Singapore Market Focus SMC strategy...ed: TH / sa: AS, PY, CS DBS Group Research . Equity STI : 3,450.69 Analyst Lee Keng LING +65 6682 3703 Carmen Tay +65 6682 3719 [email protected]

ed: TH / sa: AS, PY, CS

STI : 3,450.69 Analyst Lee Keng LING +65 6682 3703 Carmen Tay +65 6682 3719 [email protected] [email protected]

Key Indices

Current % Chng

FS STI Index 3,450.69 -1.2%

FS Small Cap Index 397.06 -0.3%

SGD Curncy 1.35 2.5%

Daily Volume (m) 2,668

Daily Turnover (S$m) 1,483

Daily Turnover (US$m) 1,100

Source: Bloomberg Finance L.P.

Market Key Data

(%) EPS Gth Div Yield

2017 9.7 4.1

2018F 12.7 3.8

2019F 8.3 3.4

(x) PER EV/EBITDA

2017 17.1 15.7

2018F 15.2 14.9

2019F 14.0 16.8

DBS Group Research . Equity

8 Mar 2018

Singapore Market Focus

SMC strategy Refer to important disclosures at the end of this report

Upside participation, downside

protection

Earnings still key; go for names with clear growth

catalysts – BreadTalk, Cityneon, mm2 Asia, and

Riverstone

Keep a firm eye on growth and another on

downside protection as small-mid caps have yet to

recover from recent selldown

Steady dividends make good safety nets – Chip Eng

Seng, Hong Leong Finance, Riverstone, Sheng

Siong, Sunningdale, and UMS

Trading cheap and ready to shine in 2018 – China

Aviation Oil, Delfi, Riverstone, and Roxy Pacific

Firm eye on earnings growth. Encouraged by the positive earnings growth momentum displayed in 4Q, we seek to identify stocks with clear catalysts to sustain double-digit earnings growth over the next two years.

Our preferred picks to ride the earnings momentum –

Breadtalk, Cityneon, mm2 Asia, Riverstone

Dividends provide shelter amidst volatility. With results

season now over and dividend payments back in focus, we

believe that growth stocks with a dividend sweetener could

outperform over the next one to two months. Historically,

SMCs that have consistent dividend payouts also tend to be

more resilient.

With the FT ST Small Cap Index and FT ST Mid Cap Index

(FSTM) underperforming YTD and still trending near post-

February correction lows, we believe that selected dividend-

paying stocks are worth a relook, as their attractive

dividends could serve as a valuable safety net amidst volatile

markets.

Riverstone and Sunningdale make attractive dividend

growth plays. We also like Chip Eng Seng, Hong Leong

Finance, Sheng Siong and UMS for their stable dividends.

Opportunities to bottom fish companies currently

trading at attractive valuations. We also see opportunities

to bottom fish, as there are a few other companies that are

on the cusp of an earnings turnaround (Delfi, Roxy Pacific),

or trading at deep discounts despite strong growth

prospects (Riverstone, China Aviation Oil).

STOCKS

12-mth

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 3 mth 12 mth Rating

Earnings Growth BreadTalk Group Ltd

1.79 383 2.05 14.0 38.8 BUY Cityneon Holdings Ltd

1.01 188 1.45 2.0 27.0 BUY mm2 Asia 0.46 403 0.75 (13.3) 0.0 BUY

Riverstone 1.04 587 1.27 0.0 18.2 BUY

Dividend Plays Chip Eng Seng 0.92 432 1.18 2.2 26.2 BUY HL Finance 2.67 906 3.20 (1.8) (0.4) BUY Riverstone Holdings

1.04 587 1.27 0.0 18.2 BUY Sheng Siong Group Ltd

0.95 1,081 1.20 2.2 1.1 BUY Sunningdale Tech Ltd

1.83 263 2.70 (1.6) 28.4 BUY UMS Holdings 1.13 461 1.37 15.9 90.9 BUY Attractive Valuations China Aviation Oil 1.50 987 1.98 (5.7) (0.7) BUY Delfi Ltd 1.52 707 1.80 14.3 (34.5) BUY Riverstone Holdings

1.04 587 1.27 0.0 18.2 BUY Roxy-Pacific Holdings

0.55 499 0.69 1.9 7.8 BUY

Source: DBS Bank, Bloomberg Finance L.P.

Closing price as of 7 Mar 2018

Market Focus

Page 2

Season of Positive Revisions

Results are in. The recent 4Q reporting season concluded with a

positive earnings revision trend of +2% to +3% for FY18F and

FY19F earnings of stocks under our coverage. Within our small-

mid cap (SMC) universe, c.65% reported results which were

within expectations, while c.16% were above.

The upward revisions were led by APAC, Hi-P, Best World,

Riverstone, UMS and Hong Leong Finance. Notably, APAC

delivered impressive first full-year results post IPO, while Best

World, Riverstone and UMS saw record profits in FY17.

Among the sectors, Technology shone the brightest with

earnings upgrades of +15.6% and +19.0% for FY18F and FY19F

respectively, but results for the Oil & Gas sector remained weak.

Post results earnings revision by sector

Source: DBS Bank

Growth stocks with steady yields are more attractive. Encouraged

by the positive earnings growth momentum displayed in 4Q, we

seek to identify stocks with clear catalysts to sustain firm growth

momentum ahead. There are at least 16 SMCs under our

coverage offering >10% earnings growth in FY18F, as detailed

on the following page.

Apart from potential capital gains, small-mid cap stocks can also

pay good dividends – providing investors with both upside

participation and downside protection. With results season now

over and dividend payments back in focus, we believe that

growth stocks with a dividend sweetener could outperform over

the next one to two months. Historically, SMCs that are

consistent dividend payouts also tend to be more resilient.

Additionally, we also see opportunities to bottom fish, as there

are a few other companies that are trading cheap but offer

steady growth and/or on the cusp of an earnings turnaround.

Key Investment Metrics: Riverstone checks all the boxes

Source: DBS Bank

.

Sector F Y18 F Y19

Banking 3.3% 0.8%

Commodities Related -1.8% 10.9%

Consumer Goods -3.8% 3.2%

Consumer Serv ices 7.0% 9.2%

Financials -2.9% -2.0%

Health Care 0.2% -0.7%

Industrials 3.2% 2.9%

Oil & Gas -3.4% -9.5%

Real Estate 7.6% -3.2%

REITS 2.6% 1.2%

Technology 15.6% 19.0%

Telecommunications -0.4% -0.3%

Grand Total 2.5% 1.5%

Current v s Prev . % Chng

Company Ea rnings Growth

Dividend Play Attractive Va luations

BreadTalk √ √

China Aviation Oil √ √

Chip Eng Seng √ √

Cityneon √ √

Delfi √ √

Hong Leong Finance √

mm2 Asia √

Riverstone √ √ √

Roxy Pacific √ √

Sheng Siong √

Sunningdale √ √

UMS Holdings √ √

Market Focus

Page 3

SMC stocks in our BUY list with > 10% earnings growth for FY18F

Source: DBS Bank

Mkt Pric e Ta rge t EPS CAGR

Ca p (S$) Pric e % 17-19

Compa ny FYE (S$m) 5-Ma r-18 (S$) Ups ide Rcmd FY17 FY18F FY19F (%) FY18F FY19F

Roxy-Pacific Dec 661.6 0.56 0.69 24% BUY (80.5) 532.8 66.6 224.7 1.8 1.6

Breadtalk Dec 506.6 1.80 2.05 14% BUY 60.3 57.1 7.0 29.7 3.9 2.2

Spore Medical Group Dec 231.1 0.51 0.73 42% BUY 243.8 46.7 5.8 24.6 - -

Cityneon Dec 254.4 1.04 1.45 39% BUY 165.5 42.6 19.6 30.6 - -

mm2 Asia Mar 523.3 0.45 0.75 67% BUY 21.4 28.4 21.3 24.8 - -

Sunningdale Dec 353.8 1.87 2.70 44% BUY (1.6) 24.3 6.5 15.1 3.7 4.0

Delfi Dec 929.0 1.52 1.80 18% BUY (16.8) 19.8 19.7 19.8 1.8 2.2

Riverstone Dec 763.3 1.03 1.27 23% BUY 7.4 19.5 11.9 15.6 2.3 2.7

iFAST Dec 242.2 0.92 1.26 37% BUY 64.5 16.1 16.4 16.2 3.3 2.5

APAC Dec 433.3 1.22 1.25 2% BUY 63.1 14.3 6.5 10.3 1.6 4.1

Hi-P Dec 2,051.9 2.54 2.48 -3% BUY 131.3 14.0 10.5 12.2 9.8 2.4

Manulife US REIT Dec 1,224.6 0.90 1.00 11% BUY 68.5 14.0 0.4 7.0 6.2 7.0

China Aviation Oil Dec 1,297.3 1.50 1.98 32% BUY (4.0) 12.2 9.1 10.6 3.0 2.9

UMS Dec 611.5 1.14 1.37 20% BUY 84.3 11.6 5.0 8.3 4.9 5.3

CDL Hospitality Trust Dec 1,991.3 1.66 2.00 20% BUY (4.3) 10.3 4.1 7.2 5.6 6.1

Ea rn ings Gth (%) Div Yld (%)

Market Focus

Page 4

Look for Earnings Boosters

Firm eye on earnings growth, which remains key for SMCs. While

the earnings growth trend has been positive, we would favour

companies with strong, specific catalysts to help sustain double-

digit earnings growth over the next two years. Our preferred

picks include BreadTalk, Cityneon, mm2 Asia, and Riverstone.

Riding on growing scale and improving operating leverage to

deliver sustainable growth. Cityneon and mm2 Asia stand out as

young and fast-growing companies, and are still in their

transformative stages of growth. Cityneon has successfully

transformed into a creator of innovative and interactive

exhibitions, while mm2 Asia has established a meaningful

presence across the production value chain - from movie/drama

creation to exhibitions.

Meanwhile, Riverstone – which also features in several other

screens as a dividend growth play and bottom-fishing candidate,

is poised to deliver successive earnings records in the coming

years as the group ramps up on new capacity to meet growing

demand. Driven by new stores and cost management, the

outlook for BreadTalk also remains attractive.

Our preferred picks to ride the earnings momentum:

BreadTalk (BUY; TP: S$2.05)

We remain positive on BreadTalk over continued consolidation

of underperforming outlets that will yield better margins going

forward and sale of stakes in properties such as CHIJMES and

AXA Tower that will unlock shareholder value if they

materialise. Growth drivers remain intact and turnaround in

Bakery division led by store growth and better profitability in

FY18F will drive earnings growth. BreadTalk’s valuation, based

on its core business (ex-property investments), seems

compelling at 18x FY18F PE.

Cityneon (BUY; TP: S$1.45)

Though Cityneon has been listed for over ten years, it was

given a new lease of life when VHE Entertainment (VHE) was

injected into the group in September 2015. Cityneon has since

evolved to become a creator of innovative and interactive

exhibitions, focusing on creating captivating cutting-edge

content, and delivering engaging and interactive exhibitions to

audiences, from its traditional exhibition business.

Since its injection into Cityneon, VHE has secured two more

Intellectual Property (IP) rights – Transformers and Jurassic

World. Together with the first IP – Avengers, Cityneon is now

on a stronger and firmer growth path with a total of three IPs,

to help propel the group to even greater heights. We continue

to expect Cityneon to deliver explosive FY16-19F EPS CAGR

growth of 165%. Trading at a low PE-to-growth ratio of 0.2x

FY18F earnings, Cityneon is attractive to investors seeking

unique ideas in the entertainment industry.

mm2 Asia (BUY; TP: S$0.75)

mm2 Asia was listed on the SGX in December 2014 as a

leading producer of films and TV/online content in Asia. In a

short span of about three years, the group has evolved to

become a full-service provider in the entire value chain of

content creation to distribution, with the acquisition of

cinemas (18 in Malaysia and eight in Singapore), event

production and concert promotion company UnUsUaL, and

post-production company, Vividthree.

Having a strong presence in the entire value chain of content

creation and distribution further cements mm2's status as the

leader in the media/entertainment industry. With a much

larger and stronger scale, mm2 can now enjoy the synergistic

benefits from the entire value chain. We expect strong

earnings CAGR of 28% for FY17-20F, underpinned by growth

in productions, expansion into the China market, and

contribution from UnUsUaL. The cinema arm, on the other

hand, helps the group build a recurring income base.

Riverstone (BUY; TP: S$1.27)

A global market leader in niche cleanroom gloves, Riverstone’s

edge in the high-tech cleanroom segment sets it apart from

the bigger boys. Given intense competition in the healthcare

space, we see value in Riverstone’s growing cleanroom

business – which allows the group to command consistently

higher margins vs peers (16% vs peers’ c.10-15% in FY17).

With new cleanroom facilities set to kick in from 2Q18,

cleanroom capacity is expected to grow by c.33% to at least

2bn gloves p.a. The ramp-up on these new capacities should

help drive higher growth in cleanroom gloves vis-à-vis the

lower-margin healthcare business, allowing Riverstone’s

earnings growth of c.16% to catch up with larger peers’

c.17%.

Market Focus

Page 5

Dividends provide shelter amidst volatility

Small- and mid-cap indices have underperformed YTD. YTD,

the FT ST Small Cap Index (FSTS) is down 2.1%, while the FT

ST Mid Cap Index (FSTM) eased 1.6% vs +2.6% for the ST

Index. Both the FSTS and FSTM have not recovered from the

February selldown and are still trending near the February low.

YTD Performance - FSTS, FSTM and STI


As SMC stocks tend to be more volatile, dividends serve as a

safety net and offer stability amidst volatile markets.

In our screen, we focus on:

1) Dividend sweeteners – Companies that have upped

their dividends recently on higher earnings achieved

in FY17

- APAC Realty, BreadTalk, Hi-P

2) Dividend growth – Companies that could pay

increasing dividends over time

- Riverstone, Sunningdale

3) Steady yields – Companies which have been

consistent in paying and/or growing dividends

- Chip Eng Seng, Hong Leong Finance, Sheng Siong,

UMS

(1) Dividend sweetener on record FY17 earnings

On the back of record results, several companies have upped

their dividends as a sweetener. In the large-cap space, DBS

declared a higher S$1.20 dividend for FY17, to be maintained

going forward – which is nearly 2x that compared to previous

years. CapitaLand also hiked its 2017 dividend payout by 20%

to 12 Scts a share.

In the small-mid cap space, several companies that have also

raised their dividend payout in FY17 include APAC Realty,

BreadTalk and Hi-P:

APAC Realty declared a final dividend of 2 Scts per share in

4Q17. This works out to c. 90% of 4Q17 net profit, as APAC

was only listed at end-September 2017. APAC has guided that

it is committed to pay at least 50% of FY18F profit as

dividend.

Assuming a payout ratio of 60% for FY18F, dividend yield is

attractive at 4.5%. We believe that APAC, which owns one of

Singapore’s largest real estate agency, ERA Realty, is poised to

deliver a robust 10% 2-year CAGR in EPS on the back of a turn

in the Singapore residential market, which is at the cusp of a

multi-year recovery.

BreadTalk declared final and special dividends of 2 Scts and 3

Scts respectively, exceeded our expectations of a total of 4

Scts. Going forward, our positive stance for the stock

continues as BreadTalk's financial performance remains on a

growth trajectory. Higher-than-expected special dividends will

support the share price, while any property sale going forward

could act as a share price catalyst.

For Hi-P, the group has declared a special DPS of 19 Scts,

together with the 2Q17 results announcement. For the full

year FY17, dividend yield, excluding the special payout, works

out to 3% or 6 Scts DPS. Going forward, we expect higher

dividend payout ratio of 35% (up from 20%) in FY18F and

FY19F, which works out to a DPS of about 6 Scts, which is

similar to FY17, excluding special DPS of 19 Scts.

We expect earnings momentum for Hi-P to remain strong, on

the back of the new products in the Wireless and IoT

segments, and also an expanding customer base. We are now

expecting EPS CAGR of 41% for FY16-19F. Hi-P is in a sweet

spot now as more than half of its earnings are derived from

the Wireless (smartphone) and Computer Peripherals (IoT

segment, e.g. smart home) segments, which are expected to

continue to do well.

Market Focus

Page 6

(2) Two companies that have emerged as dividend growth plays

Supported by firm earnings growth and strong cash flow

generation, both Sunningdale and Riverstone have been

paying increasingly higher dividends y-o-y over the past few

years:

DPS FY12 FY13 FY14 FY15 FY16 FY17

Sunningdale

(S cts)

3.0 3.5 4.0 5.0 6.0 7.0

Riverstone

(sen)

3.1 3.1 3.5 6.5 6.5 7.0

Source: Companies, DBS Bank

Since FY12, Sunningdale has been growing dividends by at

least 0.5 Sct to 1 Sct p.a., resulting in a substantially higher

dividend payout of 7 Scts per share in FY17 vs 3 Scts in FY12.

While Riverstone does not have a fixed dividend policy, its past

payouts have averaged 40%. As profits grew, its dividend

payments have also more than doubled from 3.1 sen in FY12

to 7 sen for FY17.

Underpinned by capacity growth and ongoing production

ramps amidst robust demand, their core earnings are projected

to grow at 15-16% CAGR over FY17-19F, which provides

support for expectations of even higher dividends to be paid

going forward.

(3) Consistency is key

Apart from REITs/Trusts, several SMCs have also demonstrated

consistency in paying good dividends. UMS has been paying a

fixed 5-6 Scts of dividends since 2010, and maintained its payout

despite issuing bonus shares in FY17. Chip Eng Seng also stands

out for its fixed 4-Sct dividend (with upside from special

dividends in bumper years), which is rare among small-cap

property developers.

Hong Leong Finance and Sheng Siong, which typically manage

dividends based on a target payout ratio rather than a fixed

amount per share, have also paid consistently good dividends in

past years. With earnings set to grow at 4% and 5.5% over

FY17-19F respectively, we believe the positive dividend growth

trend is likely to be maintained going forward.

Stocks with consistently good dividend payouts

Source: Thomson Reuters, DBS Bank

Mkt Price Target Div EPS CA GR

Cap (S$) Price % Yld (%) 17-19

Company F YE (S$m) 5-Mar-18 (S$) Upside Rcmd F Y14 F Y15 F Y16 F Y17 F Y18F F Y19F F Y18F (%) F Y18F F Y19F

UMS Holdings Dec 611.5 1.14 1.37 20% BUY 6.0 6.0 6.0 5.6 6.0 6.0 5.3 8.3 10.5 10.0

Hong Leong Finance Dec 1,204.2 2.70 3.20 19% BUY 10.0 11.0 9.0 13.0 13.6 14.1 5.0 4.0 13.4 13.0

Chip Eng Seng Dec 571.3 0.92 1.18 29% BUY 6.0 4.0 4.0 4.0 4.0 4.0 4.3 28.1 18.0 9.8

Sheng Siong Dec 1,420.8 0.95 1.20 27% BUY 2.9 3.5 3.8 3.3 3.4 3.6 3.6 5.5 19.7 18.3

P/E (x)DPS (ct s)

Market Focus

Page 7

Upcoming distributions (DPS, payout dates and yields*)

Note: Dividend yield is derived based on upcoming distributions only, does not take into account interim dividends that have already been paid.


Company DPS ($) Price @ 7

Mar 18

Div Y ld

(%)

Ex Date Pay ment Date

BHG RETAIL REIT 0.0273 0.80 3.4% 08-Mar-18 28-Mar-18

DASIN RETAIL TRUST 0.0415 0.89 4.7% 14-Mar-18 27-Mar-18

ASIAN PAY TELEVISION TRUST 0.01625 0.57 2.9% 14-Mar-18 23-Mar-18

STRAITS TRADING CO. LTD 0.06 2.25 2.7% 16-Apr-18 04-May-18

M1 LIMITED 0.062 1.78 3.5% 18-Apr-18 27-Apr-18

UNITED OVERSEAS INSURANCE LTD 0.19 7.60 2.5% 19-Apr-18 03-May-18

LEE METAL GROUP LTD 0.01 0.41 2.4% 20-Apr-18 07-May-18

GREAT EASTERN HLDGS LTD 0.6 30.33 2.0% 20-Apr-18 08-May-18

SINGAPORE TECH ENGINEERING LTD 0.1 3.35 3.0% 24-Apr-18 08-May-18

KEPPEL TELE & TRAN 0.035 1.54 2.3% 25-Apr-18 09-May-18

CEI LIMITED 0.034 1.00 3.4% 26-Apr-18 15-May-18

UNITED OVERSEAS BANK LTD 0.65 27.65 2.4% 26-Apr-18 13-Jun-18

UOB-KAY HIAN HOLDINGS LIMITED 0.048 1.43 3.4% 27-Apr-18 19-Jun-18

SINGAPORE REINSURANCE COR LTD 0.008 0.32 2.5% 27-Apr-18 28-May-18

SINGAPORE O&G LTD. 0.0089 0.37 2.4% 27-Apr-18 18-May-18

TALKMED GROUP LIMITED 0.0137 0.70 2.0% 27-Apr-18 09-May-18

CSE GLOBAL LTD 0.015 0.37 4.1% 30-Apr-18 18-May-18

FRENCKEN GROUP LIMITED 0.0239 0.62 3.9% 30-Apr-18 11-May-18

VICOM LTD 0.2288 6.05 3.8% 30-Apr-18 10-May-18

HWA HONG CORPORATION LIMITED 0.011 0.32 3.4% 30-Apr-18 18-May-18

AVI-TECH ELECTRONICS LIMITED 0.013 0.51 2.6% 30-Apr-18 15-May-18

TELECHOICE INTERNATIONAL LTD 0.016 0.27 5.9% 02-May-18 21-May-18

TREK 2000 INT'L LTD 0.01 0.27 3.8% 02-May-18 16-May-18

MEMTECH INTERNATIONAL LTD 0.055 1.65 3.3% 02-May-18 18-May-18

UMS HOLDINGS LIMITED 0.03 1.13 2.7% 02-May-18 25-May-18

UOL GROUP LIMITED 0.175 8.45 2.1% 02-May-18 11-May-18

OKP HOLDINGS LIMITED 0.02 0.35 5.8% 03-May-18 17-May-18

DYNAMIC COLOURS LIMITED 0.015 0.28 5.4% 03-May-18 15-May-18

CHALLENGER TECHNOLOGIES LTD 0.022 0.49 4.5% 03-May-18 18-May-18

DBS GROUP HOLDINGS LTD 1.1 28.09 3.9% 03-May-18 15-May-18

WHEELOCK PROPERTIES (S) LTD 0.06 1.79 3.4% 03-May-18 14-May-18

COMFORTDELGRO CORPORATION LTD 0.0605 2.00 3.0% 03-May-18 14-May-18

SINGAPURA FINANCE LTD 0.03 1.03 2.9% 03-May-18 14-May-18

WILMAR INTERNATIONAL LIMITED 0.07 3.18 2.2% 03-May-18 16-May-18

AP OIL INTERNATIONAL LIMITED 0.005 0.24 2.1% 03-May-18 25-May-18

OKP HOLDINGS LIMITED 0.007 0.35 2.0% 03-May-18 17-May-18

OVERSEAS EDUCATION LIMITED 0.0275 0.37 7.4% 04-May-18 17-May-18

HL GLOBAL ENTERPRISES LIMITED 0.03 0.52 5.8% 04-May-18 23-May-18

MULTI-CHEM LIMITED 0.044 0.92 4.8% 04-May-18 23-May-18

CHIP ENG SENG CORPORATION LTD 0.04 0.92 4.4% 04-May-18 23-May-18

HOCK LIAN SENG HOLDINGS LTD 0.018 0.47 3.8% 04-May-18 22-May-18

HONG LEONG FINANCE LIMITED 0.09 2.67 3.4% 04-May-18 23-May-18

CENTURION CORPORATION LIMITED 0.015 0.50 3.0% 04-May-18 18-May-18

Market Focus

Page 8

Upcoming distributions (DPS, payout dates and yields*)

Note: Dividend yield is derived based on upcoming distributions only, does not take into account interim dividends that have already been paid.

Source: DBS Bank, Bloomberg

Company DPS ($) Price @ 7

Mar 18

Div Y ld

(%)

Ex Date Pay ment Date

NERATELECOMMUNICATIONS LTD 0.015 0.37 4.1% 07-May-18 25-May-18

MDR LIMITED 7.98E-05 0.00 2.7% 07-May-18 23-May-18

MFG INTEGRATION TECHNOLOGY LTD 0.0075 0.32 2.4% 07-May-18 23-May-18

PAN-UNITED CORPORATION LTD 0.008 0.39 2.1% 07-May-18 18-May-18

FIRST RESOURCES LIMITED 0.0555 1.73 3.2% 08-May-18 17-May-18

UPP HOLDINGS LIMITED 0.005 0.25 2.0% 09-May-18 25-May-18

JARDINE CYCLE & CARRIAGE LTD 0.9248 35.93 2.6% 10-May-18 25-Jun-18

HOSEN GROUP LTD 0.001 0.05 2.2% 11-May-18 25-May-18

FEDERAL INT(2000) LTD 0.02 0.37 5.4% 14-May-18 23-May-18

BBR HOLDINGS (S) LTD 0.006 0.22 2.7% 14-May-18 31-May-18

LHT HOLDINGS LIMITED 0.05 0.81 6.2% 15-May-18 25-May-18

HO BEE LAND LIMITED 0.1 2.55 3.9% 15-May-18 31-May-18

ISDN HOLDINGS LIMITED 0.006 0.22 2.8% 15-May-18 05-Jun-18

KINGSMEN CREATIVES LTD 0.015 0.61 2.5% 15-May-18 31-May-18

BROOK CROMPTON HOLDINGS LTD. 0.05 0.79 6.3% 17-May-18 31-May-18

VENTURE CORPORATION LIMITED 0.6 27.09 2.2% 17-May-18 31-May-18

ENVIRO-HUB HOLDINGS LTD 0.003 0.04 7.9% 22-May-18 08-Jun-18

GLOBAL TESTING CORPORATION LTD 0.09 1.25 7.2% 28-May-18 29-Jun-18

Market Focus

Page 9

Opportunities to bottom fish

Attractive valuations with a chance to shine in 2018. With

positive vibes gathered during the Q4 reporting season and a

handful of companies guiding for stronger operational

prospects in 2018, we would see the February correction as an

opportunity for investors to accumulate selective stocks at

attractive valuations.

In our screen, we favour companies that are: -

1) On the cusp of an earnings turnaround, and/or

i.e. Delfi Ltd, Roxy Pacific

2) Trading at attractive valuations despite strong earnings

growth potential

i.e. Riverstone Holdings, China Aviation Oil (CAO)

Turnaround plays - Delfi and Roxy Pacific may have missed the

mark in their recent Q4 earnings report card compared to a

year ago, but are set for an earnings turnaround in 2018.

Ongoing share buybacks for Roxy signal confidence in future

earnings, providing further support to its share price.

Firm growth but cheap valuations. Trading at relatively cheap

valuations vs peers, the recent pullbacks in Riverstone and CAO

also offer investors a better entry point, ahead of their strong,

anticipated growth in subsequent quarters.

Four stocks to bottom fish in 2018

Company FYE Mkt Price Target Upside Rcmd Core Earnings Gth (%) EPS CAGR

P/E (x) P/BV (%) Net Cash

(Debt) as % of

Mkt Cap

Yield

Cap (S$) Price 17-19

(S$m) 5-Mar-18 (S$) (%) FY17

FY18F

FY19F (%) FY18F FY19F FY18F FY19F (%) Delfi Dec 929.0 1.52 1.80 18% BUY (16.8) 19.8 19.7 19.8 25.0 20.9 3.1 2.9 2.1% 2.2%

Roxy Pacific Dec 661.6 0.56 0.69 24% BUY (80.5) 532.8 66.6 224.7 16.1 9.6 1.2 1.1 (83.0%) 1.6%

Riverstone Dec 763.3 1.03 1.27 23% BUY 7.4 19.5 11.9 15.6 14.7 13.1 3.1 2.7 4.0% 2.7%

China Aviation Oil

Dec 1,297.3 1.50 1.98 32% BUY (4.0) 12.2 9.1 10.6 10.2 9.3 1.2 1.1 18.2% 2.9%

Source: Thomson Reuters, DBS Bank

Delfi (BUY; TP: S$1.80) - Turning the corner

With its share price currently trading near six-year lows, Delfi’s

weak operating environment appears to be priced in and is

worth a relook. 4Q17 performance suggests that weakness

might have bottomed out, and is set to improve from FY18F.

Riding on the low-base effect, improving sentiment, lower raw

materials, and positive production rationalisation effects,

earnings could grow at c.20% CAGR over FY17-19F and drive

a meaningful recovery in share price.

Our TP of S$1.80 is based on regional peer average of 26x,

pegged to blended FY18F/19F earnings.

Roxy Pacific (BUY; TP: S$0.69) – Ready for launch

One of the earliest to land bank in the current market cycle,

Roxy’s investments in small but freehold residential sites gives

the company the flexibility to launch quickly and hit the

market.

Strong take-up rates for The Navian – its first launch in 2018

have been encouraging. With a total of six residential

developments in Singapore ready for launch in 2018 (two to

three of which will be within 1Q18), the group is well poised to

capture the rise in buyer demand ahead of its peers, and grow

earnings quickly at c.53% CAGR over FY17-19F.

Still largely “undiscovered” among institutional funds, we

believe the ability to surprise on the upside is high over the

near term. Roxy currently trades at 1.3x FY18F P/BV, below

historical average. At its peak, Roxy traded at 2.3x P/BV.

Market Focus

Page 10

Riverstone (BUY; TP: $1.27) – Cleanroom edge not priced in yet

Given the competitive nature of the healthcare glove industry (which represents the bulk of peer revenues), we see value in Riverstone’s growing cleanroom glove business, which allows the group to command consistently higher margins vs peers. We believe the market has yet to fully appreciate Riverstone’s unique strengths and leadership in the cleanroom glove arena, as its shares continue to trade cheaply (below its historical average forward PE) vs larger peers, which have re-rated strongly in recent months despite unchanged fundamentals. Based on consensus estimates, Hartalega is currently trading at +1SD of its historical average, while Top Glove and Kossan are at above +2SD. We see the valuation gap of c.55% (vs larger peers’ c.29x) narrowing and Riverstone at least trading at its historical average forward PE of 16x FY19F PE (from c.13x currently) as the group ramps up on its incoming cleanroom glove capacities to deliver higher-quality earnings growth at 16% CAGR over FY17-19F. Better-than-expected execution could spark a further re-rating to 18x PE (+1 SD), in line with peers.

China Aviation Oil (BUY; TP: $1.98) – Firm growth ahead

CAO’s jet fuel import business segment as well as its key associate SPIA, which roughly accounts for over 80% of CAO’s earnings, are set to benefit from the double-digit pace of international travel growth in China over the next few years. In particular, with a fifth runway in Shanghai Pudong soon to start commercial operations, contribution from SPIA is well

poised to enjoy firm growth ahead. The continued expansion in

its jet fuel supply business will also help its trading business to

reap benefits from a greater scale and network.

With over US$300m in cash (net cash of US$180m) and a strengthened management team, the group will step up its efforts on the M&A front to make value-accretive acquisitions, which could act as a further re-rating catalyst for the stock.

ed: TH / sa: YM, PY

BUY Last Traded Price ( 6 Nov 2017): S$1.605 (STI : 3,381.85) Price Target 12-mth: S$2.01 (25% upside) (Prev S$2.04) Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

What’s New • 3Q17 earnings in line, Restaurants and Food Atrium

offset Bakery’s drag on operating profit

• Interim DPS of 1 Sct declared

• Sale of AXA Tower a potential catalyst

• Maintain BUY and S$2.01 TP

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Revenue 615 603 630 658 EBITDA 80.0 82.3 84.7 89.0 Pre-tax Profit 29.7 44.8 39.1 42.0 Net Profit 11.4 24.4 21.8 23.5 Net Pft (Pre Ex.) 8.63 16.4 21.8 23.5 Net Pft Gth (Pre-ex) (%) (29.2) 89.7 33.3 7.4 EPS (S cts) 4.07 8.67 7.76 8.34 EPS Pre Ex. (S cts) 3.07 5.82 7.76 8.34 EPS Gth Pre Ex (%) (29) 90 33 7 Diluted EPS (S cts) 4.05 8.63 7.73 8.30 Net DPS (S cts) 3.85 5.00 3.00 3.00 BV Per Share (S cts) 46.9 50.6 55.4 60.7 PE (X) 39.5 18.5 20.7 19.3 PE Pre Ex. (X) 52.3 27.6 20.7 19.3 P/Cash Flow (X) 5.1 5.7 6.2 5.8 EV/EBITDA (X) 6.4 6.1 5.7 5.2 Net Div Yield (%) 2.4 3.1 1.9 1.9 P/Book Value (X) 3.4 3.2 2.9 2.6 Net Debt/Equity (X) 0.3 0.1 CASH CASH ROAE (%) 8.8 17.8 14.7 14.4 Earnings Rev (%): (4) (1) (1) Consensus EPS (S cts): 5.5 7.5 8.2 Other Broker Recs: B: 2 S: 0 H: 1

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Dough is holding shape Maintain BUY, TP raised to S$2.01. We remain positive on BreadTalk over continued consolidation of underperforming outlets that will yield better margins going forward and sale of stakes in properties such as CHIJMES and AXA Tower that will unlock shareholder value if they materialise. Based on 3Q17 results, growth drivers remain intact and turnaround in Bakery division led by store growth and better profitability in FY18F will drive earnings growth next year. BreadTalk’s valuation, based on its core business (ex-property investments), is compelling at 17x FY18F PE. Where we differ. We believe consensus has yet to factor in the value of BreadTalk’s investment properties into its share price. BreadTalk’s core business is undervalued at 17x FY18F PE after stripping out the value of investment properties from the current share price. Applying a 22x PE valuation to the retail business and adding back the value of its investment properties, our derived a target price is S$2.01, which is above consensus. Potential catalyst. We see potential for special dividends if Perennial sells AXA Tower. BreadTalk could pay c.4.5 Scts in special dividends upon the sale of AXA Tower based on our estimates. Valuation: Our TP of S$2.01 is derived from a sum-of-parts (SOTP) valuation. On a per share basis, we value its retail business at 22x FY18F PE at S$1.71, investment properties at S$0.43 based on market value, net debt at -S$0.13 per share. Key Risks to Our View: Operational risks include food safety and licences as well as negative publicity. In extreme cases, food operating licences can be revoked for lapse in food safety. Negative publicity may also result in weaker demand and poorer marketability when selling its franchises as the public and franchisees shy away from their association with BreadTalk. At A Glance Issued Capital (m shrs) 281 Mkt. Cap (S$m/US$m) 452 / 332 Major Shareholders (%) Meng Tong Quek 34.0 Lih Leng Lee 18.6 Primacy Investment Ltd 14.0

Free Float (%) 3m Avg. Daily Val (US$m) 0.24 ICB Industry : Consumer Services / Food & Drug Retailers


7 Nov 2017

Singapore Company Guide

Breadtalk Group Ltd Version 4 | Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report

Company Guide

Breadtalk Group Ltd

WHAT’S NEW

3Q17 results

3Q17 within estimates. Headline earnings of S$4m (+22% y-o-y) and revenue of S$154m (-2% y-o-y) were in line with our forecasts. Revenue declined 7.8% y-o-y due to lower sales across all divisions.

Lower revenue dragged by Bakery division. Bakery revenue declined 2% y-o-y to S$77.2m, affected by 1) the termination of underperforming franchisees in China and Shanghai; and 2) lower revenue from directly operated stores in Shanghaiand Beijing. Food Atrium revenue declined by 9.4% y-o-y to S$36.8m on lower number of outlets (decrease of three outlets). Restaurant sales (Din Tai Fung) improved 8.3% y-o-y to S$31.1m.

4orth, a separate segment carved out for F&B new concepts. BreadTalk reported separate segmentals for 4orth, a new F&B business concepts division. The division has the five operating outlets of Sō, a rebranded concept from RamenPlay, and 90%-owned Song Fa Bak Kut Teh in China and Thailand. EBITDA and EBIT for 9M17 were S$0.3m and -S$0.4m respectively. These numbers were carved out from the Restaurant segment which previously consolidated them. This leaves the Restaurant segment with just the Din Tai Fung operations.

Bakery division led to lower margins. Headline gross and operating margins declined to 55.2% (-1.1ppt) and 6.7% (-1.7ppt) on Bakery’s higher raw material costs and lower profitability from directly operated stores in Singapore and Shanghai, and rationalisation of underperforming franchisees. While group margins were lower, Food Atrium’s operating margin improved to 7.6% from an operating loss in 3Q16. Restaurant's operating margins remained at 21%.

