SMC Monthly Refer to Important Disclosures at the End of This Report
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Singapore Market Focus SMC Monthly Refer to important disclosures at the end of this report Issue No. 1 DBS Group Research . Equity 11 Jan 2016 STI : 2,751.23 Blooms amidst the gloom FSST Small Cap : 397.54 FSST - Mid Cap : 650.02 Small-cap names can often shine despite uncertainty and malaise in the broader market. We begin 2016 with the following conviction picks under the following themes: Analyst Growth – MM2, Riverstone and Sheng Siong Paul YONG CFA +65 6682 3712 [email protected] Yield – China Merchants Holdings (Pacific) Singapore Research Team Recovery – Japfa Five conviction picks to kick off 2016. Generally, our Key Indices five conviction picks have drivers and catalysts that Current % Chng should help them outperform the market. For mm2 Asia STI Index 2,804.27 -1.1% (BUY, TP S$1.05), earnings should be boosted by growth FS Small Cap Index 403.16 -0.5% USD/SGD Curncy 1.41 -1.8% in local productions as well as its expansion into the Daily Volume (m) 1,361 China market. Riverstone (BUY, TP S$2.83) should Daily Turnover (S$m) 994 benefit from an enlarged capacity as well as a strong Daily Turnover (US$m) 705 USD vs Ringgit, while Sheng Siong (BUY TP S$1.01) is Source: Bloomberg Finance L.P. looking to see both store growth and margin expansion. A rebound in day-old-chick prices should help Japfa’s (BUY TP S$0.90) earnings to recover, and lastly, CM Pacific (BUY TP S$1.45) offers a highly attractive dividend yield of over 8%, with long-term earnings bolstered by SMC Top Picks recently acquired toll roads in China. Price Mkt Cap Target Price Performance (%) S$ US$m S$ 3 mth 12 mth Rating Unsurprisingly, Watch out for potential reversions. Current oil & gas-related names were among the worst China Merchants 0.83 1,026 1.45 (8.8) (12.5) BUY performing in 2015, as brent crude fell to less than Hldgs (Pacific) US$34 per barrel (-34% y-o-y) from over US$100 per Japfa Ltd 0.49 599 0.90 48.5 (22.2) BUY barrel just over 15 months ago. While we are bearish on mm2 Asia 0.78 113 1.05 13.0 290.0 BUY Riverstone 2.40 616 2.83 39.1 141.2 BUY near term oil prices, if it does recover significantly, and Holdings Ltd Sheng Siong holds, we can expect to see a rebound in stock prices of 0.83 865 1.01 (1.8) 19.4 BUY oil & gas companies. Among these names, we think Group Ltd Ezion (BUY, TP S$1) and Pacific Radiance (BUY, TP S$0.42) should bear the most watching. Source: DBS Bank Prices as of 8 Jan 2016 SMC Radars: Memtech and Yuuzoo. As automotive designs trend toward more light-weight and stylish models, Memtech, a precision manufacturer of plastics and rubber, could potentially benefit from the increasing adoption of decorative and functional plastic content in vehicles. Touting its targeted networks as 3rd-generation theme-based networks, YuuZoo, a supplier of global e- commerce and network solutions, provides customers with a more direct way to monetise social network users. www.dbsvi ckers.com ed: TH / sa: JC Page 1 Market Focus SMC Monthly Jan-16: Top 5 Conviction Picks No. Security Desc. Sector Rating Last Price Target Price Upside (%) Catalyst (8-Jan) 1 Japfa Ltd Consumer BUY 0.490 0.90 84 1) Earnings delivery Goods 2) Expansion 3) Recovery in purchasing power 2 China Merchants Industrials BUY 0.825 1.45 76 1) Earnings execution Holdings (Pacific) 2) Upcoming final dividend of S 3.5cts 3 mm2 Asia Consumer BUY 0.780 1.05 35 1) Growth in local productions Services 2) Further expansion into Chinese market 3) Contribution from recent acquisition 4 Sheng Siong Consumer BUY 0.830 1.01 22 1) Store growth Group Services 2) Margin expansion 5 Riverstone Health Care BUY 2.400 2.83 18 1) Capacity expansion Holdings 2) Earnings delivery 3) Strengthening USD vs Ringgit Source: DBS Bank, Bloomberg Finance L.P. Theme 1: Growth mm2 Asia* [MM2 SP, TP S$1.05] Sheng Siong Group [SSG SP, TP S$1.01] As a leading producer of films and TV/online content in Asia, One of the most well-run grocery retailers in ASEAN, Sheng mm2 provides a full suite of services spanning the entire Siong leads regional peers in profitability, cashflow generation filmmaking process. and working capital management. Consistently delivering earnings growth (CAGR of 20.4% since FY11) through a Riding on growing demand and support for local production, combination of margin expansion, store growth and SSSG, mm2 will continue to grow its presence in Singapore, Taiwan, Sheng Siong’s financial performance has consistently met our and Hong Kong, by offering localised content. In addition, its expectations. We believe that it is this consistency, together