Simons Trading Research

Author: simonsg   |   Latest post: Fri, 16 Aug 2019, 6:42 PM


Yangzijiang Shipbuilding - Key Takeaways From Investor Conference Call

Author: simonsg   |  Publish date: Wed, 21 Aug 2019, 6:58 PM

  • CFO reassured investors that Chairman’s assistance in investigation does not relate to Yangzijiang Shipbuilding (SGX:BS6).
  • Business and operations functioning as usual; customers and bankers remain supportive.
  • Yangzijiang Shipbuilding share price overhang to persist till dust settles; uptick in order wins could help restore confidence to some extent.
  • Reiterate BUY; Target Price S$1.82.
  • During the investor conference call hosted by DBS, the CFO of Yangzijiang Shipbuilding, Ms Liu Hua, reassured investment community that Chairman’s assistance in investigation is not related to the Group and operations are carrying on as usual.

Key Takeaways From the Conference Call

Shipbuilding business is in good hands.

  • While Executive Chairman, Mr Ren Yuanlin, has been the prominent figure of Yangzijiang Shipbuilding, his son, Mr Ren Letian has succeeded him as CEO since Mar-2015, after rotating to manage various divisions of the shipyard for nearly 10 years prior to his appointment. The shipbuilding business has done well in the past four years under the new CEO’s leadership as Chairman took a step back to focus on the Investment segment.

Ability to secure contracts should not be impacted.

  • Existing shipbuilding customers who have expressed concerns over this incident involving the Chairman are comforted by the clarification. This is not expected to affect the shipyard’s ability to clinch newbuild contracts.
  • Management remains confident of securing US$1.5-2.0bn worth of new orders this year, despite slow YTD wins of ~S$209m. The order pipeline includes high-value mega vessels such as 13.9k / 23k TEU containerships and 210k dwt / 326k dwt bulk carriers with newbuild prices ranging from US$50-150m for each vessel.
  • Some potential contracts are in advanced to final negotiations and could conclude in 2H19.

Operations of JV yard with Mitsui officially starts in August.

  • The official commencement of the JV yard has taken several months due to the clearance from regulatory authorities such as licensing and anti-trust rule. Nevertheless, the parties started preparation work shortly after the formalisation of the partnership, such as LNG design, worker training and construction of bulk carriers at Taichang yard.
  • Cleaner energy vessels remain the longer-term growth strategy of Yangzijiang Shipbuilding. Not only does it have a more promising demand outlook, newbuild LNG carriers are also expected to yield double-digit gross margins as compared to single digit for conventional containerships and bulk carriers.

Investment portfolio is under control.

  • During the Chairman’s leave, CEO will assume his role in the investment arm. The CEO is probably even more prudent than his father and prefers to keep the size of the total portfolio at around Rmb10bn (vs current ~Rmb15-16bn) ideally. The returns from these investment hover around 10%, mostly backed by collateral.

Bankers are supportive.

  • Bankers have expressed confidence with Yangzijiang Shipbuilding. As far as we understand, this event should not trigger loan reviews etc.

Stock price seems to have over-reacted.

  • Management felt that the massive selldown on Yangzijiang Shipbuilding’s shares on market rumours was unwarranted. While most investors are understandably concerned, some shareholders in HK/China, who are more familiar with such events, have expressed their confidence in Yangzijiang Shipbuilding.

Our Thoughts

  • We maintain our view as highlighted in report: Yangzijiang Shipbuilding - DBS Research 2019-08-15: Clearing The Air On Chairman’s Assistance In Investigations.
  • We believe the clarification should alleviate some concerns but Chairman’s assistance in the investigation will likely remain as an overhang and cause volatility in share price, aggravated by short-sellers, until the dust settles. (See the daily short-sell transactions vs the daily volume as well as the share-buyback volume here.)

Share price tanked ~25% as the news unfolded and a further~25% upon resumption of trading.