Operating profit decline was within expectations. EBITDA was S$20.9m (-19.1% y-o-y) while EBIT was at S$10.4m (-21.2% y-o-y). Lower one-off items such as PPE write-offs and disposals gain/loss helped PBT and PAT to reach S$9m (+8.4% y-o-y) and S$4m (+22.2% y-o-y) respectively. An interim dividend of 1 Sct was declared, in line with expectations.

3Q17 tracking our estimates. We have anticipated lower operating profit led by lower revenue from the Bakery division undergoing store franchisee rationalisation. Therefore, this set of results is largely expected. While headline operating profit declined slightly due to ongoing restructuring of the Bakery Division, Restaurant Division and Food Atrium Division remained positive with revenue and operating profit growth respectively.

Asset sale remains a likely stock catalyst. We remain positive on the stock as 1) continued consolidation of underperforming outlets will contribute to better margins going forward; 2) sale of stake in properties such as CHIJMES and AXA Tower will unlock shareholder value if they materialise; 3) full-year headline earnings may even track slightly ahead due to comparatively lower one-off items.

Maintain BUY, S$2.01 TP. Our earnings remain largely unchanged and outlook continues to track our estimates. BreadTalk’s results are largely led by its Bakery division as seen in this 3Q17 numbers. Post restructuring of Bakery franchisees in China this year, we expect store opening and revenue growth to resume from FY18F onwards. No change to our recommendation since long-term growth drivers remain intact. Maintain BUY on the stock.

Company Guide

Breadtalk Group Ltd

Quarterly / Interim Income Statement (S$m)

FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq

Revenue 157 148 154 (2.0) 4.5

Cost of Goods Sold (68.8) (65.0) (69.2) 0.5 6.4

Gross Profit 88.5 82.6 85.1 (3.9) 3.1

Other Oper. (Exp)/Inc (79.6) (73.4) (74.7) (6.2) 1.8

Operating Profit 13.2 9.16 10.4 (21.2) 13.4

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 0.56 (0.2) 0.0 nm (89.4)

Net Interest (Exp)/Inc (1.2) (0.8) (0.7) 40.5 17.8

Exceptional Gain/(Loss) (4.2) (1.3) (0.7) 84.7 (49.7)

Pre-tax Profit 8.32 6.81 9.02 8.4 32.4

Tax (3.0) (2.8) (2.9) (3.8) 1.5

Minority Interest (2.1) (1.9) (2.2) (4.3) 15.8

Net Profit 3.26 2.11 3.98 22.2 88.3

Net profit bef Except. 7.50 3.41 4.63 (38.3) 35.8

EBITDA 25.9 19.4 20.9 (19.1) 7.7

Margins (%)

Gross Margins 56.3 55.9 55.2

Opg Profit Margins 8.4 6.2 6.7

Net Profit Margins 2.1 1.4 2.6

Source of all data: Company, DBS Bank

Company Guide

Breadtalk Group Ltd

CRITICAL DATA POINTS TO WATCH

Critical Factors Less aggressive store expansion to focus on driving higher operating efficiencies and margin improvement. The focus is to raise efficiency of its existing operations, lower operating costs, and expand margins. Store openings till year-end will therefore not be aggressive. We see margins improving at the group level, driven by the swing to profitability at the Food Atrium business, cost-saving initiatives at the Bakery, and improved sales mix from the Restaurant business. We expect store expansion to be more aggressive once cost efficiencies and margin improvements are realised from FY18F.

Driving margin improvement through cost efficiencies. Initiatives such as better demand planning, more efficient human resource planning, and tighter cost controls have helped to benefit operating margins. They have led to lower food wastage, and reduction in unnecessary payroll expenses. Management has also been spending less on capex, leading to some moderation in depreciation expenses going forward.

Non-performing legacy franchisees. We expect to see a stronger franchisee base with less drag from non-performing accounts post restructuring of franchisee accounts. As franchise outlets have higher net margins, and lower direct operational risk, there is potential for Bakery margins to increase as well given that franchise revenue is royalty income, recognised as a percentage of franchisee sales with minimal costs to BreadTalk. We expect margins to increase when a mix of franchise stores improves going forward.

Changes to management personnel, tenant-mix and tenant quality have enabled Food Atrium to turn profitable. Food Atrium division has made a marked turnaround in FY17F. While its Food Atriums in Singapore were profitable in FY16, Food Atrium in tier 2 cities in China were a drag. Changes were made to the China portfolio in FY16 by closing non-performing outlets especially in tier 3 cities. It also replaced China Food Atrium’s management team with new personnel which made changes to tenant quality and tenant mix, which led to improvements in performance and occupancy at its China Food Atriums. Food Atrium openings this year will include Shenzhen, Guangdong and Shanghai.

New outlet in London this year. BreadTalk has already planned for a new outlet in London this year through a JV (BreadTalk is the major shareholder of the JV) with Fairy Rise Development (Din Tai Fung franchise owner), Din Tai Fung Taiwan, a UK partner and a Taiwanese individual. We also see scope for more outlets in Thailand as there are currently only three Din Tai Fung restaurants. As restaurant margins are attractive, better sales mix from Restaurant business would improve overall profitability.

Bakery outlets

Restaurant outlets

Food court outlets

Total

Annual sales per outlet S$m

Source: Company, DBS Bank

Company Guide

Breadtalk Group Ltd

0.00

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(S$)

Appendix 1: A look at Company's listed history – what drives its share price?

Share price has been driven by various factors including earnings, properties and strategic investors

Source: DBS Bank

Earnings turnaround,

potential sale of AXA Tower

Re-rated on new BreadTalk IHQ building and Minor International

taking a stake

Gain in Perennial CHIJMES investment, operating

margin expansion

Sale and earnings growth declined, higher interest costs, lower net margins

Company Guide

Breadtalk Group Ltd

Balance Sheet:

Cash business; balance sheet currently in net debt. As with all food service companies, BreadTalk is a cash business. The business generated S$65-90m of operating cashflows annually and S$28-54m of positive free cashflows in the last three years. Net debt as of end-September 2017 was about S$36m, equivalent to approximately S$0.13 per share, or net debt ratio of 0.25x. BreadTalk was in net cash till FY12 when it built its BreadTalk IHQ. In FY13 when it opened its IHQ, net debt was S$89m. It further issued S$75m of bonds in FY16 due 1 April 2019 at 4.6% coupon for general corporate purposes, including refinancing of existing borrowings, and financing capital expenditure and general working capital.

Share Price Drivers:

Changes to property holdings are likely to drive share price. Valuations for BreadTalk re-rated to an all-time high when it moved into its IHQ in 2013. Similarly, when it sold 112 Katong last year and declared special dividends, its share price re-rated as well. In 4Q16, BreadTalk announced the sale of 111 Somerset, which also lifted BreadTalk’s share price in anticipation of special dividends.

Key Risks:

Food safety and licences. As a restaurant operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked.

Negative publicity affects consumer confidence and the marketability of its franchise. BreadTalk has had some negative publicity, especially in 2015 over food safety and food preparation procedures in Singapore and China. Incidents such as these can generate negative response from the public which can potentially affect sales as well as the marketability of its franchise overseas.

Company Background

BreadTalk Group is a Singapore-based food and beverage (F&B) group engaged in the operations and franchising of bakery/confectionery outlets, food courts and restaurants across the region. BreadTalk’s portfolio currently has six brands – BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Teiand Din Tai Fung. It operates over 900 outlets across 17 countries.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide

Breadtalk Group Ltd

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Bakery outlets 862 862 856 859 864 Restaurant outlets 30.0 32.0 34.0 36.0 38.0 Food court outlets 65.0 57.0 61.0 61.0 61.0 Total 957 951 951 956 963 Annual sales per outlet 0.65 0.65 0.63 0.66 0.68

Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (S$m) Bakery operations 308 306 296 303 311 Restaurant sales 143 150 154 166 179 Food Atrium income 173 159 153 161 169 Others 0.0 0.0 0.0 0.0 0.0

Total 624 615 603 630 658 Operating profit (S$m) Bakery operations 5.15 12.6 9.57 9.39 9.32 Restaurant sales 25.8 23.2 26.5 25.7 27.7 Food Atrium income (2.9) (7.5) 8.57 6.92 7.01 Others 4.51 4.18 (4.8) (0.3) 0.0

Total 32.6 32.5 39.9 41.7 44.0 Operating profit margin (%) Bakery operations 1.7 4.1 3.2 3.1 3.0 Restaurant sales 18.0 15.4 17.3 15.5 15.5 Food Atrium income (1.7) (4.7) 5.6 4.3 4.2 Others N/A N/A N/A N/A N/A Others N/A N/A N/A N/A N/A Total 5.2 5.3 6.6 6.6 6.7

Income Statement (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 624 615 603 630 658 Cost of Goods Sold (294) (278) (268) (277) (290) Gross Profit 330 337 334 353 369 Other Opng (Exp)/Inc (298) (305) (295) (311) (325) Operating Profit 32.6 32.5 39.9 41.7 44.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (1.3) (0.8) 0.13 0.13 0.14 Net Interest (Exp)/Inc (1.3) (4.8) (3.2) (2.8) (2.2) Exceptional Gain/(Loss) (4.6) 2.80 8.01 0.0 0.0 Pre-tax Profit 25.4 29.7 44.8 39.1 42.0 Tax (10.8) (12.1) (11.4) (9.1) (9.7) Minority Interest (7.0) (6.2) (9.0) (8.2) (8.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 7.60 11.4 24.4 21.8 23.5 Net Profit before Except. 12.2 8.63 16.4 21.8 23.5 EBITDA 80.9 80.0 82.3 84.7 89.0 Growth Revenue Gth (%) 5.9 (1.5) (2.0) 4.5 4.5 EBITDA Gth (%) 0.6 (1.1) 2.9 2.9 5.1 Opg Profit Gth (%) 30.8 (0.2) 22.6 4.6 5.5 Net Profit Gth (Pre-ex) (%) (45.0) (29.2) 89.7 33.3 7.4 Margins & Ratio Gross Margins (%) 52.9 54.9 55.5 56.0 56.0 Opg Profit Margin (%) 5.2 5.3 6.6 6.6 6.7 Net Profit Margin (%) 1.2 1.9 4.0 3.5 3.6 ROAE (%) 6.0 8.8 17.8 14.7 14.4 ROA (%) 1.4 2.1 4.6 4.0 4.1 ROCE (%) 5.2 5.4 8.6 9.0 8.9 Div Payout Ratio (%) 55.6 94.7 57.7 38.7 36.0 Net Interest Cover (x) 24.7 6.8 12.5 15.1 20.3


Negative on 1) Higher expenses for corporate services, treasury functions; and 2) EBIT losses at new segment 4orth.

Company Guide

Breadtalk Group Ltd


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 157 153 148 148 154 Cost of Goods Sold (68.8) (67.8) (66.7) (65.0) (69.2) Gross Profit 88.5 85.5 80.9 82.6 85.1 Other Oper. (Exp)/Inc (79.6) (75.8) (75.3) (73.4) (74.7) Operating Profit 13.2 9.71 5.63 9.16 10.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.56 (1.0) 0.38 (0.2) 0.0 Net Interest (Exp)/Inc (1.2) (0.9) (1.0) (0.8) (0.7) Exceptional Gain/(Loss) (4.2) 2.40 9.95 (1.3) (0.7) Pre-tax Profit 8.32 10.1 15.0 6.81 9.02 Tax (3.0) (4.7) (2.6) (2.8) (2.9) Minority Interest (2.1) (1.4) (1.7) (1.9) (2.2) Net Profit 3.26 4.02 10.7 2.11 3.98 Net profit bef Except. 7.50 1.63 0.74 3.41 4.63 EBITDA 25.9 20.4 16.8 19.4 20.9

Growth Revenue Gth (%) 5.1 (2.6) (3.7) 0.0 4.5 EBITDA Gth (%) 18.0 (21.2) (17.6) 15.8 7.7 Opg Profit Gth (%) 28.4 (26.3) (42.0) 62.8 13.4 Net Profit Gth (Pre-ex) (%) 54.8 (78.3) (54.6) 361.2 35.8 Margins Gross Margins (%) 56.3 55.8 54.8 55.9 55.2 Opg Profit Margins (%) 8.4 6.3 3.8 6.2 6.7 Net Profit Margins (%) 2.1 2.6 7.2 1.4 2.6

Balance Sheet (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 206 181 179 177 172 Invts in Associates & JVs 33.9 35.3 35.4 35.5 35.7 Other LT Assets 126 105 105 104 103 Cash & ST Invts 102 138 140 165 195 Inventory 9.88 9.81 9.70 10.1 10.5 Debtors 60.0 59.2 58.4 61.1 63.8 Other Current Assets 7.28 6.46 6.46 6.46 6.46 Total Assets 545 534 534 559 587

ST Debt 82.0 31.5 45.2 45.2 45.2 Creditor 94.1 86.8 89.2 92.4 96.6 Other Current Liab 86.1 99.8 99.8 99.8 99.8 LT Debt 120 150 114 114 114 Other LT Liabilities 16.8 14.5 14.5 14.5 14.5 Shareholder’s Equity 129 132 142 156 171 Minority Interests 17.2 19.9 28.9 37.1 45.9 Total Cap. & Liab. 545 534 534 559 587

Non-Cash Wkg. Capital (103) (111) (114) (115) (116) Net Cash/(Debt) (99.6) (43.5) (18.7) 5.89 35.4 Debtors Turn (avg days) 33.5 35.4 35.6 34.6 34.6 Creditors Turn (avg days) 143.3 144.1 142.2 141.5 141.0 Inventory Turn (avg days) 15.3 15.7 15.8 15.4 15.3 Asset Turnover (x) 1.2 1.1 1.1 1.2 1.1 Current Ratio (x) 0.7 1.0 0.9 1.0 1.1 Quick Ratio (x) 0.6 0.9 0.8 1.0 1.1 Net Debt/Equity (X) 0.7 0.3 0.1 CASH CASH Net Debt/Equity ex MI (X) 0.8 0.3 0.1 CASH CASH Capex to Debt (%) 18.6 20.2 25.1 25.1 25.1 Z-Score (X) 2.0 2.3 2.3 2.4 2.4


Company Guide

Breadtalk Group Ltd

Cash Flow Statement (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 25.4 29.7 44.8 39.1 42.0 Dep. & Amort. 49.6 48.3 42.4 42.9 44.9 Tax Paid (6.9) (9.1) (11.4) (9.1) (9.7) Assoc. & JV Inc/(loss) 1.31 0.83 (0.1) (0.1) (0.1) Chg in Wkg.Cap. 0.42 10.2 3.25 0.29 0.94 Other Operating CF (3.4) 9.20 0.0 0.0 0.0 Net Operating CF 66.5 89.2 78.8 73.0 77.9 Capital Exp.(net) (37.5) (36.7) (40.0) (40.0) (40.0) Other Invts.(net) (20.4) 16.3 0.0 0.0 0.0 Invts in Assoc. & JV (22.9) (2.8) 0.0 0.0 0.0 Div from Assoc & JV 1.19 0.46 0.0 0.0 0.0 Other Investing CF 21.7 (2.3) 0.0 0.0 0.0 Net Investing CF (57.9) (25.0) (40.0) (40.0) (40.0) Div Paid (4.2) (8.0) (14.1) (8.4) (8.4) Chg in Gross Debt 3.60 (20.6) (22.1) 0.0 0.0 Capital Issues (0.7) 0.0 0.0 0.0 0.0 Other Financing CF (8.7) (9.6) 0.0 0.0 0.0 Net Financing CF (10.0) (38.2) (36.2) (8.4) (8.4) Currency Adjustments 0.82 (0.4) 0.0 0.0 0.0 Chg in Cash (0.6) 25.7 2.69 24.6 29.5 Opg CFPS (S cts) 23.5 28.1 26.9 25.9 27.4 Free CFPS (S cts) 10.3 18.7 13.8 11.7 13.5


Target Price & Ratings History

Source: DBS Bank

Analyst: Alfie YEO

Andy SIM CFA

Company Guide

Breadtalk Group Ltd

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 7 Nov 2017 07:43:14 (SGT) Dissemination Date: 7 Nov 2017 08:59:27 (SGT)

Sources for all charts and tables are DBS Bank unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated

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Company Guide

Breadtalk Group Ltd

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ed: DT / sa:YM, PY, CS

BUYLast Traded Price ( 28 Feb 2018): S$1.58 (STI : 3,517.94)

Price Target 12-mth: S$1.98 (25% upside) (Prev S$2.08)

Analyst Paul YONG, CFA +65 6682 3712 [email protected]

What’s New • FY17 net profit of US$85.3mn (-4% YoY) misses our

projections by 5% due to higher than expected taxes

• Outlook remains positive given firm global air travel

demand, led by strong growth in China

• Net cash of US$180mn and strengthened management

team should help M&A ambitions

• Maintain BUY with S$1.98 TP (13x FY18F PE)

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2016A 2017A 2018F 2019F

Revenue 11,703 16,268 19,570 21,765 EBITDA 94.3 95.9 107 116 Pre-tax Profit 91.9 92.2 103 112 Net Profit 88.9 85.3 95.7 104 Net Pft (Pre Ex.) 88.9 85.3 95.7 104 Net Pft Gth (Pre-ex) (%) 45.1 (4.0) 12.2 9.1 EPS (S cts) 13.7 13.1 14.7 16.1 EPS Pre Ex. (S cts) 13.7 13.1 14.7 16.1 EPS Gth Pre Ex (%) 45 (4) 12 9 Diluted EPS (S cts) 13.7 13.1 14.7 16.1 Net DPS (S cts) 4.26 4.46 4.42 4.83 BV Per Share (S cts) 100 111 122 133 PE (X) 11.5 12.0 10.7 9.8 PE Pre Ex. (X) 11.5 12.0 10.7 9.8 P/Cash Flow (X) nm nm nm nm EV/EBITDA (X) 8.9 8.8 7.8 6.9 Net Div Yield (%) 2.7 2.8 2.8 3.1 P/Book Value (X) 1.6 1.4 1.3 1.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 14.3 12.4 12.6 12.6

Earnings Rev (%): (2) (2) Consensus EPS (S cts): 13.9 15.9 18.5 Other Broker Recs: B: 4 S: 0 H: 1


Associates continue to shine

Maintain BUY with an adjusted TP of S$1.98, as we still favour

CAO as an aviation growth proxy. We continue to like China

Aviation Oil given its monopolistic position as the sole importer

of bonded jet fuel into China, and for its 33% stake in the

exclusive jet fuel refueller at Shanghai Pudong International

Airport (SPIA). It also has a growing international jet fuel supply

and trading business that will increasingly benefit from CAO’s

greater scale. It is a beneficiary of growing air travel demand

both in China and globally as well.

Net cash of US$180mn or S$0.27 ps to help fund inorganic

growth. CAO had a cash balance of US$300mn, or net cash of

US$180mn, at the end of 2017 and has also recently refreshed

and strengthened its management team with seconded

personnel from parent China National Aviation Fuel Group Ltd

(CNAF). We believe this could help the company deliver on the

M&A front.

Where we differ: We have lower-than-consensus forecasts as

we are more conservative on trading gains in 2018F.

Potential catalysts: CAO’s share price should re-rate as it delivers

steady earnings growth and/or if it can make value accretive

acquisitions using its strong balance sheet position.

Valuation:

Valuations attractive at 8.5x FY18F ex-cash PE. Given that 80%

of its earnings is derived from monopolistic businesses with a

firm growth outlook, we see current valuations at 10.7x

FY18PE, declining to 9.8x FY19F PE, as attractive. Factoring in

net cash per share of S$0.28, valuations are even more

enticing. Our target price is based on 13x FY18F PE, or +1 SD

of its historical average, and has not factored in acquisitions.

Key Risks to Our View:

Weaker demand for air travel and execution risk. A sustained

slowdown in demand for air travel could hit jet fuel demand

and volumes. Further, the group could also face execution risks

in its trading business and on prospective M&As.

At A Glance Issued Capital (m shrs) 865

Mkt. Cap (S$m/US$m) 1,366 / 1,032

Major Shareholders (%)

China National Aviation Fuel Grp 51.0

BP Plc 20.1

Free Float (%) 28.9

3m Avg. Daily Val (US$m) 1.1

ICB Industry : Oil & Gas / Oil & Gas Producers

DBS Group Research . Equity 1 Mar 2018

Sin gapore Company Guide

China Aviation Oil Version 7 | Bloomberg: CAO SP | Reuters: CNAO.SI Refer to important disclosures at the end of this report

Company Guide

China Aviation Oil

WHAT’S NEW

Better associate contributions offset by higher tax expenses and lower trading gains

CAO’s full-year results missed our expectations by 5%, with

net profit declining 4% YoY to US$85.3mn as tax expenses

were higher than we expected. The company maintained its

full-year dividend at 4.5 Scts, which is equal to a c.30%

payout.

Full-year revenues rose 39% YoY to US$16.3bn on higher oil

prices as well as supply and trading volumes, which increased

by 14.6% YoY to 37.31mn tonnes. Gross profit, however, fell

by 12.1% YoY to US$38.7mn on lower gains from trading

and optimisation activities, as “markets reclined to

backwardation in 3Q17 further exacerbated by increase in

supply & operational costs incurred due to various supply

disruptions caused by weather and refinery outages”.

Contributions from associates rose by 7.8% YoY to

US$71.5mn, led by a 5.8% YoY increase in contribution from

SPIA to US$64.2m while all other associates also saw

improved performances. Tax expenses jumped 133% YoY to

US$6.9mn mainly due to the decline in deferred tax assets

following the utilisation of unabsorbed tax losses from prior

years to offset current year’s profits, the increase in

recognition of deferred tax liabilities on the share of

undistributed retained earnings from associates, and tax

expenses incurred on the transfer of shareholding.

Outlook remains positive. Looking ahead, with international

travel expected to grow at a double-digit pace in China for

the next few years, CAO’s jet fuel import business segment as

well as its key associate SPIA, which we estimate together

account for over 80% of CAO’s earnings, are set to benefit.

In particular, with a fifth runway in Shanghai Pudong soon to

start commercial operations, contribution from SPIA is well

poised to enjoy firm growth ahead.

Meanwhile, continued expansion in its international jet fuel

supply business will also help its trading business to reap

benefits from a greater scale and network. CAO has cash of

over US$300mn (net cash of US$180mn) and we believe that

with a refreshed and strengthened management team

(seconded from parent CNAF), the group will step up on its

efforts on the M&A front to make value accretive

acquisitions, which could act as a further re-rating catalyst for

the stock.

We lower our FY18 and FY19 earnings estimates by 2.6%

and 2.4% respectively, factoring in higher associate

contributions offset by lower gross profit and higher tax

expenses. Our TP is now S$1.98, from S$2.08 previously,

mainly due to a weaker USD/SGD rate.

Quarterly / Interim Income Statement (US$m)


Revenue 3,276 5,223 4,061 24.0 (22.3)

Cost of Goods Sold (3,265) (5,219) (4,052) 24.1 (22.3)

Gross Profit 10.6 4.33 8.34 (21.3) 92.5

Other Oper. (Exp)/Inc (5.4) (2.6) (6.5) 20.5 150.8


Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -

Associates & JV Inc 13.3 21.5 16.8 26.2 (21.8)

Net Interest (Exp)/Inc (0.2) (0.4) (1.3) (576.3) (212.4)

Exceptional Gain/(Loss) 0.0 0.0 0.0 - -

Pre-tax Profit 18.3 22.8 17.4 (5.4) (24.0)

Tax (0.4) (1.4) (3.3) 687.5 134.9

Minority Interest 0.0 0.0 0.0 - -

Net Profit 17.9 21.4 14.0 (21.7) (34.5)

Net profit bef Except. 17.9 21.4 14.0 (21.7) (34.5)

EBITDA 18.5 23.3 18.7 0.7 (19.7)

Margins (%)





Company Guide

China Aviation Oil


Critical Factors

Sole importer of jet fuel into China with growing international

presence… Leveraging on the network of its parent CNAF, a

state-owned enterprise that is the largest aviation transportation

logistics services provider in China, CAO has a monopoly in the

supply of imported jet fuel (or bonded jet fuel) to 17

international airports in China. With CNAF’s support, CAO has

also expanded its business to the marketing and supply of jet

fuel to airline companies at 48 international airports outside of

the China, spanning the Asia Pacific, North America, Europe

and the Middle East.

Given its monopoly, CAO is poised to benefit from the long-

term growth of China’s international air travel market. Coupled

with its ongoing international expansion, we expect middle

distillates & jet fuel volumes supplied and traded to grow to

20.8mn by FY18F, and 21.8mn tonnes by FY19F, from 19.8mn

tonnes in 2017.

Optimising margins through trading. Given that CAO enjoys

cost-plus pricing for its China jet fuel import business, and after

hedging downside risk, CAO will seek to further optimise

margins when viable trading opportunities arise. While

opportunities to improve margins are available in both

backwardation and contango markets, CAO generally prefers

contango markets as it allows for superior opportunities for

margin optimisation from the storing and trading of fuels

(which also includes gas oil, fuel oil and avgas).

We project that CAO’s average gross profit per tonne (on a

combined and blended basis), which in 2017 was lower than in

2015 and 2016, will rise gradually from 2018F onwards as it

benefits from economies of scale.

Steady growth in contributions from associates, including prized

asset SPIA. CAO’s best-performing asset, the 33% owned

associate SPIA, has always been a significant contributor to

CAO’s bottom line, accounting for over 90% of total associate

contribution. With two new runways added in the last 18

months, which has doubled the capacity of the airport, and an

additional satellite concourse expected to be completed by

2019, capacity at Shanghai Pudong, China’s second largest

airport, is expected to be raised from 60 million to 80 million

passengers a year, which should underpin SPIA’s long-term

growth prospects.

Middle Distillates Volumes (m tonnes)

Other Oil Product Volumes (m tonnes)

Implied Average Middle Distillate Price (USD/bbl)

Gross Profit per Tonne (US$)

Contribution from Associates (US$ m)


Company Guide

China Aviation Oil

Balance Sheet:

Strong balance sheet with a net cash position of US$180mn as

at end-2017. With net cash of US$180mn as at end-2017, we

believe the group has sufficient firepower with room to gear up

further to finance its M&A opportunities and grow the scale and

reach of its business and profits.


Progress on the M&A front. While CAO is armed with dry

powder for potential acquisitions and investments, it has yet to

announce significant M&A plans – its last major investment was

in 2013, when the company acquired a 39% stake in refueller

CNAF Hong Kong Refuelling Ltd. Management has shared that

they will be looking at both “asset-light” investments, which

will allow the group to gain access to air spaces, customer

contracts, strategic alliances and further trading synergies, as

well as “asset-backed” investments (or infrastructure assets),

which may include airport refueling stations, pipelines going

into airports and storage facilities. We believe that the

deployment of cash to fund value-accretive opportunities should

lead to a further rerating of the stock.

Key Risks:

Weaker demand for air travel. Given the group’s exposure to

the air passenger market, events that could significantly

dampen traveller sentiment, such as the outbreak of diseases

and acts of terror, could weigh on global demand for jet fuel.

Potential mark-to-market losses. As SPIA and CNAF-HKR hold

inventories of 15 days and seven days respectively, these have

to be marked to market. In a declining oil price environment,

these would result in paper losses for these associates, which

add volatility to CAO’s bottom line.

Trading and execution risks. CAO is exposed to a myriad of

risks that are inherent in the lifecycle of trades, which include

market risk, credit risk, and operational risk.

Company Background

China Aviation Oil (Singapore) Corporation Ltd is principally

engaged in the supply and trading of bonded jet fuel, with a

monopoly in China and a growing international presence. Apart

from jet fuel, the group also trades and/or supplies other

transportation fuels (such as fuel oil, gas oil and aviation gas)

and has varying equity stakes in oil-related assets. These assets

include airport refueling facilities (SPIA and CNAF HKR),

pipelines (China National Aviation Fuel TSN-PEK Pipeline

Transportation Corp Ltd) and storage facilities (China Aviation

Oil Xinyuan Petrochemicals Co Ltd and at Oilhub Korea Yeosu

Co Ltd).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide

China Aviation Oil

Key Assumptions

FY Dec 2015A 2016A 2017A 2018F 2019F

Middle Distillates Volumes (m tonnes)

11.9 18.6 19.8 20.8 21.8

Other Oil Product Volumes (m tonnes)

8.28 14.0 17.5 18.0 18.6 Implied Average Middle Distillate Price (USD/bbl)

74.4 52.7 65.2 75.2 80.2

Gross Profit per Tonne (US$)

1.76 1.35 1.04 1.09 1.14

Contribution from Associates (US$ m)

42.3 66.4 71.5 78.8 84.7

Segmental Breakdown

FY Dec 2015A 2016A 2017A 2018F 2019F

Revenues (US$m)

Middle distillates 7,010 7,754 10,233 12,398 13,886

Other oil products 1,978 3,949 6,034 7,172 7,879

Total 8,987 11,703 16,268 19,570 21,765

Income Statement (US$m)

FY Dec 2015A 2016A 2017A 2018F 2019F

Revenue 8,987 11,703 16,268 19,570 21,765

Cost of Goods Sold (8,952) (11,659) (16,229) (19,527) (21,719)

Gross Profit 35.4 44.1 38.7 42.3 46.2

Other Opng (Exp)/Inc (13.1) (17.3) (15.3) (15.3) (15.8)

Operating Profit 22.3 26.7 23.5 27.0 30.4

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 42.3 66.4 71.5 78.8 84.7


Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 63.6 91.9 92.2 103 112

Tax (2.3) (3.0) (6.9) (7.2) (7.9)

Minority Interest 0.0 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net Profit 61.3 88.9 85.3 95.7 104

Net Profit before Except. 61.3 88.9 85.3 95.7 104

EBITDA 66.2 94.3 95.9 107 116

Growth

Revenue Gth (%) (47.3) 30.2 39.0 20.3 11.2

EBITDA Gth (%) 19.1 42.5 1.7 11.2 8.8

Opg Profit Gth (%) 104.8 19.7 (12.3) 15.0 12.8

Net Profit Gth (Pre-ex) (%) 24.7 45.1 (4.0) 12.2 9.1

Margins & Ratio

Gross Margins (%) 0.4 0.4 0.2 0.2 0.2

Opg Profit Margin (%) 0.2 0.2 0.1 0.1 0.1

Net Profit Margin (%) 0.7 0.8 0.5 0.5 0.5

ROAE (%) 10.7 14.3 12.4 12.6 12.6

ROA (%) 5.5 8.1 5.2 4.7 4.5

ROCE (%) 3.7 3.8 2.7 2.8 3.0

Div Payout Ratio (%) 29.8 31.1 33.9 30.0 30.0

Net Interest Cover (x) 21.5 21.4 8.4 9.7 10.9


Company Guide

China Aviation Oil


FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017

Revenue 3,276 3,311 3,673 5,223 4,061

Cost of Goods Sold (3,265) (3,296) (3,662) (5,219) (4,052)

Gross Profit 10.6 15.5 10.6 4.33 8.34

Other Oper. (Exp)/Inc (5.4) (3.4) (2.8) (2.6) (6.5)






Pre-tax Profit 18.3 26.4 25.7 22.8 17.4

Tax (0.4) (1.1) (1.1) (1.4) (3.3)


Net Profit 17.9 25.3 24.6 21.4 14.0

Net profit bef Except. 17.9 25.3 24.6 21.4 14.0

EBITDA 18.5 27.0 26.1 23.3 18.7

Growth

Revenue Gth (%) (16.9) 1.1 10.9 42.2 (22.3)

EBITDA Gth (%) (24.6) 45.6 (3.4) (10.8) (19.7)

Opg Profit Gth (%) 2.6 132.0 (35.7) (77.5) 6.1

Net Profit Gth (Pre-ex) (%) (22.8) 41.1 (2.8) (12.9) (34.5)

Margins

Gross Margins (%) 0.3 0.5 0.3 0.1 0.2

Opg Profit Margins (%) 0.2 0.4 0.2 0.0 0.0

Net Profit Margins (%) 0.5 0.8 0.7 0.4 0.3

Balance Sheet (US$m)

FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 6.21 5.65 5.19 4.95 4.70

Invts in Associates & JVs 266 281 321 333 346

Other LT Assets 9.43 9.18 7.53 7.26 7.00

Cash & ST Invts 171 287 300 318 350

Inventory 56.8 171 210 252 281

Debtors 337 591 1,069 1,286 1,430

Other Current Assets 0.0 0.0 0.0 0.0 0.0

Total Assets 846 1,344 1,913 2,201 2,418

ST Debt 0.0 100 120 120 120

Creditor 247 588 1,060 1,276 1,419

Other Current Liab 0.01 0.62 0.95 7.21 7.86

LT Debt 0.0 0.0 0.0 0.0 0.0

Other LT Liabilities 6.16 6.31 7.92 7.92 7.92

Shareholder’s Equity 593 650 724 791 864

Minority Interests 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 846 1,344 1,913 2,201 2,418

Non-Cash Wkg. Capital 147 173 218 255 284

Net Cash/(Debt) 171 187 180 198 230

Debtors Turn (avg days) 26.3 14.5 18.6 22.0 22.8

Creditors Turn (avg days) 21.7 13.1 18.5 21.8 22.6

Inventory Turn (avg days) 1.9 3.6 4.3 4.3 4.5

Asset Turnover (x) 8.1 10.7 10.0 9.5 9.4

Current Ratio (x) 2.3 1.5 1.3 1.3 1.3

Quick Ratio (x) 2.1 1.3 1.2 1.1 1.2

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) N/A 0.4 0.4 0.4 0.4

Z-Score (X) 14.6 10.7 10.4 10.4 10.1


Company Guide

China Aviation Oil

Cash Flow Statement (US$m)

FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 63.6 91.9 92.2 103 112

Dep. & Amort. 1.56 1.21 0.94 0.94 0.94

Tax Paid (2.2) 0.0 (0.7) (1.0) (7.2)

Assoc. & JV Inc/(loss) (42.3) (66.4) (71.5) (78.8) (84.7)

Chg in Wkg.Cap. 33.1 (25.8) (46.1) (44.1) (29.4)

Other Operating CF (1.7) (1.4) (2.1) 0.0 0.0

Net Operating CF 52.1 (0.5) (27.2) (19.9) (8.0)

Capital Exp.(net) (0.3) (0.4) (0.4) (0.4) (0.4)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 37.2 36.2 45.5 67.1 71.8

Other Investing CF 0.19 1.47 3.60 0.0 0.0

Net Investing CF 37.2 37.3 48.7 66.6 71.3

Div Paid (12.8) (19.3) (27.7) (28.7) (31.3)

Chg in Gross Debt 0.0 100 20.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (0.3) (0.3) (1.6) 0.0 0.0

Net Financing CF (13.0) 80.4 (9.3) (28.7) (31.3)

Currency Adjustments (0.1) (0.4) 0.62 0.0 0.0

Chg in Cash 76.2 117 12.8 18.0 32.0

Opg CFPS (S cts) 2.92 3.89 2.90 3.72 3.29

Free CFPS (S cts) 7.99 (0.1) (4.3) (3.1) (1.3)



Source: DBS Bank

Analyst: Paul YONG, CFA

Company Guide

China Aviation Oil








Completed Date: 1 Mar 2018 12:02:16 (SGT) Dissemination Date: 1 Mar 2018 12:13:57 (SGT)







































Company Guide

China Aviation Oil



in market-making.














DBS Group.



have a proprietary position in the securities recommended in this report as of 31 Jan 2018.


Report.


3. BSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a











ed: JLC / sa:YM, PY, CS

BUY

Last Traded Price ( 13 Feb 2018): S$0.95 (STI : 3,415.07)

Price Target 12-mth: S$1.18 (24% upside)

Analyst Carmen Tay +65 6682 3719 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New FY17 revenue and PATMI of S$859.7m and S$35.5m came

in within expectations on higher development sales

Spotlight for 2018 and 2019 remains on upcoming launches at Woodleigh and Changi

Meanwhile, growing recurring income and strong dividend track record (even in 2009) are attractive attributes; Proposes 4 Sct dividend for FY17, representing 4.2% yield

Maintain BUY with TP of S$1.18

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017A 2018F 2019F

Revenue 748 860 799 1,228 EBITDA 98.6 102 108 164 Pre-tax Profit 76.1 70.2 67.2 121 Net Profit 35.7 35.5 31.7 58.3 Net Pft (Pre Ex.) 35.7 35.5 31.7 58.3 Net Pft Gth (Pre-ex) (%) (43.3) (0.5) (10.6) 83.7 EPS (S cts) 5.75 5.72 5.11 9.39 EPS Pre Ex. (S cts) 5.75 5.72 5.11 9.39 EPS Gth Pre Ex (%) (43) (1) (11) 84 Diluted EPS (S cts) 5.75 5.72 5.11 9.39 Net DPS (S cts) 4.00 4.00 4.00 4.00 BV Per Share (S cts) 123 125 126 131 PE (X) 16.5 16.6 18.6 10.1 PE Pre Ex. (X) 16.5 16.6 18.6 10.1 P/Cash Flow (X) nm nm 11.0 2.8 EV/EBITDA (X) 13.1 18.6 18.8 12.4 Net Div Yield (%) 4.2 4.2 4.2 4.2 P/Book Value (X) 0.8 0.8 0.8 0.7 Net Debt/Equity (X) 0.9 1.6 1.7 1.5 ROAE (%) 4.7 4.6 4.1 7.3 Earnings Rev (%): 5 27 17 Consensus EPS (S cts): 5.50 4.00 8.00 Other Broker Recs: B: 2 S: 0 H: 0


Attractive Valuations and Yield Integrated real estate developer with strong capability to

leverage upcoming property upturn. Singapore-based Chip Eng

Seng Corporation (CES) has been selectively acquiring projects

in Singapore and overseas which are ripe for the picking. Most

of the group’s residential projects have already been

substantially sold and, together with an estimated construction

order book of S$560m (as at Jan 2018), CES has locked in at

least S$1bn in sales – which will be recognised progressively,

underpinning strong earnings visibility in the coming years.

Meanwhile, plans to launch recently acquired residential sites at

Woodleigh and Changi in 2H18 and 1H19 respectively, should

boost the group’s earnings and NAV in the medium term.

Where we differ: A largely uncovered stock, we like CES for its

strong earnings visibility and the potential to unlock its

undervalued hotel portfolio.

Potential catalysts: Successful pre-sales, landbanking activities

Potential unlocking of undervalued hotel portfolio. The group

has also built up a sizable hotel and commercial portfolio. The

jewel is Park Hotel Alexandra, which is recorded in its book at

an estimated S$210m (S$475k/key) but potential realisable

value, if sold, could be as high as S$376m (S$850k/key), which

means a 27Scts upside to current NAV. While the hotel provides

stable recurring cash flow to the group, substantial value could

be unlocked, given the robust demand for hotel assets in

Singapore. Valuation:

Maintain BUY and SOTP-based TP of S$1.18. Assuming a

conservative 45% discount (vs larger peers’ 10%) to RNAV of

S$1.88 and valuing its construction business at peers’ average

of 8x FY18F PE, we arrive at a SOTP-based TP of S$1.18. A

prospective 4.2% yield is also on offer.


(i) Execution risk, (ii) Weaker demand, (iii) Competition, (iv)

Equity fund raising risk


Mkt. Cap (S$m/US$m) 590 / 446


Tiam Seng Lim 12.5

Tiang Chuan Lim 7.1

Lee Meng Chia 4.1

Free Float (%) 76.3


ICB Industry : Financials / Real Estate


14 Feb 2018


Chip Eng Seng Version 2 | Bloomberg: CHIP SP | Reuters: CESE.SI Refer to important disclosures at the end of this report

Company Guide

Chip Eng Seng

WHAT’S NEW

Chip Eng Seng’s FY17 results in line; Maintains 4 Sct dividend

FY17 PATMI of S$35.5m; Results in line. In 4Q17, CES delivered PATMI of S$14.5m on revenue of S$256.1m (+22.4% q-o-q), primarily on stronger contributions from the Property Development and Hotel segments, which helped offset weakness in the Construction division.

On a full-year basis, revenue was up 14.9% to S$859.7m, while earnings (PATMI) held relatively steady y-o-y at S$35.5m, in line with our expectations.

The Property Development segment was the key revenue driver for the group this quarter, contributing S$194m (or c.76% of sales) on the progressive recognition of ongoing development projects (High Park Residences and Grandeur Park Residences) and proceeds from the handover of completed townhouses in Doncaster, Melbourne, which should continue to contribute positively to 1Q18 revenue.

The Hospitality division continued to gain traction during the quarter, gaining 31.8% q-o-q to S$13.7m on the back of higher occupancies for its key hotel assets, Park Hotel Alexandra (Singapore) and Grand Park Kodhipparu (Maldives), which only commenced operations in June 2017. Contributions from a newly-added asset, The Sebel Mandurah in Australia, also helped.

Expanding investment portfolio to further boost recurring income. While dwarfed at the top-line (c.6.1% of sales), we estimate that CES’ portfolio of investment assets roughly contributed c.13% of FY17 EBIT.

With the recent addition of a Grade-A office building at 205 Queen Street (Auckland) at end-2017 and the proposed acquisition of its fourth hospitality asset, Mercure & Ibis Styles Grosvenor Hotel in Adelaide, we believe contributions from this segment will be even more meaningful in FY18F.

Proposes 4Sct dividend for FY17, which is expected to be paid on 23 May 2018.

Maintain BUY with TP of S$1.18; Offers attractive 4.2% yield. Apart from the strong earnings visibility from ongoing development projects and the potential unlocking of its undervalued hotel portfolio, we also like CES for its strong dividend payment record.

Notably, the company has consistently paid dividends through the property cycle – even in 2008/2009, and has maintained a fixed dividend of 4 Scts over the last eight years.



Revenue 250 209 256 2.4 22.4

Cost of Goods Sold (204) (174) (204) (0.1) 17.2

Gross Profit 45.7 35.1 52.1 14.0 48.5




Associates & JV Inc 0.0 0.02 0.39 nm nm

Net Interest (Exp)/Inc (4.7) (5.9) (4.8) (1.0) 18.1


Pre-tax Profit 30.6 24.5 26.2 (14.3) 7.1

Tax (7.7) (5.7) (4.5) (41.0) (21.2)

Minority Interest 0.0 (4.7) (7.2) nm 53.9

Net Profit 22.9 14.0 14.5 (36.6) 3.5


EBITDA 37.2 32.9 35.5 (4.4) 7.9

Margins (%)





Company Guide

Chip Eng Seng


Critical Factors

Substantial proportion of ongoing developments pre-sold ahead

of completion. The progressive sale and revenue recognition

from six available-for-sale development properties provides

earnings visibility over the next few years. Recent launches have

been well received. As at 31 Dec 2017, a substantial proportion

of units at ongoing developments were pre-sold ahead of their

completion – at least 87.5% for Grandeur Park Residences

(which was only launched in March 2017) to 100% for High

Park Residences (a collaboration between CES, Heeton Holdings,

and KSH Holdings).

Growing landbank signals earnings potential beyond 2021. Beyond the existing development projects, we believe that CES’ unutilised landbank is indicative of the group’s longer-term earnings potential and cash flow generation capability. While the majority of CES’ landbank currently lies in Australia, we are comforted by the group’s recent moves to replenish its Singapore landbank.

We believe that both the Woodleigh and Changi land plots, which are slated for launch in 2H18 and 1H19 respectively, could add more than 1,000 new units for sale, with an estimated combined GV of close to S$1.5 bn.

Net construction order book estimated at S$560m. CES’ construction revenues are mainly derived from Singapore public housing, public transport infrastructure, and private residential projects. While local construction outlook still appears favourable at this juncture, the extent to which CES is able to truly benefit from these positive trends hinges upon the success and viability of its tenders. Following its recent S$168m contract win in Jan 2018, we estimate CES’ construction order book to be closer to S$560m (vs S$397.1m at end-4Q17).

Recurring income pool to see further boost on steady expansion in Hotels and Investments portfolio. Over the years, CES has been increasingly active in the management of its hotel and investment portfolio, resulting in a growing asset base (to c.9 properties at end-FY17) and higher recurring income.

With the recent addition of 4.5-star The Sebel Mandurah (purchase includes strata restaurant property) in Nov 2017 and a Grade-A office building at 205 Queen Street, Auckland - through a 50%-joint venture with Roxy-Pacific, we estimate that CES’ recurring income base would see a 20% boost y-o-y to c.S$58.5m in FY18F.

This would represent approximately 6.7% of consolidated revenue, up from 5.1% in FY16. Further acquisitions, including the completion of its proposed acquisition of Mercure & Ibis Styles Grosvenor Hotel in Adelaide, could provide more upside.

FY19F Potentially a Banner Year for Property Development

Recent Acquisitions to Boost Recurring Income

RNAV of S$1.88 and SOTP-based TP of S$1.18


347.5 411.7

571.7492.5

912.7

0

200

400

600

800

1,000

FY15 FY16 FY17 FY18F FY19F

Reve

nue (

S$ m

)

23.1

38.0

48.7

58.5 62.0

0

10

20

30

40

50

60

70

FY15 FY16 FY17 FY18F FY19F

Reve

nue (

S$ m

)

Bre a kdown of RNAV OMV ($m)

Inve stme nt Prope rtie s

Investment Properties (Revalued) 320

less book value -320

Surplus / Deficit 0

De ve lopme nt Prope rtie s

NPV of Development Profits 230

Hote l Ope ra tions 521

less book value (Hotels + Assoc) -355

Surplus / Deficit 166

Book NAV 770

RNAV 1,166

Total Shares 621

RNAV / Sha re (S$) 1.88

Discount 45%

Disc ounte d RNAV / Sha re (S$) 1.03

SOTP Va lua tion S$

Discounted RNAV / Share (S$) 1.03

Value of Construction Business / Share 0.15

SOTP-ba se d TP (S$): 1 .18

Company Guide

Chip Eng Seng


Prior to May 2015, CHIP SP’s share price was mainly driven by NAV growth


Strong Historical Correlation with SGXREDO Index


Little Correlation with Quarterly Earnings Performance


0.3

0.7

1.1

1.5

Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17

Last

Pri

ce v

s N

AV

PS (S$

)

CHIP SP Equity NAVPS

Sep 2013: Award of S$103.8m HDB contract

Nov/Dec 2013: Acquired 28,002sqm of landbank in Doncaster and investment property in Melbourne

Aug 2014: JV acquired 178,724sqft of land at Fernvale Road (Singapore)

Jun 2013: Award of S$165m HDB contract

Feb 2016: Acquired 24,394 sqm land parcel at New Upper Changi Road (Singapore)

Oct 2016: JV acquires Maldivianresort

Jan 2017: M&Apotential given cheap valuations

Mar 2017: Sentiment lifted on property curb relaxation measures

0

500

1000

1500

0

0.4

0.8

1.2

Oct-14 Oct-15 Oct-16 Oct-17

CHIP SP Equity (LHS) SGXREDO Index (RHS)

Correlation: +0.732

0

0.1

0.2

0.3

0.4

0.5

0

0.4

0.8

1.2

Oct-14 Oct-15 Oct-16 Oct-17

T12M EPS (RHS) CHIP SP Equity (LHS)

Correlation: + 0.786

Apr - Aug 2015: Sector-wide sell-down on macro weakness

July 2017: JV acquired 210,404 sqft of land at Woodleigh Lane

Company Guide

Chip Eng Seng

Balance Sheet:

Net gearing could rise from 0.9x in FY16 to c.2.2x following

recent en-bloc and land tender wins. While this appears high at

first look, successful sale of the Woodleigh site and Changi

Garden will alleviate any potential concerns from its alleviated

gearing level.


Acquisition of further landbank and/or a fourth hotel asset at a

reasonable price.

Potential transactions in Singapore hotel space could spark

revaluation of CES’s Park Hotel Alexandra. On the back of

strong transaction velocity in the office sector, investor attention

has been moving to the hotel sector. Given robust demand for

hotel assets in Singapore, we believe the potential realisable

market valuation for Park Hotel Alexandra would be c. S$850 a

key (when pegged to peers’ average) or close to S$376m vs

current book value of c.S$210m.

Key Risks:

Weaker demand for private residential property across CES’ key

markets of Singapore and Australia could impact the success of

its future launches significantly.

Keen competition across Property Development and

Construction segments. Judging by the recent spike in en-bloc

tenders at record sale prices and heightened competition for

landbank, land prices are expected to rise further. This could

impact CES’ ability to replenish its landbank (at a reasonable

price), which is imperative for future profitability and growth.

Meanwhile for the construction business, we note that EBIT

margins have come off over the years and remain watchful of

the competitive landscape in the local construction sphere as

this could lead to more aggressive bidding among contractors

and ultimately, compression of margins.

Possible equity fund-raising to pare down debt. We project that

net gearing will rise to 2.2x over the next two years on the back

of a rise in landbanking activity, which are primarily covered by

loans. We believe that the company could potentially look at

equity fund-raising ahead to pare down gearing to a more

sustainable level.

Company Background

Founded in the 1960s as a construction company, Singapore-

based Chip Eng Seng Corporation (CES) has expanded its scope

and scale over the past five decades, and has gradually

diversified into property development, investments, and

hospitality businesses.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide

Chip Eng Seng

Segmental Breakdown

FY Dec 2015A 2016A 2017A 2018F 2019F

Revenues (S$m) Property Development 347 412 572 492 913

Construction 306 298 239 253 258

Hotel Operations 14.1 27.4 38.6 42.9 46.2

Investment Properties 8.97 10.6 10.1 10.4 10.7

Others 0.10 0.06 0.0 0.0 0.0

Total 676 748 860 799 1,228


FY Dec 2015A 2016A 2017A 2018F 2019F

Revenue 676 748 860 799 1,228

Cost of Goods Sold (515) (602) (707) (653) (985)

Gross Profit 161 146 153 146 243


Operating Profit 80.4 92.2 90.5 91.9 147


Associates & JV Inc 1.02 (0.7) 0.58 5.12 5.12



Pre-tax Profit 67.6 76.1 70.2 67.2 121

Tax (10.3) (24.4) (20.3) (21.5) (38.7)

Minority Interest 5.74 (16.0) (14.4) (13.9) (23.9)


Net Profit 63.0 35.7 35.5 31.7 58.3

Net Profit before Except. 63.0 35.7 35.5 31.7 58.3

EBITDA 87.5 98.6 102 108 164

Growth Revenue Gth (%) (38.8) 10.6 14.9 (7.1) 53.7

EBITDA Gth (%) (73.6) 12.6 3.6 5.8 51.4

Opg Profit Gth (%) (74.1) 14.6 (1.8) 1.5 60.5

Net Profit Gth (Pre-ex) (%) (77.8) (43.3) (0.5) (10.6) 83.7

Margins & Ratio Gross Margins (%) 23.9 19.6 17.7 18.3 19.8



ROAE (%) 8.5 4.7 4.6 4.1 7.3

ROA (%) 3.2 1.7 1.4 1.1 2.0

ROCE (%) 2.8 1.1 0.6 0.1 1.0

Div Payout Ratio (%) 39.6 69.6 70.0 78.2 42.6



Company Guide

Chip Eng Seng


FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017

Revenue 250 182 213 209 256


Gross Profit 45.7 29.2 36.1 35.1 52.1







Pre-tax Profit 30.6 12.9 6.66 24.5 26.2

Tax (7.7) (2.6) (1.6) (5.7) (4.5)

Minority Interest 0.0 (4.2) (4.2) (4.7) (7.2)

Net Profit 22.9 6.11 0.82 14.0 14.5


EBITDA 37.2 19.4 14.4 32.9 35.5

Growth Revenue Gth (%) 64.7 (27.3) 16.9 (1.6) 22.4

EBITDA Gth (%) 95.3 (47.9) (25.8) 129.1 7.9

Opg Profit Gth (%) 97.2 (50.8) (29.8) 148.6 1.0

Net Profit Gth (Pre-ex) (%) 152.1 (73.4) (86.6) 1,615.0 3.5

Margins Gross Margins (%) 18.3 16.1 17.0 16.8 20.4



Balance Sheet (S$m)

FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 225 220 324 463 602

Invts in Associates & JVs 12.1 6.36 6.94 12.1 17.2

Other LT Assets 298 302 341 341 341

Cash & ST Invts 442 482 258 186 269

Inventory 625 1,128 1,689 1,714 1,603

Debtors 249 81.2 89.7 79.4 122


Total Assets 1,907 2,232 2,728 2,816 2,974

ST Debt 120 234 8.74 8.74 8.74

Creditor 117 86.4 58.5 66.8 101

Other Current Liab 79.6 81.6 95.3 104 121

LT Debt 738 937 1,524 1,574 1,624

Other LT Liabilities 109 117 233 233 233


Minority Interests (5.3) 10.7 34.3 48.2 72.1

Total Cap. & Liab. 1,907 2,232 2,728 2,816 2,974

Non-Cash Wkg. Capital 733 1,055 1,644 1,642 1,522

Net Cash/(Debt) (416) (689) (1,275) (1,396) (1,364)




Asset Turnover (x) 0.3 0.4 0.3 0.3 0.4

Current Ratio (x) 4.3 4.2 12.7 11.1 8.7

Quick Ratio (x) 2.2 1.4 2.1 1.5 1.7

Net Debt/Equity (X) 0.6 0.9 1.6 1.7 1.5

Net Debt/Equity ex MI (X) 0.6 0.9 1.6 1.8 1.7

Capex to Debt (%) 2.3 (0.2) 7.7 9.5 9.2

Z-Score (X) NA NA NA NA NA


Company Guide

Chip Eng Seng


FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 67.6 76.1 70.2 67.2 121

Dep. & Amort. 6.09 7.09 11.1 11.1 11.1

Tax Paid (27.2) (34.2) (22.2) (12.8) (21.5)

Assoc. & JV Inc/(loss) (1.0) 0.66 (0.6) (5.1) (5.1)

Chg in Wkg.Cap. 255 (292) (524) (6.8) 102


Net Operating CF 300 (257) (492) 53.6 208

Capital Exp.(net) (20.0) 2.28 (118) (150) (150)

Other Invts.(net) (1.1) (2.5) 72.0 0.0 0.0

Invts in Assoc. & JV (1.4) 8.20 (28.6) 0.0 0.0

Div from Assoc & JV 4.52 1.07 0.30 0.0 0.0

Other Investing CF 0.0 0.0 (0.1) 0.0 0.0

Net Investing CF (17.9) 9.03 (74.2) (150) (150)

Div Paid (37.4) (24.8) (24.8) (24.8) (24.8)

Chg in Gross Debt (80.8) 312 364 50.0 50.0

Capital Issues (6.3) 0.05 3.29 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0

Net Financing CF (124) 287 342 25.2 25.2

Currency Adjustments (0.2) (0.2) (0.1) (0.1) (0.1)

Chg in Cash 157 39.1 (224) (71.4) 82.9

Opg CFPS (S cts) 7.24 5.68 5.25 9.73 17.0

Free CFPS (S cts) 44.9 (41.0) (98.1) (15.5) 9.31



Source: DBS Bank

Analyst: Carmen Tay

Derek TAN

Company Guide

Chip Eng Seng








Completed Date: 14 Feb 2018 09:25:19 (SGT) Dissemination Date: 14 Feb 2018 10:12:29 (SGT)







































Company Guide

Chip Eng Seng



in market-making.














DBS Group.





Report.


3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past

12 months for investment banking services from Chip Eng Seng Corporation as of 31 Jan 2018.

4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of

securities for Chip Eng Seng Corporation in the past 12 months, as of 31 Jan 2018.












ed: TH / sa:YM, PY, CS



Analyst Lee Keng LING +65 6682 3703 [email protected]

What’s New • Significant surge in FY17 revenue and net profit, partly

due to acquisition of Jurassic World

• Moving up the value chain for the traditional business

• Explore M&A opportunities; a fourth IP

• Maintain BUY; TP S$1.45

Price Relative


Revenue 96.8 117 140 154 EBITDA 12.4 30.1 42.5 48.6 Pre-tax Profit 7.33 20.2 31.2 36.8 Net Profit 6.54 17.4 24.7 29.6 Net Pft (Pre Ex.) 6.54 17.4 24.7 29.6 Net Pft Gth (Pre-ex) (%) 650.6 165.5 42.6 19.6 EPS (S cts) 2.67 7.10 10.1 12.1 EPS Pre Ex. (S cts) 2.67 7.10 10.1 12.1 EPS Gth Pre Ex (%) 577 166 43 20 Diluted EPS (S cts) 2.67 7.10 10.1 12.1 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 28.3 33.9 44.0 56.1 PE (X) 38.9 14.7 10.3 8.6 PE Pre Ex. (X) 38.9 14.7 10.3 8.6 P/Cash Flow (X) 132.8 nm 6.2 6.8 EV/EBITDA (X) 21.0 10.8 7.1 5.7 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 3.7 3.1 2.4 1.9 Net Debt/Equity (X) 0.1 0.9 0.4 0.2 ROAE (%) 11.0 22.8 26.0 24.2

Earnings Rev (%): - - Consensus EPS (S cts): 6.50 9.40 11.3 Other Broker Recs: B: 4 S: 0 H: 0



Mkt. Cap (S$m/US$m) 254 / 192


Lucrum1 Investment Limited 69.0

Free Float (%) 31.1


ICB Industry : Consumer Services / Media

DBS Group Research . Equity 28 Feb 2018

Marvelous transformation

FY17 a transformation year. With the acquisition of Jurassic

World in August last year, Cityneon is now on a stronger and

firmer growth path. Together with the two existing Intellectual

Property rights (IPs) – Avengers and Transformers and the

traditional business, Cityneon reported record high revenue that

broke the S$100m mark and 163% jump in net profit to

S$17.4m. We continue to expect Cityneon to deliver explosive

FY16-19F EPS CAGR growth of 165%. Trading at a low PE-to-

growth ratio of 0.2x FY18F earnings, Cityneon is attractive to

investors seeking unique ideas in the entertainment industry.

Where we differ: Assuming more travelling sets. We assume

nine exhibition sets for FY18F and FY19F (five for Avengers, two

each for Transformers and Jurassic World), vs consensus of

seven to eight sets for FY18F and FY19F.

Potential catalyst: M&A, a fourth IP, expanding project pipeline,

focus on higher-margin projects for the traditional business.

Valuation:

Maintain BUY; TP S$1.45. Our earnings forecast is based on

nine exhibition sets in total for FY18F and FY19F. We have

assumed the construction of an additional Jurassic World

travelling set in FY18F. Our target price of S$1.45 is based on

PE valuation peg of 14.4x, which is at a 20% discount to

peers’ average PE of 18x on FY18F earnings.


VHE’s limited track record. Victory Hill Exhibitions (VHE) was

formed in 2012 and its first exhibition was held in New York in

2014.

Earnings dependent on number of visitors, especially for the

permanent set in Las Vegas.


Cityneon Holdings Version 10 | Bloomberg: CITN SP | Reuters: CNHL.SI Refer to important disclosures at the end of this report

80

180

280

380

480

580

680

0.1

0.3

0.5

0.7

0.9

1.1

1.3

Feb-14 Feb-15 Feb-16 Feb-17 Feb-18

Relative IndexS$

Cityneon Holdings (LHS) Relative STI (RHS)

Company Guide

Cityneon Holdings

WHAT’S NEW

FY17 a record-high year

RESULTS HIGHLIGHTS

Significant surge in FY17 revenue and net profit: FY17

revenue broke the S$100m mark, rising 20.7% y-o-y to

S$116.7m, in line with our forecast. Net profit jumped

162.9% to S$17.4m, 6% above our estimates. Part of the

growth is due to the contribution from the newly acquired

third intellectual property rights (IPR), Jurassic World - The

Exhibition in August 2017. Together with the other two IPRs

(Disney’s Marvel’s Avengers S.T.A.T.I.O.N. and Hasbro’s

Transformers), Cityneon had a total of six exhibition sets in

2017.

IPR accounts for 70.5% of total gross profit. Revenue for the

IPR surged 187%, mainly derived from contracts entered

during the year including the opening of Marvel's Avengers

S.T.A.T.I.O.N. Exhibitions in Taipei, Beijing and Russia as well

as the opening of Transformers Exhibition in Chongqing,

China. The IPR segment accounts for 43.5% of the total

revenue for the group but 70.5% of gross profit, due to its

high margin of 88.7%. Hence an improvement was seen in

the aggregate gross profit margins from 36.0% in FY16 to

53.5% in FY17.

Timely release of sequel movies from the franchises in 2018.

There are several movies from the franchises on which

Cityneon has based its exhibits, set to be released in 2018.

There are three Marvel movies planned, and one each from

the Transformers and Jurassic World franchise. The timing of

these movie releases augurs well for the group’s IPR business.

Moving up the value chain for the traditional business.

Cityneon will continue to expand its full suite of “Design &

Build” services, especially for the upcoming 2020 World Expo

in Dubai, to continue its success in the previous World Expos

in Shanghai and Milan.

OUTLOOK

Exploring M&A opportunities; a fourth IP. Cityneon has put in

place its financing needs and will continue to explore new

business development opportunities including M&A activities.

It will continue to align its traditional core business with that

of the IPR business, especially in the area of creative and

design.

For the IPR segment, besides investing in new exhibition

travelling sets for its three existing IPs, Cityneon is also

seeking to secure a fourth IP to take the group to greater

heights.

EARNINGS & RECOMMENDATION

Maintain BUY; TP S$1.45. No changes to our earnings

forecasts based on nine exhibition sets in total for FY18F and

FY19F (five for Avengers, two each for Transformers and

Jurassic World). We have assumed the construction of an

additional Jurassic World travelling set in FY18F. Our target

price of S$1.45 is based on PE valuation peg of 14.4x, which

is at a 20% discount to peers’ average PE of 18x on FY18F

earnings.

Company Guide

Cityneon Holdings


FY Dec 2H16 1H17 2H17 % chg yoy % chg qoq

Sales 50.4 49.7 67.0 32.9 34.8

Cost of Goods Sold (33.6) (26.5) (26.4) (21.4) (0.1)

Gross Profit 16.8 23.3 40.6 141.4 74.4

Other Operating Expenses (16.3) (14.5) (27.6) 69.2 90.6

Non-Operating Income 0.0 0.0 0.0 - -

Interest Income 0.0 0.0 0.0 - -

Interest Expense (0.2) (0.5) (1.6) 600.0 215.4

Share of Associates' or JV Income (0.0) (0.1) (0.1) 182.4 4.3

Exceptional Gains/(Losses) 0.0 0.0 0.0 - -

Pretax Profit 1.6 8.6 11.6 622.9 35.6

Tax 0.3 (0.8) (1.9) n.m. 129.3

Minority Interests (0.1) 0.0 (0.0) (62.0) (370.0)

Net Profit 1.8 7.7 9.6 423.8 24.8

Margins

Gross Margins (%) 33.3% 46.8% 60.5%

Pretax Profit Margins (%) 3% 17% 17%

Net Profit Margins (%) 4% 16% 14%


Company Guide

Cityneon Holdings


Critical Factors

Number of IPs secured. To date, Cityneon has secured three IP

rights – with Marvel Entertainment to use Avengers

S.T.A.T.I.O.N. till 2024, with HASBRO Studios for the

Transformers franchise till 2023 and the latest Jurassic World –

The Exhibition from Universal Studios till 2027. With more IP

rights, Cityneon would be able to build various exhibition sets to

cater to different demand.

Scalable business model. The first sets for Avengers and

Transformers had each cost around US$8-9m to build, but

subsequent sets had cost only about one-third of the original

cost per set. Though the cost for Jurassic World is higher,

subsequent sets are also expected to be lower. Thus, Cityneon is

able to achieve operational leverage with every subsequent set

built. We believe that more sets would be needed to fulfil the

overwhelming demand. We assume nine sets for FY18F and

FY19F (five for Avengers, two each for Transformers and

Jurassic World), up from a total of six sets in FY17.

The nine exhibition sets would enable Cityneon to hold

exhibitions in various parts of the world. Only the Las Vegas set

in the US is permanent, while the rest are travelling sets, and

will be moved from one location to another after the exhibition

ends, which usually lasts for a few months. For every location or

project, Cityneon would be able to book revenues that include

licensing fees, minimum guarantees from the operator and also

merchandise sales. Assuming that an exhibition lasts for about

3-4 months, theoretically, a set can be used 2-3 times per year

based on a back-to-back schedule.

Project pipeline. Transformers in China was launched in

December 2017. Besides China, VHE also intends to venture

into Europe, US and the rest of Asia with both the Avengers

and Transformer sets. For the newly acquired Jurassic World set,

the schedule is full till 2019. It is slated to tour another two

cities in the US after Chicago in 2018, before it moves on to

Europe and Asia. Cityneon is planning to build a second

travelling set in 2018.

Manageable execution risk with upfront licensing fees.

Execution risk is minimal for the travelling exhibits as the bulk of

the risk is borne by the operator. There is operating risk for only

the permanent set in Las Vegas.

Avengers S.T.A.T.I.O.N.

Transformers

Jurassic World – The Exhibition

Project pipeline and assumption Avengers S.T.A.T.I.O.N

Transformers Jurassic Park

A1*

• Las Vegas

TF1

• China: Dec 2017 –Dec 2019

JW1

• Chicago: 26 May 2017 – 7 Jan 2018

A2

• China till end2019

TF2

• Asia: 3 years

JW1

• 2 cities in USA

A3

• Russia, Moscow:Nov 17

• Asia

• Europe

JW1

• Europe / Asia

A4

• Australia, Melbourne: Mar18

JW2

• Europe

A5

• Asia: 3 years


Company Guide

Cityneon Holdings


Source: DBS Bank; Bloomberg Finance L.P.

Company Guide

Cityneon Holdings

Balance Sheet:

Expansion should increase debt levels, but still below 1x net

debt/equity. Cityneon has secured short-term debt of ~S$66m to

fund the acquisition of Jurassic World, building of new exhibits and

upgrading of existing sets. Another ~S$23m long-term debt is for the

acquisition of the office property in Singapore. Despite this, the

group is expected to remain in a <1x net debt/equity position,

barring other unexpected capex outlays.


Securing new exhibition locations. There are no limits on locations

for its IP rights. Cityneon can venture into any part of the world with

the three existing franchises. Though it makes more business sense to

target the larger cities first, VHE has vast opportunities as there are

>30 large cities globally, each with a population of >10m.

Moving up the value chain for the traditional business. For the

traditional business, the focus would be on the theme park building

projects, which generally command higher margins. Cityneon has

already established a successful track record with the completion of

the multi-million international theme park project in Shanghai, which

gives it a competitive advantage to secure other theme park-related

projects. It now aims to move up the value chain, instead of just

being a contractor.

Key Risks:

Limited track record for VHE. VHE was formed in 2012 and its first

exhibition was held in New York in 2014.

Earnings dependent on number of visitors. The permanent set in Las

Vegas is dependent on the number of visitors. For the travelling sets,

Cityneon will usually receive upfront payment fees from operators to

use its exhibits, but a higher number of visitors would enable the

group to generate higher royalties in excess of the minimum

guarantees on royalties. Furthermore, ancillary sales like merchandise,

photos, food & beverage are also dependent on the number of

visitors.

Low free float of c.30%. Cityneon shares are tightly held, with a

free float of about 30%. Post the general offer, Lucrum1, which is

majority-owned by Chinese parties and led by Executive Chairman &

Group CEO Mr Ron Tan, holds 69%. Ron Tan has a 15.5% stake in

Lucrum1.

Company Background

Cityneon has evolved to become a creator of innovative and

interactive exhibitions, focusing on creating captivating cutting-edge

content, and delivering engaging and interactive exhibitions to

audiences. To date, it has secured three IP rights – with Marvel

Entertainment to use Avengers S.T.A.T.I.O.N. till 2024, HASBRO

Studios for the Transformers franchise till 2023, and Universal Studios

for Jurassic World – The Exhibition, expiring in 2027.

Capital Expenditure

ROE (%)

Forward PE Band (x)

Business Model


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2015A 2016A 2017A 2018F 2019F

Capital Expenditure (-)

S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015A 2016A 2017A 2018F 2019F

Avg: 15.4x

+1sd: 23.2x

+2sd: 31.1x

-1sd: 7.6x

-0.2

9.8

19.8

29.8

39.8

49.8


(x)

Las Vegas (permanent sets)

Ticket sales (incl. processing charges)

Merchandise sales / Photo ops

Sponsorship revenue

Naming rights

Sources of revenue:

Depreciation of the set

Sources of expenditure:

COGS (merchandise)

Rental expense

SG&A/ other opex

Royalties to Marvel/Hasbro (10% of net ticket sales)

Travelling sets (operated by partners)

20% cut of ticket sales

Upfront license fee from partner for usage of set

Merchandise (sales to partner + cut of final sales to customer)

Sources of revenue:

Depreciation of the set

Sources of expenditure:

COGS (merchandise)

SG&A/ other opex(minimal)

Royalties to Marvel/Hasbro (10% of ticket sales)

Ha

lf of th

e 2

0%

go

es to

Ma

rvel o

r Ha

sbro

Risk-reward profile:No execution risk; partner runs the operations

High margins (DBS estimate 25-35% net margin) but lower nominal take

Risk-reward profile:Cityneon takes on execution risk.

Lower margin (DBS estimate of 25% net margin) but higher nominal take

Minimum guarantees reduce risk

of non-performance

Risk-reward profile Cityneon takes on execution risk.

Lower margin (DBS estimate of mid-teen net margin) but higher nominal take.

Risk-reward profile No execution risk; partner runs the operations.

High margins (DBS estimates 30-40% net margin) but lower nominal take.

