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Fuxing China (NEUTRAL; Target Price: S$0.050)

1Q12 net loss of RMB6 million came on the back of a 30 per cent decline in revenue to RMB118 million and a 13 ppt dip in GPM (gross profit margin) to 13 per cent, as impact from a slowing global economy remain pronounced in the current quarter. Overall revenue was down 30 per cent YoY to RMB118 million as a 37 per cent fall in zipper related revenue to RMB88 million was partially mitigated by contribution of RMB13 million from its processing businesses that Fuxing acquired in 2Q11. We estimate blended selling prices for its zipper products fell by around 30 per cent, in a move to retain customers’ orders. The company expects operating environment to remain tough for the rest of the year due to intense competition that is keeping margins down. Demand for zippers is likely to remain soft as its customers draw down their existing inventory. In the meantime, Fuxing will exercise tight control on costs and conserve its working capital. Construction of its new Xiamen headquarter is expected to commence upon receipt of regulatory approval. We note that the RMB250 million construction cost for its new headquarters in Xiamen will be incurred progressively over the next three years. This would likely be funded by its cash balance of RMB164 million as of March 2012, bank loans as well as internally generated cash flow. – OSK-DMG


Hi-P International (Not Rated)

As expected, Hi-P reported a big fall in profits in 1Q12 to just S$1.5 million. However, Hi-P expects a stronger 2H in 2012 and for full year net profit to exceed FY11’s S$45 million. Assuming 1H12 net profit of S$10 million, it would have to earn S$35 in 2H12, and if this momentum continues, FY13 results could certainly exceed FY10’s peak of S$67 million. As the stock has retreated in the last few weeks and is currently hovering around the 200-day moving average, it may be worthwhile to take a bet on Hi-P on further weakness. At the recent peak of S$1.05, Hi-P was valued at 20x FY11 earnings. Granted that earnings were at depressed levels, this was absolutely on the over-priced side for an old-world manufacturing stock. It has now fallen back to a more reasonable valuation, its long-term historical mean of 12x. If earnings can recover to FY10 peak levels, the stock would be trading at its long-term mean again. Any further weakness would suggest undervaluation for the stock. Hi-P expects to spend S$180 million in 2012 to expand its production capacity and accelerate its automation programme. This is almost two times what it spent in FY11 and FY10 combined. To some extent, this is driven by its problems with labour costs in China and the need to automate to lower costs. However, it also suggests Hi-P is optimistic enough on future orders to justify this level of capex. Specifically, management mentioned new business opportunities for wireless, computing & peripherals, home appliances, sports digital devices and personal grooming devices.  – Maybank Kim Eng Research


Hoe Leong (HOLD; Target Price: S$0.20)

Hoe Leong Corp (HOE) reported 1Q12 revenue and gross profit of S$20.6 million (+32 per cent YoY) and S$5.3 million (+23 per cent YoY) respectively, and these were generally in line with our estimates. However, a steep and unexpected loss of S$3.3 million from share of results from associates and JVs led to an overall 1Q net loss of S$0.9 million. HOE’s S$4.2 million share of losses from its Malaysian associate Semua comprises loss on disposal of a vessel (S$3.4 million) and operating losses (S$0.8 million). HOE previously purchased a 49 per cent stake in Semua Group from Malaysia-listed Sumatec Group, for RM35.3 million (S$15.1 million) in September 2010 to diversify its business. However, the operating environment has since worsened and a turnaround is unlikely to happen soon. On May 10, HOE disclosed that since Semua did not meet the guaranteed RM31 million profit for FY11, it has the right to seek compensation either through an issuance of new Sumatec shares, a transfer of Semua shares held by Sumatec to HOE, or a combination of the two options. HOE is currently considering its options, and depending on the increase of its effective stake on Semua, there is a possibility that Semua’s financials could be consolidated into HOE in the future. More importantly, this consolidation could have a material impact on HOE’s profitability and balance sheet ratios. While we are fairly comfortable about HOE’s core business, we remain cautious on its Semua stake. Risks include impairment on its Semua stake and a material impact on HOE’s balance sheet on consolidation. – OCBC Investment Research


HTL International (SELL; Target Price: S$0.29)

HTL turned around in 1Q12, registering PATMI (net profit) of US$1.5 million vs a loss of US$0.4 million in 1Q11. This was due to a US$3.2 million forex gain for the quarter vs a US$3.2 million loss in 1Q11. 1Q12 turnover grew by 24.2 per cent from US$105.1 million to US$130.5 million, largely driven by sales to North America, followed by ANZ and Asia. The newly acquired Terasoh Group contributed US$3.3 million to sales growth. Despite the huge increase to North America, this did not help overall group profitability as the group aggressively priced its products to capture market share. This, coupled with rising raw leather prices and higher China factory production costs, has shaved off the group’s gross margins from 35.3 per cent to 33.4 per cent. Turnover fell by 16.5 per cent to US$7.2 million mainly driven by a change in business model in Domicil Home Germany, whereby instead of invoicing for the sale, Domicil recently started to invoice the net gross margin relating to the sale and this has been accounted for as other operating income together with fees from franchisees. If not for the change, revenue would have been higher by 12.8 per cent to US$9.7 million. The group’s net borrowings rose to US$69.5 million vs US$53.2 million as at 31 December 2011. This has resulted in a negative FCF of US$15.7 million in 1Q12 vis-à-vis a positive US$4 million in 1Q11. The group’s net gearing stands at 41.4 per cent vs 31.8 per cent as at 31 December 2011. – OSK-DMG