  • While stock has since bounced off the low, it has lost almost one quarter of its market cap despite the yard’s non-involvement in the investigation as well as intact operations and fundamentals of the group at this point.
  • In our opinion, more clarity on Chairman’s investigation, and strong contract flows could restore investors’ confidence to remove the share price overhang. See Yangzijiang Shipbuilding share price.

Stock is now trading at 0.6x PB, near its cash level

  • Stock is now trading at 0.6x PB, near its cash level, representing 25% / 65% discount to its global and Chinese peers, notwithstanding its highest ROE and dividend yield.
  • We estimate that including financial assets, net cash accounts for 95 Scts out of its book value per share of ~S$1.55.
  • See also Yangzijiang Shipbuilding announcements; Yangzijiang Shipbuilding news.

Source: DBS Research - 21 Aug 2019

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NetLink NBN Trust - Safety in Numbers

Author: simonsg   |  Publish date: Wed, 21 Aug 2019, 6:40 PM

Post NDR Feedback - Investment Thesis Intact. BUY

  • We hosted NETLINK NBN TRUST (SGX:CJLU) management on a Singapore NDR and came away confident in the security of operating cashflows and DPU for the short-to long-term.
  • With a virtual residential-fibre monopoly and guaranteed regulated returns, NetLink Trust provides a haven amid the current industry turbulence.
  • Maintain BUY with risks to our outlook from any negative revisions to its regulatory regime.

Short-term Growth Supported by Cable Migration

  • Continued residential cable migration by StarHub to NetLink Trust’s fibre network is expected to continue to drive higher than normal connection growth for at least the next quarter. Including homes that have no broadband connection at all, there is a potential 126k fibre connections to be made.
  • In the longer-term, a general annual increase of 25k households from public and private sector endeavours will provide organic growth.
  • Meanwhile, although there are around 300k registered businesses in Singapore there are only 130k non-residential end users of which NetLink Trust currently has 46k (35%) share.

Higher Capex – Not a Problem

  • NetLink Trust is increasing its capex this year partly on network densification efforts in order to lower latency even further. Although no regulatory approvals are required, regulator IMDA is kept updated of plans.
  • Management has not disclosed the higher level of capex for FY20, but given a low net debt to EBITDA level of 2x additional leverage can be taken on to support such.
  • More importantly, given the RAB regulatory framework, NetLink Trust is guaranteed a 7% pre-tax WACC return for qualified capex for the current rate period.

Potential DPU Upside From Healthy Balance Sheet

  • Management also assured investors that the SGD190m cash distribution for FY19 is at least sustainable. We have assumed a minor dip to SGD186m this year but assume this will increase above SGD200m in the long-term.
  • If NetLink Trust levered up to 3x net debt to EBITDA, an additional SGD350m (SGD0.09 per unit) above our current DPU forecasts could be provided to unit holders.

Other Meeting Highlights

  • Although the current environment is of falling interest rates, there has been no indication of a review for the current rate of return being triggered. The next formal review period will period in FY22 and be set for FY23.
  • Management is currently evaluating financing options for its capex. This includes deciding on rated or non-rated debt facilities.
  • Management qualified that although it had proposed to be the single 5G passive network provider in the recent IMDA consultation, the initial guidelines indicated were for a two network set up. It is management’s view that a single network could save on site redundancy and that a regulated return on capex under a RAB framework incentivizes a faster deployment.
  • Even without being appointed as a license holder for 5G, NetLink Trust will partly benefit from the fibre deployed to connect a higher amount of base stations necessary to support 5G.
  • Part of the slower non-building access point (NBAP) deployment for government’s SmartNation initiatives is the equipment to be located at such points (e.g. lamp post) need more power than currently available.
  • Fibre broadband equipment is capable of 10Gbps download speeds already but demand/take up is limited with the current set of applications and content. It is the telco service providers that provide the equipment and not NetLink Trust. This has also limited demand for opening up the second fibre point that is present in most households.
  • Competition from SP Telecom (Not Listed) may eventually show up in the non-residential side but most likely will be initially targeted at data centres operated by the SP group. It is unlikely to spill into the residential connection space.
  • Although 5G speeds are comparable with today’s fibre, the latter will always have an edge. Likewise, the amount of data an average household consumes on fixed broadband is much higher than wireless broadband and would lead to a more expensive bill for the average Singapore user. This makes it more economical to maintain both services rather than switch to a pure wireless broadband consumption model.
  • Maintenance capex is not actually the SGD40m-60m level but less than 20% of these amounts.
  • Fibre has a 30-year life per manufacturer’s claims but likely to last longer in practice.
  • Management is comfortable to reach a long-term leverage of 3x-4x debt to EBITDA.