Company Guide

Cityneon Holdings

Segmental Breakdown

FY Dec 2015A 2016A 2017A 2018F 2019F

Revenues (S$m)

Old Business 96.5 75.0 79.7 80.7 84.5

Victory Hill Exhibitions (VHE)

0.0 21.7 37.1 59.5 69.6

Total 96.5 96.8 117 140 154

Net Profit (S$m) Old Business 0.87 (0.5) 7.43 5.78 7.25


0.0 7.07 9.93 19.0 22.4

Total 0.87 6.54 17.4 24.7 29.6

Net Profit Margins (%) Old Business 0.9 (0.7) 9.3 7.2 8.6


N/A 32.6 26.8 31.9 32.1

Total 0.9 6.8 14.9 17.6 19.2


FY Dec 2015A 2016A 2017A 2018F 2019F

Revenue 96.5 96.8 117 140 154


Gross Profit 23.3 34.8 63.8 70.9 80.3




Associates & JV Inc 0.02 (0.1) (0.2) 0.0 0.0



Pre-tax Profit 0.79 7.33 20.2 31.2 36.8

Tax 0.04 (0.7) (2.8) (6.1) (6.8)

Minority Interest 0.04 (0.1) 0.0 (0.4) (0.4)


Net Profit 0.87 6.54 17.4 24.7 29.6


EBITDA 2.63 12.4 30.1 42.5 48.6

Growth

Revenue Gth (%) 23.7 0.3 20.7 20.1 9.9

EBITDA Gth (%) (34.4) 371.4 142.5 41.1 14.5

Opg Profit Gth (%) (58.8) 606.2 177.6 45.8 17.0

Net Profit Gth (Pre-ex) (%) (62.9) 650.6 165.5 42.6 19.6

Margins & Ratio

Gross Margins (%) 24.1 36.0 54.7 50.5 52.1



ROAE (%) 2.3 11.0 22.8 26.0 24.2

ROA (%) 1.2 6.3 9.7 10.3 11.5

ROCE (%) 1.0 7.3 10.5 11.4 12.1

Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0



Full contribution from Jurassic World

Higher contribution from VHE with the acquisition of the third IP

Company Guide

Cityneon Holdings


FY Dec 2H15 1H16 2H16 1H17 2H17

Sales 55.8 46.3 50.4 49.7 67.0


Gross Profit 13.7 18.0 16.8 23.3 40.6

Other Operating Expenses (12.5) (12.2) (16.3) (14.5) (27.6)

Non-Operating Income 0.0 0.0 0.0 0.0 0.0

Interest Income 0.02 0.00 0.00 0.00 0.00

Interest Expense (0.2) (0.4) (0.2) (0.5) (1.6) Share of Associates' or JV Income

0.0 (0.1) (0.0) (0.1) (0.1)

Exceptional Gains/(Losses) 0.0 0.0 0.0 0.0 0.0

Pretax Profit 1.5 5.7 1.6 8.6 11.6

Tax 0.0 (1.0) 0.3 (0.8) (1.9)

Minority Interests 0.0 0.0 (0.1) 0.0 (0.0)

Net Profit 1.6 4.7 1.8 7.7 9.6

Growth (y-o-y)

Revenue Gth (%) 13.8 (9.6) 7.3 32.9

Gross Profit Gth (%) 88.2 22.3 29.5 141.4

Net Profit Gth (%) n.m. 16.2 64.3 423.8

Margins

Gross Margins (%) 38.8% 33.3% 46.8% 60.5%

Pretax Profit Margins (%) 12% 3% 17% 17%

Net Profit Margins (%) 10% 4% 16% 14%

Balance Sheet (S$m)

FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 16.0 43.4 80.2 86.9 93.1


Other LT Assets 10.7 10.4 39.3 37.9 36.5

Cash & ST Invts 24.3 22.6 17.9 43.7 65.9

Inventory 0.19 0.73 0.68 0.39 0.42

Debtors 26.0 28.7 75.9 49.9 54.9


Total Assets 87.6 120 238 242 274

ST Debt 11.7 28.2 66.5 66.5 66.5

Creditor 23.8 19.6 44.6 19.1 20.4


LT Debt 0.0 0.04 23.0 23.0 23.0


Shareholder’s Equity 49.6 69.3 82.9 108 137


Total Cap. & Liab. 87.6 120 238 242 274

Non-Cash Wkg. Capital 11.4 22.0 54.1 48.2 51.2

Net Cash/(Debt) 12.6 (5.7) (71.6) (45.9) (23.6)




Asset Turnover (x) 1.3 0.9 0.7 0.6 0.6

Current Ratio (x) 1.7 1.3 1.0 1.3 1.5

Quick Ratio (x) 1.4 1.0 0.8 1.0 1.3

Net Debt/Equity (X) CASH 0.1 0.9 0.4 0.2

Net Debt/Equity ex MI (X) CASH 0.1 0.9 0.4 0.2

Capex to Debt (%) 38.8 104.0 47.4 16.8 16.8

Z-Score (X) 5.2 4.4 4.0 4.0 4.0


Debt to fund acquisition of Jurassic World, building of new exhibits and upgrading of existing sets

Acquisition of office property

Company Guide

Cityneon Holdings


FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 0.79 7.33 20.2 31.2 36.8

Dep. & Amort. 1.47 4.44 7.84 9.73 10.3

Tax Paid (0.2) (0.4) (1.0) (1.0) (6.1)

Assoc. & JV Inc/(loss) 0.0 0.12 0.19 0.0 0.0

Chg in Wkg.Cap. 0.80 (9.7) (43.4) 0.75 (3.7)

Other Operating CF 0.07 0.18 5.12 0.0 0.0

Net Operating CF 2.89 1.92 (11.0) 40.7 37.2

Capital Exp.(net) (4.5) (29.4) (42.4) (15.0) (15.0)

Other Invts.(net) (1.1) 0.0 0.0 0.0 0.0

Invts in Assoc. & JV (0.4) 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (10.0) (0.9) 0.15 0.0 0.0

Net Investing CF (16.0) (30.3) (42.3) (15.0) (15.0)

Div Paid (0.9) 0.0 0.0 0.0 0.0

Chg in Gross Debt (3.1) 15.8 39.2 0.0 0.0

Capital Issues 15.7 12.5 0.0 0.0 0.0

Other Financing CF 0.87 (0.6) 11.8 0.0 0.0

Net Financing CF 12.6 27.7 51.0 0.0 0.0

Currency Adjustments 0.85 0.16 (1.0) 0.0 0.0

Chg in Cash 0.39 (0.5) (3.4) 25.7 22.2

Opg CFPS (S cts) 0.95 4.76 13.2 16.3 16.7

Free CFPS (S cts) (0.7) (11.2) (21.9) 10.5 9.09



Source: DBS Bank

Analyst: Lee Keng LING

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 14 Mar 17 0.80 1.26 BUY

2: 15 May 17 0.90 1.26 BUY

3: 30 May 17 0.94 1.23 BUY

4: 21 Sep 17 1.14 1.45 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

0.74

0.84

0.94

1.04

1.14

1.24

Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18

S$

Assume 9 sets in total for 2018 and 2019

Part finance acquisition of Jurassic World and to build new sets

Company Guide

Cityneon Holdings















































Company Guide

Cityneon Holdings



in market-making.














DBS Group.





Report.



12 months for investment banking services from Cityneon Holdings as of 31 Jan 2018.












ed: CK / sa:YM, PY

BUY (Upgrade from HOLD)

Last Traded Price ( 14 Dec 2017): S$1.43 (STI : 3,416.94)


Analyst Andy Sim +65 6682 3718 [email protected] Alfie YEO +65 6682 3717 [email protected]

What’s New • Upgrade to BUY; accumulate on hopes of a better 2018

• Project 20% profit growth in FY18F on better

sentiment, post product rationalisation

• Share price at 6-year low and already priced in weak

operating environment

• Despite call upgrade, we cut our TP to S$1.80

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F

Revenue 402 385 415 449 EBITDA 54.5 46.6 53.9 63.0 Pre-tax Profit 39.2 34.9 41.3 49.4 Net Profit 26.2 23.4 28.1 33.6 Net Pft (Pre Ex.) 28.2 23.4 28.1 33.6 Net Pft Gth (Pre-ex) (%) 83.5 (16.8) 19.8 19.7 EPS (S cts) 5.77 5.17 6.19 7.41 EPS Pre Ex. (S cts) 6.21 5.17 6.19 7.41 EPS Gth Pre Ex (%) 84 (17) 20 20 Diluted EPS (S cts) 5.77 5.17 6.19 7.41 Net DPS (S cts) 3.12 2.86 3.41 3.70 BV Per Share (S cts) 44.4 46.4 49.8 53.8 PE (X) 24.8 27.7 23.1 19.3 PE Pre Ex. (X) 23.1 27.7 23.1 19.3 P/Cash Flow (X) 10.9 17.1 20.0 16.5 EV/EBITDA (X) 11.7 13.5 11.6 9.8 Net Div Yield (%) 2.2 2.0 2.4 2.6 P/Book Value (X) 3.2 3.1 2.9 2.7 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.8 11.4 12.9 14.3 Earnings Rev (%): (32) (30) N/A Consensus EPS (S cts): 5.4 7.5 8.2 Other Broker Recs: B: 1 S: 0 H: 2


Position for a better year ahead

Thesis: Turning the corner; upgrade to BUY. Delfi’s share price is

at 6-year low and has slumped by 36% YTD on the back of its

disappointing performance. This was due to softer sentiment in

Indonesia and product-rationalisation initiatives. Looking ahead,

we believe its share price could have priced in the current

subdued situation and should improve as we move into FY18F.

This is on the back of: (i) low-base effect, coupled with expected

improvement in sentiment in 2018; (ii) nearing end of

production rationalisation efforts; and (iii) lower raw material

costs.

Where we differ: Worth a re-look and accumulate despite

current weak performance. Despite Delfi’s current weak

operating performance, we believe the counter is worth a re-

look. While the upcoming 4Q17 results, expected to be released

in Feb 2018, may not register a significant turnaround, we

believe it should show a bottoming-out trend at worst.

Potential catalyst: Better-than-expected operating performance

could set the stage for a meaningful share price recovery after a

couple of years of dismal performance. We now project

earnings growth of 20% each year in FY18F/19F, marking a

reverse from our previous forecast of profit contraction. Further

upward revision could re-rate share price. Valuation:

Our TP drops to S$1.80 as we slash our forecasts by 32%/

30%, coupled with rolling over our PE valuations to

FY18F/19F, but still based on 26x PE, in line with regional

peers.


Slower-than-expected earnings recovery. Our thesis is premised

on expectations of better prospects in 2018. A slower-than-

expected earnings recovery arising from higher raw material

costs, a weaker rupiah, investment costs, or continued erosion

in share price could render our thesis void. At A Glance

Issued Capital (m shrs) 611

Mkt. Cap (S$m/US$m) 874 / 649


Berlian Enterprises Ltd 50.5

Commonwealth Bank of Austr 16.5

Standard Life Aberdeen Plc 7.6

Free Float (%) 37.8


ICB Industry : Consumer Goods / Food Producers


18 Dec 2017


Delfi Ltd Version 7 | Bloomberg: DELFI SP | Reuters: DELF.SI Refer to important disclosures at the end of this report

31

51

71

91

111

131

151

171

191

211

1.2

1.7

2.2

2.7

3.2

3.7

4.2

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Relative IndexS$

Delfi Ltd (LHS) Relative STI (RHS)

Company Guide

Delfi Ltd

WHAT’S NEW

Position for a better year ahead

Upgrade to BUY, share price at 6-year low: Despite a dismal

operating performance in 3Q17 and YTD, we believe 2018

should turn out to be a better year ahead for Delfi. As we

move into the finishing months of 2017, we advocate

accumulating the counter and are upgrading it to BUY, with a

revised TP of S$1.80.

Its share price has dipped by 36% YTD on the back of dismal

operating performance due to softer-than-expected

sentiment and the company’s product-rationalisation efforts.

Whilst we slash our forecasts by 30%-32% for FY17F/18F,

we believe operating performance should have bottomed and

looks to be on the recovery path.

We recognise that operating performance may not show a

rapid improvement in the closing quarters of 2017, but its

share price is at a 6.5-year low and with the

underperformance this year, we believe it could be time to

accumulate.

What caused the dismal performance in share price this year?

In general, its operating performance has been weak as seen

from 1Q17 to 3Q17 results. The weak performance was due

to (i) weak consumer environment in Indonesia; and (ii)

impact of the group’s ongoing production-rationalisation

exercise to remove underperforming SKUs (stock keeping

units).Thus, sales slid by 5% y-o-y in for 9M17, while net

profit came in at US$18.2m, down by 19% y-o-y. In fact, if

not for a recognition of US$4.6m gain on the back of the

divestment of 50% stake in PT Ceres Meiji Indotama

Indonesia recognised in 2Q17, 9M17 headline net profit

would have been worse. Also, 1H17 also saw a lower interim

dividend of 1.22 UScts, down from 1.36 UScts in 1H16, due

lower profits.

SKU rationalisation almost done; continued product

development.

Delfi’s share price has declined by c.32% YTD, arising from a

weaker-than-expected operating performance. Going

forward, management has indicated that its strategy to

rationalise its SKUs is almost done and is ready to continue its

trend to launch new products. That said, it will also be

cognisant of changing customer preferences and look

towards relaunching new products, although not at the rate

of 25-30 products a year seen prior to 2014.

Looking forward - improvement in sentiment in 2018.

Consumer F&B companies in Indonesia had a relatively

disappointing 2017 YTD, which possibly was due to various

factors such as a prolonged weak commodity price

environment, higher electricity tariff for households, lower

minimum wage increase, tax reform and slow government

spending. Looking ahead, our Indonesia consumer team

expects a stronger dose of fiscal stimulus that can lead to

more efforts in supporting consumers’ purchasing power

ahead of Indonesia’s presidential election (PE) in 2019. As

such, this could bode well for companies like Delfi which

derives a majority of its revenue from Indonesia.

Softer raw material costs could boost margins. In 2016,

consumer companies, particularly F&B, has benefited from

margin expansion, particularly due to the benign raw material

environment seen back in 2015. There tends to be a lagged

effect for raw material price movements. Looking into 2018,

we expect a repeat of the events in 2016 due again to the

generally subdued prices. As can be seen, the prices of several

soft commodities have decreased YTD (as of time of writing,

such as sugar (-26%), cocoa (-12%) and palm oil (-18%).

Notwithstanding the above, we remain cognisant that

packaging materials prices could chip some shine off the

benefits of soft commodities prices. Overall, we believe the

net impact should still be positive for companies like Delfi.

Upgrade to BUY; TP: S$1.80

Look towards 2018. We revise our forecasts down by 30-

32% to align with the YTD performance and now expect

FY17F EPS to register a contraction of -17% on the back of

lower sales, coupled with higher operating expenses. That

said, we believe the weak performance for 2017 should soon

be a thing of the past and investors should look towards the

performance in FY18F. We are projecting earnings to reverse

and post growth of 20% each year in FY18F and FY19F.

Worth a re-look. Share price at 6-year low, TP: S$1.80.

Having said all that, we believe Delfi is worth a re-look and

accumulating given its share price is at 6-year low, retreating

by 36% YTD. Delfi also has a strong distribution network

within Indonesia, and is still the market leading in chocolate

confectionery despite recent weak operating figures. We

upgrade our recommendation to BUY, from HOLD, with a

revised TP of S$1.80 that implies 26% potential upside.

Risks: Illiquidity in shares; turnaround in operations. Our

positive thesis is on expectations that we are past the worst

for Delfi, and 4Q17 should show a bottoming-out trend and

2018 will turn out better. In the event that this fails to

materialise, its share price could continue to de-rate. Its

shares are relatively illiquid and hence there are days in which

there could be unexplained significant movements.

Company Guide

Delfi Ltd

Sugar: down 26% YTD Cocoa: -11% YTD

Source: ThomsonReuters, DBS Bank Source: ThomsonReuters, DBS Bank

CPO: down 18% YTD Milk Powder: down by 32% YTD

Source: ThomsonReuters, DBS Bank Source: ThomsonReuters, DBS Bank

+69% +26%

Page 4

Company Guide

Delfi Ltd

Peers valuation comparison

Company Trade

currency

Market Cap

(US$m) Px Last PE

(Act) PE (Yr

1) PE(Yr

2) EV/EBITDA

(LTM) P/BV (x)

P/Sales (x)

ROE (%)

Operating Margin

(%)

Net Margin

(%)

Dividend Yield (%)

Net Gearing

(%)

Peers

Delfi Ltd SGD 650 1.43 24.8x 27.7x 23.1x 12.4x 3.1x 1.7x 13% 9.8% 6.5% 2.1% -7%

Unilever Indonesia Tbk PT IDR 29,298 52125 57.9x 54.7x 48.9x 40.0x 61.9x 9.7x 136% 21.7% 16.0% 1.7% 43%

Mayora Indah Tbk PT IDR 4,117 2500 40.4x 40.8x 34.3x 22.2x 8.5x 2.9x 22% 12.6% 7.4% 0.8% 44%

Gudang Garam Tbk PT IDR 11,137 78575 20.2x 20.3x 18.0x 12.3x 3.8x 1.9x 17% 13.3% 8.8% 3.3% 46% Indofood Sukses Makmur Tbk PT IDR 4,819 7450 16.1x 15.0x 13.9x 8.1x 2.1x 0.9x 14% 12.4% 5.7% 3.2% 81% Indofood CBP Sukses Makmur Tbk PT IDR 7,495 8725 26.7x 26.3x 24.2x 16.2x 5.4x 2.9x 20% 14.1% 10.4% 1.8% -31% Nippon Indosari Corpindo Tbk PT IDR 574 1260 36.6x 38.2x 24.3x 20.0x 4.5x 3.1x 20% 17.6% 11.1% 1.1% 31%

Jollibee Foods Corp PHP 5,297 246 39.0x 38.7x 33.9x 22.8x 6.9x 2.1x 18% 5.7% 5.4% 0.9% -14%

Universal Robina Corp PHP 6,606 151 21.8x 29.9x 27.6x 16.2x 4.3x 3.0x 20% 14.9% 13.6% 1.1% 35%

Nestle (Malaysia) Bhd MYR 5,743 100 40.5x 35.7x 32.8x 26.6x 34.8x 4.5x 98% 15.8% 12.6% 2.7% 39%

Avg (total) 33.2x 33.3x 28.7x

Avg (ex-Unilever) 30.2x 30.6x 26.1x

Thai Beverage PCL SGD 18,102 0.97 17.0x 20.1x 19.2x 19.6x 4.6x 3.1x 27% 14.5% 18.2% 2.8% 27%

BreadTalk Group Ltd SGD 344 1.64 21.8x 23.4x 21.9x 5.8x 3.5x 0.8x 9% 4.8% 1.9% 1.5% 48%

JUMBO Group Ltd SGD 281 0.59 26.2x 21.3x 19.9x 14.7x 5.8x 2.6x 22% 12.2% 10.0% 1.7% -74%

21.7x 21.6x 20.3x

Source: ThomsonReuters, DBS Bank (Prices as of 18 Dec 2017)

Company Guide

Delfi Ltd

Company Guide

Delfi Ltd



Revenue 86.6 100 87.9 1.5 (12.3)

Cost of Goods Sold (55.8) (66.9) (57.4) 2.8 (14.2)

Gross Profit 30.7 33.3 30.5 (0.7) (8.4)


Operating Profit 10.4 13.9 6.75 (34.9) (51.5)


Associates & JV Inc (0.3) 0.0 (0.6) (92.7) nm



Pre-tax Profit 9.07 13.1 5.47 (39.7) (58.3)

Tax (3.1) (3.8) (2.2) (31.4) (43.6)


Net Profit 5.93 9.29 3.32 (44.1) (64.3)


EBITDA 12.2 16.7 9.02 (26.2) (45.8)

Margins (%)





Company Guide

Delfi Ltd


Critical Factors Indonesia macro consumption the key driver. Revenue growth is tied to Indonesia’s consumer spending since Indonesia sales accounted for 72% of FY16 revenue. The combination of multiple factors: a prolonged weak commodity price environment, higher electricity tariff for households, lower minimum wage increase, tax reform and slow government spending led to a slowdown in households’ consumption YTD 2017. An improvement in consumer confidence would aid top-line recovery.

Input costs contribute significantly to cost of sales. Key inputs

are cocoa, sugar, milk, palm oil and packaging, all of which

contribute over 75% to cost of sales. We estimate that cocoa,

milk and sugar each makes up 30%, 15% and 15% of total

costs respectively. Commodity inputs are largely imported into

Indonesia and are mainly paid in US dollars, while finished

products are sold mainly in Indonesia in rupiah. About 70% of

the group’s COGS are denominated in US dollars.

Rupiah movements can impact gross margins. The depreciation

of the rupiah against the US dollar has led to significantly higher

input costs in 2015. Average gross margins were over 30%

previously but were below this level in middle of 2015 due to

the weak rupiah. This has, however, recovered in 2016 and

2017 given the stable rupiah and management’s cost-

containment initiatives. Our sensitivity analysis shows that every

5% depreciation of the rupiah against the US dollar would lead

to a 1.1% fall in net profit. However, operating margins have

weakened since 4Q16 (YTD) given investments in its distribution

channels.

Strong market position. Delfi still has a dominant market share

in Indonesia of about 50%. Distribution channels cover both

general and modern trade extensively. Delfi's competitive

advantage is in the general trade, as it has a first-mover

advantage and considerable reach into suburban and rural

areas. Global players have already been competing in the

market but mainly in the modern channels.

Philippines positive but still relatively small. Regional markets,

mainly comprising the Philippines, contribute close to 30% of

sales, but insignificantly to EBITDA. Delfi's market share stands

at about 10% and it is still investing into the market, including

its brand portfolio and its route-to-market/distribution channels.

Improvements in operating efficiencies and profitability will

contribute to earnings growth to some extent.

Rupiah assumption

BC vol growth (%)

BC ASP growth (%)

BC gross margins


13000 13300 13400 13500 13500

0.0

1947.9

3895.7

5843.6

7791.4

9739.3

11687.1

13635.0

2015A 2016A 2017F 2018F 2019F

-15

-1

-5

76

-16.5

-11.8

-7.0

-2.3

2.4

7.1

2015A 2016A 2017F 2018F 2019F

3

5

0

5 5

0.00

1.02

2.04

3.06

4.08

5.10

2015A 2016A 2017F 2018F 2019F

29.8

34.8 34.7 34.6 34.4

0.0

7.0

14.0

21.1

28.1

35.1

2015A 2016A 2017F 2018F 2019F

Company Guide

Delfi Ltd


Comments

Delfi’s share price looks to be closely correlated to forward mean EPS. In our view, this in turn is contingent upon sales, gross margins, operating margins.

Source: ThomsonReuters, DBS Bank

Comments

From the chart, we noted that operating margins precede movements in share price by about one to two quarters. In actual terms, the time lead could be shorter as results are announced about a month after the close of the quarter.

That said, we believe operating margins for the group could be a share price driver.

The recent slump in share price could provide an opportunity, as we believe operating margins could be on the mend. We project margins to be 10.8%/ 11.8% in FY18F/19F, up from FY17F’s 10% and a low of 7.7% seen in 3Q17.

Source: ThomsonReuters, DBS Bank

Company Guide

Delfi Ltd

Balance Sheet:

Net cash provides buffer for inorganic opportunities. Post the

sale of its Cocoa Ingredients to Barry Callebaut, Delfi is a pure

consumer goods-focused company. It is in a net cash position,

from a net debt position prior to the disposal. This could serve

as a war chest for Delfi to undertake inorganic growth

opportunities, particularly when economic conditions

deteriorate further, thus providing more options. Even with the

capital reduction of US$60m (completed in June 2016), the

group remains and will still be in a net cash position, barring

any significant investments.


Potential M&A opportunities. The acquisition of rivals in key

markets such as Indonesia and the Philippines will help the

company defend and gain market share, thereby enhancing its

position in the chocolate confectionery business.

Revenue growth in key market: Indonesia. A sustained top-line

growth, coupled with recovery in operating margins could

provide an upward push to Delfi's stock price as investors

continue to buy into Indonesia's consumption growth story.

Key Risks:

Input costs. Commodity price increases particularly in cocoa,

sugar and crude palm oil may erode margins, if there is

insufficient lead time for the company to increase product

prices.

Slowdown in the Indonesian economy. As over 70% of

revenue originates from Indonesia, a slowdown in Indonesia's

economy will affect sales and consumption. A slower

Indonesian economy, including lower subsidies, wages,

disposable incomes, etc., will give rise to earnings risks.

Currency risk. The company reports its earnings in US dollars

with a significant portion of its input costs also denominated in

US dollars. Revenues are denominated largely in rupiah. The

rupiah’s depreciation will erode margins if ASPs remain

unchanged.

Company Background

Delfi manufactures, markets and distributes confectionery

products. The company has a broad brand portfolio that

extends across multiple product categories and different price

points. Its key markets are Indonesia, the Philippines, Singapore

and Malaysia. Its brands command approximately 50% market

share in Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2015A 2016A 2017F 2018F 2019F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

2015A 2016A 2017F 2018F 2019F


US$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 51.4x

+1sd: 73.9x

+2sd: 96.5x

-1sd: 28.9x

-2sd: 6.3x5.7

25.7

45.7

65.7

85.7

105.7

Dec-13 Dec-14 Dec-15 Dec-16

(x)

Avg: 5.08x

+1sd: 5.97x

+2sd: 6.87x

-1sd: 4.18x

-2sd: 3.28x

2.4

3.4

4.4

5.4

6.4

7.4


(x)

Company Guide

Delfi Ltd

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Rupiah assumption 13,000 13,300 13,400 13,500 13,500

BC vol growth (%) (15.0) (1.0) (5.0) 7.00 6.00

BC ASP growth (%) 3.00 5.00 0.0 5.00 5.00

BC gross margins 29.8 34.8 34.7 34.6 34.4

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (US$m)

Indonesia 296 296 283 305 330

Regional markets 110 107 102 110 119

Total 406 402 385 415 449

EBITDA (US$m)

Indonesia 39.0 54.2 46.4 53.6 62.8

Regional markets 0.44 0.53 0.51 0.55 0.59

Total 39.5 54.8 46.9 54.2 63.3

EBITDA Margins (%)

Indonesia 13.2 18.4 16.4 17.6 19.0

Regional markets 0.4 0.5 0.5 0.5 0.5

Total 9.7 13.6 12.2 13.0 14.1

Income Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 406 402 385 415 449


Gross Profit 121 140 134 144 154

Other Opng (Exp)/Inc (89.2) (94.1) (95.0) (98.9) (101)



Associates & JV Inc 0.06 (0.3) (0.3) (0.3) (0.3)


Exceptional Gain/(Loss) (20.1) (2.0) 0.0 0.0 0.0

Pre-tax Profit 7.39 39.2 34.9 41.3 49.4

Tax (12.1) (13.1) (11.5) (13.2) (15.8)



Net Profit (4.7) 26.2 23.4 28.1 33.6


EBITDA 39.5 54.5 46.6 53.9 63.0

Growth

Revenue Gth (%) (19.5) (0.9) (4.3) 8.0 8.0

EBITDA Gth (%) (52.1) 37.9 (14.5) 15.6 17.0

Opg Profit Gth (%) (57.4) 44.2 (15.4) 16.4 18.1

Net Profit Gth (Pre-ex) (%) (69.4) 83.5 (16.8) 19.8 19.7

Margins & Ratio

Gross Margins (%) 29.8 34.8 34.7 34.6 34.4


Net Profit Margin (%) (1.2) 6.5 6.1 6.8 7.5

ROAE (%) (1.8) 11.8 11.4 12.9 14.3

ROA (%) (1.1) 7.2 6.8 7.8 8.8

ROCE (%) (5.7) 10.1 9.5 10.7 11.9

Div Payout Ratio (%) N/A 54.0 55.3 55.0 50.0



Company Guide

Delfi Ltd


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Revenue 86.6 106 93.1 100 87.9


Gross Profit 30.7 40.6 30.7 33.3 30.5




Associates & JV Inc (0.3) (0.1) 0.24 0.0 (0.6)


Exceptional Gain/(Loss) 0.0 (2.0) 0.0 0.0 0.0

Pre-tax Profit 9.07 6.42 8.67 13.1 5.47

Tax (3.1) (2.8) (3.0) (3.8) (2.2)


Net Profit 5.93 3.65 5.63 9.29 3.32


EBITDA 12.2 12.8 12.2 16.7 9.02

Growth

Revenue Gth (%) (18.6) 22.0 (11.8) 7.6 (12.3)

EBITDA Gth (%) (17.0) 4.4 (4.2) 36.3 (45.8)

Opg Profit Gth (%) (19.8) (8.1) (3.1) 50.8 (51.5)

Net Profit Gth (Pre-ex) (%) (27.0) (4.7) (0.5) 65.2 (64.3)

Margins

Gross Margins (%) 35.5 38.4 33.0 33.2 34.7



Balance Sheet (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 117 127 135 143 150


Other LT Assets 9.36 10.1 10.1 10.1 10.1

Cash & ST Invts 120 67.7 74.6 77.2 84.1

Inventory 59.6 54.7 55.0 59.4 64.1

Debtors 56.3 61.8 55.0 59.4 64.1


Total Assets 388 342 351 370 393

ST Debt 59.5 44.2 44.2 44.2 44.2

Creditor 25.9 34.7 24.1 26.0 28.1


LT Debt 15.2 9.58 9.58 9.58 9.58




Total Cap. & Liab. 388 342 351 370 393


Net Cash/(Debt) 44.9 14.0 20.9 23.4 30.3




Asset Turnover (x) 0.9 1.1 1.1 1.2 1.2

Current Ratio (x) 2.2 1.7 1.7 1.8 1.8

Quick Ratio (x) 1.5 1.1 1.1 1.1 1.2



Capex to Debt (%) 29.4 30.4 31.6 31.6 31.6

Z-Score (X) 4.6 5.0 4.9 4.9 4.9


Includes gain from divestment of 50% stake in PT Ceres Meiji Indotama Indonesia (US$4.6m) in 2Q17

Company Guide

Delfi Ltd

Cash Flow Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 7.39 39.2 34.9 41.3 49.4

Dep. & Amort. 7.85 9.18 8.32 9.29 10.3

Tax Paid (19.7) (13.5) (1.4) (11.5) (13.2)

Assoc. & JV Inc/(loss) (0.1) 0.27 0.28 0.29 0.31

Chg in Wkg.Cap. 24.8 18.3 (4.2) (6.8) (7.4)


Net Operating CF 43.3 59.7 38.0 32.5 39.4

Capital Exp.(net) (22.0) (16.4) (17.0) (17.0) (17.0)

Other Invts.(net) (0.3) (0.7) 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (38.8) 0.0 0.0 0.0 0.0

Net Investing CF (61.1) (17.1) (17.0) (17.0) (17.0)

Div Paid (34.2) (8.3) (14.1) (13.0) (15.4)

Chg in Gross Debt 5.91 (24.7) 0.0 0.0 0.0

Capital Issues 0.0 (60.0) 0.0 0.0 0.0

Other Financing CF (8.0) (2.2) 0.0 0.0 0.0

Net Financing CF (36.3) (95.2) (14.1) (13.0) (15.4)

Currency Adjustments 1.70 0.81 0.0 0.0 0.0

Chg in Cash (52.4) (51.8) 6.90 2.51 6.95

Opg CFPS (S cts) 4.07 9.12 9.30 8.67 10.3

Free CFPS (S cts) 4.70 9.55 4.64 3.41 4.94



Source: DBS Bank

Analyst: Andy Sim

Alfie YEO

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 24 Feb 17 2.33 2.26 HOLD


1

1.21

1.41

1.61

1.81

2.01

2.21

2.41

Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17

S$

Company Guide

Delfi Ltd








Completed Date: 18 Dec 2017 18:12:14 (SGT) Dissemination Date: 18 Dec 2017 18:34:19 (SGT)







































Company Guide

Delfi Ltd



in market-making.














DBS Group.



have a proprietary position in Thai Beverage Public Company, recommended in this report as of 30 Nov 2017.


Report.



12 months for investment banking services from Indofood Sukses Makmur as of 30 Nov 2017.












ed: JS / sa: xxx, PY

BUY Last Traded Price ( 10 Nov 2017): S$2.72 (STI : 3,420.10)


Analyst Singapore Research Team [email protected] Sue Lin LIM +65 8332 6843 [email protected]

What’s New 3Q17 earnings above expectations; at an inflection

point with improved loan yields and loan growth

Raising FY17-19F earnings on higher NIM and loan

growth; potential uplift in dividends to c.5% yield

Beneficiary of rising interest rates and macro

environment, albeit smaller impact vs banks; sustained

improvement in earnings traction should support share

price momentum; M&A possibility is a bonus

Maintain BUY, TP of S$3.20

Price Relative

Forecasts and Valuation FY Dec (S$m) 2016A 2017F 2018F 2019F

Pre-prov. Profit 65.1 97.4 108 109 Net Profit 53.1 80.5 88.5 89.4 Net Pft (Pre Ex.) 53.1 80.5 88.5 89.4 Net Pft Gth (Pre-ex) (%) (27.2) 51.8 9.8 1.1 EPS (S cts) 12.0 18.1 19.8 20.1 EPS Pre Ex. (S cts) 12.0 18.1 19.8 20.1 EPS Gth Pre Ex (%) (27) 51 10 1 Diluted EPS (S cts) 12.0 18.1 19.8 20.1 PE Pre Ex. (X) 22.7 15.0 13.7 13.6 Net DPS (S cts) 9.00 12.1 13.3 13.4 Div Yield (%) 3.3 4.4 4.9 4.9 ROAE Pre Ex. (%) 3.1 4.7 5.1 5.1 ROAE (%) 3.1 4.7 5.1 5.1 ROA (%) 0.4 0.6 0.7 0.4 BV Per Share (S cts) 382 386 393 400 P/Book Value (x) 0.7 0.7 0.7 0.7 Earnings Rev (%): 5 13 9 Consensus EPS (S cts): 17.0 18.0 18.0

Other Broker Recs: B: 1 S: 0 H: 0

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Building momentum

Beneficiary of better macroeconomic environment; M&A potential.

Hong Leong Finance (HLF) has a unique role to play in the Small

Medium Enterprises lending scene in Singapore as the largest

financial company (finco) locally. We believe HLF will benefit from the

better macroeconomic environment as we have started to see better

loan growth and loan yields returning in 3Q17, in line with higher

systemic loan growth and better interest rate outlook. The strong

9M17 earnings prompted us to raise FY17F earnings by 5% on higher

NIM and loan growth. On a positive outlook on the macro front and

interest rate environment, we also expect loan growth and NIM to

improve, hence raising FY18-19F earnings by 5-13% p.a. Sustained

improvement in earnings traction should be positive to share price.

Elsewhere, we believe that with the MAS’ rule relaxation on fincos in

mid-Feb 2017, which lifted the limits on uncollateralised loans as a

percentage of capital funds (from 10% to 25% of capital funds) and

liberalised its existing policy to allow a foreign takeover of a finco

(subject to certain conditions), opens new opportunities for HLF.

Where we differ. We are the only broker covering the stock. Post

MAS’ rule relaxation, all three fincos have re-rated on possibility of

M&A. However, we believe HLF’s current share price has yet to price

in this year’s earnings recovery, as well as its strength as the largest

finco in Singapore.

Potential catalyst. Sustained improvement in earnings profile should

support share price momentum. Additional catalysts would include

further relaxation of funding and lending rules, as well as M&A

newsflow. Under a M&A scenario, which is a bonus for the company,

we believe HLF should attract a minimum 1x BV or S$3.80 as current

shareholders are unlikely to sell out at lower valuation given its

prospects under the expected new regulatory regime.

Valuation:

Maintain BUY, TP of S$3.20. Our TP of S$3.20 is derived from the

Gordon Growth Model with 5% ROE, 2% long-term growth and 6%

cost of equity, implying c.0.8x FY17F BV. Despite a 5-13% earnings

revision, we had previously already imputed prospects of HLF reaching

an ROE level of 5%. The 3Q17 results has proven so.


As a smaller financial institution, and with exposure to riskier business

lending, HLF may be more prone to asset-quality upsets should the

economic cycle deteriorate. Also, HLF is more sensitive to changes in

fixed deposits rate, in contrast to banks who have a large CASA base.


Mkt. Cap (S$m/US$m) 1,212 / 892


Hong Leong Investment Holding 22.45

Hong Realty Pte Ltd 5.24

Free Float (%) 69.38


ICB Industry : Financials / General Financial


13 Nov 2017


Hong Leong Finance Version 3 | Bloomberg: HLF SP | Reuters: HLSF.SI Refer to important disclosures at the end of this report

76

96

116

136

156

176

196

216

1.9

2.1

2.3

2.5

2.7

2.9

3.1

Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

Relative IndexS$

Hong Leong Finance (LHS) Relative STI (RHS)

Company Guide

Hong Leong Finance

WHAT’S NEW

Strong earnings growth continues; results above expectations

Highlights

Strong earnings growth continues; results above our

expectations. HLF continues its strong earnings growth

momentum and recorded S$23.6m net profit in 3Q17 (+84.2%

y-o-y/+12.9% q-o-q), despite recognising a one-off provision of

S$2.8m, as broad-based growth in net interest income across

interest on loans, hiring charges, and other interest income

kicked in, from higher loan yields and loan growth of 2.2%

during the quarter, as well as lower cost of funding partially

offset by a lower average loan base. Fee income also grew

26.3% y-o-y/-6.5% q-o-q in 3Q17 to S$3.8m.

One-off provision of S$2.8m. In 3Q17, HLF topped up

provisions by S$2.8m. Including reversal of provisions in 1H17,

9M17 provisions stood at S$2.5m. We remain confident on

HLF’s asset quality as demonstrated by its low provision and NPL

levels historically. What remains a wildcard is the effect of the

implementation of IFRS9/SFRS109.

Outlook

Loan growth of 2.2% q-o-q encouraging. We believe loan

contraction bottomed out in 1Q17 as loan book saw first

significant tick up in 3Q17 after remaining largely flat in 2Q17

after seeing a contraction through FY2016. We believe that

loan growth is set for recovery against better economic

conditions with encouraging signs of an improving property

market and GDP outlook.

FY17-19F earnings raised by 5-13%; expect higher dividends.

We revised our earnings forecasts upwards by 5%/13%/9% in

FY17F/18F/19F, reflecting better loan yields and loan growth

outlook ahead. As a result, we now expect a minimum12 Scts

dividend per share, a 33% increase from previous year’s

dividend per share of 9 Scts. Stock is currently trading at ~4.4%

dividend yield at current prices

Value and recommendation

Maintain BUY, TP at S$3.20. Our TP of S$3.20 is derived from

the Gordon Growth Model with 5% ROE, 2% long-term

growth and 6% cost of equity, implying c.0.8x FY17F BV.

Despite a 5-9% earnings revision, we had previously already

imputed prospects of it reaching an ROE level of 5%. The 3Q17

results has proven so.

Company Guide

Hong Leong Finance



Net Interest Income 32.0 42.6 47.4 48.0 11.1

Non-Interest Income 35.1 46.8 51.2 46.1 9.6

Operating Income 35.1 46.8 51.2 46.1 9.6

Operating Expenses (20.4) (21.0) (20.1) (1.2) (4.0)

Pre-Provision Profit 14.7 25.8 31.1 111.7 20.6

Provisions 0.75 (0.7) (2.8) nm 307.4

Associates 0.0 0.0 0.0 - -

Exceptionals 0.0 0.0 0.0 - -

Pretax Profit 15.4 25.1 28.3 83.5 12.9

Taxation (2.7) (4.2) (4.8) 80.1 12.8

Minority Interests 0.0 0.0 0.0 - -

Net Profit 12.8 20.9 23.6 84.2 12.9

Growth (%)

Net Interest Income Gth (5.9) 17.5 11.1

Net Profit Gth 15.8 26.8 12.9

Key ratio (%)

NIM N/A N/A N/A

NPL ratio N/A N/A N/A

Loan-to deposit N/A N/A N/A

Cost-to-income 58.1 44.9 39.3

Total CAR N/A N/A N/A


Company Guide

Hong Leong Finance


Critical Factors

Opportunities from MAS’ rule relaxation. HLF was the first finco allowed

to offer business current accounts, subject to various conditions prior to

the MAS’ rule relaxation. Going forward, positive catalysts could also

come from cheaper funding if HLF is able to hold institutional deposits

like the banks, thereby allowing HLF to act as the “go-to-bank” for

various transactions for SMEs. There could also be further opportunities in

unsecured lending, however, we think caution should be exercised on

unsecured lending to smaller-sized SMEs due to risk concerns. We note

that the new MAS rules have not been implemented, and we look

towards its full implementation and more clarity in 2H2017.

