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Eu Yan Sang (BUY; Target Price: S$0.94)

Eu Yan Sang has managed to overcome a major hurdle in China. It has clinched a key license to open a pharmacy in China which will allow it to sell its prescriptions drugs and Chinese herbal medicine. Previously, the Company was only retailing food products and its proprietary Lingzhi cracked spores capsules in China. Its flagship products such as Bak Foong pills are considered “medicine”, and hence could only be distributed via hospitals. The first pharmacy will open in Dongguan later this year, and a second one is being planned. The pharmacy license is awarded on a store by store basis. EYS has just opened its 16th store in the country and targets 20 by year end. – DMG Research

 

Frasers Commercial Trust (Not Rated)

Frasers Commercial Trust (FCOT) is an office REIT backed by a strong sponsor and offers income stability through long-term master lease agreements. In our view, the positive rental reversion for its two key assets, China Square Central (CSC) and Central Park (CP), and the unlocking of value through a sale or redevelopment of KeyPoint are positive catalysts for the REIT. When the existing master lease agreement for CSC expires on 29 March 2012, FCOT will take over direct management of the property. CSC will likely experience an immediate lift to its net property income as the positive rental reversion kicks in – 53 per cent of total gross rental income expiring in FY12F with the average passing rent at S$6 psf vs current market rent at S$6.3-8.0 psf. The completion of the Telok Ayer MRT station next year should also boost CSC’s signing rents this year and next. FCOT has been granted an outline planning permission (OPP) for the redevelopment of KeyPoint, which could be rezoned from commercial to mixed commercial and residential use. In our view, FCOT could sell the asset and use the proceeds to purchase its sponsor’s pipeline of assets, redeem the convertible perpetual preferred units (5.5 per cent coupon), and/or reduce its debt. We would prefer FCOT to refrain from redeveloping KeyPoint to preempt the risk of reducing the building’s attractiveness as an instrument for stable income. KeyPoint could possibly be sold for S$1,200-1,300 psf, above its purchase price of S$1,186 psf. – Maybank Kim Eng Research

 

Hu An Cable (Not Rated)

Hu An Cable is one of the top 10 largest integrated cable manufacturers in China. Under the 12th Five Year Plan for China (2011-2015), RMB5.3 trillion will be spent on capital expenditure in the power industry. This represents a 67.7 per cent increase from the RMB3.16 trillion that was earmarked for 2006-2010 under the 11th Five Year Plan. For 2011-2015, China will spend approximately RMB610 billion on power cables, RMB500 billion on ultra-high voltage power cables and RMB521.6 billion on rural grid power cables. It is building a factory with the capacity to manufacture mid- and high-end cables at a location close to its current factory in Yixing City, Jiangsu Province. The capital expenditure of RMB430 million will be funded by internal cash, bank borrowings and IPO proceeds from the SGX listing. Two production lines for mid-voltage power cables and one production line for high-voltage power cables were installed as of October 2011. We believe that production will start sometime during the middle of this year. Hu An appears inexpensive compared to its peers which are listed in China and Taiwan. It is trading at a P/E of 3.6x, P/B (price to book) of 0.6x and offering a dividend yield of 4.6 per cent. – OCBC Investment Research

 

Neptune Orient Lines (HOLD; Target Price: S$1.38)

Neptune Orient Lines (NOL) announced it has mandated four banks as joint lead managers in its issuance of S$-denominated perpetual capital securities. The size, pricing and distribution rate of this issue have not been finalised and will only be available after its currently ongoing meetings with investors. NOL has the option to call the perpetual securities in full and at par at the end of five years and every distribution date thereafter. The issue will have semi-annual distributions and, after a 10-year period, the distribution rate will see a step up of 1.5 per cent per annum. NOL also has the discretion to defer distributions to perpetual security-holders. However, if NOL falls into arrear in the distributions to perpetual security-holders, it will be restricted from distributing dividends to ordinary shareholders. In addition, deferred distributions are cumulative and bear interest at the distribution rate. NOL said the proceeds of this issue will be primarily applied to its working capital needs. The high 1.5 per cent step up in the distribution rate after 10 years should be punitive to NOL if it does not call the perpetual securities back within 10 years. This shows the management’s intent and confidence to service the distributions and, eventually, call the securities. And since accounting standards dictate that these perpetual securities are treated as equity, instead of debt, this issue will improve NOL’s gearing ratio, without diluting shareholders’ interests. NOL’s cost of borrowing should also lower with the improved gearing ratio. NOL had previously said it expected delivery of 32 vessels over the next three years is fully covered by its existing credit lines, which are without attached gearing ratio covenants. With the proceeds from this issue of perpetual securities, NOL’s cash position will be strengthened further. This positions NOL well to navigate through the difficult environment the container shipping sector is currently facing, despite recent increases in freight rates. – OCBC Investment Research