Source: Maybank Kim Eng Research - 21 Aug 2019

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Health Management International - Operationally Robust

Author: simonsg   |  Publish date: Tue, 20 Aug 2019, 9:19 AM

FY19 Within Expectations; Take the Cash Offer

  • HEALTH MANAGEMENT INTERNATIONAL LTD (SGX:588)'s FY19 PATMI met the higher end of our expectations. 4QFY19 core PATMI fell 7% y-o-y due to gestation costs at StarMed. Revenue rose 10% y-o-y, driven by decent patient load growth and robust bill sizes.
  • Our FY20-22E earnings forecasts are unchanged. We raise DCF-based Target Price to SGD0.73 (WACC: 7.1%, LTG: 1.5%) as we roll forward valuation to FY20.
  • While our HOLD rating is maintained, we recommend investors to take the cash option of EQT’s SGD0.73 offer.

Malaysian Hospitals Are Robust

  • Operations at the two Malaysian hospitals are robust. 4Q19 revenue rose 10%, driven by strong patient load growth of 6%, coupled with higher outpatient bill sizes (+5%), while inpatient bill sizes were firm (+0.5%). 4QFY19 EBITDA margin fell 2.7ppt to 21.6% due to gestation costs from StarMed. Excluding the effects of FX, one-off items, and StarMed, PATMI would have risen 4% y-o-y.

On Track With Expansion Plans

  • Construction for the new hospital block at Regency Specialist Hospital in Johor has begun, with expected commissioning in 2021. This will boost bed count to 380 from 218 currently. The official launch for StarMed will take place in FY20, and Health Management International reiterates expectations that StarMed will incur start-up losses for up to 3 years.
  • Health Management International will continually recruit specialists and boost marketing efforts to increase awareness of StarMed. Health Management International remains optimistic of StarMed’s long-term prospects, in view of rising demand for day surgeries and diagnostic imaging.

Take the Cash Offer

  • On 5 Jul, EQT launched an offer to privatise Health Management International at SGD0.73 via a scheme of arrangement. We recommend investors to take the cash option, as
    1. this is a clean exit given that the offeror’s shares will not be listed on any exchange, and
    2. the offer price fully reflects the fundamental value of Health Management International.
  • The scheme meeting is expected to take place in Sep-Oct 2019.

Source: Maybank Kim Eng Research - 20 Aug 2019

Labels: HMI
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OCBC - Successful Integration of Wing Hang; Opportunities From GBA Beckon

Author: simonsg   |  Publish date: Mon, 19 Aug 2019, 6:58 PM

  • The acquisition of Wing Hang Bank has provided OCBC with a platform to grow its Wholesale Banking, Treasury and Private Banking businesses. The next phase of growth involves capturing business opportunities in the Greater Bay Area (GBA) and cross-border flows between China and ASEAN countries.
  • Having successfully integrated OCBC Wing Hang, OCBC is poised for inorganic growth within the core markets of Singapore, Malaysia, Indonesia and Greater China.
  • Maintain BUY. Target price: S$14.48.

What’s New

  • We attended OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39)’s Corporate Day held in Hong Kong last week:

Growing importance of Greater China.

