090120 dbs - survival of the fittest

8/7/2019 090120 DBS - Survival of the Fittest

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Regional Small/Mid Cap Strategy Q4 2008

Country Assessment

Yeo Kee Yan (65) 6398 7955 [email protected] Lee Keng (65) 6398 7970 [email protected] Page 1

www.dbsvickers.com

Refer to important disclosures at the end of this report

SingaporeSurvival of the fittest

We see the bear market rally that started in 4Q08extending into 1Q 09. Our 1Q strategy focuses oncompanies with strong balance sheets that give them theability to ride out the recession.

Markets managed to find a short-term low in 4Q08 as investors bet that 1) the

frozen credit markets may start to thaw following recent aggressive measures by

central banks to inject liquidity, 2) valuation has fallen to previous crisis troughs,

the recent stock market correction has priced in weak FY08 earnings and pooreconomic data and 3) global efforts to pump prime economies could shorten

the global recession

Still, we remain mindful of the current credit crunch on small and medium size

companies. With earnings downgrades still an on-going process, our stock

selection adds focus on companies with strong balance sheets that should

enable them to weather and emerge from the current crisis as stronger entities.

We take a positive view of recent plans to review capital expenditure by Ezra aswell as its improved charter rates that are backed by long-term contracts. We

also like ASL Marines good earnings visibility and net cash position in FY09.Among S-chips, we view the Chinese governments initiatives to shift its weight

from exports to domestic consumption as positive for China Hongxing, which isbacked by 17Scts net cash per share. We also pick water treatment company,Epure for its more defensive business model and good net cash position.Our final pick is Raffles Medical in light of the defensive nature of the healthcaresector, the companys strong operating cashflow and net cash position.

DBS Group Research . Equity

Singapore Market Focus

Small/Mid Cap Strategy

05 January 2009


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Market Data52-Week

Indices Closed12 Dec 08 Chng Net-1 mth -1 mth (%) -3 mth (%) -6 mth(%) -12 mth(%) High LowFSSTI 1,740 (44) (2.4) (32.3) (42.4) (50.7) 3531 1474

FTSE Mid Cap 342 (27) (7.3) (40.7) (55.0) (61.7) 908 299

FTSE Small Cap 291 (15) (4.8) (38.4) (54.9) (66.5) 867 257

Transactions: YTD*STI (bn) 63.3

FTSE Mid Cap (bn) 43.6

FTSE Small Cap (bn) 58.0

Source: Bloomberg

* Start 10 Jan 08

PERFORMANCE REVIEWLast quarter, in particular October, saw global equity indices

experience the worst fall in recent history, with the impact of

the global credit crisis deepening spurring the collapse of

more financial institutions. Concerted efforts by global

central banks to cut interest rates and to roll out economic

stimulus packages managed to prevent the market from free

falling. However, sentiment remained cautious.

Small cap stocks were hit harder, as a result of a flight to

quality. Against this backdrop, our small cap stock picks

were not spared. Our small cap portfolio fell 32.7% Q-o-Q

on a price-weighted basis, vs 38.4% and 40.7% drop in the

FS Small Cap Index (FSTS) and FS Mid Cap Index (FSTM)

respectively.

Among our four picks, both Ezra and Celestialunderperformed the FSTS and FSTM most of the time. Ezra

was hit by falling oil prices and concerns about funding for

its high capex needs while margins for Celestial were

affected by high raw materials. High dividend yield stocks

Parkway Life REIT and Pan United Corp, outperformed themarket during the 3-month period.

Relative Performance - Small cap picks vs FSTS & FSTM

Source: Bloomberg, DBS Vickers

STI vs FS Mid and Small Cap

1,500

2,000

2,500

3,000

3,500

4,000

Jan-08 Mar-08 Jun-08 Aug-08 Nov-08

200

300

400

500

600

700

800

900

1000

FS STI FTSE Small Cap FTSE Mid Cap

STI FTSE Small and

mid Cap


0.0

0.2

0.4

0.6

0.8

1.0

1.2

Sep-08 Oct-08 Nov-08

Celestia l Ezra Pan UnitedParkway Life REIT FSTS FSTM


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Average daily turnover volume eased from above 1.2bn to

around the 1bn mark shortly after the market recoveredfrom its low in end October as sentiment remained cautious.Turnover for mid cap stocks accounted for an average of20% of total volume in 4Q08 while small cap stocksaccounted for an average of 17% during the same period.

