Share
Bank of China – China
Results
• Results better than expectations. Bank of China (BOC) reported 2010 net profit of Rmb104.4b, up 29.2% yoy. This was 3% above our estimates and 5.5% above Bloomberg consensus estimates. Earnings were driven by robust qoq net interest margin (NIM) expansion, low credit costs resulting from a stable non-performing loan (NPL) balance and strong loan growth for the year. New loans for 4Q10 increased 1.9% qoq, or Rmb105.45b, while new deposits increased by Rmb44.7b, or 0.6% qoq, over 4Q10.
• NIM saw large qoq expansion on stronger loan pricing power. NIM for the full year was 2.07%, up 3bp yoy. For 4Q10, we estimate that NIM increased by 12bp qoq to 2.16%. We believe the strong qoq rise in NIM was driven by increased loan pricing power on renminbi loans and the recovery in margins for BOC’s forex business. NIM likely also benefitted from the two interest rate hikes during 4Q10.
• Asset quality remained stable. The NPL balance saw a minor decline over 4Q10 to Rmb62.47b. The NPL ratio remained steady at 1.10% and BOC’s coverage ratio saw a minor decline to 196.6%.
• Dividend payout cut to 37%. BOC declared a final dividend of HK$0.146/share, implying a payout ratio of 37%. This is consistent with expectations that banks will cut dividends in order to increase their internal generation of capital. However, BOC will continue to ensure that shareholders are rewarded by a rising DPS on an absolute basis.
• T1 CAR boosted to 10.09%. BOC’s T1 capital adequacy ratio (CAR) increased 10.09% following BOC’s Rmb60b rights issue during 4Q10. Total CAR was boosted to 12.58%.
• LLR/Loan ratio still below 2.50%. The loan loss reserve (LLR)/loan ratio for BOC was 2.17% as at end-10 at the group level and 2.45% for BOC’s mainland business. This was mostly a result of lower provision charges for BOC over 4Q10 as credit cost for the full year was only 30bp by our estimates. As systemically important banks (SIB) must comply with the 2.5% rule by end-13, this may force BOC to incur higher provision charges over the next two years relative to the other SIBs.
• Fees rose 18.4% yoy. Net fees and commissions rose 18.4% yoy to Rmb54.48b. The increase was largely driven by bank card fees, which grew 57.2% yoy. Non-interest related income totalled Rmb82.56b, accounting for 29.86% of operating income. This was down from noninterest related income accounting for 31.6% of operating income in 2009. This was due to the 22% yoy rise in net interest income, which had a greater contribution to BOC’s operating income.
• Minor migration of funds into time deposits. As of end-10, 48% of BOC’s deposits were in demand accounts and about 52% were in time deposits. The proportion of demand deposits slipped by 1ppt hoh from end-1H10 levels. We attribute this flow of funds to the greater magnitude of increase for benchmark time deposit rates. The rise in proportion of time deposits can also be due to the aggressive sales of high-yield shortterm wealth-management deposits towards end-10. When examining the maturity profile of BOC’s deposits, it can be observed that deposit maturity within 1-3 months saw the greatest absolute amount of increase (about Rmb61b).
Stock Impact
• Solid earnings to kick off reporting season for banks. BOC reported a solid set of results, and while the numbers were mostly as expected, the stronger-than-expected NIM expansion was a pleasant surprise. We believe BOC’s numbers provide a positive indication of the earnings reports of other Chinese banks.
Earnings Revision/Risk
• We revise up our 2011 and 2012 earnings estimates by 6.9% and 5.7% respectively to adjust for BOC’s higher-than-expected net profit for 2010.
• Primary risk factors include a macro hard landing.
Valuation/Recommendation
• Maintain HOLD. Despite BOC’s solid results, we maintain our HOLD recommendation for the bank. BOC’s LLR/loan ratio continues to be the weakest among SIBs, which will make the bank susceptible to higherthan- peers credit costs over the next two years. Unlike the coverage ratio, there is no way to raise the LLR/loan ratio other than setting aside more provisions. As such, we believe earnings growth for BOC may be weaker than its SIB peers’ in the medium term. Recommend entry at HK$3.90.
Share Price Catalyst
• 1Q10 results and easing inflationary concerns.