Leader Environmental Technologies (BUY; Target Price: S$0.146)

Leader’s 1Q results came in below our expectation with RMB2.0 million in PATMI (-60.2 per cent YoY) on the back of S$14.3 million in sales (7.6 per cent YoY). Though revenue increased, earnings came in weak with gross margin falling 30 ppts as a result of more wastewater business contribution which yielded lower margin. Despite the current project backlog standing healthy at RMB219.3 million, a big chunk of it will be pushed back indefinitely until customer’s credit terms can be enhanced. Consequently, in view of the challenging environment, we lower our earnings estimates by 17.0 per cent and 15.9 per cent for FY12 and FY13 respectively. On a positive note, the group will kick start its O&M project in 2Q, which is expected to contribute approximately RMB24 million to the topline with 40 per cent gross margin. – OSK-DMG



SMRT (HOLD; Target Price: S$1.71)

Following a directive issued by the Land Transport Authority (LTA), SMRT will begin replacing, with immediate effect, the power supplying third rail at locations where hairline cracks on some parts of the third rail joints are more visible. Although the presence of hairline cracks does not pose any immediate concerns, the move is more of a precautionary measure and the LTA has also reiterated the need for SMRT to closely monitor the condition of the third rail joints across its entire rail network. SMRT had previously disclosed a S$500 million capital expenditure plan for FY13 with the excess from its usual annual budget related to a portion of the S$900 million, seven-year plan to upgrade and renew aging MRT assets. According to SMRT’s work and time-line projections, the cost of the third rail replacement has not been included in this year’s estimates. While the final amount will only be known pending the outcome of its third rail checks, we expect to see a slight uptick in this year’s capital expenditure with the increase coming from an acceleration of costs from later years. As for SMRT’s share price, it has held steady despite initial selling pressure following its weak FY12 results, and has managed to outperform the FTSE STI Index over the past two and a half weeks. While the COI continues its public hearings, we deem the possibility of further sharp sell-offs to be remote as SMRT services and its operational cash flows remain in demand and resilient. We reiterate our belief that SMRT will not have difficulty addressing its higher capital outlay requirements given its existing net cash position and available MTN programme, and leave our conservative 60 per cent PATMI dividend payout ratio estimates unchanged. – OCBC Investment Research


Swiber Holdings (NEUTRAL; Target Price: S$0.66)

Taking off the exceptional items such as foreign exchange losses and fair value losses on convertible bond, Swiber posted a strong set of results with US$13.5 million core PATMI (+294.2 per cent YoY) on the back of US$194.4 million revenue (+29.1 per cent YoY). Swiber managed to achieve a strong gross margin of 19.8 per cent through geographic cost synergy and better vessels utilisation rate (>75 per cent). Meanwhile, despite the strong growth in revenue (+29.1 per cent YoY), admin expenses only increased by 8.9 per cent to US$13.8 million on the back of the newly added depreciation expenses as well as the 32.7 per cent jump in headcount to 2,604 employees. This came as a positive surprise to us as historically, admin expenses would shoot up along with the revenue growth. Swiber currently has an outstanding backlog order of US$1.2 billion. The group is expected to execute and recognise half of this backlog order (US$600 million) in the next three quarters. Moving on, we believe that the group is capable of replenishing the orderbook in time with more new wins in view of the robust tendering activities in Southeast Asia. Most notably in Indonesia, as according to Upstream, Swiber is closing on in winning the US$200 million EPCIC contract from ConocoPhillips and securing a turnkey contract potentially worth US$170 million from Premier Oil. – OSK-DMG


Yamada Green (BUY; Target Price: S$0.30)

3QFY12 net profit of RMB82 million (+27 per cent YoY) was below our projected RMB97 million due to wet weather that affected mushroom yield, as well as higher costs of production.  Shiitake mushroom revenue grew by 57 per cent to RMB194 million mainly because of a larger cultivation area of 5,134 mu. Shiitake volume was up 58 per cent to 28,500 tonnes while ASP stayed relatively flat at RMB6.8/kg. Processed food sales saw stable growth of 15 per cent to RMB41 million. Black fungus contributed RMB7 million, up from RMB5 million a year ago. Volume for black fungus was 1,550 tonnes while its ASP grew by 2 per cent from a year ago to RMB4.7/kg. GPM dipped 6 ppt as a favourable sales mix towards fresh fungus – 83 per cent of 3QFY12 revenue – was more than offset by a 10 ppt GPM drop for shiitake mushroom due to higher synthetic log prices. Processed food GPM recovered 6 ppt to 32 per cent on better selling prices. Black fungus’ GPM was 29 per cent due to the reclassification of expenses into COGS in the current quarter. – OSK-DMG