FTSE Volume Traded (mil shares)

500

1,000

1,500

2,000

2,500

3,000

Jan-08 Mar-08 Jun-08 Sep-08 Nov-08

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Total Volume (LHS)

FTSE Small Cap Vol vs Tot Vol % (RHS)

FTSE Mid Cap Vol v s Tot V ol % (RHS)

m


GROWTH AND VALUATIONGrowth and Valuation Large Caps vs Small / Mid Caps

PE (x) Earnings Growth (%)2007 2008F 2009F 2007 2008F 2009F

Basic Materials 22.5 6.1 3.3 -41% 267% 86%

Consumer Goods 19.9 7.7 11.6 2% 159% -34%

Consumer Services 8.1 10.3 10.9 21% -22% -5%

Financials 8.4 8.5 9.2 20% -2% -7%

Health Care 15.3 15.7 14.8 35% -3% 6%

Industrials 7.5 7.8 8.6 35% -3% -9%

Oil & Gas 2.3 4.9 5.1 79% -54% -4%Real Estate 10.5 9.8 9.3 48% 8% 5%

REITS 10.5 9.1 9.3 27% 15% -2%

Technology 3.7 19.2 (7.7) 34% -81% -350%

Telecommunications 10.9 12.4 12.1 3% -12% 3%

Large Caps 9.2 9.2 10.1 21% -1% -8%Basic Materials 5.2 4.6 4.4 47% 13% 4%

Consumer Goods 4.8 4.3 4.1 61% 12% 4%

Consumer Services 14.3 14.0 12.4 99% 2% 13%

Financials 4.5 4.0 3.7 128% 10% 9%

Health Care 11.8 11.3 9.9 36% 4% 14%

Industrials 7.0 6.0 5.8 99% 17% 2%

Oil & Gas 5.6 3.6 3.4 24% 54% 7%

Real Estate 4.8 6.7 5.0 48% -29% 34%REITS 13.7 7.9 7.7 64% 74% 2%

Technology 5.0 5.8 7.5 169% -13% -23%

Telecommunications 6.0 6.3 7.8 -10% -5% -19%

Small / Mid Caps 6.3 5.9 5.5 63% 6% 9%DBSV Universe 8.7 8.7 9.2 26% 0% -5%Small Cap Ex Pty & Fin 6.0 5.3 5.2 70% 14% 2%Small vs Large Caps -32% -36% -46%Small Caps Ex Pty v Large Caps -34% -42% -48%Source: DBS Vickers


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Market de-rated further in 4Q08. Our small/mid caps FY08and FY09 PE declined to 6.0x and 5.5x as at end 4Q08 from7.9x and 6.2x respectively when compared to the previous

quarter. Small/mid caps continue to trade at much lower

valuation multiples compared to large caps, which are

trading at 9.5x FY08 and 10.2x FY09. Further earnings

downgrades reduced growth to 6% FY08 and 9% FY09,

much lower than the 10% FY08 and 29% FY09 during 3Q.

Nevertheless, the revised earnings growth for small/mid caps

are still much better than zero growth for large caps in FY08

and negative 7% growth in FY09.

Oil & Gas and Financials the worst hit. Oil & Gas, REITs andReal Estate were the worst hit sectors in 4Q08. Oil & Gassector eased 52.8% on a 3-mth basis on the back of more

than 50% fall in oil prices and concerns of order

cancellations. Stocks like Jaya, Swiber and ASL Marine were

among the top 20 most oversold stocks. REITS and Shipping

Trusts were hit by fears about re-financing issues arisingamid

the current credit crisis. 35% of the most oversold stocks

featured here are Shipping Trusts and REITS. Basic Materials

performance was skewed by Midas (beneficiary of stimulus

package) and SP Chemicals (takeover offer). Healthcare was

generally more defensive in the down market.

Small/Mid Cap Sector Performance (Sorted in ascendingorder on 3-month performance)

Chng1m Chng3m Chng6m Chng12mOil & Gas -3.5 -53.2 -72.3 -77.7

REITS -11.8 -47.2 -59.5 -65.9

Real Estate -3.0 -47.0 -63.5 -76.9

Industrials -6.9 -43.4 -56.4 -64.8

Total -4.5 -41.9 -58.9 -69.6Financials -11.3 -40.1 -60.3 -67.8Telecommunications -9.5 -39.7 -48.6 -47.9

Technology -12.3 -38.2 -51.5 -61.5

Consumer Services 8.5 -33.8 -54.4 -61.0

Consumer Goods 1.7 -32.1 -54.8 -67.3

Health Care 6.6 -30.0 -44.1 -49.4

Basic Materials 0.7 -9.0 -44.4 -66.2

Source: DBS Vickers

Small/Mid Cap 20 most oversold stocks in the past 3 months

Source: DBS Vickers

Price/ D ivM k t Price Target BVCompany Cap (S$ ) Price % (x )