NIM set to recover after 2016’s decline. The dip in FY2016’s net interest

margin (NIM) was caused by expensive fixed deposits taken in towards

the end of 2015 due to competition for fixed deposits among banks

alike, in lieu of the impending rate hike. HLF’s cost of deposit was 1.6%

for FY2016. According to our channel checks, fixed deposit rates have

since fallen from the highs at end-2015 to beginning 2016 (some banks

were offering as high as 1.8% - 1.9% for 12-month fixed deposits) to

<1.3% currently. We believe that with expensive deposits now out of its

system, HLF can focus on managing cost of funds going forward. There

may also be a NIM uptick should Fed rate hikes translate into rising SIBOR

yields in 2H2017. We estimate HLF’s NIM for FY2017 to normalise to

levels above FY2015’s.

Better loan growth outlook. With the exception of FY2012 which saw

expansion in balance sheet with loan growth of 19.3% and customer

deposits growth of 29.4%, HLF’s loan growth has been in the mid-single

digit range between 2014 and 2015. The loan book in 2016 shrank due

to lumpy development projects attaining Temporary Occupation Permit

(TOP). We expect loan growth to be in the low single digit range in FY17F

due to the slower overall loan momentum in Singapore. HLF remains

selective in writing loans for private residential properties due to the

unattractive yield, and remains cautious about the commercial property

market.

Highly selective key areas of growth. We remain optimistic about selected

growth industries for HLF, such as medical and equipment financing,

which continued to see high growth rates in the last few years. We also

expect to see vehicle loan growth given the relaxation of rules on loan-to-

value ratios and loan tenure, and unwavering interest in the luxury cars

segment. HDB financing, in contrast to private residential properties,

remains a key focus for HLF. The relaxation of unsecured lending limits

could catalyse further lending.

Margin Trends

Gross Loan& Growth

Customer Deposit & Growth

Loan-to-Deposit Ratio Trend

Cost & Income Structure


1.0%

1.1%

1.2%

1.3%

1.4%

1.5%

0

20

40

60

80

100

120

140

160

180

200

2015A 2016A 2017F 2018F 2019F

S$ m

Net Interest Income Net Interest Income Margin

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0

2,000

4,000

6,000

8,000

10,000

2015A 2016A 2017F 2018F 2019F

S$ m

Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

2,000

4,000

6,000

8,000

10,000

12,000

2015A 2016A 2017F 2018F 2019F

S$ m

Customer Deposits (LHS)

Customer Deposits Growth (%) (YoY) (RHS)

76%

81%

86%

91%

96%

101%

8,563

9,563

10,563

11,563

12,563

13,563

2015A 2016A 2017F 2018F 2019F

S$ bn

Loans Deposit Loan-to-Deposit Ratio (RHS)

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

800

900

1,000

2015A 2016A 2017F 2018F 2019F

S$ m

Net Interest Income Non-interest Income Cost-to-income Ratio

Company Guide

Hong Leong Finance


NIM is well sought after, corresponds with share price re-rating

Source: Bloomberg Finance L.P., DBS Bank

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

1.0

1.5

2.0

2.5

3.0

3.5

Jan-1

0

Ap

r-10

Jul-10

Oct

-10

Jan-1

1

Ap

r-11

Jul-11

Oct

-11

Jan-1

2

Ap

r-12

Jul-12

Oct

-12

Jan-1

3

Ap

r-13

Jul-13

Oct

-13

Jan-1

4

Ap

r-14

Jul-14

Oct

-14

Jan-1

5

Ap

r-15

Jul-15

Oct

-15

Jan-1

6

Ap

r-16

Jul-16

Oct

-16

Jan-1

7

S$ %

Share price (LHS) NIM (RHS)

We observe that from 2010 to the beginning of 2012, HLF’s share price was on a downward trend, in line with its full-year NIM. Between 2013 and mid-2015, HLF’s share price was largely range bound due to flattish NIM of 1.3%. Thereafter, HLF’s share price was on a downward trend due to lower full -year NIM.

Going forward, HLF should continue to leverage on its competitive strength as a strong property loans financier and SME bank, as well as potential growth prospects versus its finco peers. Stronger loan growth, higher loan yields and lower cost of funds should contribute to higher net interest income and NIM for HLF.

Higher NIM should bode well for HLF’s share price.

Higher NIM should bode well for HLF’s share price.

Company Guide

Hong Leong Finance

Balance Sheet:

Asset quality is sound. HLF’s non-performing loans (NPL) position is

graded in line with industry standards. HLF’s NPL ratio has been

consistently low and is the lowest among its finco peers, at 0.8% for

FY2016– comprising secured NPL of 0.7% and unsecured NPL of 0.1%.

HLF’s NPL ratio is also considerably lower than local banks’ NPL which are

above 1%, as HLF mostly lends on a secured basis with LTV below 100%.

In the event of a bad loan, HLF is typically able to recover most amounts

outstanding.

Strong capital position. HLF maintains a strong capital position at 16.4%

for FY2016, well above the statutory requirement of 12%, prescribed by

the Finance Companies Act.


Further relaxation of funding and lending rules. Further to MAS’

announcement in Feb 2017, any further relaxation of rules pertaining to

fincos, for instance, liberalisation of funding sources to allow business

CASA without restrictions, allowing fincos to garner retail CASA, could

catalyse HLF’s share price.

M&A newsflow. We believe that HLF is an extremely attractive takeover

target for foreign banks/entities that are keen to expand their reach in

the Singapore SME lending space. Any M&A-related newsflow would

further catalyse HLF’s share price.

Key Risks:

Risk to asset quality. While HLF applies stringent credit underwriting

procedures, unexpected deterioration in HLF’s loan portfolio could pose

downside risk to earnings. Deterioration in the loan portfolio could be

caused by softening of the economic cycle and/or worsening business

conditions limited to a specific sector.

Sensitive to fixed deposits rate. HLF is more sensitive to changes in S$

fixed deposits rate, in contrast to banks who have large CASA base. High

fixed deposits rate will lead to higher cost of funds, affecting NIM.

Company Background

Hong Leong Finance, the financial services arm of Hong Leong Group

Singapore, is Singapore’s largest finance company with a distribution

network of 28 branches and over 600 employees. HLF has more than 55

years of experience in Small and Medium-sized Enterprise (SME) lending,

offering a wide range of products and services, including deposits and

savings, consumer and corporate loans, government assistance

programmes for SMEs, as well as corporate finance and advisory services.

Asset Quality

Capitalisation (%)

ROE (%)

Forward PE Band (x)

PB Band (x)


-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

2015A 2016A 2017F 2018F 2019F

NPL Ratio

Provision Charge-OffRate

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2015A 2016A 2017F 2018F 2019F

Tier-1 CAR Total CAR

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2015A 2016A 2017F 2018F 2019F

Avg: 16.3x

+1sd: 18.4x

+2sd: 20.5x

-1sd: 14.1x

-2sd: 12x

10.6

12.6

14.6

16.6

18.6

20.6

22.6

Nov-13 Nov-14 Nov-15 Nov-16

(x)

Avg: 0.66x

+1sd: 0.72x

+2sd: 0.78x

-1sd: 0.61x

-2sd: 0.55x

0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.9

0.9

Nov-13 Nov-14 Nov-15 Nov-16

(x)

Company Guide

Hong Leong Finance

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Gross Loans Growth 5.3 (5.7) 2.8 4.0 5.0

Customer Deposits Growth 9.3 (8.8) 5.0 7.0 7.0

Yld. On Earnings Assets 2.4 2.5 2.6 2.6 2.7

Avg Cost Of Funds 1.3 1.6 1.4 1.5 1.5


FY Dec 2015A 2016A 2017F 2018F 2019F

Net Interest Income 162 137 170 181 182


Operating Income 175 149 183 194 197


Pre-provision Profit 83.1 65.1 97.4 108 109

Provisions 3.64 (1.1) (0.4) (1.0) (1.1)

Associates 0.0 0.0 0.0 0.0 0.0

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pre-tax Profit 86.8 64.0 97.0 107 108

Taxation (13.9) (11.0) (16.5) (18.1) (18.3)



Net Profit 72.9 53.1 80.5 88.5 89.4

Net Profit bef Except 72.9 53.1 80.5 88.5 89.4

Growth (%)

Net Interest Income Gth 8.8 (15.7) 24.1 6.4 0.9

Net Profit Gth 16.0 (27.2) 51.8 9.8 1.1

Margins, Costs & Efficiency (%)

Spread 1.1 0.9 1.2 1.2 1.2

Net Interest Margin 1.3 1.1 1.4 1.4 1.4

Cost-to-Income Ratio 52.5 56.4 46.7 44.6 44.6

Business Mix (%)

Net Int. Inc / Opg Inc. 92.6 91.5 92.8 93.0 92.7

Non-Int. Inc / Opg inc. 7.4 8.5 7.2 7.0 7.3

Fee Inc / Opg Income 7.1 8.4 7.1 6.9 7.2

Oth Non-Int Inc/Opg Inc 0.2 0.1 0.1 0.1 0.1

Profitability (%)

ROAE Pre Ex. 4.4 3.1 4.7 5.1 5.1

ROAE 4.4 3.1 4.7 5.1 5.1

ROA Pre Ex. 0.6 0.4 0.6 0.7 0.4

ROA 0.6 0.4 0.6 0.7 0.4


Expect NIM expansion beyond FY15 levels

Company Guide

Hong Leong Finance


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Net Interest Income 32.0 33.1 36.3 42.6 47.4


Operating Income 35.1 37.4 40.0 46.8 51.2


Pre-Provision Profit 14.7 18.5 18.9 25.8 31.1

Provisions 0.75 (0.8) 0.92 (0.7) (2.8)

Associates 0.0 0.0 0.0 0.0 0.0

Exceptionals 0.0 0.0 0.0 0.0 0.0

Pretax Profit 15.4 17.7 19.8 25.1 28.3

Taxation (2.7) (3.0) (3.4) (4.2) (4.8)


Net Profit 12.8 14.7 16.5 20.9 23.6

Growth (%)

Net Interest Income Gth (5.9) 3.5 9.6 17.5 11.1

Net Profit Gth 15.8 15.0 12.0 26.8 12.9

Balance Sheet (S$m)

FY Dec 2015A 2016A 2017F 2018F 2019F

Cash/Bank Balance 1,796 1,485 1,645 1,994 14,686

Government Securities 1,333 1,258 1,271 1,296 1,322

Inter Bank Assets 0.0 0.0 0.0 0.0 0.0

Total Net Loans & Advs. 10,091 9,515 9,785 10,174 10,686

Investment 0.55 0.55 0.55 0.55 0.55

Associates 0.0 0.0 0.0 0.0 0.0

Fixed Assets 27.9 24.5 22.9 21.6 23.6

Goodwill 0.0 0.0 0.0 0.0 0.0

Other Assets 38.4 29.5 30.3 31.5 33.1

Total Assets 13,287 12,313 12,754 13,519 26,752

Customer Deposits 11,444 10,442 10,964 11,731 12,553

Inter Bank Deposits 0.0 0.0 0.0 0.0 0.0

Debts/Borrowings 0.0 0.0 0.0 0.0 0.0

Others 155 174 66.9 34.5 12,417

Minorities 0.0 0.0 0.0 0.0 0.0

Shareholders' Funds 1,688 1,697 1,724 1,753 1,782

Total Liab& S/H’s Funds 13,287 12,313 12,754 13,519 26,752


Company Guide

Hong Leong Finance

Financial Stability Measures (%)

FY Dec 2015A 2016A 2017F 2018F 2019F

Balance Sheet Structure

Loan-to-Deposit Ratio 88.2 91.1 89.2 86.7 85.1

Net Loans / Total Assets 75.9 77.3 76.7 75.3 39.9

Investment / Total Assets 0.0 0.0 0.0 0.0 0.0

Cust . Dep./Int. Bear. Liab. 100.0 100.0 100.0 100.0 100.0

Interbank Dep / Int. Bear. 0.0 0.0 0.0 0.0 0.0

Asset Quality

NPL / Total Gross Loans 0.7 1.0 0.8 0.8 0.8

NPL / Total Assets 0.6 0.7 0.6 0.6 0.3

Loan Loss Reserve Coverage 147.7 122.5 140.5 145.5 140.0

Provision Charge-Off Rate 0.0 0.0 0.0 0.0 0.0

Capital Strength

Total CAR 15.1 16.4 16.6 15.9 8.2

Tier-1 CAR 0.0 0.0 0.0 0.0 0.0



Source: DBS Bank

Analyst: Singapore Research Team

Sue Lin LIM

S.No.Date of

Report

Clos ing

Price

12-mth

Target

Price

Rat ing

1: 05 Apr 17 2.83 3.20 BUY

2: 28 Apr 17 2.80 3.20 BUY

3: 10 Aug 17 2.67 3.20 BUY


1

2

3

2.02

2.12

2.22

2.32

2.42

2.52

2.62

2.72

2.82

2.92

Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17

S$

Expect lower NPL ratio on better economic outlook

Company Guide

Hong Leong Finance








Completed Date: 13 Nov 2017 10:19:11 (SGT) Dissemination Date: 13 Nov 2017 10:29:10 (SGT)







































Company Guide

Hong Leong Finance



in market-making.














DBS Group.



have a proprietary position in the securities recommended in this report as of 31 Oct 2017.


Report.













ed: TH / sa:YM, PY, CS

BUY Last Traded Price ( 7 Feb 2018): S$0.495 (STI : 3,383.77)


Analyst Lee Keng LING +65 6682 3703 [email protected]

What’s New • Newly acquired cinemas boosted 3Q18 revenue but

dragged down margins

• Earnings cut by 9-11%, on slightly lower revenue from

cinema and higher interest cost

• Maintain BUY, TP of S$0.75, as we rolled forward

valuation to FY19F

Price Relative

Forecasts and Valuation FY Mar (S$ m) 2017A 2018F 2019F 2020F

Revenue 95.4 163 258 306 EBITDA 41.4 53.2 69.5 77.8 Pre-tax Profit 25.9 36.5 46.2 54.5 Net Profit 18.8 25.3 32.5 39.5 Net Pft (Pre Ex.) 18.8 25.3 32.5 39.5 Net Pft Gth (Pre-ex) (%) 130.1 34.6 28.4 21.3 EPS (S cts) 1.80 2.18 2.80 3.40 EPS Pre Ex. (S cts) 1.80 2.18 2.80 3.40 EPS Gth Pre Ex (%) 98 21 28 21 Diluted EPS (S cts) 1.80 2.18 2.80 3.40 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 8.25 15.2 18.0 21.4 PE (X) 27.6 22.7 17.7 14.6 PE Pre Ex. (X) 27.6 22.7 17.7 14.6 P/Cash Flow (X) 84.7 25.5 21.1 11.7 EV/EBITDA (X) 12.4 10.3 11.0 9.9 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 6.0 3.3 2.7 2.3 Net Debt/Equity (X) CASH CASH 0.7 0.6 ROAE (%) 30.7 19.2 16.9 17.2 Earnings Rev (%): (9) (11) NEW Consensus EPS (S cts): 2.40 3.20 3.50 Other Broker Recs: B: 2 S: 0 H: 0


Growth intact

Growth path on track. We continue to expect strong earnings

CAGR of 28% for FY17-20F, underpinned by growth in

productions, expansion into the China market, and contribution

from UnUsUaL. The cinema arm, on the other hand, helps the

group build a recurring income base. Having a strong presence

in the entire value chain of content creation and distribution

further cements mm2's status as the leader in the

media/entertainment industry. With a much larger and stronger

scale, especially with the completion of the Cathay cinema

acquisition, mm2 can now enjoy the synergistic benefits from

the entire value chain.

3Q18 results: 3Q18 revenue surged 190% y-o-y to S$52.4m,

boosted by newly acquire cinemas in Malaysia and Singapore.

Net earnings jumped by a smaller 53% to S$6.4m on lower

margins.

Where we differ: Higher valuation peg vs consensus. We value

the production business at 25x PE, in line with peers listed in

Asia, vs consensus’ valuation of about 22x. For UnUsUaL, we

value it at current valuation. For the cinema segment, we use

21x PE valuation peg.

Potential catalyst: Reaping the fruits of labour in North Asia. We

expect North Asia to contribute >70% of production revenue

from FY18F, up from 36% in FY16 and 56% in FY17. Upside to

earnings would come from more projects, especially in China,

where the market is bigger and budgets are much higher. Valuation:

Reiterate BUY, TP of S$0.75. Our sum-of-parts target price is

now S$0.75, after accounting for slightly lower revenue from

the cinema, higher interest costs and rolling forward our

valuation to FY19F earnings on valuation peg of 25x. Key Risks to Our View:

No long-term financing arrangements for productions. The

commencement of each production is dependent on mm2’s

ability to secure funding.

Unavailability of good scripts. Lack of good scripts for

production may lead to less support from stakeholders.

At A Glance Issued Capital (m shrs) 1,163

Mkt. Cap (S$m/US$m) 576 / 434


Wee Chye Ang 49.9

StarHub Ltd 9.8

Yeo Khee Seng 8.1

Free Float (%) 43.2


ICB Industry : Consumer Services / Media


8 Feb 2018


mm2 Asia Version 15 | Bloomberg: MM2 SP | Reuters: MM2A.SI Refer to important disclosures at the end of this report

68

268

468

668

868

1068

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7


Relative IndexS$

mm2 Asia (LHS) Relative STI (RHS)

Company Guide

mm2 Asia

WHAT’S NEW

3Q18 results boosted by cinema acquisitions

Newly acquired cinemas boosted revenue... Group revenue

surged 190% to S$52.4m, mainly due to the acquisition of

the Lotus cinemas in Malaysia and Cathay cinemas in

Singapore, and also its core production business and

UnUsUaL, the event production and concert promotion arm.

Nine-month revenue accounts for 65% of our FY18F

revenue, roughly in line, as Cathay cinemas only account for

one-month contribution. Gross profit jumped 172% y-o-y to

S$24.2m.

...but dragged down margins: 3Q18 net margin eased to

12.3%, from 14.6% in 2Q18 and 23.3% in 3Q17, partly due

to the increasing contribution from the cinema arm, which

has lower margins, and also the one-off expenses for the

recent cinema acquisitions.

Outlook

Core production

Expect key contribution from North Asia. Going forward,

mm2 will continue to focus on its core business in Singapore

and Malaysia as well as expand it to Hong Kong, Taiwan,

China and also the US. Productions in these markets are

expected to continue to form a bigger part of its revenue into

FY2019, especially from North Asia. We expect North Asia to

contribute about 70% of production revenue from FY18F, up

from 36% in FY16 and 56% in FY17. For 9-month FY18,

revenue from North Asia contributed approximately 76% of

the group's production revenue.

Seeking listing of Vividthree on Catalist. mm2’s subsidiary

Vividthree is seeking listing on the Catalist board of SGX.

mm2 acquired a 51% stake in Vividthree, a 3D animation

company, in early 2015 for S$3.06m or a PE of about 3x.

Incorporated in 2006, Vividthree has grown to become a

leading player and go-to studio in the field of visual effects

(VFX), 3D animation, virtual reality and computer generation

imagery (CGI) in Singapore. Though Vividthree’s contribution

to mm2 is still small now, accounting for 5-6% of the

group’s revenue and gross profit in FY17, a successful listing

should provide more visibility to attract the best talents for its

management, which is crucial for the creative business, and

pave the way for higher growth ahead, while parent mm2

can unlock value.

Platform business

The only cinema operator in both Malaysia and Singapore.

mm2 is now the second largest cinema operator in

Singapore, following the completion of the Cathay cinema

acquisition in November last year. In Malaysia, it is the fourth

biggest player, with ownership of 18 cinemas. The group is

now the only cinema operator in Malaysia and Singapore,

with major presence in both countries, and is in a strategic

position to optimise its capital expenditure and reach out to a

wider audience, thus reaping economies of scale.

UnUsUaL benefitting from rising demand for concerts and

events. With the increase in demand for concerts and events

in the region, UnUsUaL, with its dominant market position, is

set to benefit from this rising trend. It will continue to expand

into the region and also to bring in more western concerts.

Furthermore, the recent signing of the letter of intent to

present 48 “Disney On Ice” shows could open the door for

more Disney projects ahead.

Earnings and Recommendation

FY18F to FY19F earnings cut by 9-11%. We have lowered

FY18F to FY19F earnings by 9-11%, after accounting for

slightly lower revenue from the cinema segment and higher

interest costs. We continue to expect strong earnings growth

CAGR of 28% for FY17-20F, driven by all its core production

and platform businesses. Maintain BUY, new target price of

S$0.75, after rolling forward the sum-of-parts valuation to

FY19F earnings, and also lower valuation peg of 25x (vs 28x

previously), except for event production & concert

promotion, which is based on UnUsUal's current market

value.

Sum of parts valuation


Se gme nt Sta ke

Va lua tion

(S$m) Assumption

Production & Distribution 100% 478.8 Based on 25x PE, in line with peers

Cinema Operation 100% 180.8 Based on 21x PE, in line with peers

Post-Production 51% 31.9 Based on 25x PE, in line with peers

Event Production &

Concert Promotion 41.91% 180.6 Based on current valuation

Tota l va lue 872.1

Number of shares 1,162.2

Va lue pe r sha re (S$) 0.75

Company Guide

mm2 Asia


FY Mar 3Q17 2Q18 3Q18 % chg yoy % chg qoq

Revenue 18.0 60.3 52.4 190.4 -13.2

Cost of Goods Sold (9.2) (34.8) (28.2) 207.9 -19.0

Gross Profit 8.9 25.5 24.2 172.4 -5.2

Other Oper. (Exp)/Inc 0.0 0.0 0.0 - -

Operating Profit 8.9 25.5 24.2 172.4 -5.3

Other Non Opg (Exp)/Inc 1.1 (0.2) 0.5 -56.3 -381.8

Associates & JV Inc 0.0 0.0 0.2 nm nm

Net Interest (Exp)/Inc 0.0 0.0 0.0 - -


Pre-tax Profit 5.8 15.0 10.4 79.6 -31.0

Tax (0.9) (1.8) (1.9) 111.7 2.5

Minority Interest (0.7) (2.2) (2.0) 203.4 -7.6

Net Profit 4.2 11.0 6.4 52.9 -41.4

Net profit bef Except. 4.2 11.0 6.4 52.9 -41.4

EBITDA 8.7 15.2 14.0 61.9 -7.7

Margins

Gross Margins (%) 49.2 42.3 46.1

Opg Profit Margins (%) 49.2 42.3 46.1

Net Profit Margins (%) 23.3 18.2 12.3


Company Guide

mm2 Asia


Critical Factors

Synergistic acquisitions

mm2 has made several acquisitions to maintain its competitive

advantage, and to build synergies across the entire value chain.

For content creation, mm2 has several tie-ups globally to co-

produce films. It has also acquired a 51% stake in Vividthree, a

computer graphic studio, which is planning to go for Catalist

listing on SGX.

For the platform business, mm2 is the number four player in

Malaysia, and owns a total of 18 cinemas with a market share

of about 14% in terms of number of screens. It has also

acquired the entire eight Cathay cinemas in Singapore.

Other than cinemas, mm2 owns a 42% stake in UnUsUaL Ltd, a

market leader in large-scale live events and concerts, and is also

beefing up its OTT (over-the-top) platform.

Healthy production pipeline

The number of production titles has increased steadily over the

last few years; from six productions in FY14, to about 18 in

FY17. mm2 has a robust production pipeline of 35 production

titles, from April 2017 to September 2018. Out of these, 23

titles or 62% are from North Asia. In terms of production

budget, North Asia accounts for almost 80% of the total.

Expansion in North Asia

We expect North Asia to contribute about 70% of production

revenue from FY18F, up from 36% in FY16 and 56% in FY17.

mm2 has a unique presence in all the Chinese markets,

including Singapore, Malaysia, Hong Kong, Taiwan, and China.

This presents ample cross-border collaboration opportunities.

One example is the remaking of existing successful titles in

China, with the adaptation of local settings, which would be

more appealing to the locals there. mm2 is also looking to

expand to non-Chinese speaking markets like Korea, Japan,

Thailand, India, and the US.

UnUsUaL is also leveraging on mm2’s network of contacts in

the media and entertainment industry to expand into North

Asia.

Digital age shift – content is king

The evolution of the media industry, from traditional media (TV,

radio, newspaper) to digital media leads to increasing

opportunities for mm2, which is strong in content creation and

platform businesses.

Business Model – The Film Budget

Business Model – Gross Receipts (Box Office)

Revenue Breakdown by Segment

Profitability Trend


Prints & Advertising Cost

Producer’s Fee

Team / Crew Fees

Script Rights

Post - Production Cost

Production Cost

Production Team / Crew Fees

Director’s Fee

Income to mm2

Distribution Commission

Marketing Costs

Return to Stakeholders (mm2 may also be a stakeholder)

* only when return is higher than stakeholders’ ROI Net Receipts

Producer Bonus *

Exhibitors’ Cost

Income to mm2

less

less

less

less

Equals

Box Office Receipts

Company Guide

mm2 Asia

Appendix 1:

A look at Company's listed history – what drives its share price?


Company Guide

mm2 Asia

Balance Sheet:

Net gearing position in FY19F. We expect the group to take on

more debt financing for the acquisition of the Cathay cinemas

in Singapore. Net gearing for FY19F is thus expected to increase

to 0.77x, from net cash in FY18F.


Cost savings and efficiency from horizontal integration. The full

integration of the content business (production of movies,

Vividthree) and platform business (Cinema, UnUsUaL) would

lead to better efficiency and cost savings for the group. For

example, the ownership of cinemas not only provides a source

of recurring income to the group but also cost savings as mm2

usually has to pay about 50% of its gross box office proceeds

for rental of cinemas. Cinema operations is a profitable

business, and may even be profitable with less than 30% of the

seats occupied. mm2’s multiple platform capabilities would

place the group in a position to better distribute and exhibit

content to reach a wider audience.

Bigger production budget = higher growth

As mm2 adopts a fee-based model, its revenue is directly

correlated to the size of the production budget. We expect

North Asia, especially China, to contribute about 70% of

production revenue from FY18F, up from 36% in FY16 and

56% in FY17. The budget for China tends to be much bigger,

about S$10m on average per production, vs average of S$1-2m

for Singapore and Malaysia projects, and S$3m for Hong Kong

and Taiwan productions.

Key Risks:

No long-term financing arrangements for productions. The

commencement of each production is dependent on mm2’s

ability to secure funding.

Unavailability of good scripts. Lack of good scripts for

production may lead to less support from stakeholders.

Inability to predict the commercial success of movies produced.

The commercial success of its productions is primarily

determined by inherently unpredictable audience reactions.

Company Background

mm2 Asia is a leading producer of films and TV/online content

in Asia. As a producer, mm2 provides services over the entire

film-making process – from financing and production to

marketing and distribution, and thus has diversified revenue

streams. mm2 also owns entertainment company, UnUsUaL,

and cinemas in Malaysia and Singapore.

Number of Titles (Production & Distribution)

Year Number of Titles

(Production) Number of Titles

(Distribution) FY Mar 2012 3 2 FY Mar 2013 6 8 FY Mar 2014 6 18 FY Mar 2015 9 26 FY Mar 2016 14 24 FY Mar 2017 18 26

Apr 17 to Sep 18* 35

* projection

UnUsUal: Number of Events (Production & Concert Promotion)

Year Number of

Events (Production)

Number of Concerts

(Promotion) FY Dec 2013 68 12 FY Dec 2014 46 9 FY Dec 2015 51 10 FY Mar 2017 64 19

Cinemas acquired Name of cinemas Number of cinemas Number of screens Malaysia Cathay 2 22 Mega Cineplex 3 11 Lotus 13 84 Total Malaysia 18 127 Singapore Cathay 8 64 Total Singapore 8 64

Forward PE Band (x)

PB Band (x)


Avg: 16.5x

+1sd: 22.3x

+2sd: 28.2x

-1sd: 10.6x

-2sd: 4.8x4.3

9.3

14.3

19.3

24.3

29.3


(x)

Avg: 5.2x

+1sd: 6.53x

+2sd: 7.87x

-1sd: 3.87x

-2sd: 2.54x2.0

3.0

4.0

5.0

6.0

7.0

8.0


(x)

Company Guide

mm2 Asia

Segmental Breakdown

FY Mar 2016A 2017A 2018F 2019F 2020F

Revenues (S$m)

Production & Distribution 29.8 55.3 73.7 95.8 124

Cinema Operation 12.6 46.8 108 113

Event Production & Concert Promotion

22.6 37.9 49.2 64.0

Post-Production 4.87 5.00 5.00 5.00

Total 38.3 95.4 163 258 306

Gross profit (S$m) Production & Distribution 13.1 26.5 33.2 43.1 56.0

Cinema Operation 7.56 25.7 59.2 62.1


15.2 19.7 25.6

Post-Production 2.69 3.50 3.50 3.50

Total 18.4 45.3 77.5 125 147

Gross profit Margins (%) Production & Distribution 44.0 47.9 45.0 45.0 45.0

Cinema Operation nm 60.0 55.0 55.0 55.0


nm nm 40.0 40.0 40.0

Post-Production nm 55.4 70.0 70.0 70.0

Total 48.0 47.5 47.5 48.7 48.0


FY Mar 2016A 2017A 2018F 2019F 2020F

Revenue 38.3 95.4 163 258 306

Cost of Goods Sold (20.0) (50.1) (85.8) (132) (159)

Gross Profit 18.4 45.3 77.5 125 147







Pre-tax Profit 9.99 25.9 36.5 46.2 54.5

Tax (1.1) (3.8) (6.2) (7.9) (9.3)

Minority Interest (0.7) (3.2) (4.9) (5.8) (5.8)


Net Profit 8.18 18.8 25.3 32.5 39.5


EBITDA 19.4 41.4 53.2 69.5 77.8

Growth

Revenue Gth (%) 57.9 148.8 71.2 57.7 19.0

EBITDA Gth (%) 95.2 113.6 28.6 30.7 12.0

Opg Profit Gth (%) 56.7 155.5 44.5 42.5 15.3

Net Profit Gth (Pre-ex) (%) 59.4 130.1 34.6 28.4 21.3

Margins & Ratio

Gross Margins (%) 48.0 47.5 47.5 48.7 48.0



ROAE (%) 29.5 30.7 19.2 16.9 17.2

ROA (%) 15.3 16.2 9.6 6.6 5.8

ROCE (%) 25.0 24.6 12.4 6.4 5.9

Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0



Partial contributions from Lotus and Cathay

Partial contributions from UnUsUaL

Mainly to finance acquisition of Cathay cinema chain in Singapore

Company Guide

mm2 Asia


FY Mar 1Q2018 2Q2018 3Q2018

Revenue 24.6 31.4 52.4

Cost of Goods Sold (9.3) (16.8) (28.2)

Gross Profit 15.4 14.6 24.2

Other Oper. (Exp)/Inc (5.8) (6.9) (14.5)

Operating Profit 9.55 7.71 9.72

Other Non Opg (Exp)/Inc 0.05 0.46 0.50

Associates & JV Inc 0.0 (0.2) 0.16

Net Interest (Exp)/Inc 0.0 0.0 0.0

Exceptional Gain/(Loss) 0.0 0.0 0.0

Pre-tax Profit 9.57 7.99 10.4

Tax (1.8) (1.6) (1.9)

Minority Interest (1.4) (1.8) (2.0)

Net Profit 6.40 4.60 6.43

Net profit bef Except. 6.40 4.60 6.43

EBITDA 11.0 9.81 14.7

Growth

Revenue Gth (%) N/A 27.6 66.9

EBITDA Gth (%) nm (10.4) 49.9

Opg Profit Gth (%) nm (19.3) 26.0

Net Profit Gth (Pre-ex) (%) nm (28.2) 40.0

Margins

Gross Margins (%) 62.4 46.5 46.1

Opg Profit Margins (%) 38.8 24.5 18.5

Net Profit Margins (%) 26.0 14.6 12.3

Balance Sheet (S$m)

FY Mar 2016A 2017A 2018F 2019F 2020F

Net Fixed Assets 3.65 11.2 71.8 306 355


Other LT Assets 26.1 54.3 42.0 28.2 14.5

Cash & ST Invts 4.74 25.8 122 85.0 134

Inventory 9.83 23.3 31.4 48.4 58.3

Debtors 24.4 46.4 95.8 151 180


Total Assets 69.0 163 363 619 742

ST Debt 0.20 11.1 11.1 11.1 11.1

Creditor 23.8 48.4 82.8 128 154


LT Debt 2.85 0.58 70.6 242 292


Shareholder’s Equity 36.2 86.5 177 209 249


Total Cap. & Liab. 69.0 163 363 619 742


Net Cash/(Debt) 1.69 14.1 40.0 (168) (169)




Asset Turnover (x) 0.7 0.8 0.6 0.5 0.5

Current Ratio (x) 1.4 1.4 2.4 1.9 2.1

Quick Ratio (x) 1.0 1.1 2.1 1.6 1.8

Net Debt/Equity (X) CASH CASH CASH 0.7 0.6

Net Debt/Equity ex MI (X) CASH CASH CASH 0.8 0.7

Capex to Debt (%) 279.3 141.0 75.4 93.0 16.5

Z-Score (X) 10.9 6.6 6.6 4.7 4.7


Mainly to finance acquisition of Cathay cinema chain in Singapore

Company Guide

mm2 Asia


FY Mar 2016A 2017A 2018F 2019F 2020F

Pre-Tax Profit 9.99 25.9 36.5 46.2 54.5

Dep. & Amort. 8.98 14.8 14.8 14.8 14.8

Tax Paid (1.1) (3.8) (5.6) (6.2) (7.9)

Assoc. & JV Inc/(loss) 0.0 0.01 0.0 0.0 0.0

Chg in Wkg.Cap. (22.6) (30.8) (23.2) (27.6) (12.5)


Net Operating CF (4.7) 6.12 22.5 27.3 49.1

Capital Exp.(net) (8.5) (16.5) (61.6) (235) (50.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CF (8.5) (16.5) (61.6) (235) (50.0)

Div Paid 0.0 0.0 0.0 0.0 0.0

Chg in Gross Debt 2.35 17.8 70.0 171 50.0

Capital Issues 9.10 18.0 65.0 0.0 0.0

Other Financing CF (0.7) 0.0 0.0 0.0 0.0

Net Financing CF 10.7 35.8 135 171 50.0

Currency Adjustments 0.0 0.0 0.0 0.0 0.0

Chg in Cash (2.5) 25.4 96.0 (36.7) 49.1

Opg CFPS (S cts) 1.98 3.52 3.93 4.72 5.29

Free CFPS (S cts) (1.5) (1.0) (3.4) (17.9) (0.1)



Source: DBS Bank

Analyst: Lee Keng LING

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 13 Apr 17 0.51 0.63 BUY

2: 23 May 17 0.59 0.70 BUY

3: 24 May 17 0.59 0.70 BUY

4: 14 Jun 17 0.60 0.70 BUY

5: 19 Jul 17 0.59 0.75 BUY

6: 24 Jul 17 0.53 0.75 BUY

7: 14 Aug 17 0.48 0.60 BUY

8: 02 Nov 17 0.57 0.73 BUY

9: 03 Nov 17 0.55 0.73 BUY


1

234

5

6

7

8

9

0.43

0.48

0.53

0.58

0.63

0.68


S$

Assume debt financing for future acquisitions

Proceeds from share placement

FY17 and FY18 - Acquisition of cinemas and RINGS.TV

Assume 70% debt financing for Cathay cinema acquisition

Company Guide

mm2 Asia















































Company Guide

mm2 Asia



in market-making.














DBS Group.



have a proprietary position in the securities recommended in this report as of 29 Dec 2017.


Report.