TPV Technology – China
Results
• Net profit increased by 19.9% yoy to US$169.3m. Revenue increased 44.8% yoy to US$1,1632m, higher than our expectations of US$10,105m. The group declared a final dividend of US$0.014/share, up from US$0.0126 in 2009. Gross margin dropped 40bp to 5.4% due to a decline in gross margin of the LCD TV business segment. TPV’s 4Q10 net profit was US$57.1m, substantially higher than market consensus of US$43.0m and our estimate of US$47.8m.
• LCD TV shipments surged by 55.6% to 14.8m units. This represents 7.7% of world’s total supply in 2010. ASP rose to US$290.80 from US$281.90 in 2009. Meanwhile, TPV shipped 56.5m monitor units worldwide in 2010, up 22.3% yoy. This provides TPV a global market share of 32.8%.
Stock Impact
• Management does not see any near-term difficulty in sourcing electronic components despite the current situation in Japan. The group’s suppliers also assure the supply of components to TPV in the near term. Management believes there is opportunity for TPV to take market share from smaller players who are unable to secure supply of components. Tight supply of components is likely to provide support for panel prices which might trigger retailers and distributors to secure inventory for peak season in 2H11. This is positive for system integrators like TPV. TPV gained market share in both the LCD monitor and TV markets, outperforming most of the players in the industry in 2010.
Valuation/Recommendation
• TPV is trading at 0.8x P/B, one of the lowest within the supply chain. TPV is benefitting from increasing outsourcing and the group is gaining global market share. Maintain BUY with a target price of HK$5.84. We argue that TPV will outperform panel makers in terms of operating performance during the downcycle.
Earnings Revision/Risk
• We revise up our net profit forecasts for 2011 and 2012 by 1.8% and 2.2% due to post-results adjustments.
• Increasing exposure to huge China TV market. TPV acquired Philips’ China TV operation last year. This has major strategic significance for TPV as Philips’ range of TV products will complement TPV’s own brand, thereby extending TPV’s product portfolio to cover the top quartile of product segment. The shipment target of the acquired business for 2011 is a few hundred thousand units. The group is also looking to break even in the first year of operation. Despite limited contribution in the early stage, we think entering the China TV market should complement TPV’s own brand and reduce reliance on overseas markets.
• Gaining market share in global LCD TV market. We believe TFT-LCD television will follow the path taken by the monitor market. Major players such as TPV will gain market share through industry consolidation.
Consumer – Hong Kong
What’s New
• Ministry of Finance PRC yesterday announced a pilot scheme to boost tourism and consumption in Hainan. Under the pilot scheme, all visitors to Hainan Province will be able to claim back taxes on imported goods they have purchased. According to the Hainan government, all visitors to Hainan Province aged 18 or above who depart the island by plane to another location on the mainland can apply for the refunds, but tourists flying to foreign destinations cannot. However, the new scheme will limit the number of claims, types of merchandise, value of tax-free merchandise, quantities of merchandise and the number of designated duty free shops. The scheme, which comes into effect on 20 April, covers 18 types of imported items, including jewellery, handicraft, watches, perfume and cosmetics. The scheme is part of the province's plan to build the island into an international tourist destination.
• Visitors eligible for the scheme. All visitors to Hainan aged 18 or above who depart from the island by plane to another location on the mainland.
• Criteria for enjoying the scheme. Visitors who depart from Hainan must satisfy all of the following requirements: a) Visitors must already have the departing air tickets. b) Visitors must make payment for the purchase of merchandise in the designated duty free shops. The types of the merchandise, number of claims, value of tax-free merchandise and the quantities of products should be in accordance with the stipulated requirements. Upon payment, visitors will get a purchase document instead of the merchandise. c) Before departing from Hainan to other parts of the mainland, visitors will pick up the merchandise in the designated areas within the restricted zone of the airport.
• Only two designated duty-free shops. One designated duty-free shop will be opened each in Sanya and Haikou, capital city of Hainan Province.
• Types of approved tax-free merchandise. The tax-free merchandise must be imported goods. There are altogether 18 types of approved taxfree merchandise, comprising jewellery, handicraft, watches, perfume, cosmetics, writing instruments, eyewear, scarves, ties, woollen knitted/woven products, cotton knitted/woven products, garments, footwear and headwear, leather belts, luggage, small leather bags, candies and sports goods.