with venture into the lucrative Chinese movie market provides further strong dividend payout of 90% and yield of c.4%, which led to support for growth as Chinese films are generally characterised the stock’s re-rating from 20x to 22x FY15PE currently, as its by their bigger budgets and higher margins. To strengthen its share price appreciated c.22% over the year. competitive edge, mm2 recently acquired five cineplexes in Malaysia, which serve as a source of recurring income to the The Group operates 39 stores currently, but unlike other local Group, while generating cost savings for its future productions operators, still has scope to further expand its store network and over the longer term, as half of film proceeds are retained by targets to ultimately operate 50 stores island-wide. We also cinema operators. expect margin expansion through better sales mix, direct sourcing and bulk handling to improve going forward, while At 23x FYMar16F PE and 14x FY17F PE based on its enlarged long-term earnings drivers (which are still at their initial stages) share capital, mm2 trades at a c.40% discount to peers’ 27x such as e-commerce and its JV in China, continue to develop. FY16F PE. Given its smaller size, we apply a 30% discount, or PE of 19x to projected FYMar17F earnings, which implies a 12- Our target price for Sheng Siong is S$1.01, based on 25x FY16F month target price of S$1.05. PE, which is below regional peers’ average of 27x PE. *Note: We initiated coverage of mm2 Asia on 6 Jan-16, after the counter closed at S$0.77. Page 2 Market Focus SMC Monthly Riverstone Holdings [RSTON SP, TP S$2.83] Driven by contribution from these recent acquisitions, we project The Malaysian-based manufacturer of niche cleanroom nitrile CMHP’s core earnings to grow by nearly 50% from HK$675m in gloves and healthcare gloves had an exceptional run-up this year 2014 to HK$1,004m by 2017. from S$0.975 to a peak of S$2.58, before closing the year up 146% at S$2.40. Apart from its strong cash flow generation and long-term growth prospects, we also like the company for its attractive dividend The Group completed Phase 2 (of 5) of its expansion plans on yield of over 8%. Our 12-month target price of S$1.45 is based schedule in 3Q15, which will add 1bn gloves in annual on DCF valuation with WACC of 9.8%, and offers >60% upside. production capacity to 5.2bn by end-2015. To further capture We see the stock re-rating as it delivers earnings growth. opportunities from both new and existing customers, Riverstone will be accelerating its expansion plans ahead of schedule. When Theme 3: Recovery the five expansion phases are complete (expected by 2018), total production capacity will be raised to a minimum of 8.2bn gloves Japfa Ltd [JAP SP, TP S$0.90] p.a. Furthermore, Riverstone is able to grow capacity faster than Shares bounced back from a record low of S$0.28 on 15 Sep expected as it recently acquired 9.364 acres of land for the 2015 after the government ordered day-old-chick (DOC) construction of a factory and worker hostels. breeders to cull parent stock to address the oversupply situation in the poultry industry. Breeders have agreed to the culling of 6m Going forward, we expect capacity expansion to underpin poultry parent stock (of which Japfa’s share is 16% or c. 960k) growth, supported mostly by robust long-term global demand and when complete, would reduce the feed cost for Japfa’s for healthcare gloves amid rising healthcare standards and breeding division. Combined with the stabilisation of DOC prices expenditures, and greater awareness to workplace safety. A above breakeven cost, we anticipate the Group’s breeding strengthening US$ vs Ringgit will also benefit the company as segment GPM to recover substantially. Riverstone receives c. 90% of its revenues in US$, while only c. 35% of its costs are incurred in US$. We arrive at our 12-month At 25% EBITDA CAGR over the next three years, we believe that target price of S$2.83 after applying a target valuation multiple Japfa, given end-2015 price of S$0.47, remains undervalued at of 20x blended FY16/17F PE, which is fair given its smaller 7.6x forward PE. Looking forward, we expect recovery in the capacity. breeding segment, strong growth in China’s raw milk output, Rupiah stabilisation and recovery in purchasing power to boost Japfa’s FY16 earnings. Theme 2: Prospective Yield China Merchants Holdings (Pacific) [CMH SP, TP S$1.45] The Chinese toll road operator completed its Jiurui Expressway acquisition and the acquisition of three toll roads in Guangxi Zhuang Autonomous Region over the year, which should propel the Group’s top and bottom lines in the medium to long term.