 

Parkson Retail Asia (Not Rated)

PRA was listed on the Singapore Exchange in November last year and is controlled by Parkson Hldg Bhd (PKS MK), which is listed on Bursa Malaysia. Its sister company, Parkson Retail Group), is listed on the Hong Kong Stock Exchange and operates 52 department stores in China. PRA is envisaged as the ASEAN emerging market arm of Parkson Hldg, with plans to expand its presence in the Indonesian and Vietnamese markets. It is also exploring plans in Thailand, Cambodia and Myanmar. Department stores are highly popular in the emerging markets and experienced operators are able to provide a range of products to suit local conditions. PRA rents its space from mall owners and mostly operates department stores whose sizes range from 8,000 sq m to 10,000 sq m. The bulk of its revenue comes from subleases to concessionaire retailers, with about 20 per cent from direct sales. The concessionary model lowers operating risk as cost is borne by retailers. Parkson stores are primarily targeted at the middle-to-upper income segment, with fashion and cosmetics making up more than 80 per cent of sales. Net profit for 1HFY12 grew by 29 per cent YoY to S$27 million, which was ahead of consensus. – Maybank Kim Eng Research

 

Swiber Holdings (HOLD; Target Price: S$0.75)

Swiber Holdings announced that it has secured a US$273 million contract through a local collaboration with ACS subsidiary Dragados Offshore for offshore construction work in the Gulf of Mexico. The undisclosed customer is likely to be PEMEX, and work entails the procurement, transportation and installation of pipeline. The project will be executed through a consortium group with Dragados and Swiber, and we understand from management that Swiber will be doing the bulk of the work. According to newswires, Swiber’s accommodation/pipelay barge Swiber Conquest will lay the pipeline, while Dragados Offshore will contribute the use of its shops in Tampico and logistics base in Ciudad del Carmen. As the US Gulf of Mexico is a new market for Swiber, it is prudent to factor in contingencies for the group. However, there are unlikely to be major hiccups as Swiber Conquest has a good track record of pipe-laying and the waters where it will be executing the work is relatively shallow. Meanwhile we are estimating gross margins of about 15-18 per cent for this project. As the contract falls within our new order assumption of US$850 million for this year, we maintain our earnings estimate but increase our peg to 12x blended FY12/13F core earnings due to improved sentiment on the sector with regards to contract wins, such that our fair value estimate rises to S$0.75 (prev. S$0.61). Looking ahead, we expect more contract wins for Swiber but this also means more funds would be needed for working capital. – OCBC Investment Research

 

Weiye Holdings (Not Rated)

Weiye Holdings is a real estate developer focused on residential property development in two provinces in China: Henan and Hainan. On 3 August 2011, it completed its acquisition of Kyodo-allied Industries Ltd via a reverse takeover, and is currently listed on the SGX mainboard. The company first established itself in Henan and has developed eight projects in the province with a total GFA over 407,000 sqm since 2001. In 2009, Weiye then expanded its operations to Hainan province on which management plans to base its next phase of growth. Its current pipeline consists of four projects in Hainan and two projects in Henan, making up a total GFA of over 1.2 million sqm. We visited three of Weiye’s projects in Hainan recently: Weiye Costa Rhine located in Wanning City, Weiye Oxygen Town in Tunchang County, and West International Plaza in Danzhou County. Construction for the first two projects is expected to complete by the end 2012, whereas West International Plaza is expected to complete by end 2013. From our discussions with management, we believe that Weiye’s property development businesses in Hainan would likely be a focal point for company’s plan for growth ahead. Management has a positive view on Hainan real estate, over the long term, for which they foresee a secular growth in demand as the uptrend in tourism and leisure consumption in China continues. Moreover, Weiye believes that they have an edge over competitors given that Weiye can leverage upon a large network of former clients in Henan who would be potential buyers of a vacation home in Hainan. The company also has sales agencies in other Chinese cities, such as Chengdu, which organize tours for interested buyers to visit their projects in Hainan. – OCBC Investment Research