• Types of taxes. The taxes for claim under the scheme comprise import duty, import associated value-added tax (VAT) and consumption tax.
• Number of claims. Visitors living outside Hainan can claim the tax refund twice a year, while local residents can only claim it once.
• Value of tax-free merchandise and quantities of merchandise. For each departure from Hainan, each departing visitor can only be entitled to purchase a total of Rmb5,000 worth of approved tax-free merchandise. The limitation on the quantities of merchandise is listed in the table on the right. In addition, each departing visitor can purchase one item of approved tax-free merchandise with a value of over Rmb5,000 provided the visitor pays the import duty.
Our View
• Gradual progression to remove taxes on imported consumer goods. We believe it is the long-term objective of the central government to remove taxes on imported consumer goods. We expect the government to deepen the new scheme in Hainan by, for instance, opening more designated duty-free shops, increasing the number of claims permitted per year, increasing the limit on aggregate value of the merchandise etc. In addition, we believe the central government will extend the scheme to other provinces in the future. But we believe all these will be rolled out over a long period of time similar to the pace of the Individual Travel Scheme which started to be implemented in 2004.
• Impact on watch segment limited in the near term. The average import tariff for watches is 11-12% and the consumption tax (import value of over Rmb10,000) is about 20%. We estimate the import tariff and luxury consumption tax together account for about 15% of the retail prices of luxury watches. Retail prices for high-end watches in China are around 25% higher than that sold in Hong Kong. It is too early to gauge the impact because it remains to be seen whether watch brand owners will supply good quantities of best-selling products to the two designated duty-free shops. Product variety is an issue for the two designated dutyfree shops. Secondly, there will also be a VAT on the retail price (17%). Hence, there will always be a price gap, but the price gap will narrow.
• Sa Sa will be less affected. The average import tariff for cosmetics is about 15% and consumption tax is about 30%. But the import value is substantially lower than the retail price. We estimate the import tariff and luxury consumption tax together account for only about 5% of the retail prices of cosmetics. Imported cosmetics sold in Hong Kong are about 10-50% cheaper than that sold in mainland China. Sa Sa (Tic: 178 HK; BUY) will be affected, but the potential impact on it is less severe than on Hong Kong-based watch retailers.
• Jewellery segment will be least affected. The pilot scheme only targets imported products. Chow Sang Sang (116 HK/ NOT RATED) and Luk Fook (590 HK/ BUY) produce and source products in China. They do not import finished products like Sa Sa and Emperor. Hence, Luk Fook (590 HK) will not be directly affected by the development. Having said that, we do not rule out the possibility that deepening and expanding pilot scheme may reduce the growth momentum of visitor arrivals to Hong Kong in the long run.
Action
• Buy Emperor Watch & Jewellery and Sa Sa as their strong earnings growth will outpace the gradual deepening and expanding tax-free scheme. Do not forget that China still has VAT at the retail level which is an incentive for mainland consumers to buy imported goods (especially expensive items) in Hong Kong.
• We prefer jewellery retailers such as Luk Fook which will be least affected.
Sector Catalysts
• Newsflow on industry sales figures on watches and jewellery.
Risks
• Policy risk; macroeconomic conditions.
Bank of China (Hong Kong) – Hong Kong
Results
• Bank of China (Hong Kong) reported net profit of HK$17.924b, +28.8% yoy. This met our expectation of HK$17.5b and beat consensus of HK$15.3b. EPS was HK$1.532.
• Net operating income before impairment allowances was HK$26.055b, + 5.6% yoy.
• Return on average assets and return on average equity was 1.21% and 14.77% respectively, maintained at similar levels as in 2009.
• Total assets rose 37% yoy to HK$1,661b. Customer deposits increased 21.6% while total advances to customers rose 19.1%
• Loan quality was maintained with classified or impaired loan ratio at 0.23%.
• Core Tier-1 capital adequacy and total capital adequacy ratio stood at similar levels as at end-09, at 11.3% and 16.1% respectively.