  • Prior to the acquisition of Wing Hang Bank (WHB), Greater China contributed S$208m or 6% of group PBT in 2013. Since then, contribution from Greater China has grown to S$1,037m or 19% of group PBT, representing 5-year CAGR of 38%. On an organic basis, we estimate that OCBC Wing Hang (Consumer and SME) would have grown at 5-year CAGR of 4%, compared with 21% for its Hong Kong branch (Wholesale Banking) and Bank of Singapore (Private Banking).
  • From a business franchise perspective, including cross-border flows booked in Singapore, operating profit from Greater China would have expanded from S$476m to S$1,628m, representing a 5-year CAGR of 28%.

Corporate Banking: growth driven by PRD and new industries.

  • OCBC has realised growth from new markets:
    1. revenue related to the Pearl River Delta (PRD) grew 126% y-o-y in 1H19, and
    2. OCBC has secured new businesses from new industries, such as Healthcare, Education and Logistics, worth HK$1.7b in 2018.
    3. OCBC has launched cash management system Velocity to grow its operating accounts in 2019.

Benefitting from growing affluence.

  • AUM from Greater China expanded by 4x from US$9b to US$36b, representing 5-year CAGR of 32% (OCBC group: 1.8x or 5-year CAGR of 12%). Greater China accounted for 35% of group AUM in 2018. AUM per client has improved by 2.5x despite a doubling of headcount for relationship managers (RMs).
  • Bank of Singapore (BOS) plans to address ultra-high net worth clients’ needs for Wealth Preservation and Succession through its capabilities in wealth planning and structuring.

New revenue stream from treasury activities.

  • OCBC Wing Hang’s total treasury sales revenue has grown 13x since 2014, driven by a 27x increase in hedging solutions.
  • OCBC established its North Asia Treasury Hub in Hong Kong in 2017. Going forward, OCBC Wing Hang plans to launch new products, such as equity-linked notes and interest rate hedging solutions, and digitise its treasury products on an e-platform.

Shore up funding in HK$ and US$.

  • Hong Kong has abundant supply of US dollar due to the Hong Kong dollar’s peg to the US dollar. Deposits denominated in US dollar expanded from 23% to 31% of total funding base over the past five years. Likewise, deposits denominated in Hong Kong dollar has expanded from 2% to 10% of total funding base.

Stock Impact

Opportunities from GBA beckons.

  • Greater Bay Area (GBA) comprises Guangdong province (9 key cities: Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen, and Zhaoqing), Hong Kong and Macau, which forms a formidable hub. GBA accounted for 5% of China’s population and 12% of China’s GDP. OCBC is currently the 4th largest foreign bank in GBA with 89 branches (Hong Kong: 66 branches, Shenzhen: 5 branches and Guangzhou: 3 branches).
  • GBA contributed PBT of S$605m or 37% of PBT from Greater China. Management target to double PBT from GBA to S$1b in 2023, which represents a 5-year CAGR of 11%. This is supported by loan growth of 12% per annum to S$80b by 2023. Overall, management expects Greater China to account for 20-25% of group PBT by 2023 (2018: 19%).

Smooth integration of OCBC Wing Hang.

  • Management has implemented a 5-year strategic plan conducted over three phases:
    • Phase I: Preserve (2014-15) – Retain customers and preserve revenue streams.
    • Phase II: Enhance (2015-16) – Deepen customer relationships, improve efficiency and expand product suite.
    • Phase III: Grow (2017 onwards) – Grow new franchises and revenue streams. Realise potential of a regional bank through Greater Bay Area (GBA) strategy.
  • PBT has accelerated to a 3-year CAGR of 17.4% during Phase III in 2016-2018. Asset quality remains stable with NPL ratio for OCBC Wing Hang at 0.58% (OCBC group: 1.48%). Management plans to invest HK$400m over the next three years to enhance its digital offerings.
  • OCBC Wing Hang started preparation of internal rating-based approach (IRBA) to calculate risk-weighted assets (RWA) in 2016. Management expects IRBA to be approved and fully implemented in 2020.

