singapore market focus small mid cap monthly · ezion provides liftboats/service rigs and offshore...

ed: CK / sa: JC, PY

FSST Small Cap: 389.57 FSST - Mid Cap : 700.99 STI : 2,875.24

Analyst Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team

Key Indices

Current % Chng STI Index 2,875.24 -0.3% FS Small Cap Index 389.57 0.1% USD/SGD Curncy 1.41 2.7% Daily Volume (m) 2,037 Daily Turnover (S$m) 887 Daily Turnover (US$m) 629

Source: Bloomberg Finance L.P. SMC Top Picks

Prices as at 7 Oct 2016 Source: DBS Bank; Bloomberg Finance L.P.

DBS Group Research. Equity 10 Oct 2016

Singapore Market Focus

Small Mid Cap Monthly

Issue No. 8 Refer to important disclosures at the end of this report

Eye$ on the money

Sticking with our safety first theme as we approach the US elections and with Brexit back in focus, we look at firms that are all cashed up

Prompted by a recent call for Metro to return excess cash to shareholders, we screen for cash-rich SMCs that offer value

Top picks for Oct: China Aviation Oil, Cityneon, Ezion Holdings, Katrina Group and Singapore O&G

SMC Radar: SunMoon

Conviction picks for October underperform marginally; add Ezion, our preferred proxy to ride the rebound in oil. Our top picks underperformed last month, closing 0.6% lower on average since our last issue. For October, we keep most of our picks, China Aviation Oil, Cityneon, Katrina Group and Singapore O&G. Following OPEC’s recent surprise move on production cuts, we add Ezion Holdings, our preferred SMC proxy to the uplift in oil sentiment, which we think could see a strong rebound from a low base. All cashed up. Prompted by a recent call for Metro Holdings to return excess cash to shareholders by an activist investor, some investors have turned their interest towards companies with a large amount of net cash sitting on their balance sheet, and which offers value. Our screen for SMC names of market capitalisation between US$20m to US$1bn is based on the following criteria: 1) profitable in the last year of operations, 2) 60% or more of their market capitalisation in net cash, and 3) trading at <1x P/B. SMC Radars: SunMoon, a global distributor and marketer of fresh fruits, vegetables and products, has an asset-light, consumer-centric and brand-focused business model. The proposed entry of Yiguo E-commerce, which has a strategic partnership with Alibaba, not only provides working capital for SunMoon but also fast-tracks its expansion plan in China.

Previous China Aviation 1.385 850 1.70 0.0 106.7 BUYCityneon Holdings 0.940 163 1.37 (6.0) 437.1 BUYmm2 Asia 0.865 316 0.95 12.3 158.2 BUY Singapore O & G 1.210 205 1.50 3.9 80.6 BUY

Price Mkt Cap Target Price Performance (%)

S$ US$m S$ 1 mth 12 mth Rating

Current China Aviation 1.385 850 1.70 0.0 106.7 BUY Cityneon Holdings 0.940 163 1.37 (6.0) 437.1 BUY Ezion Holdings 0.345 507 0.58 35.3 (45.5) BUY Katrina Group 0.310 51 0.43 (6.1) -! BUY Singapore O & G 1.210 205 1.50 3.9 80.6 BUY

Market Focus


Conviction Picks – September & October 2016 Review of our performance for September Singapore’s equity markets fared slightly better than expected during the seasonally volatile month of September, as the indices (FTSE STI, FTSE Small Cap and FTSE Mid Cap indices) erased losses from mid-September – edging into positive territory (albeit barely) with marginal gains of 0.2% on average since our last issue. Meanwhile, our conviction picks underperformed as they declined by a modest 0.6%, which we think was mainly due to profit-taking on Cityneon (which is still up almost 190% YTD), and Katrina Group, which closed slightly lower. Singapore O&G did well, gaining 5.2% m-o-m.

Desc. 1M Price Performance* Sep Conviction Picks# -0.6% China Aviation Oil +0.7% Cityneon Holdings -4.6% Katrina Group -1.6% Singapore O&G +5.2% Indices (STI, FSTS and FSTM) +0.2% FTSE STI -0.6% FSTS Index +0.6% FSTM Index +0.7%

*Refers to change in last price between 8th Sep and 7th Oct

#Shown are 4 out of our 5 top picks. For full list, please refer to September

issue: Safety First as Dark Clouds Gather

Source: DBS Bank, Bloomberg Finance L.P. Add Ezion for October, our preferred SMC proxy to the recent uplift in oil sentiment. While details on OPEC’s agreement to cut production are lacking and scepticism remains until the cuts materialise, the surprise move sends a positive signal that OPEC is on the cusp of changing its production strategy, which we think could put a floor on oil prices and set the stage for a steadier oil recovery.

Following the post-OPEC uplift in oil sentiment, we believe that service providers could see a strong rebound from the low base, and add Ezion as our preferred pick (among SMCs under our coverage) to ride the rebound. Ezion Holdings [EZI SP, TP S$0.58] Ezion provides liftboats/service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East. As of June 2016, it has a total of 26 service rigs delivered and 17 service rigs in operation. Despite the weak oil & gas market, we believe Ezion remains an attractive investment as its liftboat/service rig assets support the more resilient production stage of the offshore E&P value chain, and these assets offer an attractive substitute to the traditional workboat/barge combination used to support production platform maintenance. In terms of the business outlook, vessel deliveries of 2/7/2 units in 2016/2017/2018 respectively – all which have secured back-to-back contracts – are expected to contribute to the bottomline. Additionally, an MOU inked with one of China’s top IPPs – Huadian – to support Chinese offshore windfarm installations holds potential. Rate reductions and contract terminations remain a key risk for Ezion; we have prudently assumed a 15% p.a. reduction in our model. Ezion’s share price, currently trading at 0.4x P/BV, has been dragged down by its recent rights issue, as well as weak sentiment in the wake of the Swiber incident in Singapore, but we believe this is unjustified. We have a BUY call on Ezion with a TP of S$0.58, based on 0.6x FY16 P/BV.