• Net interest income increased mildly while impairment reversal continued. Net interest income amounted to HK$17.734b, +4.5% yoy. Impairment allowance continued its reversal trend at a slower rate, from HK$1.19b in 2009 to HK$315m in 2010, -73.5% yoy.
• Net interest margin (NIM) fell from 1.7% in 2009 to 1.5%. Loan-todeposit ratio showed a slight drop from 61.0% to 59.7%.
• Operating expenses increased if Lehman minibond charges excluded, but cost-to-income ratio improved. Operating expense in 2010 reached HK$9,584b, -21% yoy. However, 2009 expenses included a one-off charge of Lehman minibond-related expenses of HK$3.278b. Excluding the Lehman minibond contribution, operating expenses in 2010 would have increased 7%. Cost-to-income ratio improved significantly, from 46.60% in 2009 to 34.84%.
• Insurance business showed improvement albeit still a small contribution to overall income. Net operating income from BOC Life increased 51.5% to HK$1.2b, a small contribution compared to the overall net operating income of HK$27.8b.
Stock Impact
• Overall results were solid given the significantly improved insurance business and solid growth in all areas, while demonstrating conservatism and strong deposit-gathering abilities. Deposit growth led loan growth, resulting in a very conservative loan-to-deposit ratio of 59.69%, likely a positive surprise to the market.
Earnings Revision/Risk
• The bank’s balance sheet is positioned to reserve loan capacity for more profitable loan growth once the rate environment becomes more favourable.
• While the renminbi internationalisation faces varying pace of development from macro risks (eg, fund inflow concern at times having higher priority than the renminbi internationalisation), the bank has showed early indication of being a major beneficiary of the policy, seen in the more than 300% increase in its trade finance loans from HK$9.1b in 2009 to HK$31.6b in 2010.
Valuation/Recommendation
• Maintain BUY. A one-stage Gordon growth model with ROE of 16.6%, COE of 9.5%, and growth of 3.5% implies a fair price of $28.28, or 15.8x 2012F PE. A two-stage Gordon growth with same assumptions implies a fair price of $28.97. With this range in mind, we update our target price to $28.62, the mid-point of our range. Our estimate assumes a flat NIM and should show more upside if spreads or loan-to-value ratio improves.
Li & Fung – Hong Kong
Results
• Li & Fung (L&F) posted worse-than-expected results for 2010 again, the third consecutive year of earnings disappointment. Net profit grew 27% yoy to HK$4.28b, below our estimate of HK$4.53b and consensus of HK$5.03b. EPS only grew 23% yoy to HK$1.12 as L&F issued shares to acquire IDS. The weaker results was due to slower-than-expected turnover growth and higher finance costs and acquisition-related expenses.
• Turnover rose 19% yoy to HK$124b, driven by the recovery of the Northern America markets (the US and Canada), acquisitions and outsourcing deals. In 2010, L&F did three large (Visage, Jimlar and IDS) and eight small acquisitions. The company also signed two sizeable outsourcing deals – Wal-Mart and Li Ning – in 2010.
• Gross margin and EBIT margin expanded 2ppt and 0.6ppt to 13.6% and 4.3% respectively, due to effective cost control. However, net margin edged up only 0.4ppt to 3.7% due to a spike in finance and other costs. Interest expense more than doubled to HK$768m as debts surged. To finance its acquisitions, L&F issued a US$400m bond in May 10 and increased the issue by a further US$350m in Jul 10. Net debt soared 264% yoy to HK$15b in 2010, pushing gearing ratio up from 23% to 53%. The company also incurred acquisition-related expense of HK$142m in 2010.
Stock Impact
• The worse-than-expected results and the conservative guidance on Wal-Mart business may prompt a modest earnings downgrade. Management indicated that the Wal-Mart operation incurred losses in Jan-Feb 11. The contribution from Wal-Mart business may turn out to be below market expectation. It is known that Wal-Mart will continue to source over 70% of volume itself and outsource the smaller markets such as South America and Japan to L&F. As such, even with a turnaround, L&F would only earn a thin margin (<1%) from the Wal-Mart business.
• In the three-year (2011-13) plan, L&F targets to attain core operating profit of US$1.5b (HK$11.7b or a doubling from 2010) by 2013. We believe acquisitions will continue to drive growth as in the previous threeyear (2008-10) plan.
