What is the news? How do we view this?

3Q12 echoes 2Q12 as labour costs and weak demand continue to bite into net income, although the high inventories in 2Q12 were translated into sales for 3Q12. The inevitable OEM squeeze that we talked about in our last report took care of the bottom line, resulting in  HK$11.9m profit. The HK$1.7m gain from minority shows that there is a loss in its moulds & tooling segment.

Its top - FMCG, fast-food and toy - customers reported flat revenues in 3Q12 y-y (positive in constant currencies).

Using our RIV model, 11.4% (revised to average of last 5 years) ROE, 2-year horizon, accelerated depreciation, bestinventory-turnover; we get a fair price of  S$1.85. However due to the general market’s current obsession with leverage fears, we will use - strictly for target price calculation only - a dilution factor on its share base that equals our forecast of its best unsecured net debt position in the next 2 years divided by its best share price attained in the last 6 months.

This factor is about 100%. Therefore our target price is S$1.85/200% =  S$0.93. In our previous report, we used a discount to NBV, which discount we estimated from history. We believe the share dilution basis reflects the current market’s fear-of-leverage situation in a more model-able manner. We also use the highest price in the last 6 months because of the difficulty in buying below that price. The total volume transacted in that period is 194,000 shares, over 126 trading days or just 1,500 shares daily.

Investment Action

Besides our target price of S$0.93 being 16% higher than the best done price of  S$0.80  (apart from the 5100 shares at S$0.90)  in the last 6 months, we rate this a  BUY also because of the conservative metrics built into our valuation.

But, please bear in mind that  In our last report, we mentioned net income would not likely reach FY10 level in the next 2 years; and, positive effects of having its own plant in Guangxi would also come later. One would need patience if one expects some price catalysts soon.

Source: PhillipCapital Research - 20 Dec 2012