Earnings Revision / Risk

  • We maintain our existing earnings forecast.

Valuation / Recommendation

  • Maintain BUY. Our target price of S$14.48 is based on 1.40x 2019F P/B, which is derived from the Gordon Growth Model (ROE: 10.8%, COE: 8.00% (Beta: 1.1x) and Growth: 1.0%).

Source: UOB Kay Hian Research - 19 Aug 2019

Labels: OCBC Bank
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MM2 Asia - Glass Neither Half Empty Nor Full

Author: simonsg   |  Publish date: Mon, 19 Aug 2019, 9:19 AM

Mixed Quarter. HOLD

  • Although 1Q is a seasonally softer revenue quarter for mm2 Asia (SGX:1B0), event/concert division was unusually slower. Lower gross profit margins (62% vs 67% a year ago) exacerbated this further.
  • We assume revenue catch up in later quarters and maintain revenue forecasts but increase production cost assumptions leading to -2%/-9% in FY20E/21E core profit forecasts.
  • Our 1x PEG based Target Price on a revised 13% (from 16% previously) core profit CAGR over FY19-22E is consequently lowered by 27% to SGD0.20.
  • Maintain HOLD where core production and cinema performance business are key drivers of our outlook.

Seasonally Soft Quarter Held Back Further

  • mm2 Asia's 1QFY20 revenues at SGD49.0m (-37% q-o-q; +0.1% y-o-y) were held back by subsidiary UnUsUaL (SGX:1D1) investing time and effort to develop 2HFY20 projects and revenues.
  • The core movie/TV production and cinema businesses were up on an undisclosed individual basis but were up SGD1.6m on a combined y-o-y basis. 1QFY19 represented 18% of revenues and 39% of FY19 revenues and core profits.
  • 1QFY20 was 17%/15% and 36%/24% of MKE/consensus revenues and core profit forecasts – below expectations.

The Revenue Line Appears Intact

  • Management indicated that the core movie/TV production business had 80 projects at end 1QFY20 against 46 at end FY19. The cinema business has benefited from recent Hollywood blockbusters while keeping costs flat y-o-y with the next batch of potential big films to be shown in 2HFY20.
  • UnUsUaL indicated that a significant number of high value concerts and events are also expected in 2HFY20. Although the aim is to go for higher value productions we forecast these will also involve higher project costs.

Back to the Beginning

  • After a detailed breakdown of revenues by segment and geography in 4QFY19 results (see report: mm2 Asia - Maybank Kim Eng 2019-06-03: Road To Redemption?), disclosure has reverted back to being less transparent.
  • We continue to opine that such visibility would aid the market in evaluating the progress of its major business segments. This is particularly pertinent given management reasserted its plans to separately list the cinema business in FY21.

Source: Maybank Kim Eng Research - 19 Aug 2019

Labels: MM2 Asia
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UMS Holdings Ltd - Waiting for Re-rating Catalysts

Author: simonsg   |  Publish date: Fri, 16 Aug 2019, 6:42 PM

  • UMS's 2Q19 results within expectations; GP margin fell y-o-y but stable q-o-q.
  • 2H19 outlook challenging but order volumes stabilizing, though no clear turnaround sign yet.
  • SEMI expects recovery in semiconductor industry in 2020.
  • Maintain FULLY VALUED, Target Price raised to S$0.49.

Stabilising Demand in 2H19 But No Clear Turnaround Signal Yet

  • Near term, UMS HOLDINGS LIMITED (SGX:558) is seeing stable business orders in 2H19, despite the challenging semiconductor outlook. However, we would prefer to be cautious and maintain our forecasts and FULLY VALUED call for now. Factors to look out for before we turn more positive would be the successful renewal of existing contract with its key customer before the end of this year, and a meaningful pick-up in semiconductor equipment sales.
  • Longer term, SEMI expects a rebound in the semiconductor industry in 2020. Semiconductor equipment sales are projected to decline by 18.4% in 2019 from last year’s historic high, and to resume with an 11.6% y-o-y growth in 2020.