(S$m) 12- Dec (S$ ) Upside Rc md 08F 09F 08F 08F 3M 6M 12MJ aya Hldgs 227 0.30 0.23 -22% FV 1.5x 2.7x 0.5x 44.1% (73) (82) (83)

Asia Environment 45 0.11 0.10 -3% FV 4.2x 6.3x 0.3x 6.7% (64) (78) (88)

Frasers Commercial Trust 171 0.24 0.31 30% H 6.3x 8.0x 0.2x 24.5% (64) (71) (73)

Pacific Shipping Trust US$ 0.14 US$0.52 271% B 3.3x 3.8x 0.3x 30.6% (63) (66) (67)

Rickmers Maritime 145 0.40 0.63 59% H 5.4x 5.8x 0.3x 32.2% (62) (65) (69)

Epure International 271 0.21 0.34 60% B 5.0x 4.2x 0.9x 0.0% (61) (58) (70)

Banyan Tree 305 0.40 0.37 -8% FV 12.8x 14.2x 0.5x 3.1% (60) (74) (78)

Swiber Hldgs 231 0.55 1.00 83% B 3.3x 2.2x 0.6x 0.0% (59) (79) (84)

Mapletree Logistics Trust 611 0.32 0.57 82% B 4.6x 5.9x 0.4x 22.4% (57) (65) (71)

CSE Global 204 0.40 0.80 100% B 4.0x 4.0x 1.3x 11.3% (56) (63) (68)

ASL Marine 133 0.44 0.84 91% B 2.6x 2.5x 0.6x 9.1% (55) (63) (71)

F irst Ship Lease 253 0.51 1.65 227% B 25.4x 93.7x 0.4x 33.9% (54) (58) (61)

China Sky Chemical F ibre 232 0.29 0.35 25% H 2.1x 2.3x 0.3x 7.3% (54) (68) (85)

Silverlake Axis 112 0.10 0.13 30% FV 2.5x 6.6x 1.6x 18.6% (53) (70) (82)

Asia Enterprises 49 0.18 0.10 -43% FV 2.1x 1.9x 0.4x 18.8% (53) (57) (62)

Global Testing Corp 33 0.04 0.05 47% FV 8.2x nm 0.2x 0.0% (53) (65) (81)

CSM 470 0.19 0.38 105% H nm nm 0.2x 0.0% (53) (77) (82)

Tat Hong 296 0.60 0.75 26% B 3.3x 3.9x 0.8x 9.8% (52) (71) (81)

Suntec REIT 999 0.65 0.88 35% H 8.8x 7.4x 0.3x 15.8% (51) (58) (62)

K-Reit 392 0.60 0.93 55% H 18.4x 20.1x 0.2x 16.7% (51) (58) (72)

Performance (% )E ( x ) Share Priceld(% )

119


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STRATEGY/THEMES AND STOCK PICKSA Bear market rally Just as bull markets consolidate forbreathers, so do counter-trend rallies interrupt bear markets.

As stocks reeled from a massive sell off across the board

during 4Q08, there is optimism that stock prices have

touched a temporary floor following the US governments

efforts to save big corporations such as Citigroup and US

auto manufacturers, global governments concerted efforts

to pump prime their respective economies and unfreeze

credit markets (e.g. the USD 700bil bailout plan, Chinas

USD583bil economic stimulus and Singapores SGD2.3bil

stimulus plan to encourage bank to give credit).

Going ahead, investors can look forward to year-endwindow dressing activities and Singapores budget

scheduled on January 22nd.

, US President elect Obamas

pledge to revive the economy and create jobs should

continue to see bargain hunting on minor dips ahead of his

swearing in ceremony on January 20th

next year.

Despite near-term positives, we remain mindful of the on-

going credit crisis and the vulnerability of small companies.

As banks impose stricter lending criterions, we prefer to stay

away from companies with high gearing and poor operating

cash flows.

Focus on strong balance sheet Thus, in addition to attractivePE valuations, we think a strong balance sheet is a must. Ouradditional criterions are companies with net cash (or slight

net debt), an Altmans Z-score (a formula for predicting

bankruptcy, the lower the score, the higher chance of

bankruptcy) of at least 2.0 and good operating cash flows.

There should be no sharp increase in debtors turnover days.

(1) Beneficiary of Chinas focus on domestic consumptionChina Hongxing is expected to benefit from the Chinesegovernments initiatives to focus on domestic consumption.

