Huaxin International Tower) 2,121 Shenzhen (Wearnes Technology Building) 17,712 China (Qingdao, Shenyang, Suzhou) 28,664 Total 48,497 4% China Total 1,205,266 96% Malaysia (used by WBL or rented out) Malaysia (KL) 11,905 Malaysia (PJ) 18,703 Malaysia (Penang) 3,642 Malaysia (Others) 16,426 Malaysia Total 50,676 4% Total Landbank 1,255,942 100%

Source: Company

Figure 10: Landbank in “tools of trade” Site Site area (sqm) Current land use Current land zoning Subsidiary

China (Suzhou) 432,800 Agricultural theme park Tourism Suzhou Future Agriworld

Australia (Brisbane) 9,787,700 Sand mine Resource Pacific Silica

Singapore (central) 25,678 Automotive show rooms Light Industrial Malayan Motor, SM Motors

USA (Florida, Georgia, Texas, California) 1,190,900 Nurseries Agricultural Speedling Total 11,437,078

Source: Company

We have not talked much about Speedling’s landbank in the USA because there

is little chance of redevelopment. Also, it is too far away from management’s sphere of concentration for the property development business. Trading. WBL has also streamlined some of its more promising investments, which are basically involved in trading, distribution and engineering into a category known as Trading. They cover:


15

- Applied Engineering in Singapore which is a process equipment fabrication shop for the O&G industry, and

- Distribution of equipment and construction materials under Polytek Engineering (industrial equipment), Wealco Equipment (supply of equipment for construction, marine, hospitality and transport industries) and Welmate (fire protection systems, prefab wall panels, etc) and SPC Wearnes (distribution of bottled gas).

While the long term intention is likely to be there, WBL is not in any hurry to dispose of any of these assets at the moment. First, it is more likely than not to realise extraordinary gains than losses as these are profitable concerns. Second, they are currently benefiting from the present upcycle in the oil & gas and construction industries, as well as internal improvements. Others. This is likely to be a catch-all category for businesses and assets such as:

- Sand mining operations under Pacific Silica in Australia, - Agrotechnology business under Speedling USA and China, - 10% equity stake in Singapore-listed United Engineers, - Stakes in Chrontel, GIH and RFNet

WBL’s investments in agrotechnology in the US are in Speedling, which is headquartered in Sun City, Florida, USA. Speedling produces vegetable transplants, ornamental products and horticultural products and supplies. Besides the nurseries in six locations in the US, Speedling also has greenhouse production facilities in China. Management personally does not like the business model, as it is asset intensive but generates little returns. We think they will try to dispose of this business eventually. As for the 10% stake in UE, management believes this to be a long term strategic asset, as long as UE continues to perform well and possibly because of Tecity’s involvement in its destiny.


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Balance Sheet Profit and lossYE Sep (S$'m) 2006 2007 2008F 2009F 2010F YE Sep (S$'m) 2006 2007 2008F 2009F 2010FTotal assets 1,916.8 1,914.1 1,862.5 1,934.2 2,034.2 Sales 2,103.5 2,063.7 2,097.6 2,267.9 2,518.8Current assets 1,071.2 1,081.7 994.6 1,043.5 1,119.0 Cost of goods sold -1,741.4 -1,801.8 -1,689.3 -1,852.5 -2,015.7

Cash & ST investment 222.6 248.2 236.0 242.1 259.4 Gross profit 362.1 261.9 408.3 415.3 503.1Trade & other debtors 463.1 421.7 402.3 434.9 483.1 Non-operating Income 46.7 39.9 31.6 25.0 25.0Inventory 220.5 223.4 208.3 228.4 248.5 Operating expenses -245.4 -285.4 -293.7 -306.2 -340.0Others 165.0 188.4 148.1 138.1 128.1 Operating profit 163.4 16.3 146.2 134.2 188.1

Other assets 845.6 832.4 867.9 890.7 915.2 Net interest/Investment income -20.0 -20.1 -20.0 -20.0 -20.0Investment properties 63.0 57.5 54.6 51.9 49.3 Share of associates/JVs 6.6 7.0 10.7 23.9 8.3Net fixed assets 566.3 539.8 566.7 595.1 624.8 Exceptionals 0.0 0.0 0.0 0.0 0.0Others 216.3 235.1 246.6 243.7 241.1 Pretax income 150.1 3.2 136.9 138.1 176.4