Earnings Revision/Risk
• We maintain our net profit estimates for 2011-12 at HK$5.35b and HK$6.48b respectively, and introduce 2013 forecast of HK$7.68b. This represents a 22% CAGR. Although the company targets to achieve a doubling in core operating profit, we expect EPS would not double from 2010 to 2013 as costs related to acquisitions (finance costs, share issue) will also increase.
Valuation/Recommendation
• Maintain SELL. Based on our earnings forecasts, L&F is trading at 32x 2011F PE, which seems stretched. The market has been over-estimating the company’s profit growth over the last three years, giving it a high premium. The earnings disappointment may cause the market to wake up. We raise our target price from HK$27.20 to HK$36.00, based on a higher multiple of 27x 2011F PE and 1.1x PEG as the recovery in the US market reduces the risk premium.
Mitra Adiperkasa – Indonesia
Results
• 2010 results in line with expectations. Mitra Adiperkasa (MAPI) reported 2010 net profit of Rp201.1b (+22.6% yoy), 5% above our estimate but 3% below consensus.
• Net profit growth could have been stronger. The 22.6% yoy net profit growth in 2010 was due to a lower tax rate of 27.1% in 2010 (2009: 41.8%). However, net profit growth should have been stronger as the 2.1% decline in pre-tax profit was dragged by non-core items, including lower forex gain of Rp0.6b (-99.6% yoy) and higher loss on asset disposal at Rp57.3b (+383.9% yoy), mostly due to Harvey Nichols’ write-off.
• Operating profit continued to grow by a strong 45.9% yoy to Rp449.1b in 2010, surpassing our and consensus expectations. Hence, operating margin improved by 200bp to a historical high of 9.5%. This was driven by higher productivity as seen by better sales of Rp11.7m/sqm (+4% yoy) and higher-than-expected same-store sales (SSS) growth of 10% (our forecast: 7%). As such, MAPI’s rental cost-tosales ratio fell to 12.2% in 2010 from 12.7% in 2009. MAPI also enjoyed more efficient promotional activities as seen by the decline in promotion expense-to-sales ratio of 1.1% (2009: 2.1%), helped by more jointpromotions with banks.
• 4Q10 numbers looked strong. 4Q10 net profit increased 8.8% qoq to Rp52.8b but pre-tax profit declined 13.3% after accounting for a Rp46.4b loss in asset disposal (+422.9% qoq), mostly from Harvey Nichols’ writeoff (about Rp35b). Revenue rose 6.0% qoq to Rp1,319.7b while operating profit grew a strong 26.8% qoq to Rp147.2b on better merchandising mix and productivity. Note that the 4Q is normally the strongest quarter for mid- to high-end retailers like MAPI.
• Improving balance sheet. Net gearing declined to 49.1% as at end-4Q10, vs 64.1% in 3Q10 and 71.4% in 4Q09, driven by lower net debt and a stronger equity base. Management also said it will refinance the maturing Rp295b bonds in 2012. This year, we expect MAPI to repay a Rp158.2b of debt through internal cash, in line with management’s target of Rp160b-200b.
Stock Impact
• Focus on specialty stores and F&B; number of stores to exceed 1,000. We expect MAPI to expand its store space by 40,000sqm this year by opening about 300 new stores (2010: 40,594sqm and 134 stores). The plan is to expand specialty stores by 24,000sqm (60% of total expansion) and F&B outlets by 16,000sqm (40% of total expansion) with no plans for new department stores. About 30% of the 300 stores, mostly Sports Station, opening will be in ex-Java areas. For the new Payless ShoeSource brand, MAPI will open about 17 stores this year. It is also considering opening stores in Singapore and Kuala Lumpur in 2H11. In total, the number of stores would reach 1,154 this year. Capex budget is Rp350b-400b this year.
• Expect revenue to grow 18.4% this year. We expect revenue to increase 18.4% yoy to Rp5,580.4b this year, in line with management’s expectation of 20%. Our assumptions are based on an 8% SSS growth and 40,000sqm expansion.