Itssportswear products, which cater to mid-to-low endconsumers in 2nd and 3rd tier cities in China, are less

susceptible to the economic slowdown compared to high-

end consumables. Hongxing offers good value at currentvalue as stock isbacked by 17Scts net cash per share andoffering 16.5% EPS CAGR over FY09 and FY10.(2) Beneficiary of Chinas massive USD583bil stimulus plan.The recently announced stimulus package include plans for

environmental protection that could be beneficial for waste

and water treatment companies. Our second pick is leading

water and wastewater treatment company Epure. Thecompany has a strong net cash of 14cts/share, and is in a

strong financial position which enables it to finance BOT

projects and future working capital through internally

generated funds. Current valuation is compelling at 4.7x

FY09 PER.(3)Rebound in oil price lifts oversold O&M stocks Oil pricehas fallen nearly 70% since peaking out at USD147pbl. Our

average oil price assumption for 2009 is USD60pbl, which is

about 40% higher compared to current price. Our technical

analyst sees strong support for oil price at USD38-40pbl.

Our picks are Ezra and ASL Marine. We view Ezras recentannouncement to review its orders for 5 multi-functional

support vessels positively as it signals a preference towards

cash conservation, thus improving on its current net debt

position even as growth continues to be underpinned by

long-term charter contracts. ASL Marines strong balance

sheet and good earnings visibility from its large shipbuildingorder book coupled with sustained strong demand for ship

repair and chartering services justifies the company as our

next pick in the O&M sector. ASL also offers an attractive

dividend yield of c. 11%.

(4)Healthcare sector as defensive Our final pick is RafflesMedical. Besides the defensive nature of its business, the

company boasts of a strong operating cash flow and has a

strong net cash position that should increase from S$9mil as

of Sept08 to S$16mil by end 2008. Its healthy balance sheet

will see it through this period of uncertainty. It is trading at

its historical low valuation of c. 10x PE

.1Q09 Small/Mid Cap Stock PicksFYE Mkt Price Target EV/EBITDA P/BV Div Yld ROE Val/Day

Company Cap (S$) Price % PE (x) (x) (x) (%) (%) 6m(S$m) 12-Dec (S$) Upside Rcmd 08E 09F 08E 08E 08E 08E ($000s)

ASL Marine Jun 133 0.44 0.84 91 Buy 2.6 2.5 2.0 0.6 9.1 31 253

China Hongxing Dec 533 0.21 0.33 56 Buy 5.0 4.3 1.0 0.6 4.0 13 6,719

Epure International Dec 271 0.21 0.34 60 Buy 5.0 4.2 1.5 0.9 0.0 20 469

Ezra Holdings Aug 404 0.69 1.25 81 Buy 5.0 4.5 4.6 0.7 26.1 55 4,545

Raffles Medical Dec 334 0.645 0.76 17 Buy 11.6 10.1 7.5 1.5 3.9 14 226

Source: DBS Vickers


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DBSV 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 (0-15% total return over the next 12 months for small caps, 0-10% 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

DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) andBloomberg (DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMERThis document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS VickersSecurities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [Thisreport is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form byany means or (ii) redistributed without the prior written consent of DBSVR.]

The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as toits accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for generalcirculation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situationand the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken insubstitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liabilitywhatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to thisdocument. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to timehave interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/oremployees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to performbroking, investment banking and other banking services for these companies.DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction asa manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification ondisclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATIONThe research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about thecompanies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part ofhis/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 5Jan 2009, the analyst and his / her spouse and/or relatives who are financial ly dependent on the analyst, do not hold interests in the securitiesrecommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the securities

recommended in this report as of 31 Dec 2008

2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registeredbroker-dealer, beneficially own a total of 1% or more of any class of common equity securities of the Pacific ShippingTrust as of 5 Jan 2008

3. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registeredbroker-dealer, may beneficially own a total of 5% or more of any class of common equity securities of Pacific ShippingTrust as of 5 Jan 2009.

4. Compensation for investment banking services:i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past

12 months, and within the next 3 months receive or intends to seek compensation for investment banking servicesfrom the ASL Marine,Parkway Life REIT,Pacific Shipping Trust, Mapletree Logistics Trust, Silverlake Axis

ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any


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investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing toobtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction inany security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTIONGeneral This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or

resident of or located in any locality, state, country or other jurisdiction where such distribution, publication,availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement tohold an Australian financial services licence under the Corporation Act 2001 [CA] in respect of financial servicesprovided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [MAS]under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only forwholesale investors within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and

regulated by the Hong Kong Securities and Futures Commission.

Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Advisers licence and is regulatedby the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No.198600294G), which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any researchreport published by any foreign DBS Vickers entities is distributed in Singapore only to institutional investorsas defined under the Securities and Futures Act. Distribution of research reports published by a foreign-relatedcorporation of DBSVR/DBSVS to Accredited Investors as defined under the Financial Advisers Regulations isprovided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11 of theFirst Schedule to the FAA.

United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in themeaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority.Research distributed in the UK is intended only for institutional clients.

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090120 dbs - survival of the fittest

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