12 months for investment banking services from mm2 Asia as of 29 Dec 2017.


securities for mm2 Asia in the past 12 months, as of 29 Dec 2017.












ed: TH / sa: JC, PY, CS

BUY (Upgrade from HOLD)

Last Traded Price ( 23 Feb 2018): S$1.04 (STI : 3,533.22)


Analyst Carmen Tay +65 6682 3719 [email protected]

What’s New • Riverstone delivers record earnings in FY17 despite

unfavourable forex; headline profits up 7.4% y-o-y to

RM129.3m

• Core earnings outpaced output growth slightly (+17.1% vs

16.9% y-o-y), implying its strategy to grow the higher-

margin cleanroom segment is paying off

• Riverstone can outperform peers amid industry headwinds

as it ramps up on cleanroom glove capacity

• Upgrade to BUY with a higher TP of S$1.26

Price Relative

Forecasts and Valuation FY Dec (RM m) 2016A 2017A 2018F 2019F

Revenue 655 817 934 1,055 EBITDA 169 186 230 260 Pre-tax Profit 139 151 178 199 Net Profit 120 129 154 173 Net Pft (Pre Ex.) 120 129 154 173 Net Pft Gth (Pre-ex) (%) (4.9) 7.4 19.5 11.9 EPS (S cts) 5.46 5.86 7.01 7.84 EPS Pre Ex. (S cts) 5.46 5.86 7.01 7.84 EPS Gth Pre Ex (%) (5) 7 19 12 Diluted EPS (S cts) 5.46 5.86 7.01 7.84 Net DPS (S cts) 2.19 2.36 2.82 3.15 BV Per Share (S cts) 25.1 28.8 33.0 37.6 PE (X) 19.1 17.7 14.8 13.3 PE Pre Ex. (X) 19.1 17.7 14.8 13.3 P/Cash Flow (X) 19.3 15.7 16.7 11.1 EV/EBITDA (X) 13.0 11.8 9.6 8.2 Net Div Yield (%) 2.1 2.3 2.7 3.0 P/Book Value (X) 4.1 3.6 3.2 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 23.2 21.8 22.7 22.2

Earnings Rev (%): 0 6 Consensus EPS (S cts): 6.90 7.50 Other Broker Recs: B: 1 S: 0 H: 2


Lifted by the semiconductor upcycle

Upgrade to BUY with TP of S$1.27 as we see earnings growing on

strong cleanroom ramp-up. A global market leader in niche Class 10

and Class 100 cleanroom gloves, Riverstone’s edge in the high-tech

cleanroom segment sets it apart from the bigger boys. Given intense

competition in the healthcare space, we see value in Riverstone’s

growing cleanroom business – which allows the group to command

consistently higher margins vs peers (16% vs peers’ c.10-15% in FY17).

With new cleanroom facilities set to kick in from 2Q18, cleanroom

capacity is expected to grow by c.33% to at least 2bn gloves p.a. The

ramp-up on these new capacities should help drive higher growth in

cleanroom gloves vis-à-vis the lower-margin healthcare business,

allowing Riverstone’s earnings growth of c.16% to catch up with larger

peers’ c.17%.

Where we differ: We are more bullish vs consensus as we expect the

improved output mix to help sustain margins and drive bottom line.

Potential catalysts: Further capacity expansion, sustained increase in

cleanroom glove mix (and thus margins), and inorganic growth.

Capacity expansion and improving mix to underpin long-term growth.

In anticipation of strong demand for both its cleanroom and healthcare

gloves, Riverstone is now in the process of accelerating its expansion

plans. Under its revised three-year expansion plan, we expect total

glove production capacity to grow to 9bn pieces by end-2018 (vs 8.2bn

previously) and 10.4bn pieces p.a. by end-2019.

Backed by robust demand and expectations of a higher cleanroom mix,

we project earnings to grow at a c.16% CAGR from RM129m in FY17

to RM173m by FY19F.

Valuation:

Upgrade to BUY with TP of S$1.27, based on 16x FY19F PE.

Underpinned by double-digit capacity growth and higher-quality

earnings growth supported by more stable cleanroom margins, we

believe that Riverstone deserves to at least trade at its historical average

valuation of 16x FY19F PE, which represents a c.45% discount to larger

peers’ 29x.


Global economic slowdown. While margins for cleanroom gloves tend

to be resilient, demand for these gloves could be threatened in the

event of a slowdown in the global economy.


Mkt. Cap (S$m/US$m) 771 / 584


Ringlet Investment Limited 50.8

Wai Keong Lee 10.9

Free Float (%) 33.5


ICB Industry : Health Care / Health Care Equipment & Services



Riverstone Holdings Version 10 | Bloomberg: RSTON SP | Reuters: RVHL.SI Refer to important disclosures at the end of this report

90

140

190

240

290

340

390

0.3

0.5

0.7

0.9

1.1

1.3


Relative IndexS$

Riverstone Holdings (LHS) Relative STI (RHS)

Company Guide

Riverstone Holdings

WHAT’S NEW

Riverstone rises above persistent headwinds to deliver record-breaking FY17

Record RM129.3m profit in FY17. Riverstone delivered a

decent set of 4Q17 results despite challenging operating

conditions. Sales grew 12.2% q-o-q to c.RM210.7m on the

back of capacity growth, but the unfavourable mix shift

towards a higher proportion of lower-margin healthcare

gloves resulted in relatively flat earnings of c.RM34.2m (vs

RM34.3m in 3Q17).

On a full-year basis, the record sales and earnings of

RM817.4m and RM129.3m were largely in line.

Higher dividend of 7 Scts for FY17 as Riverstone maintains a

40% payout, up 8% from 6.49 Scts in FY16.

Forex volatility a drag on strong core growth momentum.

Volatility in the USD/MYR rate has weighed heavily on the

sector’s performance, Riverstone was not spared. In FY17,

the group incurred net foreign exchange losses of c.RM13m,

partly offset by hedging gains of c.RM6.8m as the company

typically hedges c.50% of contracted sales.

Apart from the forex drag, Riverstone’s core growth was

otherwise strong, growing c.17.1% y-o-y to c.RM135.5m (vs

c.RM115.8m in FY16):

(RM$ m) FY16 FY17 %Chg

(yoy)

Net Profit 120.4 129.3 +7.4%

Adjustments:

Forex Loss

(Gain)

(9.3) 13.0

Fair Value Loss

(Gain) on

Derivatives

4.7 (6.7)

Adjusted Net

Profit

115.8 135.5 +17.1%


Plans to further cultivate cleanroom business starting to pay

off. Taking into account Riverstone’s temporary operational

hiccup in 3Q which affected its production ramp, we

observe that core earnings momentum has in fact outpaced

output growth at 17.1% vs 16.9% respectively, implying

that plans to further grow cleanroom sales are starting to

bear fruit.

While dipping lines can be used interchangeably between

healthcare and cleanroom gloves, the latter typically

undergo additional secondary processes in specialised

cleanroom facilities. Discussions during the 3Q17 and 4Q17

results briefing revealed that utilisation for these facilities

have improved by >20% q-o-q to nearly 100% currently,

which further supports our view that the cleanroom

segment is starting to see stronger growth vs the healthcare

segment.

Anticipate weaker 1Q18 as headwinds persist, but stronger

growth to kick in from 2Q18. With operating conditions

little changed, we expect industry headwinds – fluctuations

in USD/MYR, volatile raw material prices and operating costs

– to remain a bane for the glove industry at large. Further,

with the revised foreign worker levy policy and gas price

hike coming into force in January 2018, we anticipate 1Q18

results to be weak across the industry.

All else equal, underpinned by a c.33% increase in

cleanroom capacity to at least 2bn by end-2Q18, Riverstone

is set to see stronger growth ahead. Full contribution from

these incoming cleanroom capacities will likely only come in

from FY19 as the group ramps up on production

progressively.

Riverstone due for a re-rating. While shares of larger peers –

Kossan, Hartalega and Top Glove have re-rated strongly in

recent months, Riverstone’s strengths remain

underappreciated. Based on consensus estimates, Hartalega

currently trades at +1SD of its historical forward PE

valuations, Top Glove and Kossan above +2SD. Meanwhile,

Riverstone continues to trade below its historical average

forward PE. As a result, Riverstone’s discount gap has

widened significantly vs peers, from c.28% to 49%

currently.

Underpinned by capacity growth at c.17% CAGR (vs larger

peers’ average of c.15.2%) over FY17-19 and higher-quality

earnings growth supported by more defensible margins, we

believe that Riverstone deserves to at least trade at its

historical average valuation of 16x FY19F PE (c.45%

discount to larger peers’ 29x) as earnings growth catches

up. Better-than-expected execution on these incoming

capacities could spark a further re-rating to 18x FY19F PE

(+1SD), in line with peers.

Upgrade to BUY with a higher TP of S$1.27, based on 16x

FY19F PE. Post 4Q17, we assume higher margins on a more

favourable product mix, and partly offset by lower ASPs

resulting from the recent forex weakness, we raise our

FY19F earnings projections by c.6% to RM172.8m.

After rolling forward our earnings base to FY19F to better

capture the strong growth potential from the roll-out of

incoming cleanroom capacities, and pegging to historical

average forward valuation of 16x, we arrive at a higher TP of

S$1.27 (vs S$1.09 previously). Upgrade to BUY.

Company Guide

Riverstone Holdings

Quarterly / Interim Income Statement (RMm)


Revenue 183 188 211 15.1 12.2

Cost of Goods Sold (135) (137) (159) 18.1 16.2

Gross Profit 48.2 50.8 51.5 6.8 1.3




Associates & JV Inc 0.0 0.0 0.0 - -

Net Interest (Exp)/Inc 0.0 (0.3) (0.3) nm 6.7


Pre-tax Profit 41.4 39.7 40.3 (2.8) 1.5

Tax (5.4) (5.3) (6.0) 11.8 13.3


Net Profit 36.0 34.3 34.2 (5.0) (0.3)


EBITDA 49.7 48.3 48.9 (1.7) 1.2

Margins (%)





Company Guide

Riverstone Holdings


Critical Factors

Growth in global demand for healthcare gloves, at least in near

to medium term. The Malaysian Rubber Glove Manufacturers

Association (MARGMA) estimates that demand for healthcare

gloves is likely to grow at 8-12% p.a. between 2014 and 2020.

As a relatively new entrant in the healthcare glove industry and

with ambitions to grow revenue from this segment quickly to

drive its earnings, we project a ramp-up in Riverstone’s

healthcare glove production at a 17.5% CAGR over FY17-19F.

Long-term trends also indicate favourable demand prospects.

According to MARGMA, the global demand ratio of natural

rubber and synthetic (nitrile) rubber gloves shifted from 74:26 in

2009 to 53:47 in 2014. On the back of rising awareness of latex

allergies in emerging economies and the synthetic variety's low

cost, we expect the ratio to shift away from natural rubber

gloves in the long run.

Riverstone could be a beneficiary of the long-run substitution of

rubber gloves and PVC gloves (especially for the cleanroom

segment) by nitrile gloves as it is principally engaged in the

production of the latter.

Capacity expansion to underpin growth. To capitalise on the

favourable demand growth outlook in both the short and long

term, Riverstone guided that it now expects to expand its

manufacturing capacity to a minimum of 7.6bn gloves by end-

2017, 9bn gloves by end-2018 and 10.4bn gloves by end-2019,

as compared to 8.2bn gloves by 2018 previously.

We expect new production capacities to propel top-line growth

at a CAGR of 13.6% between FY17 and FY19F, as they

gradually come on stream.

Higher proportion of cleanroom gloves. As Riverstone’s glove

production lines can be used interchangeably for both

healthcare and higher-margin cleanroom glove production,

priority is typically given to cleanroom glove orders.

With demand in the niche cleanroom segment mainly stemming

from the semiconductor and mobile tablet sectors, we see

Riverstone as an indirect beneficiary of the current

semiconductor upcycle. Given the current competitive landscape

within the healthcare glove space, a higher sustained proportion

of cleanroom glove production could help Riverstone better

defend margins vs peers (which are predominantly focused in

the production of healthcare gloves).

Greater efficiency from higher automation and larger scale

should help to maintain margins. Despite competition and

pressure on ASPs, we expect automation efforts and

Riverstone’s growing economies of scale to help shore up and

sustain operating margins above 19%, to support stable growth

in net profit ahead.

Capital Expenditure (RM$m)

Production Capacity (m gloves)

Cleanroom Gloves (m gloves)

Healthcare Gloves (m gloves)

Operating Margins (%)


54.2

94.3

110

75 75

0.0

15.9

31.8

47.7

63.6

79.6

95.5

111.4

2015A 2016A 2017A 2018F 2019F

3942

5252

6371

7590

8924

0.0

1820.5

3641.0

5461.5

7282.0

9102.5

2015A 2016A 2017A 2018F 2019F

985 1014

1274

1609

1892

0.00

385.95

771.89

1157.84

1543.78

1929.73

2015A 2016A 2017A 2018F 2019F

2956

4238

5097

5981

7032

0.0

1420.5

2841.0

4261.5

5681.9

7102.4

2015A 2016A 2017A 2018F 2019F

25.8

21.2

18.6 19.3 19.2

0.0

5.2

10.4

15.6

20.8

26.0

2015A 2016A 2017A 2018F 2019F

Company Guide

Riverstone Holdings

Balance Sheet:

Healthy balance sheet. In 1Q17, the company took on debt for

the first time in five years to fund its upcoming expansion plans.

Despite this, we note that Riverstone remained in a net cash

position of RM89.3m as at end 4Q17.

Forecast net fixed asset growth at a CAGR of 10% between

2015 and 2019. As capacity is expected to double in 2019 from

2015 levels, we project the group’s net fixed assets to jump by

nearly 50% from RM286m in 2015 to RM419m in 2018.


Opportunities for inorganic growth. Due to the stringent

requirements for the establishment of cleanroom facilities,

Riverstone does not rule out the possibility of acquiring quality

cleanroom glove manufacturing companies in the future.

Cultivation of new markets for cleanroom products. As

cleanroom products are manufactured in controlled

environments and are subject to stringent requirements, they

are able to deliver much higher margins relative to healthcare

gloves. The ability to cultivate new markets for cleanroom

products, similar to what Riverstone recently achieved with its

diversification into the consumer electronics sector, should help

to boost earnings.

An acceleration of capacity expansion plans beyond the current

guidance of 10.4bn gloves by end-2019 could drive a further re-

rating of share price.

Key Risks:

Global economic slowdown could impact cleanroom sales. A

slowdown in the general economy could lead to declines in

discretionary spending and manufacturing activity in the HDD

industry. Although Riverstone has been gradually reducing its

exposure to HDDs, down from historical highs of up to 70%,

they still make up less than 50% of the company's cleanroom

portfolio today.

Intensifying competition could erode profitability. We believe

that oversupply over the next few years is unlikely given the

more balanced demand-supply outlook for healthcare gloves

among Malaysian peers compared to a year ago. However,

rising competition from budding glove manufacturing regions

such as Thailand and China could threaten Riverstone’s market

share and pricing power later on if it fails to advance on the

technological front.

Company Background

Riverstone Holdings (RSTON SP) is a natural rubber and nitrile

(synthetic rubber) glove manufacturer specialising in cleanroom

and healthcare gloves. It is also engaged in the manufacture

and distribution of other ancillary products such as finger cots,

packaging bags and face masks.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.0

1.1

1.1

1.2

1.2

0.00

0.05

0.10

0.15

0.20

0.25

2015A 2016A 2017A 2018F 2019F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

2015A 2016A 2017A 2018F 2019F


RMm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015A 2016A 2017A 2018F 2019F

Avg: 14x

+1sd: 18x

+2sd: 21.9x

-1sd: 10.1x

-2sd: 6.2x5.5

10.5

15.5

20.5

25.5

Feb-14 Feb-15 Feb-16 Feb-17

(x)

Avg: 3.61x

+1sd: 4.42x

+2sd: 5.23x

-1sd: 2.8x

-2sd: 1.98x1.7

2.7

3.7

4.7

5.7

6.7

Feb-14 Feb-15 Feb-16 Feb-17

(x)

Company Guide

Riverstone Holdings

Key Assumptions

FY Dec 2015A 2016A 2017A 2018F 2019F

Capital Expenditure (RM$m)

54.2 94.3 110 75.0 75.0

Production Capacity (m gloves)

3,942 5,252 6,371 7,590 8,924 Cleanroom Gloves (m gloves)

985 1,014 1,274 1,609 1,892

Healthcare Gloves (m gloves)

2,956 4,238 5,097 5,981 7,032

Operating Margins (%) 25.8 21.2 18.6 19.3 19.2

Income Statement (RMm)

FY Dec 2015A 2016A 2017A 2018F 2019F

Revenue 560 655 817 934 1,055


Gross Profit 175 173 198 233 260


Operating Profit 144 139 152 180 202



Net Interest (Exp)/Inc 0.0 0.0 (1.0) (1.8) (3.0)


Pre-tax Profit 144 139 151 178 199

Tax (17.8) (18.5) (21.5) (23.7) (26.6)



Net Profit 127 120 129 154 173

Net Profit before Except. 127 120 129 154 173

EBITDA 169 169 186 230 260

Growth

Revenue Gth (%) 40.3 16.9 24.8 14.3 12.9

EBITDA Gth (%) 68.4 (0.3) 10.5 23.6 12.8

Opg Profit Gth (%) 78.0 (3.8) 9.4 18.5 12.4

Net Profit Gth (Pre-ex) (%) 78.4 (4.9) 7.4 19.5 11.9

Margins & Ratio

Gross Margins (%) 31.2 26.4 24.2 24.9 24.6



ROAE (%) 29.7 23.2 21.8 22.7 22.2

ROA (%) 24.7 19.2 17.9 18.4 17.6

ROCE (%) 28.8 22.7 20.7 20.6 19.1

Div Payout Ratio (%) 37.8 40.0 40.2 40.2 40.2

Net Interest Cover (x) NM 138,849.0 148.4 100.0 67.4


Company Guide

Riverstone Holdings

Quarterly / Interim Income Statement (RMm)

FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017

Revenue 183 206 213 188 211


Gross Profit 48.2 51.8 43.7 50.8 51.5





Net Interest (Exp)/Inc 0.0 (0.2) (0.3) (0.3) (0.3)


Pre-tax Profit 41.4 39.2 31.7 39.7 40.3

Tax (5.4) (5.6) (4.6) (5.3) (6.0)


Net Profit 36.0 33.6 27.1 34.3 34.2


EBITDA 49.7 47.6 40.3 48.3 48.9

Growth

Revenue Gth (%) 9.6 12.4 3.7 (11.9) 12.2

EBITDA Gth (%) 19.4 (4.2) (15.3) 19.8 1.2

Opg Profit Gth (%) 21.7 (5.0) (18.8) 25.0 1.4

Net Profit Gth (Pre-ex) (%) 20.8 (6.7) (19.5) 26.8 (0.3)

Margins

Gross Margins (%) 26.3 25.2 20.5 27.1 24.4



Balance Sheet (RMm)

FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 277 337 420 444 462


Other LT Assets 9.61 8.62 9.74 9.74 9.74

Cash & ST Invts 129 103 114 165 277

Inventory 61.2 67.0 71.1 71.4 80.8

Debtors 103 140 145 187 211


Total Assets 585 668 781 898 1,062

ST Debt 0.0 0.0 6.00 6.00 6.00

Creditor 84.4 90.5 102 76.7 86.9


LT Debt 0.0 0.0 19.0 69.0 119




Total Cap. & Liab. 585 668 781 898 1,062

Non-Cash Wkg. Capital 78.2 119 127 194 217

Net Cash/(Debt) 129 103 89.3 89.8 152




Asset Turnover (x) 1.1 1.0 1.1 1.1 1.1

Current Ratio (x) 3.2 3.2 3.0 4.9 5.8

Quick Ratio (x) 2.5 2.4 2.2 3.9 4.8



Capex to Debt (%) N/A N/A 441.1 100.0 60.0

Z-Score (X) 16.6 15.4 14.7 14.7 10.9


Company Guide

Riverstone Holdings

Cash Flow Statement (RMm)

FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 144 139 151 178 199

Dep. & Amort. 24.8 29.9 34.5 50.4 57.7

Tax Paid (18.5) (22.6) (21.3) (23.7) (26.6)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (26.3) (31.8) (11.6) (67.3) (23.4)

Other Operating CF (2.3) 4.65 (6.8) 0.0 0.0

Net Operating CF 122 119 146 138 207

Capital Exp.(net) (54.2) (94.3) (110) (75.0) (75.0)

Other Invts.(net) 0.0 (2.3) 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CF (54.2) (96.6) (110) (75.0) (75.0)

Div Paid (25.8) (48.5) (48.1) (62.1) (69.5)

Chg in Gross Debt 0.0 0.0 25.0 50.0 50.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0

Net Financing CF (25.8) (48.5) (23.1) (12.1) (19.5)


Chg in Cash 49.2 (25.5) 11.1 50.5 113

Opg CFPS (S cts) 6.73 6.84 7.13 9.29 10.5

Free CFPS (S cts) 3.08 1.12 1.61 2.84 5.99



Source: DBS Bank

Analyst: Carmen Tay

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 24 Feb 17 0.92 0.92 HOLD

2: 05 May 17 0.97 1.07 BUY

3: 17 Jul 17 1.05 1.07 BUY

4: 04 Aug 17 1.05 1.07 BUY

5: 07 Aug 17 1.06 1.09 HOLD

6: 08 Nov 17 1.07 1.09 HOLD


1

23

4

5

6

0.79

0.84

0.89

0.94

0.99

1.04

1.09

1.14

1.19

1.24


S$

Company Guide

Riverstone Holdings















































Company Guide

Riverstone Holdings



in market-making.














DBS Group.





Report.













ed: JLC / sa:YM, PY, CS

BUY Last Traded Price ( 14 Feb 2018): S$0.56 (STI : 3,402.86)


Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]

What’s New FY17 net profit -41% y-o-y; lower development profits

and income from investment properties (divestment)

Unrecognised sales stood at S$459m; largely in

Australia with expected completion in FY18/FY19

First launch in FY18 saw 50% take-up

Declared final div of 0.771 Scents; maintain 40%

payout

Price Relative


Revenue 385 247 190 406 EBITDA 67.6 41.6 77.4 120 Pre-tax Profit 65.6 46.7 54.1 94.8 Net Profit 49.8 29.4 41.2 68.7 Net Pft (Pre Ex.) 33.4 6.51 41.2 68.7 Net Pft Gth (Pre-ex) (%) (57.4) (80.5) 532.8 66.6 EPS (S cts) 4.17 2.47 3.46 5.76 EPS Pre Ex. (S cts) 2.80 0.55 3.46 5.76 EPS Gth Pre Ex (%) (57) (80) 533 67 Diluted EPS (S cts) 4.17 2.47 3.46 5.76 Net DPS (S cts) 1.67 0.98 0.86 1.44 BV Per Share (S cts) 41.2 42.2 44.6 49.5 PE (X) 13.4 22.7 16.2 9.7 PE Pre Ex. (X) 20.0 102.5 16.2 9.7 P/Cash Flow (X) 88.6 nm nm 34.4 EV/EBITDA (X) 17.5 29.4 20.3 13.5 Net Div Yield (%) 3.0 1.8 1.5 2.6 P/Book Value (X) 1.4 1.3 1.3 1.1 Net Debt/Equity (X) 1.0 1.1 1.7 1.6 ROAE (%) 10.5 5.9 8.0 12.2 Earnings Rev (%): - - Consensus EPS (S cts): 3.60 19.2 57.0 Other Broker Recs: B: 2 S: 0 H: 0


Ready, set, go!

Maintain BUY; TP of S$0.69. We are maintaining our BUY rating

and TP of S$0.69 (based on 30% discount to RNAV) on Roxy-

Pacific Holdings (Roxy). Benefitting from being early in the current

en-bloc cycle, Roxy is one of the few “undiscovered” mid-cap

developer proxies to ride the recovery of the Singapore property

market. BUY!

Where we differ. Poised to hit an upbeat Singapore property

market with six freehold residential developments. We are one of

the first few brokerages to have initiated coverage on Roxy. While

the market may have overlooked Roxy for its size, we believe “best

things come in small packages”. We believe Roxy, being one of

the earliest to landbank in the current market cycle, has six

freehold residential developments in Singapore which will be ready

to launch in 2018, two to three of which will be launched within

1Q18. We see this as a window for the group to capture the rise

in buyer demand before its peers.

Potential catalysts: Strong sales take-up, more landbanking,

acquisitions of good-quality investment properties.

Lower FY17 results but all eyes on FY18. FY17 net profit fell 41%

y-o-y largely from lower contributions from development

properties and investment properties (post-divestment). Despite a

weak FY17 results, management is upbeat on FY18, anticipating

better property sales, contributions from newly-acquired

investment properties, and a better outlook on Singapore’s

hospitality sector. Declared 0.771 Scents final dividend.

Valuation:

Our TP of S$0.69 is based on 30% discount to RNAV of S$0.98.

The stock currently trades at 1.2x FY18F P/BV, below historical

average. At its peak, Roxy trades at 2.3x P/BV.


i) Slower take-up rates, ii) Government regulates more to manage

the Singapore property market, iii) AUD / NZD / JPY forex

fluctuations, and iv) acquisitions of less-desirable investment

properties.

At A Glance Issued Capital (m shrs) 1,192

Mkt. Cap (S$m/US$m) 668 / 508


Kian Lim Investment Pte Ltd 38%

Teo Hong Lim 12%

Sen Lee Development Pte Ltd 11%

Free Float (%) 22%


ICB Industry : Financials / Real Estate


15 Feb 2018


Roxy-Pacific Holdings Version 1 | Bloomberg: ROXY SP | Reuters: RXYP.SI Refer to important disclosures at the end of this report

Company Guide

Roxy-Pacific Holdings

WHAT’S NEW

Ready, set, go!

FY17 net profit fell 41% y-o-y largely from lower

development profits and lower contributions from investment

properties: Roxy’s FY17 net profit fell 41% y-o-y to S$29m,

mainly due to lower revenue (-36% y-o-y) and lower share of

results from associates (-30% y-o-y) on the back of lower

recognition of Eon Shenton, partially offset by higher fair

value gains from investment properties (+40% y-o-y).

Lower revenue was recorded in all segments but mainly in

development properties (-41% y-o-y) and investment

properties (-14% y-o-y).

The decrease in revenue from development properties was

largely due to lower revenue recognised from projects

completed or nearing completion in FY17 such as Jade

Residences, Whitehaven, and LIV on Wilkie. In addition, there

was an absence of revenue recognised from LIV on Sophie

which was completed in FY16.

The fall in investment properties was mainly due to the loss of

rental income following the divestment of 59 Goulburn

Street.

Revenue from hotel properties fell 4% y-o-y mainly due to

lower RevPar of Grand Mercure Roxy Hotel, following more

subdued corporate activity in FY17 and pricing competition

from new hotel supply.

Gross profit margin improved to 24% from 21% in FY16,

largely led by better margins of 15% recorded from its

development properties (vs 14% in FY16).

Roxy has declared a final dividend of 0.771 Scents. This brings

total FY17 dividend to 0.985 Scents vs 1.667 Scents in FY16.

The dividend payout ratio remains stable at 40%.

Unrecognised sales stood at S$459m as at FY17: As at FY17,

unrecognised sales stood at S$459m largely from its Australia

properties (89%) which are expected to be completed in

2018 / 2019.

First launch in FY18 (The Navian) recorded 50% sales take-up

in one month; targets to launch six properties (including The

Navian) in FY18. Roxy officially launched its first property in

FY18, The Navian in Jan18. As at 5 Feb 18, it has sold 23

units, 50% of total units, which is an encouraging sign, in our

view. Conservatively, management targets to launch six

properties (including The Navian) in FY18 with a total of 440

units. However, management hopes to launch another 1 or 2

more properties in FY18, if ready, to capture the demand as

soon as possible. Next in line to be launched are Harbour

View Gardens (after Chinese New Year) and Grange Road site

(expected in Apr18) while the Upper Bukit Timah site, the

River Valley site, and the Guillemard Lane site are expected to

be launched in 2Q18 / 3Q18.

Acquired three more land sites in Dec17 / Jan18. Roxy

remains active in its landbanking activities and has

accumulated another three more sites in Dec17 / Jan18 and

now owns 10 development sites, as a mean to replenish its

landbank and to capture good opportunities. The sites are

located mainly in the RCR. Management expects to launch

these properties in FY19.

Received interest to acquire its 117 Clarence Street.

According to media reports, we understand that Roxy has

received encouraging interest to acquire its 117 Clarence

Street office building in Sydney. The building was jointly

acquired with Tong Eng Group in Feb16. Management may

consider a divestment if the offer price is attractive. We have

yet to include the new landbank in the numbers.

Expect to see better RevPar in 2H18. While FY17 was a

challenging year for its hotel property in Singapore, Grand

Mercure Singapore Roxy, management expects to see some

improvement in RevPar in 2H18 as supply starts to taper off,

reducing pricing competition. In addition, management is

upbeat on the major events to be held in FY18, following

encouraging signs seen in the beginning of the year with the

Singapore Airshow 2018.

The newly acquired hotel in Osaka (Oct17) has been

successfully rebranded to Noku Roxy in Jan18 which will be

self-managed.

Noku Maldives started operations in Dec17 and expected to

be fully open soon while its hotel in Phuket is expected to be

completed and begin operations in FY19.

Maintain BUY; TP of S$0.69. We maintain our BUY rating and

target price of S$0.69. We believe Roxy is a good small- to

mid-cap proxy to Singapore property and is poised to benefit

from upbeat sentiment in the sector from the launch of six

freehold residential properties before its peers. In addition,

Roxy, being small and nimble, has been selective in small but

freehold land sites. This gives them the flexibility i) to launch

quickly and hit the market before its peers; ii) to adopt the

quick-turnaround model; and iii) to change according to

market sentiment. Key potential catalysts are i) strong sales

take-up rates upon launch; ii) ability to landbank continually;

and iii) acquisition of good-quality investment properties.

Roxy currently trades at 1.3x FY18F P/BV, below historical

average. At its peak, Roxy traded at 2.3x P/BV.

Company Guide




Revenue 93.1 60.3 43.3 (53.5) (28.1)


Gross Profit 20.2 17.5 11.9 (40.8) (32.0)




Associates & JV Inc 8.13 0.51 5.22 (35.8) nm



Pre-tax Profit 13.3 3.39 8.75 (34.3) 158.1

Tax (1.4) (1.1) (1.4) 1.3 23.8

Minority Interest (0.7) (0.8) (0.1) nm nm

Net Profit 11.3 1.50 7.27 (35.5) 385.3


EBITDA 19.1 7.12 13.1 (31.3) 84.6

Margins (%)





Company Guide



Critical Factors

Launching six freehold residential projects in Singapore in 2018.

As developers now rush to landbank, Roxy can reap the benefits

of being one of the earliest to landbank among the mid- to

small-cap developers and successfully acquire seven plots of

land to be launched in 2018. As such, Roxy has a total of c.476

residential units to be launched in 2018 that could potentially

generate more than S$0.5bn in total GDV. Assuming 100%

take-up rates, sales volume could potentially grow 8x y-o-y on

annualised sales volume for FY17.

Beefing up its recurring-income portfolio. Since the slowdown

of the Singapore property market in 2013, Roxy has started to

venture out of Singapore and expanded its horizon to build its

portfolio of assets to improve recurring income and provide

stability in earnings. In FY17, Roxy acquired four commercial

buildings, two in Australia, and two in New Zealand, adding to

its portfolio of one commercial building (excluding the

divestment of 59 Goulburn commercial building).

In addition, the Group continues to build its hospitality

segment, which will add to its recurring income. In FY17, the

Group acquired Tenmabashi Grand Hotel Osaka for JPY3bn.

These properties will start to contribute from FY18 onwards.

Realisation of development projects in Australia upon

completion. Roxy’s investments in development projects in

Australia in 2015 will soon pay off when five projects are

completed by 2018. The projects have all been substantially sold

(>95% sold) except the last project launched in 3Q17; Art

House at West End Glebe. The units sold have a total sales value

of approximately S$300mn and could potentially contribute

21% to 44% of FY18F – FY19F earnings.

Replenishing landbank for sustainability. As Roxy adopts a

quick-turnaround model and launches all its landbank in FY18,

the ability to replenish its landbank promptly would be crucial in

ensuring sustainability of its Singapore residential business if it

continues strengthening for a longer period of time. So far, it

has historically proven its ability to source for strategic land sites

and possibly faces less competition as it typically targets smaller

plots of land which may not be attractive to larger developers.

Revenue (FY15 – FY19F)

Gross profit (FY15 – FY19F)

Gross profit margin (%)

RNAV (S$’mn)

OMV (S$'mn)

Surplus / deficit of assets:

Development properties 105.9

Landbank 18.5

Hotel properties 447.2

Investment properties 97.6

669.2

NAV 504.0

RNAV 1,173.2

No of shares 1,193.5

RNAV per share (S$) 0.98

Discount 30%

Price Target (S$) 0.69


461

385

233

502

213

-

100

200

300

400

500

600

2015 2016 2017F 2018F 2019F

Reven

ue (S$

'mn)

Development Properties Hotel Ownership Investment Properties

129.7

81.2

59.2

147.3

69.2

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

2015 2016 2017F 2018F 2019F

Reven

ue (S$

'mn)

Development Properties Hotel Ownership Investment Properties

28%

21%

25%

29%

32%

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

35%

2015 2016 2017F 2018F 2019F

Gro

ss p

rofit m

arg

in (%

)

Company Guide


Appendix 1:

Roxy’s absolute performance vs Singapore property industry sales volume Remarks

Share price performance is

positively correlated with

sales volume in the

Singapore property

industry, especially in the

initial stages of an upcycle

seen in 2017, when

sentiment in the property

sector turned positive,

supported by an increase in

sales volume.

Source: DBS Bank, Thomson Analytics, Company

Roxy’s absolute performance vs its property sales volume Remarks

The market did not

reward Roxy despite the

strong sales

performance in 2016. As

the strong sales volume

was led by sales in

Australia and Malaysia,

share price performance

seemed to be more

correlated with its sales

volume in Singapore.

Source: DBS Bank, Thomson Analytics, Company

Roxy’s absolute performance vs PPI changes Remarks

We do not see much

correlation between

share price performance

and property price

changes.

Source: DBS Bank, Thomson Analytics, Company, SGX

60

160

260

360

460

560

660

Dec-

08

May

-09

Oct

-09

Mar

-10

Aug-

10

Jan-

11

Jun-

11

Nov-

11

Apr-1

2

Sep-

12

Feb-

13

Jul-1

3

Dec-

13

May

-14

Oct

-14

Mar

-15

Aug-

15

Jan-

16

Jun-

16

Nov-

16

Apr-1

7

Sep-

17

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Shar

e pr

ice a

bs p

erf (

INde

x)

Sale

s vol

ume

(uni

ts)

Sale volume (units) - RHS Abs Price Perf - LHS

Led by a change in Singapore property's sentiment as seen in a pick-up in sales volume

60

160

260

360

460

560

660

Dec-

08

May

-09

Oct

-09

Mar

-10

Aug-

10

Jan-

11

Jun-

11

Nov-

11

Apr-1

2

Sep-

12

Feb-

13

Jul-1

3

Dec-

13

May

-14

Oct

-14

Mar

-15

Aug-

15

Jan-

16

Jun-

16

Nov-

16

Apr-1

7

Sep-

17

-20

-15

-10

-5

0

5

10

15

20

Shar

e pr

ice a

bs p

erf (

INde

x)

% c

hang

e in

PPI

(%)

% change in PPI - RHS Abs Price Perf - LHS

60

110

160

210

260

310

2011 2012 2013 2014 2015 2016 9M2017 FY2018E-

100

200

300

400

500

600

700

800

900

Sale

s vo

lum

e (u

nits

)

Shar

e pr

ice

abs

perf

(Ind

ex)

% change in PPI - RHS Abs Price Perf - LHS

St rong sales led by property sales in Australia / Malaysia

Led by strong sales volume in 2012

Company Guide


Balance Sheet:

Undervalued Net Asset Value (NAV). The group’s NAV is

conservative largely because the carrying values of its hospitality

portfolio is at historical cost. In addition, development

properties comprise close to 60% of its total assets, which

typically offer more upside upon the realisation of these

development properties. Its RNAV is more than double its

current NAV.

Net debt to equity stands at 1x in FY17. Roxy’s net debt to

equity stood at 1x as at FY17. We expect the ratio could

increase to 1.7x following the landbanking / development and

acquisition of investment properties activities in FY16/FY17.

While it may seem high, its NAV could be conservative as

mentioned above. The Group’s net debt to adjusted NAV

(ANAV) stood at 0.6x as at FY17.