Total liabilities 949.0 953.4 864.6 870.8 887.9 Income taxes -49.6 -13.6 -41.1 -48.3 -61.7Current liabilities 621.3 656.6 567.7 574.0 591.1 Minority interest -41.7 -9.8 -20.0 -23.0 -26.5

Trade & other creditors 449.5 496.7 459.7 466.0 483.1 Net income after exceptionals 58.9 -20.2 75.8 66.8 88.2ST borrowings 156.9 143.0 85.0 85.0 85.0 Net income bef exceptionals 54.4 12.9 44.2 66.8 88.2Others 14.9 16.9 23.0 23.0 23.0 EPS (cents) after exceptionals 28.3 -9.6 36.1 31.8 42.0

Long-term liabilities 327.7 296.8 296.8 296.8 296.8 EBITDA 235.2 91.0 225.5 217.5 275.6LT borrowings 290.7 268.5 268.5 268.5 268.5 Source: Company data, Kim Eng estimatesOthers 37.0 28.3 28.3 28.3 28.3

Shareholder's equity 678.0 676.5 736.0 781.8 849.0Share capital 334.1 338.7 344.0 344.0 344.0Reserves 344.0 337.8 392.0 437.8 505.0 YE Sep (S$'m) 2006 2007 2008F 2009F 2010F

Minority interests 289.7 284.2 298.4 313.3 329.0 Operating cash flow 129.3 145.8 132.0 50.7 68.0Source: Company data, Kim Eng estimates Pretax profit 143.5 -3.8 136.9 138.1 176.4

Depreciation & amortisation 71.8 74.7 79.3 83.3 87.5Change in working capital -7.6 86.6 -2.4 -46.5 -51.2

YE Sep (S$'m) 2006 2007 2008F 2009F 2010F Others -78.3 -11.7 -81.8 -124.2 -144.7Growth (% YoY) Investment cash flow -111.7 -76.2 -27.0 -28.3 -29.8Sales 7.0 -1.9 1.6 8.1 11.1 Net capex -94.7 -107.1 -27.0 -28.3 -29.8

32.5 -90.0 795.5 -8.2 40.2 Change in LT investment -43.3 -4.5 0.0 0.0 0.0EBITDA 23.1 -61.3 147.8 -3.6 26.7 Change in other assets 26.2 35.4 0.0 0.0 0.0

472.2 NA NA -11.9 32.1 Cash flow after invt. 17.6 69.5 105.1 22.4 38.2EPS 417.3 NA NA -11.9 32.1 Financing cash flow -53.3 -39.8 -79.0 -21.0 -21.0Profitability (%) Change in share capital 5.8 3.4 0.0 0.0 0.0Gross margin 17.2 12.7 19.5 18.3 20.0 Net change in debt -21.5 -34.8 -58.0 0.0 0.0Operating margin 7.8 0.8 7.0 5.9 7.5 Change in other LT liab. -37.6 -8.4 -21.0 -21.0 -21.0EBITDA margin 11.2 4.4 10.8 9.6 10.9 Net cash flow -35.7 29.7 26.0 1.4 17.2Net profit margin 2.8 -1.0 3.6 2.9 3.5 Source: Company data, Kim Eng estimatesROA 3.1 -1.1 4.1 3.5 4.3ROE 8.7 -3.0 10.3 8.5 10.4StabilityGross debt(cash)/equity (%) 66.0 60.8 48.0 45.2 41.6Net debt(cash)/equity (%) 33.2 24.1 16.0 14.2 11.1Int. coverage (x) 8.2 0.8 7.3 6.7 9.4Int. & ST debt coverage (x) 11.0 1.0 6.4 5.8 8.2Cash flow int. coverage (x) 6.5 7.2 6.6 2.5 3.4Cash flow int. & ST debt cover (x) 0.7 0.9 1.3 0.5 0.6Current ratio (x) 1.7 1.6 1.8 1.8 1.9Quick ratio (x) 1.0 1.0 1.0 1.1 1.1Net debt/(cash) (S$'m) 225.1 163.3 117.5 111.3 94.1Per share data (cents)EPS 28.3 -9.6 36.1 31.8 42.0CFPS 103.4 33.8 103.1 105.6 125.8BVPS 325.8 322.5 350.8 372.7 404.7SPS 1,010.7 983.7 999.9 1,081.0 1,200.6EBITDA/share 113.0 43.4 107.5 103.7 131.4DPS 20.0 13.5 10.0 10.0 10.0Source: Company data, Kim Eng estimates