Earnings Revision/Risk
• We lower our 2011 and 2012 EPS forecasts by 0.7% and 5.7% after incorporating 2010 results in our forecasts. We also raised the effective tax rate for 2011 and 2012 from 25% to 27%. We also introduce 2013 net profit forecast at Rp441.1b.
Valuation/Recommendation
• Reiterate BUY. We roll over our valuation base to 2012 and raise our target price to Rp3,500 (previous: Rp2,950), still based on 16.5x PE. Current valuation is attractive at 12.9x 2012F PE. We like MAPI for its strong exposure to the rising middle-income group in Indonesia.
Share Price Catalyst
• Strong economic growth.
Gamuda – Malaysia
Results
• Results in line. Gamuda 2Q10 net profit grew 6.2% qoq and 19.6% yoy to RM94m (stripping out a RM15.9m gain from accounting changes, the yoy growth would have been 9.0%). 1HFY11 net profit of RM182.6m accounted for 49% of full year forecast.
• Significant margin expansion. 1HFY11 EBIT margin rose 3.8ppt yoy to 13.2% primarily driven by margin expansion at the construction and property divisions. Most notably, the construction division’s EBIT margins have improved for six consecutive quarters, to 8.2% in 2QFY11 (+1.6ppt qoq and 3.0ppt yoy) due to favourable pricing and costing.
Stock Impact
• Good progress for MRT project. Contracting pre-qualification has been called for the elevated section of the Sungai Buloh-Kajang line (SBK), and works are expected to begin in July 11.
• Meanwhile, contracts for the 9.5km tunneling works of SBK will be called for Swiss tender in the Dec quarter, followed by the award for the estimated RM7.5b contract by March 12. We continue to expect Gamuda:MMC JV to be the frontrunner for this contract.
• Double tracking construction project making progress. The doubletracking project which accounts for the bulk of Gamuda’s order books, is 58% completed, and is expected to be fully completed by 2014. A second Extention of Time (EOT) was granted by the government, which positively removes LAD (late delivery penalty) risks and opens the opportunity for raw material cost escalation claims.
• Higher local property sales target in FY11. Gamuda achieved a strong sales of RM600m in 1HFY10 sales, with unbilled sales of RM840m which represents 1.8x of FY11F’s property revenue.
• Vietnam projects to start contributing in FY11. There has been good response to the pre-marketing of Celadon City (Tan Thang Development) which is launching in the Mar 11 quarter. Pricing for this launch is at US$70,000-US$130,000 per unit (US$970-1,350 psm). Gamuda continues to have a targeted sales of RM300m for Celadon City in 11. Meanwhile, while Yenso Park’s 11 sales target has been trimmed again to RM300m (RM400 previously), land handover by the local authorities is in progress and Gamuda has secured 20 ha of land.
Earnings Revision/Risk
• While we maintain our forecasts, we acknowledge the possibility of a stronger 2H11 as construction margins are likely to rise HoH.
Valuation/Recommendation
• Maintain BUY and RM4.40 RNAV-based target price. Our sum-of-theparts-derived target price implies FY12F fully-diluted target PE of 21x
(below its +1 sd of 23x).
Share Price Catalyst
• We anticipate another momentum play as we approach 4Q1, before the award announcement for the SBK tunnelling works.
Genting Hong Kong – Singapore
Results
• A turnaround year, but still below expectations across the board. Genting Hong Kong (GENHK) reported a net income of US$67.9m for 2010, from a loss of US$21.5m in 2009. Despite the turnaround, core net profit of US$42.4m was about 48% below our expectations, mainly on lower-than-expected contribution from Resorts World Manila (RWM), and lower-than-expected EBIT (Asian cruise operations).
• Contribution from RWM was significantly below our expectations, with a net income of just US$71m, vs our forecast of US$117m, as estimated daily win of about US$0.9m was about 20% below our forecast, and EBITDA margins were also slightly lower than expected at about 30%.
• At Star Cruises, a flattish gaming contribution was slightly lower than expected, amid sharply lower occupancy at 83% (2009: 91%) as capacity days jumped 13.5% arising from the deployment of Star Pisces (a gaming-centric ship with lower occupancy rates) in Penang in Feb 10. We understand that luck factor was within the theoretical range of 2.85%. Excluding exceptionals (reversal of impairment charges in 2010 and impairment charges in 2009), operating profit was up almost 150% yoy to US$25.8m.