Strong sales take-up rates. Strong sales take-up rates upon

launch would boost confidence and ensure sustainable

profitability in its development properties. Depending on the

prices, it is also a testament that the market is receptive of

higher property prices. In addition, share price performance is

positively correlated to sales volume, especially the group’s sales

in Singapore.

Replenishing landbank is key to income sustainability. As Roxy

adopts a quick-turnaround model and plans to launch all its

landbank ahead of its peers, its ability to replenish landbank is

key to income sustainability in the longer term.

Key Risks:

Slower take-up rates. With six developments expected to be

launched in FY18, slower take-up rates for its properties would

impact the needs for more financing, thus, increasing its costs.

In addition, Roxy has the five-year timeline to complete its sales

before the ABSD and QC charges kick in.

Government regulates more to manage Singapore property.

Despite the multiple ‘warnings’ by the government to be

cautious of excessive exuberance in the property market, the

land bids and the property market remain robust and bullish.

We remain cautious that the government may decide to

implement some measures to ensure that the Singapore

property market remains sustainable in the medium term and

that it doesn’t become a “runaway train”. Depending on the

measures implemented, it could impact both the demand for

its projects or its future landbanking opportunities.

Company Background

Roxy-Pacific Holdings (Roxy) has a long track record in the

property and hospitality space since it was established in May

1967. Listed in March 2008, Roxy is one of the reputable

small- to mid-cap developers and has established its brand in

small- to medium-sized residential developments targeting

middle-to-upper-middle-income segments.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide


Segmental Breakdown

FY Dec 2015A 2016A 2017A 2018F 2019F

Revenues (S$m)

Development Properties 404 327 192 122 338

Hotel Ownership 44.5 46.3 44.3 43.0 43.0


Total 461 385 247 190 406

Gross Profit (S$m) Development Properties 93.3 45.3 28.0 20.3 62.8

Hotel Ownership 27.8 26.9 24.0 23.2 23.2


Total 130 81.2 59.5 61.3 104

Gross Profit Margins (%) Development Properties 23.1 13.9 14.6 16.6 18.6

Hotel Ownership 62.4 58.1 54.2 54.0 54.0


Total 28.1 21.1 24.1 32.3 25.6


FY Dec 2015A 2016A 2017A 2018F 2019F

Revenue 461 385 247 190 406


Gross Profit 130 81.2 59.5 61.3 104







Pre-tax Profit 101 65.6 46.7 54.1 94.8

Tax (15.9) (12.7) (15.4) (10.3) (18.0)



Net Profit 85.1 49.8 29.4 41.2 68.7


EBITDA 110 67.6 41.6 77.4 120

Growth

Revenue Gth (%) 45.0 (16.4) (36.0) (23.1) 113.8

EBITDA Gth (%) (3.6) (38.5) (38.5) 86.1 55.0

Opg Profit Gth (%) 69.7 (54.7) (46.3) 45.2 124.7

Net Profit Gth (Pre-ex) (%) (12.9) (57.4) (80.5) 532.8 66.6

Margins & Ratio

Gross Margins (%) 28.1 21.1 24.1 32.3 25.6



ROAE (%) 19.8 10.5 5.9 8.0 12.2

ROA (%) 6.0 3.5 2.0 2.6 4.1

ROCE (%) 6.0 2.6 1.1 1.8 3.6

Div Payout Ratio (%) 26.8 39.9 39.9 25.0 25.0



Contributions from development properties in Australia, expected to be completed in FY18, recognised on a completed basis

Higher contributions from newly acquired investment properties

Company Guide



FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017

Revenue 93.1 65.4 77.8 60.3 43.3


Gross Profit 20.2 16.3 13.8 17.5 11.9







Pre-tax Profit 13.3 9.17 25.4 3.39 8.75

Tax (1.4) (2.9) (10.1) (1.1) (1.4)


Net Profit 11.3 5.91 14.7 1.50 7.27

Net profit bef Except. 11.1 4.36 (4.0) 1.51 7.27

EBITDA 19.1 13.1 12.5 7.12 13.1

Growth

Revenue Gth (%) 2.4 (29.7) 18.9 (22.6) (28.1)

EBITDA Gth (%) 20.7 (31.4) (4.5) (43.2) 84.6

Opg Profit Gth (%) (15.8) 0.2 (30.6) 0.6 2.2

Net Profit Gth (Pre-ex) (%) 49.2 (60.7) (190.8) (138.0) 383.3

Margins

Gross Margins (%) 21.6 24.9 17.7 29.1 27.5



Balance Sheet (S$m)

FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 130 176 216 263 309

Invts in Associates & JVs 127 158 198 237 275

Other LT Assets 181 200 127 161 161

Cash & ST Invts 395 325 322 175 131

Inventory 0.13 0.78 1.07 1.07 1.07

Debtors 28.9 93.2 53.3 39.2 83.9

Other Current Assets 547 509 598 772 772

Total Assets 1,409 1,462 1,516 1,648 1,733

ST Debt 485 562 554 554 554

Creditor 11.8 15.6 88.9 9.69 20.7

Other Current Liab 110 85.3 30.9 10.3 18.0

LT Debt 323 271 318 518 518




Total Cap. & Liab. 1,409 1,462 1,516 1,648 1,733

Non-Cash Wkg. Capital 454 502 533 793 819

Net Cash/(Debt) (413) (507) (549) (897) (941)




Asset Turnover (x) 0.3 0.3 0.2 0.1 0.2

Current Ratio (x) 1.6 1.4 1.4 1.7 1.7

Quick Ratio (x) 0.7 0.6 0.6 0.4 0.4

Net Debt/Equity (X) 0.9 1.0 1.1 1.7 1.6

Net Debt/Equity ex MI (X) 0.9 1.0 1.1 1.7 1.6

Capex to Debt (%) 1.7 5.8 6.1 4.9 4.9

Z-Score (X) 0.0 NA NA NA NA


Higher gearing from investments made in FY16 / FY17

Company Guide



FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 101 65.6 46.7 54.1 94.8

Dep. & Amort. 4.90 6.48 5.75 5.75 7.00

Tax Paid (8.6) (24.6) (2.1) (30.9) (10.3)

Assoc. & JV Inc/(loss) (1.1) (18.6) (13.0) (38.5) (38.5)

Chg in Wkg.Cap. 62.5 (16.7) (5.6) (65.1) (33.6)


Net Operating CF 153 7.54 (19.7) (74.7) 19.4

Capital Exp.(net) (13.7) (48.3) (53.1) (53.1) (53.1)

Other Invts.(net) 0.0 0.0 99.2 (33.7) 0.0

Invts in Assoc. & JV (24.2) (17.1) (38.5) 0.0 0.0

Div from Assoc & JV 3.68 13.3 3.34 0.0 0.0

Other Investing CF 1.31 2.36 3.20 (174) 0.0

Net Investing CF (32.9) (49.7) 14.2 (261) (53.1)

Div Paid (22.8) (21.5) (16.4) (11.7) (10.3)

Chg in Gross Debt (97.0) 19.0 41.9 200 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF (102) (32.4) (22.6) 0.0 0.0

Net Financing CF (222) (34.8) 2.85 188 (10.3)


Chg in Cash (102) (75.7) (2.9) (147) (44.0)

Opg CFPS (S cts) 7.55 2.03 (1.2) (0.8) 4.44

Free CFPS (S cts) 11.6 (3.4) (6.1) (10.7) (2.8)



Source: DBS Bank

Analyst: Rachel TAN

Derek TAN

Company Guide
















































Company Guide




in market-making.














DBS Group.





Report.













ed: JLC / sa:JC, YM, PY

BUYLast Traded Price ( 27 Jul 2017): S$0.95 (STI : 3,354.71) Price Target 12-mth: S$1.20 (26% upside)

Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

What’s New 2Q17 earnings in line, gross margin expansion

continues

DPS of 1.55 Scts declared

Amazon’s entry not a serious threat for now

Maintain BUY, TP S$1.20

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Revenue 797 807 828 878 EBITDA 80.0 85.4 92.2 101 Pre-tax Profit 76.2 80.4 86.8 92.2 Net Profit 62.7 66.8 72.0 76.5 Net Pft (Pre Ex.) 62.7 66.8 72.0 76.5 Net Pft Gth (Pre-ex) (%) 10.4 6.5 7.8 6.2 EPS (S cts) 4.17 4.44 4.79 5.08 EPS Pre Ex. (S cts) 4.17 4.44 4.79 5.08 EPS Gth Pre Ex (%) 10 6 8 6 Diluted EPS (S cts) 4.17 4.44 4.79 5.08 Net DPS (S cts) 3.75 3.99 4.31 4.57 BV Per Share (S cts) 16.8 17.2 17.7 18.2 PE (X) 22.8 21.4 19.8 18.7 PE Pre Ex. (X) 22.8 21.4 19.8 18.7 P/Cash Flow (X) 18.3 20.0 13.2 14.7 EV/EBITDA (X) 17.1 16.1 14.7 13.3 Net Div Yield (%) 3.9 4.2 4.5 4.8 P/Book Value (X) 5.7 5.5 5.4 5.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 25.3 26.1 27.4 28.3

Earnings Rev (%): (3) 0 0 Consensus EPS (S cts): 4.50 4.70 4.90 Other Broker Recs: B: 6 S: 1 H: 2


CONTINUES DELIVERING

Maintain BUY TP S$ 1.20, margin expansion to drive earnings growth. We remain positive on Sheng Siong as we see growth led by improving margins. We believe expansion of its distribution centre will continue and the company will sustain gross margins going forward. Margins remain on the uptrend – supported by the increase in direct sourcing, bulk handling, and fresh mix – contributing to earnings growth. Stock is trading attractively at 19.8x FY18F PE, compared to its historical average of 23x since listing. Yield is attractive at 4.5%.

Where we differ. We do not think Amazon’s entry will pose a serious threat to Sheng Siong for now for six reasons. The online pie remains small; Sheng Siong’s target customers are not the millennials who are open to online grocery shopping; Amazon’s warehouse is relatively small; Amazon will pose a more direct threat to Redmart; its pricing is not exactly cheap to attract offline buyers online; and the online market will take time to gain share from brick-and-mortar stores rather than ramp up rapidly.

Potential catalyst. We believe that Sheng Siong, with its decent store network and logistics chain, could possibly be a takeover target by online players eventually. Online players such as Alibaba’s 盒马鲜生 and Amazon (Wholefoods) are taking the online-to-offline route, operating physical stores.

Valuation:

Our target price for Sheng Siong is S$ 1.20, based on 25x FY18F PE. The valuation is pegged at +1SD of its historical mean since listing and below regional peers' average of 30x PE.


Store openings, price competition. Revenue growth will be led by new store openings. Excessive discounts and promotions in the market by competitors will ultimately result in lower margins.

At A Glance Issued Capital (m shrs) 1,504 Mkt. Cap (S$m/US$m) 1,428 / 1,052 Major Shareholders (%) SS Holdings 29.85 Lim Family 33.99

Free Float (%) 36.16 3m Avg. Daily Val (US$m) 1.5 ICB Industry : Consumer Services / Food & Drug Retailers

DBS Group Research . Equity 28 Jul 2017


Sheng Siong Group Version 10 | Bloomberg: SSG SP | Reuters: SHEN.SI Refer to important disclosures at the end of this report

75

95

115

135

155

175

195

215

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Jul-13 Jul-14 Jul-15 Jul-16 Jul-17

Relative IndexS$

Sheng Siong Group (LHS) Relative STI (RHS)

Page 2

Company Guide

Sheng Siong Group

WHAT’S NEW

2Q17 results

2Q17 in line: Earnings of S$$16m (+6% y-o-y) were in line with our expectations. Revenue of S$202m (+7% y-o-y) was driven by 0.9% SSSG and 5.2% from new stores. Better consumer sentiment was offset by footfall decline at stores affected by the slowdown in the oil and gas industry, Woodlands store, as well as Tampines renovation. An interim DPS of 1.55 Scts was declared, amounting to 70% payout in 1H17.

Gross margins all-time high: Gross margins hit an all-time high of 26.6% due to lower input costs, better supplier rebates, and better fresh food mix.

Record high operating profit margin at 8.9%. Operating profit was S$17.9m (+11.8% y-o-y), and flat Q-o-Q. Operating expenses increased by (+6.8% y-o-y), led by admin expenses which grew 6% to S$33.6m. Operating profit margin was at a record high as gross margins expanded while operating expenses were kept at 17.7% of sales.

Other income fell. Other income dropped to S$1.8m and this was due to 1) lower rental income as the property floor area of its Tampines site was increased to 25,000 sqft; and 2) a decline in government grants on lower wage credits as well as temporary and special employment schemes.

Expect gross margins to improve further. As expected, Sheng Siong continued in its margin improvement with record gross and operating margins. We have held the view that margin expansion will continue on the back of better input prices as it expands its distribution centre going forward. Completion of new warehouse space going forward will drive the growth of gross margins further with bulk and volume discounts. Correlation between the stock price and gross margin is strong at 0.9. The Verge store has closed but the Woodlands store’s lease has been extended to October 2017. Two new stores will open in 3Q17 - the 4,300-sqft Fajar Road store and

the 12,000-sqft Woodlands St 12 store. The Kunming store is expected to open in September 2017.

Amazon opens this week, not a real threat for now. Amazon has started operations in Singapore with Amazon Prime Now, sending jitters through Sheng Siong’s stock investors. The entry of Amazon should not affect Sheng Siong for now as 1) Singapore’s online grocery retail market remains small at<2% (S$96m) of modern grocery retail sales of S$6b; 2) Amazon’s scale is relatively small; its 100,000-sqftwarehouse is comparable to Redmart’s but far smaller than DFI’s 260,000-sqft, SSG’s 500,000-sqft and NTUC Fairprice’s 730,000-sqft warehouses; 3) Amazon would pose a direct threat to Redmart as theyboth target the same customers in the online grocery space; 4) we do not see the market size swelling just becauseAmazon is coming in, as the growth of the grocery market is still largely based on population size and inflation, which requires a real shift from store to online for Sheng Siong to be affected; 5) our initial price comparison showed that Amazon’s pricingis not exactly cheap at the moment, making it difficult to take share off the physical stores at current prices; 6) Sheng Siong’s target customers are largely not the tech-savvy millennials who are open to buying from online channels.

Maintain BUY, S$1.20 TP. Our forecasts remain largely unchanged. We maintain BUY with S$1.20 TP, based on 25x FY18F PE. Even though we do not see fundamentals playing out immediately on Amazon’s entry, we are mindful that the market may be cautious on long-term implications to Sheng Siong and hence would like to highlight that negativity could weigh on the stock over the short term, based on market sentiment.

Company Guide

Sheng Siong Group



Revenue 189 217 202 6.8 (7.2)

Cost of Goods Sold (139) (163) (148) 6.2 (9.1)

Gross Profit 49.4 54.3 53.5 8.4 (1.5)

Other Oper. (Exp)/Inc (33.3) (36.3) (35.6) 6.8 (1.9)

Operating Profit 16.0 18.0 17.9 11.8 (0.6)

Other Non Opg (Exp)/Inc 2.14 2.53 1.80 (16.0) (28.7)


Net Interest (Exp)/Inc 0.20 0.02 0.03 (83.8) 37.5


Pre-tax Profit 18.4 20.6 19.8 7.5 (4.0)

Tax (3.2) (3.5) (3.7) 14.1 5.9


Net Profit 15.2 17.1 16.1 6.1 (6.1)

Net profit bef Except. 15.2 17.1 16.1 6.1 (6.1)

EBITDA 22.1 24.3 23.4 6.0 (3.6)

Margins (%)





Page 4

Company Guide

Sheng Siong Group


Critical Factors

Store expansion. Sheng Siong currently operates 43 stores (including at Loyang Point which is under renovation). Compared to the other local operators, it has scope to expand its store network, particularly in areas such as Serangoon, Hougang and Sengkang, where it has a small presence. Management targets to ultimately operate 50 stores island-wide. In the past six years, 0-8 stores were opened annually, largely a function of supply of HDB shop space available for tender and Sheng Siong’s ability to win the tenders. Sheng Siong mainly operates in HDB estates.

Gross margin expansion through better sales mix. The gross margin for fresh products is estimated to be >30%, and close to 20% for non-fresh grocery items. Sheng Siong’s product mix stands at approximately 40% fresh vs 60% non-fresh. We see headroom for its sales mix to improve to 50% for each as it skews its store offerings towards fresh products.

Mandai Distribution Centre to expand. The Mandai Distribution Centre allows Sheng Siong to perform direct sourcing and bulk handling. This effectively drives down input costs, resulting in cost savings and better margins. We estimate that the facility is currently running at only 90% of capacity and a new warehouse adjacent to the current one is expected to start construction in FY17F. It will be able to secure more suppliers and products to trade through the distribution centre to effectively enjoy more bulk handling and higher supplier rebates. Margins are expected to trend up as utilisation increases towards full capacity.

Margin expansion through direct sourcing. Sheng Siong is increasingly sourcing directly from suppliers such as farms instead of from middlemen. The company has the resources to place large orders, which is welcomed by producers.

Generating more same-store-sales growth (SSSG) to increase revenue. Sheng Siong has been able to maintain positive SSSG since 4Q13 (excluding 4Q15, 1Q16) through longer operating hours and renovation of older stores, offering the correct products and effective marketing. SSSG has been affected partly by the renovation of the Loyang store from 3Q16 to 1Q17. The SSSG would have been positive had the Loyang store performed similarly to the previous year and was not shut down for renovation. Maintaining positive SSSG will support earnings growth.

Kunming store in China to open in 2017. Its first store in Kunming (40,000 sqft) is expected to commence operations in 2017. Downside for the JV is limited to its US$6m paid-up capital, which is sufficient to open 2-3 new stores.

Rev per sqft

Operation Area (sqft)

Number of stores

SSSG (%)

Gross Margins (%)


1892 1848 1850 1816 1808

0.0

273.0

546.0

819.0

1092.0

1365.1

1638.1

1911.1

2015A 2016A 2017F 2018F 2019F

431000450000 455664

485664515664

0.0

105195.5

210390.9

315586.4

420781.8

525977.3

2015A 2016A 2017F 2018F 2019F

3942

4548

51

0.00

10.40

20.81

31.21

41.62

52.02

2015A 2016A 2017F 2018F 2019F

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Affected by SG50 promotion and discounting

Weak demand conditions, store renovations

3Q & 4Q would be negative 1.2% & 2.7% if include Loyang store renovation

22.0

22.5

23.0

23.5

24.0

24.5

25.0

25.5

26.0

26.5

27.0

1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17

Company Guide

Sheng Siong Group


Correlation of stock price to gross margin improvement is strong at 0.9

Source: DBS Bank

18

20

23

25

28

30

0.20

0.40

0.60

0.80

1.00

1.20

Aug

-11

Feb

-12

Aug

-12

Feb

-13

Aug

-13

Feb

-14

Aug

-14

Feb

-15

Aug

-15

Feb

-16

Aug

-16

Feb

-17

Gross margins (RHS) Share price (LHS)S$ %

Gross margins expanded from

20.8% to 23.2%

Gross margins expanded from

23.8% to 25.2%

Gross margins at all time high

of c.26%

Page 6

Company Guide

Sheng Siong Group

Balance Sheet:

Net cash of over S$70m or c.4 Scts per share. The excess cash allows for strategic store acquisitions if suitable real estate arises for it to expand its store presence in the future. The business generates positive working capital. Inventory is purchased on credit, and quickly turned into cash. Over the past seven years, the business has generated between S$20-75m of operating cashflow each year. Dividend payout is attractive at 90%. We expect this to be maintained as long as there is no significant requirement for cash funding.


Strong earnings growth performance. Sheng Siong’s financial performance has consistently met our expectations, delivering earnings growth (5-year CAGR of 18.1% since FY11) through a combination of margin expansion, store growth and SSSG. We believe continued delivery of consistent performance and profit growth will support a strong share price.

China to be a wildcard. We believe Sheng Siong’s JV in China is a wildcard. If operations prove to be successful, in time to come, China can provide an alternate source of growth. There is scope for the number of stores to increase should Sheng Siong’s business model work. Downside remains limited to US$6m for now should the JV fail.

Key Risks:

Revenue growth limited by store openings. Store expansion in Singapore is largely dependent on the supply of new supermarket retail space released by HDB and its ability to secure the tenders.

Excessive discounts and promotions may erode margins. Heavier discounts and promotions vis-a-vis competitors would drive sales revenue, but this could be gained at the expense of margins.

Company Background

Sheng Siong is the third-largest supermarket operator in Singapore, behind NTUC Fairprice and Dairy Farm International.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


2.0

2.1

2.1

2.2

2.2

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2015A 2016A 2017F 2018F 2019F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2015A 2016A 2017F 2018F 2019F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015A 2016A 2017F 2018F 2019F

Avg: 20.5x

+1sd: 22.2x

+2sd: 23.8x

‐1sd: 18.8x

‐2sd: 17.2x

15.4

17.4

19.4

21.4

23.4

25.4

27.4

Jul-13 Jul-14 Jul-15 Jul-16

(x)

Avg: 5.36x

+1sd: 5.88x

+2sd: 6.41x

‐1sd: 4.83x

‐2sd: 4.31x

3.8

4.3

4.8

5.3

5.8

6.3

6.8

7.3

Jul-13 Jul-14 Jul-15 Jul-16

(x)

Company Guide

Sheng Siong Group

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F

Rev per sqft 1,892 1,848 1,850 1,816 1,808 Operation Area (sqft) 431,000 450,000 455,664 485,664 515,664 Number of stores 39.0 42.0 45.0 48.0 51.0

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F

Revenues (S$m)

Singapore 764 797 807 828 878

Total 764 797 807 828 878Operating profit (S$m) Singapore 57.2 65.1 70.3 76.7 84.3

Total 57.2 65.1 70.3 76.7 84.3Operating profit Margins

Singapore 7.5 8.2 8.7 9.3 9.6

Total 7.5 8.2 8.7 9.3 9.6


FY Dec 2015A 2016A 2017F 2018F 2019F

Revenue 764 797 807 828 878 Cost of Goods Sold (576) (592) (597) (610) (645) Gross Profit 189 205 210 218 233Other Opng (Exp)/Inc (132) (140) (140) (141) (148) Operating Profit 57.2 65.1 70.3 76.7 84.3Other Non Opg (Exp)/Inc 9.26 10.5 9.53 9.60 7.20 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 1.22 0.57 0.64 0.58 0.78 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 67.7 76.2 80.4 86.8 92.2Tax (10.9) (13.5) (13.7) (14.8) (15.7) Minority Interest 0.0 0.0 0.0 (0.1) (0.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 56.8 62.7 66.8 72.0 76.5Net Profit before Except. 56.8 62.7 66.8 72.0 76.5 EBITDA 70.6 80.0 85.4 92.2 101 Growth

Revenue Gth (%) 5.3 4.2 1.3 2.5 6.1EBITDA Gth (%) 12.1 13.3 6.7 7.9 9.3Opg Profit Gth (%) 9.7 13.7 8.0 9.1 9.9 Net Profit Gth (Pre-ex) (%) 20.8 10.4 6.5 7.8 6.2 Margins & Ratio

Gross Margins (%) 24.7 25.7 26.0 26.3 26.5Opg Profit Margin (%) 7.5 8.2 8.7 9.3 9.6Net Profit Margin (%) 7.4 7.9 8.3 8.7 8.7ROAE (%) 23.6 25.3 26.1 27.4 28.3ROA (%) 15.9 16.6 17.3 18.0 18.1ROCE (%) 19.8 21.3 22.4 23.8 25.4Div Payout Ratio (%) 92.7 89.9 89.9 89.9 89.9Net Interest Cover (x) NM NM NM NM NM


Page 8

Company Guide

Sheng Siong Group


FY Dec 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017

Revenue 189 202 197 217 202Cost of Goods Sold (139) (150) (145) (163) (148)Gross Profit 49.4 52.5 51.8 54.3 53.5Other Oper. (Exp)/Inc (33.3) (35.6) (35.3) (36.3) (35.6)Operating Profit 16.0 16.9 16.5 18.0 17.9Other Non Opg (Exp)/Inc 2.14 2.21 2.37 2.53 1.80Associates & JV Inc 0.0 0.0 0.0 0.0 0.0Net Interest (Exp)/Inc 0.20 0.02 0.01 0.02 0.03Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0Pre-tax Profit 18.4 19.1 18.9 20.6 19.8Tax (3.2) (3.4) (3.5) (3.5) (3.7)Minority Interest 0.0 0.0 0.0 0.01 0.0Net Profit 15.2 15.7 15.4 17.1 16.1Net profit bef Except. 15.2 15.7 15.4 17.1 16.1EBITDA 22.1 22.8 22.6 24.3 23.4

Growth

Revenue Gth (%) (9.5) 7.2 (2.7) 10.2 (7.2)EBITDA Gth (%) (4.0) 3.3 (1.1) 7.7 (3.6) Opg Profit Gth (%) 2.5 5.2 (1.9) 9.0 (0.6) Net Profit Gth (Pre-ex) (%) (7.6) 3.3 (1.5) 11.0 (6.1) Margins

Gross Margins (%) 26.1 25.9 26.3 25.0 26.6Opg Profit Margins (%) 8.5 8.3 8.4 8.3 8.9Net Profit Margins (%) 8.0 7.7 7.8 7.9 8.0

Balance Sheet (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F

Net Fixed Assets 178 252 254 262 256 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 0.0 0.0 0.0 0.0 0.0 Cash & ST Invts 126 63.5 57.5 77.5 95.6 Inventory 52.5 61.9 61.3 62.6 66.2 Debtors 11.8 10.4 12.1 11.0 11.6 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 368 388 385 413 430

ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 109 118 108 127 135 Other Current Liab 12.6 13.0 13.7 14.8 15.7 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 2.24 2.45 2.45 2.45 2.45 Shareholder’s Equity 244 252 259 266 274 Minority Interests 0.0 2.79 2.79 2.89 2.99 Total Cap. & Liab. 368 388 385 413 430

Non-Cash Wkg. Capital (57.1) (58.3) (47.9) (68.5) (72.9)Net Cash/(Debt) 126 63.5 57.5 77.5 95.6Debtors Turn (avg days) 5.4 5.1 5.1 5.1 4.7 Creditors Turn (avg days) 66.4 71.5 70.6 72.1 76.1 Inventory Turn (avg days) 31.0 36.2 38.6 38.0 37.4 Asset Turnover (x) 2.1 2.1 2.1 2.1 2.1 Current Ratio (x) 1.6 1.0 1.1 1.1 1.2 Quick Ratio (x) 1.1 0.6 0.6 0.6 0.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/AZ-Score (X) 10.0 9.3 9.9 8.8 8.8


Company Guide

Sheng Siong Group


FY Dec 2015A 2016A 2017F 2018F 2019F

Pre-Tax Profit 67.7 76.2 80.4 86.8 92.2Dep. & Amort. 13.4 14.9 15.1 15.5 16.4Tax Paid (10.7) (12.6) (13.0) (13.7) (14.8) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0Chg in Wkg.Cap. 2.54 0.77 (11.0) 19.5 3.50Other Operating CF 0.52 (1.2) 0.0 0.0 0.0Net Operating CF 73.5 78.1 71.5 108 97.4Capital Exp.(net) (30.4) (89.3) (17.5) (23.5) (10.5) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0Other Investing CF 1.22 0.57 0.0 0.0 0.0Net Investing CF (29.2) (88.7) (17.5) (23.5) (10.5) Div Paid (48.9) (54.8) (60.0) (64.7) (68.7) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0Other Financing CF 0.0 2.59 0.0 0.0 0.0Net Financing CF (48.9) (52.2) (60.0) (64.7) (68.7) Currency Adjustments 0.04 0.40 0.0 0.0 0.0Chg in Cash (4.5) (62.4) (6.0) 20.0 18.2Opg CFPS (S cts) 4.72 5.14 5.49 5.90 6.25Free CFPS (S cts) 2.86 (0.7) 3.59 5.63 5.78



Source: DBS Bank

Analyst: Alfie YEO

Andy SIM CFA

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 27 Jul 16 0.99 1.09 BUY

2: 29 Aug 16 1.05 1.09 BUY

3: 26 Sep 16 1.08 1.09 BUY

4: 29 Sep 16 1.07 1.18 BUY

5: 04 Oct 16 1.08 1.18 BUY

6: 27 Oct 16 1.07 1.19 BUY

7: 24 Feb 17 0.96 1.13 BUY

8: 17 Mar 17 0.94 1.13 BUY

9: 10 Apr 17 0.98 1.13 BUY

10: 02 May 17 0.98 1.14 BUY

11: 20 Jun 17 0.98 1.20 BUY12: 03 Jul 17 1.00 1.20 BUY13: 10 Jul 17 0.99 1.20 BUY14: 18 Jul 17 0.99 1.20 BUY


1

2 3

4

5

6

7

8 9

10

11

12

13

14

0.86

0.91

0.96

1.01

1.06

1.11

1.16

Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17

S$

Page 10

Company Guide

Sheng Siong Group








Completed Date: 28 Jul 2017 08:58:33 (SGT) Dissemination Date: 28 Jul 2017 09:16:22 (SGT)







































Company Guide

Sheng Siong Group



in market-making.














DBS Group.


1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have a

proprietary position in Sheng Siong Group recommended in this report as of 30 June 2017.


Report.













ed: TH / sa:DT, PY, CS

BUY Last Traded Price ( 22 Feb 2018): S$1.93 (STI : 3,488.46) Price Target 12-mth: S$2.70 (40% upside) Analyst Carmen Tay +65 6682 3719 [email protected]

What’s New • 4Q17 earnings of c.S$7.7m impacted by forex but core

growth momentum (+32.9% to S$10.6m) remains firm

• YTD declines in USD/MYR and USD/CNY imply that forex headwinds may extend into 1Q18

• Ahead of the ramp-up in Penang, the promise of a higher dividend for FY17 (and potentially higher payout in FY18F) should provide some support for the stock

• Maintain BUY with TP of S$2.70

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2016A 2017A 2018F 2019F Revenue 684 725 758 787 EBITDA 73.6 72.4 85.3 89.9 Pre-tax Profit 47.2 39.4 49.3 52.4 Net Profit 39.1 31.4 39.2 41.8 Net Pft (Pre Ex.) 31.7 31.4 39.2 41.8 Net Pft Gth (Pre-ex) (%) 34.2 (1.0) 25.1 6.5 EPS (S cts) 20.9 16.7 20.7 22.1 EPS Pre Ex. (S cts) 16.9 16.7 20.7 22.1 EPS Gth Pre Ex (%) 33 (2) 24 6 Diluted EPS (S cts) 20.5 16.4 20.6 21.9 Net DPS (S cts) 6.00 7.00 7.50 7.50 BV Per Share (S cts) 188 195 207 221 PE (X) 9.2 11.6 9.3 8.7 PE Pre Ex. (X) 11.4 11.6 9.3 8.7 P/Cash Flow (X) 6.8 10.0 4.0 5.2 EV/EBITDA (X) 4.7 5.0 3.8 3.3 Net Div Yield (%) 3.1 3.6 3.9 3.9 P/Book Value (X) 1.0 1.0 0.9 0.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.5 8.7 10.4 10.3 Earnings Rev (%): - - Consensus EPS (S cts): 21.3 23.5 Other Broker Recs: B: 3 S: 0 H: 0


A dividend growth play

4Q17 performance trends broadly similar to 3Q; dividends raised for FY17. Broad trends observed in 3Q17 extended into 4Q. Notwithstanding ongoing currency headwinds, Sunningdale’s top- and bottom-line performance held relatively steady q-o-q, in line with our expectations. Notably, the group saw record Automotive sales of c.S$67.7m. Contributions from Mould Fabrication were also sustained at higher levels, which may have positive implications for the group as some of these projects could be converted into commercial contracts for the group later on.

Overall, we like Sunningdale for its strong business fundamentals and as a dividend growth play. Sunningdale has paid increasing dividends over the last six years, from 3 Scts in FY12 to 7 Scts for FY17. Backed by strong core growth, operating cash flows and lower capex needs, we believe dividends could further rise to 7.5 Scts (or higher) in FY18F.

Where we differ: We believe that Sunningdale’s world-class engineering capabilities, global presence and diversification are underappreciated, and the stock deserves to at least trade at the global average valuation of 13x FY18F PE vs consensus’ average of 11x.

Potential catalysts: Sunningdale’s share price should re-rate as it delivers steady earnings growth or value-accretive acquisitions.

Positive underlying trends and strong fundamentals underpin steady growth outlook. Sunningdale has delivered consistent margin improvements and growth over the last few years. Ahead, several underlying trends such as (1) the broad-based substitution of metallic with plastic components in a wide range of industrial applications, and (2) favourable demand outlook across the group’s three key end-sectors, indicate longer-term potential.

As the group grows capacity, ramps up production and strengthens business development efforts to ride these positive trends and unlock greater economies of scale, we project core earnings to grow at an 15% CAGR over FY16-18F.

Valuation: Maintain BUY with a TP of S$2.70, based on 13x FY18F PE. Offering a lower risk-reward profile vs local peers and higher growth vs the bigger boys in the US, our TP at S$2.70, which is based on global average of 13x FY18F PE, is fair.

Key Risks to Our View: Global economic slowdown could pose significant challenges to Sunningdale, especially in Consumer/IT and Automotive.

At A Glance Issued Capital (m shrs) 189 Mkt. Cap (S$m/US$m) 365 / 276 Major Shareholders (%) Boon Hwee Koh 15.9 Yarwood Engineering And Trading 8.1 Goi Seng Hui 8.1

Free Float (%) 64.3 3m Avg. Daily Val (US$m) 0.93 ICB Industry : Industrials / Electronic & Electrical Equipment


22 Feb 2018


Sunningdale Tech Ltd Version 3 | Bloomberg: SUNN SP | Reuters: SUND.SI Refer to important disclosures at the end of this report

Company Guide

Sunningdale Tech Ltd

WHAT’S NEW

4Q17 impacted by currency volatility but core growth momentum remains strong

4Q17 results in line. Sunningdale’s sales momentum was sustained in 4Q17, with top line coming in at c.S$187m (vs S$188.1m delivered in 3Q17). Notably, the company saw a record contribution of c.S$67.7m from the Automotive segment, which represented c.36% of consolidated revenues. Notwithstanding lower q-o-q contributions in 4Q17, mainly due to the advancement of orders to earlier quarters, Consumer/IT remained the key source of revenues of the group at c.38% of sales.

Earnings also held steady at c.S$7.7m (essentially flat q-o-q) despite volatile foreign exchange environments for the USD/MYR and USD/CNY, which resulted in foreign exchange losses of c.S$2.8m. Over the quarter, we observe that the USD/MYR and USD/CNY fell by 3.7% and 2.3% respectively.

Barring the currency impact, core growth momentum was otherwise strong, and we estimate that core earnings would have been c.38% higher, closer to S$10.6m:

4Q16 3Q17 4Q17 %Chg

(QoQ)

%Chg

(YoY)

Sales 184.1 188.1 187.0 (0.6%) 1.6%

Net Profit 21.5 7.7 7.7 0.4% (64%)

% Net Margin 11.7% 4.1% 4.1%

Forex Loss (Gain) (8.4) 3.1 2.8

Disposal Loss

(Gain) (5.1)

Adj. Net Profit 7.9 10.8 10.6 (2.4%) 32.9%

% Net Margin 4.3% 5.7% 5.6%


Brace for further forex weakness in upcoming 1Q18 as declines in main currency pairs imply that forex headwinds may extend into 1Q18.

Stronger growth to kick in from 2Q18 onwards. With the Penang plant set to kick in from 2Q18, we anticipate a gradual ramp-up in new projects and sales. We also view the high, sustained contributions from Mould Fabrication (for the second consecutive quarter since 3Q17) positively as history suggests that some of these projects could be converted into commercial contracts for the group later on.

Ahead of the ramp-up in Penang, the promise of a higher dividend for FY17 should provide support for the stock. Subsequent to the group’s inaugural 2.5-Sct dividend for 1H17, a final 4.5-Sct dividend has also been proposed, bringing payout for FY17 to 7 Scts per share.

Supported by steady operating cash flows, Sunningdale’s dividend payout has been on a rising trend, and compared to local small-cap peers, stands out as a dividend growth play:

FY12 FY13 FY14 FY15 FY16 FY17

DPS

(S cts)

3.0 3.5 4.0 5.0 6.0 7.0


Maintain BUY with TP of S$2.70. Our earnings projections and recommendation remain largely unchanged as expectations of higher growth in FY18F are largely offset by higher assumed tax rates of c.20% vs c.17% previously.