Cashflow

Key ratios

OP

NP

ANALYSTS’ COVERAGE / RESEARCH OFFICES

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SINGAPORE Stephanie WONG Head of Research Regional Head of Institutional Research +65 6432 1451 [email protected] Consumer Industrial Small/Mid Caps

Gregory YAP +65 6432 1450 [email protected] Technology & Manufacturing Telcos Transport & Logistics China Consumer

Rohan SUPPIAH +65 6432 1455 [email protected] Oil & gas Conglomerates

Pauline LEE +65 6432 1453 [email protected] Bank & Finance Retail Consumer

Wilson LIEW +65 6432 1454 [email protected] Property & Construction Hotel & Resort

Johnny TEO +65 6432 1431 [email protected] Industrial Infrastructure

David LOOMIS +65 6432 1417 [email protected] Special Situations

KELIVE Singapore ONG Seng Yeow Head of Research +65 6432 1832 [email protected] TAN Chin Poh +65 6432 1859 [email protected] GOH Han Peng +65 6432 1857 [email protected] Geraldine EU +65 6432 1469 [email protected] Ken TAI +65 6432 1412 [email protected] HONG KONG / CHINA Edward FUNG +852 2268 0632 [email protected] Power Construction

Ivan CHEUNG +852 2268 0634 [email protected] Property

Ivan LI +852 2268 0641 [email protected] Bank & Finance

Larry GRACE +852 2268 0630 [email protected] Oil & Gas Energy

Shadow LAU +852 2268 0645 [email protected] Small Caps

TAM Tsz Wang +852 2268 0636 [email protected] Small Caps

Emily LEE +852 2268 0631 [email protected] Small Caps

MALAYSIA YEW Chee Yoon Head of Research +603 2141 1555 [email protected] Strategy Banks Telcos Property Shipping Oil & gas Gaming Media Power Construction Food & Beverage Manufacturing Plantations Tobacco Electronics

INDONESIA Katarina SETIAWAN Head of Research +6221 3983 1458 [email protected] Consumer Infra Shipping Strategy Telcos Others

Ricardo SILAEN +6281 3983 1455 [email protected] Auto Energy Heavy Equipment Property Resources

Teguh SUNYOTO +6221 3983 1455 [email protected] Cement Construction Pharmaceutical Retail

Adi N. WICAKSONO +6221 3983 1455 [email protected] Generalist

Arwani PRANADJAYA +6221 3983 1455 [email protected] Technical analyst

PHILIPPINES Ed BANCOD Head of Research +63 2 849 8848 [email protected] Strategy Banking

Laura DY-LIACCO +63 2 849 8843 [email protected] Utilities Conglomerates

Lovell SARREAL +63 2 849 8871 [email protected] Consumer Cement Media

Robin SARMIENTO +63 2 849 8831 [email protected] Ports Mining

Ricardo PUIG +63 2 849 8846 [email protected] Property Telcos

TAIWAN Kevin CHANG Head of Research +8862 2547 1512 [email protected] Jack CHANG 8862 2546 4965 [email protected] Non-Tech

Jill HUANG 8862 2546 4171 [email protected] PC / Notebook

Eric LIN 8862 2546 0618 [email protected] Optical

Chialin LU 8862 2714 9840 [email protected] Communications

Tess WANG 8862 2719 8105 [email protected] Financial

THAILAND David BELLER +662 658 6300 x 4740 [email protected] Banks Shipping

Naphat CHANTARASEREKUL +662 658 6300 x 4770 [email protected] Energy

Piya ORANRIKSUPHAK +662 658 6300 x 4710 [email protected] Property

Supattra KHONGRUNGPHAKORN +662 6586300 ext 4800 [email protected] Electronics Automotive Tourism

Kanchan KHANIJOU + 662 658 6300 x 4750 [email protected] Construction

KELIVE Thailand (for retail clients) George HUEBSCH Head of Research +662 658 6300 ext 1400 [email protected] VIETNAM LE Huy Hoang +84 8 838 6636 x 160 [email protected] Recommendation definitions

REGIONAL Luz LORENZO Economist +63 2 849 8836 [email protected] Economics

Our recommendation is based on the following expected price performance within 12 months:

+15% and above: BUY -15% to +15%: HOLD -15% or worse: SELL


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