Where We Differ

  • We have assumed a lower PE of 9x FY20F earnings (vs larger peers’ 11x) compared to consensus as UMS has higher customer concentration risk vs peers.

Potential Catalysts

  • Successful renewal of contract with existing key customer, higher demand for semiconductor equipment, client diversification, earnings-accretive M&As.

What's New - 2Q19 Results in Line; Expect Stable Demand in 2H19

2Q19 results within expectations:

  • UMS's 2Q19 revenue was down 15% y-o-y to S$30m due to a 25% dip in sales from its semiconductor segment. The decline in semiconductor sales was due to lower semiconductor integrated system sales which fell 19% y-o-y to S$11.9m while component sales saw a 30% drop to S$14.5m. The company’s Singapore sales eased mainly due to weaker demand for semiconductor integrated systems. Revenue from Taiwan and Malaysia fell as a result of lower component sales.
  • On a q-o-q basis, the group's semiconductor sales stayed stable, easing just 2%. Overall, revenue for 2Q19 was up by about 4.8%, lifted by the non-semiconductor businesses.

GP margin fell y-o-y but stable q-o-q.

  • Gross margin in 2Q19 fell to 53% from 64% in 2Q18 partly due to product mix, with higher contribution from Starke’s material distribution business. On a q-o-q basis, GP margin was stable.
  • The group's bottom line, however, was boosted by contributions from associate company JEP Holdings (SGX:1J4), and its subsidiaries - Kalf Engineering and Starke Singapore. Overall, 2Q19 net profit of S$8.1m, which account for 27% of our FY19F forecast, was down 44% y-o-y but improved by 15% from 1Q19.
  • For 1H19, revenue and net profit account for 50%/51% of our full-year forecasts; in line.
  • An interim DPS of 0.5 Sct was declared, similar to 1Q19 but lower than 2Q18’s 1 Sct.

Healthy cashflow.

  • UMS continues to generate healthy cash flow in 2Q19. Net cash from operations surged 208% y-o-y to S$15.5m. The improved cash flow was achieved mainly from running down its inventory and lower capital expenditures. UMS invested S$6.9m to raise its equity stake in JEP Holdings from 29% to 39% in 2Q19. Even after making an additional investment in JEP Holdings and paying dividends of S$10.7m, the group’s net cash rose to S$6.0m as of end- 2Q19, reversing from a net debt of S$1.4m as at end-4Q18.

2H19 outlook for semiconductor remains challenging but order volumes stabilising.

  • The second half outlook for the semiconductor business remains challenging, but UMS is currently seeing stable business order volumes from its major customer in the US. Its non-semiconductor businesses, which accounted for 8.9% of 1H19 total revenue, are also making good progress.

SEMI expects recovery in semiconductor industry in 2020.

  • According to SEMI, global sales of semiconductor manufacturing equipment by original equipment manufacturers (OEMs) are projected to decline by 18.4% in 2019 from last year’s historic high.
  • Growth in equipment sales is expected to resume in 2020, with an 11.6% y-o-y jump on the strength of memory spending and new projects in China, while equipment sales in Japan will surge 46.4%.

Maintain FULLY VALUED, Target Price Raised to S$0.49

  • Though UMS is currently seeing stable business orders in 2H19, and SEMI expects a rebound in semiconductor equipment sales in 2020, we would prefer to be cautious and maintain our forecasts and FULLY VALUED call for now. Factors to look out for before we turn more positive would be the successful renewal of existing contract with its key customer and a meaningful pick-up in semiconductor equipment sales.
  • Our target price is raised to S$0.49 (previously S$0.45), still pegged to a 20% discount to peers, at a slightly higher 9x PE (vs 8x previously) and rolling over to FY20F earnings.

Source: DBS Research - 16 Aug 2019

Labels: UMS
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