Stock Impact
• Downgrade to SELL as the shares are trading at the high end of a trading range. While GENHK is still expected to deliver commendable earnings growth, present valuations have factored in a stronger surge in 2011 earnings, and we do not foresee other strong re-rating catalysts materialising. Our call takes into account emerging competition (locallylisted Belle Corporation aims to establish a modern casino by end-11) and potential economic headwinds (inflation, and overseas workers’ significant dependency for employment in the Middle East) which could slightly diminish the local spending power and patronage at RWM.
• Lowering our forecasts for RWM. We have conservatively trimmed RWM’s daily win to US$1.5m (previously US$1.8m) and EBITDA margin to 33% (35% before) in 2011. Nonetheless, our revised forecast still implies a strong bottom-line growth of over 115% yoy at RWM, which is consistent with management’s bullish outlook and RWM’s strong start this year ? we understand that the daily win is up 30% qoq, and could have reached US$2m for a period. Momentum should be supported with the opening of Genting Club (slated for mid-11) and Remington Hotel in 3Q11. Our 2013 forecasts have not imputed contribution from its Travellers’ International’s Manila Bay project, pending further clarity of plans and a timeline.
• Delay in NCL’s IPO? In yesterday’s briefing, management acknowledged that volatility in oil prices may cause a delay in Norwegian Cruise Line’s (NCL) proposed IPO, although oil prices should not significantly derail NCL’s growth given NCL’s improved pricing power and hedging (57% of fuel requirements hedged). Like industry leader Carnival Corp, NCL has seen a very strong wave booking season, with strong booking volumes, and NCL announced plans to raise ticket prices by up to 10% effective Apr 11.
• Over in Sri Lanka, Union Bank of Colombo (UBC) proposed an initial public offering, offering 15m shares at Rs25/share. Recall that in mid-10, GENHK and Genting Berhad bought 5.9% and 20% stakes in UBC. GENHK's stake was bought at HK$15.44m, and should make modest paper profits on UBC’s listing.
Earnings Revision/Risk
• We cut our 2011-12 net profit forecasts by 28% and 17% respectively, mainly on expectations of more modest earnings expansion at RWM and at Star Cruises. Nonetheless, our revised forecasts still imply brisk bottom line growth of 94% in 2011.
Valuation/Recommendation
• Contrarian SELL call with a lower target price of US$0.37. Our new target price implies a target 2011F fully-diluted PE and adjusted EV/EBITDA of 22.2x and 10.9x respectively.
Share Price Catalyst
• Upside to earnings, particularly from the Philippines, a strong dividend policy, and ability to participate in countries which may legalise casino operations – Sri Lanka and Taiwan. While Taiwan is a highly promising gaming market and appears to be en route to legalising casino operations (see RHS), it could still be a relatively long wait before Taiwan evaluates proposals and awards casino operation concessions.
Venture Corporation – Singapore
Key takeaways from luncheon presentation
What’s New
• Minimal impact from Japan earthquake. Venture should not be unduly affected as it was already holding a high level of inventory prior to the earthquake as it had experienced component shortage in 2010. Current situation is likely to require Venture to continue maintaining a high level of inventory to assure constant supply. It currently has adequate inventory for production until May. Management does not expect the impact from the Japan earthquake to be significant in 2Q11. Overall, EMS players will have to rely more on alternative sources of components outside of Japan.
• Shipment to Japan not sizeable. Venture focuses on enterprise and industrial applications. Its shipment to Japan is very small given that there are no new factories in Japan. Venture’s customers are predominantly US-based multinational companies.
• Strong pipeline of new products. Venture sees a surge in demand for power electronics (classified as industrial products in segmental breakdown) involving conversion and inversion of electricity for solar and other sources of alternative energy. For the Networking & Communications segment, Venture is working on a state-of-the-art bidirectional optical device operating at 100Gbps. For Printing & Imaging (P&I), it has just launched a new model of mobile printer in March and another new model should commence production in September.
Stock Impact
• Sustainable and attractive dividend yield. Venture’s net cash/share was S$0.87 as at end-10. Venture has proposed a final dividend of 55 cents/share, +10% yoy. Its strong balance sheet puts it in a good position to maintain a dividend payout of 55 cents/share going forward. The stock currently provides an attractive dividend yield of 5.9%.