Company Guide




Revenue 184 188 187 1.6 (0.6)

Cost of Goods Sold (159) (161) (162) 1.9 0.5

Gross Profit 25.1 27.0 25.0 (0.2) (7.1)


Operating Profit 8.29 9.55 7.26 (12.4) (24.0)

Other Non Opg (Exp)/Inc 15.8 1.03 1.69 (89.3) 63.9


Net Interest (Exp)/Inc (0.6) (0.8) (0.8) (31.8) 3.9


Pre-tax Profit 23.8 10.1 8.70 (63.4) (13.7)

Tax (2.3) (2.4) (1.0) (57.7) (59.6)


Net Profit 21.5 7.72 7.75 (64.0) 0.4


EBITDA 31.5 17.9 16.5 (47.7) (7.9)

Margins (%)





Company Guide


Critical Factors Beneficiary of the broad-based substitution for functional plastics in the Automotive, Consumer/IT and Healthcare sectors. Owing to improved plastic material properties (i.e. strength and durability) and higher cost efficiency, precision plastic components are increasingly replacing their metal counterparts in a wide range of industrial applications – particularly in the automotive, consumer goods and healthcare sectors.

Factors Driving Adoption of Plastic (vs Metal) Components End-use Industries

Drivers

Automotive Government regulations to reduce the weight of vehicles to reduce harmful emissions

Consumer Goods

Popularity of consumer wearables with the emergence of cloud computing and Internet of Things (IoT) technologies, thus stimulating demand for plastics in electronic components

Replacement of metal with plastic (which are cheaper) components to boost profit margins

Healthcare New technologies (i.e. antimicrobial plastic) are purportedly able to repel bacteria on surfaces

Plastic devices are cheaper to use and easier to replace

Source: DBS Bank

Additionally, the underlying demand outlook across the above end-sectors is also positive and industry experts have forecast these to grow at high single-digit to low double-digit levels per annum into 2020. Riding on these trends, we project Sunningdale’s top line to grow at a steady 4.2% CAGR over FY17-19F.

Raising capacity. While most of the industry players are focused on managing costs amid the challenging business climate, Sunningdale is one of few precision engineering companies that continues to actively invest in future growth.

In anticipation of the group’s medium- to longer-term capacity requirements, Sunningdale is constructing a new facility in Penang (Malaysia), which is near the operations of a number of Fortune 500 companies and on track for completion by end-1Q18 and ramp-up from 2Q18. As plant utilisation at newer facilities (i.e. Chuzhou and Thailand) remains low, there is room for Sunningdale to add capacity at these sites progressively alongside order growth.

Steady margin expansion to drive sustainable growth. Apart from its global presence and manufacturing strengths, we also like Sunningdale for its proven ability to consistently deliver and its steadily improving margins. Strategies the group can employ to deliver sustainable growth include:

(i) Development or acquisition of new engineering capabilities, (ii) Higher-margin sales mix, (iii) Productivity improvements and cost advantages on growing scale, through resource optimisation and automation

Automotive Sales

Consumer/IT Sales

Healthcare Sales

Operating Margins (%)

Effective Tax Rate (%)


Company Guide



Historical Relationship Between Earnings Growth and Sunningdale’s Share Price

Source: DBS Bank, ThomsonReuters

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

0.2

0.25

0.3

0

0.5

1

1.5

2

2.5

1/2/2012 1/2/2013 1/2/2014 1/2/2015 1/2/2016 1/2/2017 1/2/2018

Last Price (LHS) T12M EPS (RHS)

Issues profit guidance due to impairment of

goodwill

Raised S$25m via private placement of 20% new shares to Yarwood Engineering and Mr Sam Goi, to finance potential organic and inorganic growth opportunities

that may arise in future

Proposed acquisition of precision plastic manufacturer, First

Engineering Limited

Proposed acquisition of Europe-based SKAN -tooling

Saw a 52.1% surge in earnings to

S$42.1m for FY15

Achieves core net profit growth of 34.1% for FY16; Share price also surges on

takeover potential

Correlation: +0.775

Company Guide


Balance Sheet: Low gearing. Still on growth mode, Sunningdale’s net cash position of S$1.6m (<1% of current market cap) as at end-4Q17 is much lower than local peers’ average of c.30%. Further, given low gearing of 0.28x as at end-4Q17, there remains room for Sunningdale to gear up for acquisitions if attractive opportunities arise.

Share Price Drivers: Growing on acquisitions. Sunningdale has made three acquisitions since 2010 – UFE in 2011, First Engineering in 2014 and SKAN-tooling in 2015. With cash of S$111m as at end-3Q17 and restructuring of its South China plant now complete, Sunningdale could be looking to acquire.

Judging from its earlier acquisitions, we believe that the group’s criteria for future M&As would likely include precision plastic players which provide access to (1) new geographies, (2) wider product offerings or capabilities within existing Automotive, Consumer/IT and Healthcare verticals, and (3) new clientele.

Takeover potential in the longer term. Sunningdale’s proven record of strong cash flow generation, healthy balance sheet with slight net cash of S$1.6m, and inexpensive valuations – the stock currently trades at undemanding valuations of c.1x P/BV and 9.5x FY18F PE (vs local peer average of 1.3x and 11x respectively) – could lead to a takeover offer.

Given the group’s advanced manufacturing capabilities, global manufacturing footprint and diversified MNC customer base, we see Sunningdale as an attractive takeover target for private equity (PE) funds or larger top-tier players in the precision plastic field looking to (1) acquire advanced manufacturing capabilities, (2) have global manufacturing facilities, or (3) gain immediate access to a diversified MNC customer base.

Key Risks: Global economic slowdown. With exposure across some of the world’s main manufacturing regions, a global economic slowdown could pose significant challenges to Sunningdale as several of its industry segments such as Consumer/IT and Automotive are sensitive to fluctuations in the global economy.

Fluctuations in raw material costs. Key raw materials for Sunningdale are resin and engineering plastics, which typically represent c.50% of COGS. Despite cost-plus arrangements, volatility in raw material prices can still weigh on earnings.

Managing currency exposures. Due to its wide geographical presence and broad client base, Sunningdale transacts in various currencies such as USD, RMB, and MYR but reports in SGD. The largest currency exposure is to the USD, which we estimate represents approximately 40% of the group’s revenue.

Company Background Sunningdale (SUNN SP) provides one-stop turnkey plastic solutions, with capabilities ranging from product and mould designs, fabrication, injection moulding, micro-precision engineering, finishings, through to the precision assembly of complete products. The group is mainly focused on three sectors - Automotive, Consumer/IT and Healthcare.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Company Guide


Key Assumptions

FY Dec 2015A 2016A 2017A 2018F 2019F

Automotive Sales 219 245 264 282 299 Consumer/IT Sales 269 273 285 293 299 Healthcare Sales 49.8 48.5 51.7 55.8 60.8 Operating Margins (%) 4.15 4.40 4.96 5.95 6.15 Effective Tax Rate (%) 1.70 17.3 20.3 20.3 20.3


FY Dec 2015A 2016A 2017A 2018F 2019F

Revenue 674 684 725 758 787 Cost of Goods Sold (584) (590) (619) (644) (668) Gross Profit 90.8 94.3 106 114 119 Other Opng (Exp)/Inc (62.8) (64.2) (69.6) (69.4) (70.5) Operating Profit 28.0 30.1 36.0 45.1 48.4 Other Non Opg (Exp)/Inc (1.2) 11.8 5.18 5.18 5.18 Associates & JV Inc 0.90 0.94 1.22 1.41 1.48 Net Interest (Exp)/Inc (3.4) (3.0) (3.0) (2.4) (2.6) Exceptional Gain/(Loss) 18.5 7.40 0.0 0.0 0.0 Pre-tax Profit 42.8 47.2 39.4 49.3 52.4 Tax (0.7) (8.2) (8.0) (10.0) (10.7) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 42.1 39.1 31.4 39.2 41.8 Net Profit before Except. 23.6 31.7 31.4 39.2 41.8 EBITDA 61.1 73.6 72.4 85.3 89.9 Growth Revenue Gth (%) 41.8 1.5 5.9 4.6 3.8 EBITDA Gth (%) 21.1 20.4 (1.6) 17.7 5.4 Opg Profit Gth (%) 86.3 7.6 19.3 25.5 7.3 Net Profit Gth (Pre-ex) (%) (2.1) 34.2 (1.0) 25.1 6.5 Margins & Ratio Gross Margins (%) 13.5 13.8 14.6 15.1 15.1 Opg Profit Margin (%) 4.2 4.4 5.0 6.0 6.2 Net Profit Margin (%) 6.2 5.7 4.3 5.2 5.3 ROAE (%) 13.2 11.5 8.7 10.4 10.3 ROA (%) 7.0 6.2 4.7 5.7 5.8 ROCE (%) 4.4 6.2 6.0 7.5 7.6 Div Payout Ratio (%) 22.0 28.7 42.0 36.2 34.0 Net Interest Cover (x) 8.3 10.0 12.1 18.5 18.4


Company Guide



FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017

Revenue 184 172 178 188 187 Cost of Goods Sold (159) (146) (150) (161) (162) Gross Profit 25.1 25.9 27.7 27.0 25.0 Other Oper. (Exp)/Inc (16.8) (17.1) (17.3) (17.4) (17.8) Operating Profit 8.29 8.71 10.4 9.55 7.26 Other Non Opg (Exp)/Inc 15.8 1.60 0.86 1.03 1.69 Associates & JV Inc 0.22 0.18 0.21 0.31 0.53 Net Interest (Exp)/Inc (0.6) (0.7) (0.7) (0.8) (0.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 23.8 9.83 10.8 10.1 8.70 Tax (2.3) (2.1) (2.6) (2.4) (1.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 21.5 7.70 8.20 7.72 7.75 Net profit bef Except. 21.5 7.70 8.20 7.72 7.75 EBITDA 31.5 17.6 18.5 17.9 16.5

Growth Revenue Gth (%) 6.7 (6.7) 3.4 6.0 (0.6) EBITDA Gth (%) 50.1 (44.1) 5.0 (3.2) (7.9) Opg Profit Gth (%) (19.3) 5.1 19.6 (8.3) (24.0) Net Profit Gth (Pre-ex) (%) 111.1 (64.2) 6.5 (5.9) 0.4 Margins Gross Margins (%) 13.6 15.0 15.6 14.3 13.4 Opg Profit Margins (%) 4.5 5.1 5.9 5.1 3.9 Net Profit Margins (%) 11.7 4.5 4.6 4.1 4.1

Balance Sheet (S$m) FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 187 192 194 196 197 Invts in Associates & JVs 5.54 5.27 6.08 7.34 8.68 Other LT Assets 20.8 19.4 19.7 18.7 17.7 Cash & ST Invts 121 115 105 148 169 Inventory 106 115 146 121 125 Debtors 168 194 212 201 208 Other Current Assets 4.36 7.68 5.48 5.48 5.48 Total Assets 613 649 688 697 732

ST Debt 74.0 67.6 60.8 60.8 60.8 Creditor 150 184 206 182 189 Other Current Liab 2.25 3.93 2.69 10.0 10.7 LT Debt 46.0 32.2 42.9 42.9 42.9 Other LT Liabilities 9.58 9.63 9.74 9.74 9.74 Shareholder’s Equity 331 351 366 391 419 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 613 649 688 697 732

Non-Cash Wkg. Capital 126 129 155 134 139 Net Cash/(Debt) 1.11 15.5 1.60 44.1 65.5 Debtors Turn (avg days) 88.3 96.6 102.3 99.3 94.9 Creditors Turn (avg days) 75.7 109.1 120.8 116.2 107.1 Inventory Turn (avg days) 71.5 72.2 80.9 79.8 70.8 Asset Turnover (x) 1.1 1.1 1.1 1.1 1.1 Current Ratio (x) 1.8 1.7 1.7 1.9 1.9 Quick Ratio (x) 1.3 1.2 1.2 1.4 1.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 20.0 28.8 29.9 33.8 33.8


Barring forex losses of c.S$2.8m, we estimate core earnings would have been closer to S$10.6m.

Company Guide



FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 42.8 47.2 39.4 49.3 52.4 Dep. & Amort. 33.5 30.8 30.1 33.6 34.9 Tax Paid (2.5) (6.2) (9.7) (2.7) (10.0) Assoc. & JV Inc/(loss) (0.9) (0.9) (1.2) (1.4) (1.5) Chg in Wkg.Cap. (3.1) (10.8) (27.1) 12.8 (5.3) Other Operating CF (2.3) (7.3) 4.87 0.0 0.0 Net Operating CF 67.4 52.8 36.3 91.5 70.5 Capital Exp.(net) (24.0) (28.8) (31.0) (35.0) (35.0) Other Invts.(net) 0.0 0.0 (1.4) 0.0 0.0 Invts in Assoc. & JV (1.2) 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.76 1.08 0.14 0.14 0.14 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (24.4) (27.7) (32.3) (34.9) (34.9) Div Paid (7.4) (9.3) (16.0) (14.2) (14.2) Chg in Gross Debt (18.3) (21.2) 5.15 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.71 (0.5) (3.2) 0.0 0.0 Net Financing CF (25.0) (31.0) (14.0) (14.2) (14.2) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 18.0 (5.9) (10.0) 42.5 21.4 Opg CFPS (S cts) 38.0 34.1 33.7 41.6 40.1 Free CFPS (S cts) 23.4 12.9 2.82 29.9 18.7



Source: DBS Bank Analyst: Carmen Tay

Company Guide
















































Company Guide




in market-making.














DBS Group.





Report.













ed: TH / sa: SM, PY, CS



Analyst Carmen Tay +65 6682 3719 [email protected]

What’s New • UMS delivers record 4Q17 profits of S$15.8m on firm

growth momentum and positive one-off effects

• Enlarged Penang facility ready for the ramp; plans to

bring on additional capacity signals optimism over

longer-term growth prospects

• Cost savings should more than offset ASP reduction to

drive earnings growth over FY17-19F

• Maintain BUY with higher TP of S$1.37; attractive

5.3% yield also on offer

Price Relative


Revenue 104 162 179 188 EBITDA 30.0 59.6 68.9 72.2 Pre-tax Profit 24.7 55.2 61.9 65.0 Net Profit 22.6 52.0 58.1 61.0 Net Pft (Pre Ex.) 22.6 52.0 58.1 61.0 Net Pft Gth (Pre-ex) (%) (34.1) 130.3 11.6 5.0 EPS (S cts) 5.26 9.70 10.8 11.4 EPS Pre Ex. (S cts) 5.26 9.70 10.8 11.4 EPS Gth Pre Ex (%) (34) 84 12 5 Diluted EPS (S cts) 5.26 9.70 10.8 11.4 Net DPS (S cts) 6.00 5.60 6.00 6.00 BV Per Share (S cts) 44.2 40.1 44.9 50.3 PE (X) 21.7 11.8 10.5 10.0 PE Pre Ex. (X) 21.7 11.8 10.5 10.0 P/Cash Flow (X) 14.4 15.6 8.1 8.6 EV/EBITDA (X) 14.9 9.6 7.8 7.0 Net Div Yield (%) 5.3 4.9 5.3 5.3 P/Book Value (X) 2.6 2.8 2.5 2.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.8 25.7 25.5 23.9

Earnings Rev (%): 8 6 Consensus EPS (S cts): 9.80 9.90 Other Broker Recs: B: 2 S: 0 H: 0


Beneficiary of Applied Materials’s strong growth

Maintain BUY with higher TP of S$1.35; front-end semiconductor

equipment play offering growth and attractive c.6% yield. UMS

Holdings (UMS) has partnered closely with Applied Materials for more

than a decade. Notably, despite its exposure to a cyclical industry,

UMS’s earnings have been less volatile since it was awarded the Endura

contract in 2010. The company also stands out for its strong cash flow

(even after paying dividends) generation capabilities and consistent

dividends, thus offering both yield and growth.

Firm momentum and one-off gains/writebacks took UMS’s 4Q17

earnings to a record S$15.8m. Entering into 2018, growth will mainly

be supported by a ramp-up in its higher-margin Components business

and cost benefits arising from its shift to Penang. With imminent cost

savings set to offset the impact of lower ASPs, we raise our earnings

projections slightly by 6-8% for FY18-19F and roll forward our earnings

base to FY19F to arrive at a higher TP of S$1.37. Maintain BUY.

Where we differ: We have assumed a larger discount to larger peers’

15x FY18F PE compared to consensus given its higher customer

concentration risk vs peers.

Potential catalysts: Higher demand for semiconductor equipment,

diversification away from key client, earnings-accretive M&As

Positive outlook for key client Applied Materials augurs well for UMS.

SEMI predicts that global fab equipment spending could reach industry

all-time highs of over US$60.1bn in 2018. Reports by Applied Materials

also imply robust demand and a CAGR of c.10% into FY20F. This

augurs well for UMS given its primary role in the manufacture of

components for various semiconductor equipment and that it handles

c.70% of manufacturing and assembly for Applied Materials’s Endura

deposition system – especially given the successful extension of the

Endura contract.

Valuation:

Maintain BUY with higher TP of S$1.37, which is based on 12x (or 11x

ex-cash PE) FY18F PE, at a discount to larger peers’ 15x. An attractive

prospective yield of over 5% is on offer.


Key client risk. Historically, c.90% of UMS’s revenues on average can be

attributed to Applied Materials. Disruptions to the relationship or

weakness in Applied Materials’s end demand could significantly weigh

on UMS’s performance.


Mkt. Cap (S$m/US$m) 612 / 462


Andy Luong 20.1

Free Float (%) 79.9


ICB Industry : Industrials / Electronic & Electrical Equipment



UMS Holdings Version 10 | Bloomberg: UMSH SP | Reuters: UMSH.SI Refer to important disclosures at the end of this report

74

124

174

224

274

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3


Relative IndexS$

UMS Holdings (LHS) Relative STI (RHS)

Company Guide

UMS Holdings

WHAT’S NEW

FY17 a record year for UMS

New earnings record; 4Q17 slightly above on several one-

offs . UMS’s strong 3Q17 momentum was sustained into

4Q. Sales remained stable at c.S$38.7m (vs S$39.3 in 3Q), as

the sequential decline in contributions from Semiconductor

Integrated Systems (-10.3% q-o-q to S$18.2m on the back

of lower Endura shipments) were partly offset by stronger

contributions (+1.4% to c.S$19.3m) from the higher-margin

Components business. With contributions from the two key

segments holding relatively steady q-o-q, gross material

margins were thus maintained at c.58.3% in 4Q17, similar

to c.58.8% in 3Q.

Meanwhile, earnings came in slightly above as one-off

disposal gains and writebacks more than offset the impact

of forex losses and higher personnel costs to provide an

added boost to earnings. Stripping out nearly c.S$3.4m in

one-offs, FY17 PATMI would otherwise have been in line at

c.S$48.6m vs our forecast of S$47.9m (+1.1%):

FY17 S$ m

PATMI 52.0

Loss (Gain) on Disposal of

Old Equipment

(1.8)

Inventory Provision Write

Back (Down)

(1.1)

Tax Overprovision Write

Back (Down)

(0.5)

Adjusted PATMI 48.6

UMS could benefit from Applied Materials’s double-digit

growth in 2018. SEMI recently raised its projections for

global semiconductor manufacturing equipment sales in

2018, which it believes will grow by 7.5% to a record

US$60.1bn, compared to US$58bn previously. Separately,

SEMI also highlighted vast potential in China’s growing chip

market and predicts that the planned/ongoing construction

of 24 new fab projects across China alone could prompt

over US$11bn of investments in new wafer fab equipment

in 2018, and potentially surpass US$18bn by 2020.

Applied Materials also maintained its positive guidance

during its 4Q17 results in November, reiterating expectations

of double-digit revenue and profit growth in 2018.

Underlying demand trends also support Applied Materials’

rosy outlook, particularly (i) ongoing capacity additions to

meet growing demand for sensors and IoT devices, and (ii)

demand shifts from lithography to materials deposition and

removal arising from the transition to 3D memory.

Cost savings to more than offset ASP reduction, driving

earnings CAGR of 8.8% over FY17-19F; upside from further

order wins. Capacity utilisation for UMS’s Semiconductor

Integrated Systems (Endura) and Components businesses

currently stands at >90% and c.65% respectively. UMS is

also in the midst of bringing in new machines, which would

effectively raise capacity for Endura by c.30% by mid-2018,

which signals the company’s optimism over long-term

growth prospects.

Guiding for strong order flow with its key customer,

utilisation should improve as UMS ramps up progressively in

subsequent quarters. Following the completion of its shift to

Penang, UMS is also poised to reap substantial cost benefits,

which should kick in from FY18F.

While ASPs could trend lower as some of its operating cost

and tax savings are passed through to its key client, we

would argue that the improved pricing competitiveness

bodes well for further order wins as it signals UMS’s

willingness to sacrifice some margins in favour of volume

growth.

Proposed 3-Sct final dividend. UMS also proposed a 3-Sct

interim dividend to be paid on 25 May 2018, bringing total

dividends paid up c.17% from 6 Scts (pre bonus issue)/4.8

Scts (post bonus issue) per share in FY16 to 7 Scts/5.6 Scts in

FY17.

Similar to previous years, UMS is likely to maintain a 6-Sct

payout in FY18F, which represents an attractive prospective

yield of at least 5.3%.

Maintain BUY with higher TP of S$1.37 as we raise our

earnings projections slightly by 6-8% for FY18-19F to factor

in higher cost savings, and roll forward our earnings base to

FY19F.

Company Guide

UMS Holdings



Revenue 34.2 39.3 38.7 13.2 (1.7)


Gross Profit 15.6 23.1 22.5 44.4 (2.5)


Operating Profit 8.67 15.2 13.3 52.9 (13.0)

Other Non Opg (Exp)/Inc (2.5) (0.4) 2.18 nm (703.3)


Net Interest (Exp)/Inc 0.06 0.0 0.0 nm nm


Pre-tax Profit 6.23 14.9 15.4 147.2 3.6

Tax (0.3) (1.5) 0.46 (268.0) (131.3)

Minority Interest 0.0 0.16 0.0 nm nm

Net Profit 5.96 13.6 15.8 165.7 16.7


EBITDA 7.32 15.9 16.5 124.7 3.6

Margins (%)





Company Guide

UMS Holdings


Critical Factors

Higher fab equipment spending. As procurement of semiconductor

equipment tends to lag construction of new fabs/facilities by

chipmakers and foundries by 12-18 months, we believe that the new

construction of new 300mm fabs in 2015 and 2016 provides support

for more robust growth in equipment spending in 2017 and 2018.

The pick-up in key client Applied Materials’s and UMS’s orders in

recent quarters also confirm this.

Similarly, SEMI also predicts that fab equipment spending will reach

an industry all-time record of US$60.1bn in 2018.

Riding on Applied Materials’s positive outlook; following firm

recovery, earnings could further grow at 8.3% CAGR over FY17-19F.

As a long-standing manufacturing partner to Applied Materials in the

manufacture of components for various semiconductor equipment,

and as the main manufacturer and sub-assembler of Applied

Materials’s flagship Endura deposition system, UMS naturally benefits

from the uplift in demand for Applied Materials’s higher-tech wafer

fabrication equipment.

Benefitting from the current semiconductor upcycle and recovering

strongly from the trough in FY16, UMS’s earnings grew c.30% y-o-y

to S$52m in FY17, and is set to grow further as it ramps up on its

higher-margin components business, and as cost and tax savings

arising from its Penang shift kicks in.

Strong cash flow generation underpins expectations of dividend of 6

Scts per share for FY17F. Despite operating in a highly cyclical

industry, the group’s strengths lie in its stable cash flow (even after

paying dividends) generation. Coupled with the current uptick in

orders and strong net cash position of c.8 Scts per share, allows the

group to finance upcoming capex needs internally, while providing

support for a 6-Sct dividend to be paid.

In the longer term, UMS’s diversification into other businesses could

also bear fruit. In 2017, UMS acquired a 51% stake in water and

chemical engineering solutions company, Kalf Engineering. Kalf has

secured seven projects worth approximately S$13m, which is

expected to contribute to the group’s performance in FY18F.

In 2016, the group also diversified into the aerospace components

via a 10% stake in All Star Fortress Sdn Bhd (ASF). While we think

that ASF is unlikely to be profitable within the next 2-3 years, risks

inherent in this diversification remains low given the small initial

investment. These investments should provide the group with

alternate growth opportunities in the medium-to-long term, and

provide diversification away from the cyclical semiconductor business.

Gross Profit (S$ m)

Revenue Growth (%)

Operating Profit Margin (%)

Effective Tax Rate (%)

Capex (S$ m)


66.9

56.4

88.9

97.4102

0.0

14.8

29.5

44.3

59.0

73.8

88.6

103.3

2015A 2016A 2017A 2018F 2019F

1.16

-6.2

55.9

10

5

-6.8

6.0

18.7

31.5

44.3

57.1

2015A 2016A 2017A 2018F 2019F

30.728.2

34.3 34.6 34.6

0.00

7.06

14.12

21.18

28.23

35.29

2015A 2016A 2017A 2018F 2019F

6.71

8.68

6.386.7 6.7

0.0

1.8

3.5

5.3

7.0

8.8

2015A 2016A 2017A 2018F 2019F

4.46

2.68

8.76

11

10

0.0

2.2

4.4

6.7

8.9

11.1

2015A 2016A 2017A 2018F 2019F

Company Guide

UMS Holdings


Strong historical share price correlation between UMS and key client, Applied Materials

Source: Company, Thomson Reuters, DBS Bank

Meanwhile, Applied Materials’ share price is largely driven by order book and earnings projections

Source: Company, Thomson Reuters, DBS Bank

Company Guide

UMS Holdings

Balance Sheet:

Healthy balance sheet. UMS’s net cash position has

strengthened significantly, and has more than doubled from

S$15.3m at end-FY12 to S$40.6m in 4Q17. All else constant,

our projections show that UMS should be able to fund margin-

accretive M&A opportunities, if any.


Acquisition of new clients. As part of its strategy, UMS has also

embarked on new customer acquisition efforts and is actively

seeking sustainable, margin-accretive opportunities outside of

the cyclical semiconductor industry.

If successful, this could accelerate earnings growth going

forward.

M&A opportunities. Following its recent 10% stake acquisition

in aerospace component manufacturer ASF, UMS continues to

be on the lookout for diversification opportunities (outside of

the semiconductor industry) with good long-term growth

potential. If successful, these new avenues of growth could

help drive further re-rating of the share price.

Potential takeover target. UMS only has one large shareholder

with a 20% stake. With the renewal of the Endura contract

providing good earnings visibility, consistently strong cash flows

and net cash of S$40.8m (and growing), we see UMS as an

attractive takeover target.

Key Risks:

Key client risk – Applied Materials. UMS's performance is

closely tied to that of Applied Materials. Management

estimates that between 80% and 90% of UMS’s revenues are

attributable to Applied Materials.

Disruptions to the relationship (i.e. loss of market share) or

weakness in Applied Materials’s end demand could

significantly weigh on UMS’s performance.

Underlying demand for semiconductor manufacturing

equipment. As demand for semiconductor manufacturing

equipment is largely driven by capex cycles of chipmakers and

foundries, an extension of the life cycle of existing systems or

slowdown in global economy could result in deferments in

their planned capital investments.

Company Background

UMS Holdings (UMSH SP) is an integrated OEM for front-end

semiconductor equipment manufacturing, providing both

component manufacturing and sub-assembly services, primarily

to key client, Applied Materials.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.4

0.5

0.5

0.6

0.6

0.7

0.7

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2015A 2016A 2017A 2018F 2019F


0.0

2.0

4.0

6.0

8.0

10.0

12.0

2015A 2016A 2017A 2018F 2019F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2015A 2016A 2017A 2018F 2019F

Avg: 6.8x

+1sd: 8.2x

+2sd: 9.5x

-1sd: 5.5x

-2sd: 4.1x3.7

4.7

5.7

6.7

7.7

8.7

9.7

10.7

11.7


(x)

Avg: 1.26x

+1sd: 1.8x

+2sd: 2.34x

-1sd: 0.72x

-2sd: 0.17x0.1

0.6

1.1

1.6

2.1

2.6

3.1


(x)

Company Guide

UMS Holdings

Key Assumptions

FY Dec 2015A 2016A 2017A 2018F 2019F

Gross Profit (S$ m) 66.9 56.4 88.9 97.4 102

Revenue Growth (%) 1.16 (6.2) 55.9 10.0 5.00 Operating Profit Margin (%)

30.7 28.2 34.3 34.6 34.6

Effective Tax Rate (%) 6.71 8.68 6.38 6.70 6.70

Capex (S$ m) 4.46 2.68 8.76 11.0 10.0


FY Dec 2015A 2016A 2017A 2018F 2019F

Revenue 111 104 162 179 188


Gross Profit 66.9 56.4 88.9 97.4 102



Other Non Opg (Exp)/Inc 2.51 (4.7) (0.4) (0.4) (0.4)


Net Interest (Exp)/Inc 0.13 0.15 0.0 0.48 0.52


Pre-tax Profit 36.8 24.7 55.2 61.9 65.0

Tax (2.5) (2.1) (3.5) (4.1) (4.4)



Net Profit 34.3 22.6 52.0 58.1 61.0


EBITDA 44.1 30.0 59.6 68.9 72.2

Growth

Revenue Gth (%) 1.2 (6.2) 55.9 10.0 5.0

EBITDA Gth (%) 24.5 (31.9) 98.4 15.7 4.8

Opg Profit Gth (%) 24.8 (14.0) 89.7 11.0 5.0

Net Profit Gth (Pre-ex) (%) 37.6 (34.1) 130.3 11.6 5.0

Margins & Ratio

Gross Margins (%) 60.2 54.1 54.7 54.5 54.5



ROAE (%) 17.8 11.8 25.7 25.5 23.9

ROA (%) 16.6 10.8 22.2 21.3 20.2

ROCE (%) 17.7 11.7 24.2 23.4 22.2

Div Payout Ratio (%) 75.1 114.0 57.7 55.4 52.7

Net Interest Cover (x) NM NM 55,695.0 NM NM


Company Guide

UMS Holdings


FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017

Revenue 34.2 41.8 42.7 39.3 38.7


Gross Profit 15.6 21.4 21.8 23.1 22.5



Other Non Opg (Exp)/Inc (2.5) (1.0) (1.2) (0.4) 2.18


Net Interest (Exp)/Inc 0.06 0.07 0.0 0.0 0.0


Pre-tax Profit 6.23 12.4 12.6 14.9 15.4

Tax (0.3) (1.3) (1.3) (1.5) 0.46


Net Profit 5.96 11.2 11.5 13.6 15.8


EBITDA 7.32 13.6 13.6 15.9 16.5

Growth

Revenue Gth (%) 30.9 22.3 2.3 (7.9) (1.7)

EBITDA Gth (%) (16.9) 85.9 0.2 16.4 3.6

Opg Profit Gth (%) 10.1 54.5 2.9 10.6 (13.0)

Net Profit Gth (Pre-ex) (%) (12.2) 87.5 2.8 18.1 16.8

Margins

Gross Margins (%) 45.7 51.4 51.1 58.8 58.3



Balance Sheet (S$m)

FY Dec 2015A 2016A 2017A 2018F 2019F

Net Fixed Assets 34.8 31.7 38.8 42.3 44.6


Other LT Assets 84.1 83.2 87.7 87.7 87.7

Cash & ST Invts 38.9 42.6 59.6 92.1 121

Inventory 37.4 31.7 49.6 40.1 37.4

Debtors 12.4 20.9 23.4 24.4 25.6


Total Assets 208 210 259 287 316

ST Debt 0.0 0.25 19.0 19.0 19.0

Creditor 9.76 16.6 18.1 19.1 20.1


LT Debt 0.0 0.0 0.0 0.0 0.0



Minority Interests 0.0 0.0 (1.3) (1.6) (2.0)

Total Cap. & Liab. 208 210 259 287 316


Net Cash/(Debt) 38.9 42.4 40.6 73.1 102




Asset Turnover (x) 0.5 0.5 0.7 0.7 0.6

Current Ratio (x) 7.6 5.0 3.3 3.7 4.2

Quick Ratio (x) 4.4 3.3 2.1 2.8 3.4



Capex to Debt (%) N/A 1,077.5 46.1 57.9 52.6

Z-Score (X) 22.7 14.9 15.2 15.2 14.4


Company Guide

UMS Holdings


FY Dec 2015A 2016A 2017A 2018F 2019F

Pre-Tax Profit 36.8 24.7 55.2 61.9 65.0

Dep. & Amort. 7.43 5.43 4.32 7.48 7.69

Tax Paid (2.8) (2.7) (2.1) (3.3) (4.1)

Assoc. & JV Inc/(loss) 0.0 0.05 0.04 0.0 0.0

Chg in Wkg.Cap. (4.9) 0.53 (18.4) 9.62 2.41

Other Operating CF (0.7) 5.79 0.02 0.0 0.0

Net Operating CF 35.8 33.9 39.2 75.7 71.0

Capital Exp.(net) (4.5) (2.7) (8.8) (11.0) (10.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 (0.9) (0.1) 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.12 0.14 (2.1) 0.0 0.0

Net Investing CF (4.3) (3.4) (11.0) (11.0) (10.0)

Div Paid (25.7) (25.7) (26.8) (32.2) (32.2)

Chg in Gross Debt 0.0 0.25 18.8 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 0.25 0.0 (0.4) 0.0 0.0

Net Financing CF (25.5) (25.5) (8.5) (32.2) (32.2)

Currency Adjustments (0.5) (1.3) (2.8) 0.0 0.0

Chg in Cash 5.39 3.69 17.0 32.5 28.8

Opg CFPS (S cts) 9.48 7.77 10.7 12.3 12.8

Free CFPS (S cts) 7.30 7.27 5.67 12.1 11.4



Source: DBS Bank

Analyst: Carmen Tay

S.No.Date of

Report

Closing

Price

12-mth

Target

Price

Rat ing

1: 01 Mar 17 0.54 0.58 BUY

2: 15 May 17 0.78 0.86 BUY

3: 23 May 17 0.90 1.07 BUY

4: 14 Aug 17 0.90 0.90 HOLD

5: 13 Nov 17 1.04 1.21 BUY


1

2 3

45

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20


S$

Company Guide

UMS Holdings















































Company Guide

UMS Holdings



in market-making.














DBS Group.





Report.













Market Focus

Page 11








Completed Date: 8 Mar 2018 17:20:04 (SGT) Dissemination Date: 8 Mar 2018 18:52:08 (SGT)

































Market Focus

Page 12









in market-making.














DBS Group.


1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have

proprietary positions in Sheng Siong, Manulife US Real Estate Inv, CDL Hospitality Trusts, CapitaLand recommended in this report as of 31 Jan

2018.


Report.

3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued

share capital in Manulife US Real Estate Inv, CDL Hospitality Trusts, recommended in this report as of 31 Jan 2018.

4. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, DBSV HK, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of

common equity securities of Manulife US Real Estate Inv, CDL Hospitality Trusts, as of 31 Jan 2018.



12 months for investment banking services from Cityneon Holdings, mm2 Asia, Chip Eng Seng Corporation, APAC Realty Limited, Manulife

US Real Estate Inv, CDL Hospitality Trusts, CapitaLand as of 31 Jan 2018.


securities for, mm2 Asia, Chip Eng Seng Corporation, APAC Realty Limited, Manulife US Real Estate Inv, CDL Hospitality Trusts, CapitaLand in

the past 12 months, as of 31 Jan 2018.





1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of

which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.


Market Focus

Page 13

Directorship/trustee interests

8. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 31 Dec 2017.

Disclosure of previous investment recommendation produced





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Market Focus

Page 14

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Market Focus

Page 15

DBS Regional Research Offices

HONG KONG DBS Vickers (Hong Kong) Ltd Contact: Paul Yong 18th Floor Man Yee Building 68 Des Voeux Road Central Central, Hong Kong Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong

MALAYSIA AllianceDBS Research Sdn Bhd Contact: Wong Ming Tek (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia. Tel.: 603 2604 3333 Fax: 603 2604 3921 e-mail: [email protected]

SINGAPORE DBS Bank Ltd Contact: Janice Chua 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: 62 21 3003 4900 Fax: 6221 3003 4943 e-mail: [email protected]

THAILAND DBS Vickers Securities (Thailand) Co Ltd Contact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 857 7831 Fax: 66 2 658 1269 e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

Singapore Market Focus SMC strategy...ed: TH / sa: AS, PY, CS DBS Group Research . Equity STI : 3,450.69 Analyst Lee Keng LING +65 6682 3703 Carmen Tay +65 6682 3719 [email protected]

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