Earnings Revision/Risk
• We maintain our net profit growth forecast of 8.3% in 2011 and 14.8% in 2012.
Valuation/Recommendation
• Re-iterate BUY. Venture provides a defensive play on a recovery in the technology sector due to its high-value high-mix business model, consistently positive free cash flow, cash-rich balance sheet and attractive dividend yield. Ex-cash 2012F PE of 8.8x looks undemanding against 2012F EPS growth of 14.8%. Our target price is S$11.88, based on 2011F PE of 16x (Venture’s average forward PE over the past 10 years is 16.6x).
Share Price Catalyst
• We anticipate Venture to benefit from pick-up in corporate capital investment and IT spending in 2H11 and 2012.
• New product launches for technology solutions in 2012.
• Potential new customers for Print & Imaging.
Asian Property – Thailand
We raise 2011 net profit forecast and adjust target price
What’s New
• Asian Property (AP) recorded presales of Bt2.1b for Jan-mid Mar 11 (1Q10: Bt3b), mainly from housing projects. Current sales backlog stood at almost Bt26b, of which around Bt10b will be realised this year.
• AP plans to launch 20 new projects worth a combined Bt23b, aiming for Bt20b presales (+15% yoy) and Bt17b (+25% yoy) revenue this year. Of the 20 new projects, 13 will be townhouse projects worth Bt9.6b, six condominiums worth Bt12b and one single-house project worth Bt1.75b. Note that the value of new launches this year of Bt23b is 36% less than in 2010. But AP is ready to launch more projects in 2H11 if there are signs that the operating environment is turning more positive.
• We raise our 2011 net profit forecast by 12% to Bt2.2b as we increase our margin assumption by 2ppt. AP expects housing prices to increase 3-4% but its costs should increase at a slower 2% as prices of most construction materials are already fixed. Upside will come from cost reversal on completed condominium projects, similar as in last year. Maintain BUY with a new target price (ex-stock dividend) of Bt7.60.
Stock Impact
• AP sets an aggressive revenue target of Bt17b this year as about Bt10b of sales (60% of total revenue) are already in hand. We estimate its housing and condominium sales to grow 30% yoy and 6% yoy respectively.
• New brands for the low-end segment. Last year, AP launched two lowend condominium projects under the “Aspire” brand. In 2Q11, it will introduce low-end townhouses under the “The Pleno” brand costing some Bt2m each. This new brand will be built by its new subsidiary, SQE Construction, and will focus on pre-fabricated construction technology which will be used to penetrate the lower-end market.
• AP recently declared a cash dividend of Bt0.18/share and a stock dividend of 5 old shares for 1 new share Ex-dividend is 4 May and payment is on 24 May. AP will issue 469m new shares to be reserved for stock dividend. Dilution effect is 17% on its existing paid-up capital of 2,343m shares.
Earnings Revision/Risk
• We raise our 2011 net profit forecast by 12% to Bt2.2b as we increase our margin assumption by 2ppt. Given the prices of most of its construction materials had already been fixed on long-term contracts, costs are likely to increase at a slower pace than selling prices. Upside will come from cost reversal on completed condominium projects, similar as in last year. Four condominium projects worth a total Bt7b will be completed in 2H11. We keep our 2012 net profit forecast at Bt2.5b (+13% yoy).
• Risks to our forecasts are pricing pressure from the enormous new supply as well as rising development cost and SG&A expenses. Note that the value of new launches from the top five developers will continue to be massive at the same level as last year. Interest rates are still on an uptrend and UOB Economic Treasury expects Thai policy rate to reach 3% by end-11 from the current 2.25%. Moreover, if oil prices stay above US$100/bbl for too long, sentiment will turn sour.
Valuation/Recommendation
• Maintain BUY. Our new target price of Bt7.60 (ex-stock dividend) is pegged to its 5-year mean PE of 9x.
Share Price Catalyst
• A sharp increase in 2Q11 presales from new launches worth more than Bt10b will help drive its share price. The expected soft 1Q11 results compared to the peak in 1Q10 should have been priced in.