Conviction Picks for October 2016

No. Security Desc. Sector Rating Last Price

(07-Oct)

Target Price Upside/

(Downside)

Catalyst

1 China Aviation Oil Oil & Gas BUY 1.385 1.70 23% 1) Earnings growth and delivery

2) Value-accretive acquisitions

2 Cityneon Holdings Support

Services

BUY 0.940 1.37 46% 1) Securing third IP

3 Ezion Holdings Oil & Gas BUY 0.345 0.58 68% 1) Oil price recovery

2) Vessel delivery

4 Katrina Group Consumer

Services

BUY 0.310 0.43 39% 1) New outlets, regional expansion

and online sales to drive growth

5 Singapore O&G Health Care BUY 1.210 1.50 24% 1) Successful new recruits of

medical practitioners

2) Acquisition of new

specialisations and/or markets

Source: DBS Bank, Bloomberg Finance L.P.

Market Focus


All cashed up Prompted by a recent call for Metro Holdings to return excess cash to shareholders by an activist shareholder, some investors have turned their interest towards companies with a large amount of net cash sitting on their balance sheet, and which offers value.

This month, we screen for SMC names of market capitalisation between US$20m to US$1bn, with c.60% or more of their market capitalisation in net cash (adjusted for minority interest) that are trading at 1x or less P/B. Additionally, these names were also profitable in the last year of operations:

Name Mkt Price Net Cash % Net P/BV PE Yield GICS Sub-Industry Cap (S$m) S$ ps (S$) Cash

NOBEL DESIGN HLD 80.8 0.380 0.533 140% 0.52 3.5 1.5% Homefurnishing Retail

SINOSTAR PEC HOL 70.4 0.110 0.152 138% 0.60 5.5 4.6% Oil & Gas Refining & Marketing

CDW HOLDING LTD 53.3 0.225 0.258 114% 0.61 74.7 9.7% Semiconductors

BAKER TECHNOLOGY 125.8 0.620 0.574 93% 0.57 393.7 4.0% Oil & Gas Equipment & Services

HANWELL HOLDINGS 127.3 0.230 0.193 84% 0.49 62.4 0.0% Packaged Foods & Meats

PEC LTD 154.4 0.610 0.494 81% 0.70 8.2 1.6% Construction & Engineering

AP OIL INTL LTD 42.0 0.255 0.200 78% 0.80 9.6 2.0% Commodity Chemicals

SUNRIGHT LTD 39.3 0.320 0.247 77% 0.56 28.4 0.6% Semiconductor Equipment

OKP HOLDINGS LTD 86.4 0.280 0.214 76% 0.81 11.9 5.4% Construction & Engineering

HENGXIN TECH LTD 114.5 0.295 0.221 75% 0.42 4.8 2.0% Communications Equipment

HOCK LIAN SENG 186.1 0.365 0.260 71% 0.84 6.6 6.9% Construction & Engineering

DATAPULSE TECH 46.0 0.210 0.145 69% 0.97 50.0 2.9% Technology Hardware, Storage &

MUN SIONG ENGINE 39.3 0.069 0.047 69% 0.70 9.9 2.2% Construction & Engineering

CHINA MINZHONG 766.9 1.170 0.799 68% 0.71 29.5 5.5% Packaged Foods & Meats

HAI LECK HLDS 77.8 0.380 0.250 66% 0.65 6.1 10.5% Oil & Gas Equipment & Services

METRO HOLDINGS 843.5 1.015 0.641 63% 0.61 9.9 2.0% Department Stores

PARKSON RETAIL 111.2 0.165 0.103 63% 0.69 3.4 3.0% Department Stores

POWERMATIC DATA 34.9 1.000 0.606 61% 0.74 12.3 5.0% Communications Equipment

SHS HOLDINGS LTD 130.2 0.190 0.112 59% 0.61 8.4 1.7% Oil & Gas Storage &

Transportation

FU YU CORP LTD 149.1 0.198 0.115 58% 0.88 12.8 7.6% Industrial Machinery

*Prices and conversions from reporting to pricing currency (S$) reflected in above table are updated as at 6 Oct’s close Source: DBS Bank, Bloomberg Finance L.P.

Trading below net cash per share. Based on our screen, there are three names that are trading below their net cash per share level i.e. Nobel Design Holdings, Sinostar PEC Holdings and CDW Holding. Net cash per share for these companies represent 140%, 138% and 114% of their share price respectively. Additionally, Nobel Design and Sinostar are trading at just 3.5x and 5.5x historical PE, suggesting that they could potentially be deeply undervalued. Three other names are trading very close to their net cash per share. Baker Technology, Hanwell Holdings and PEC Ltd are trading at 93%, 84% and 81% of their net cash per share respectively. Undemanding PE valuations. Besides Nobel Design and Sinostar, there are several other companies in our screen that also trade at undemanding (historical) PE valuations of 10x or less. These include PEC Ltd (8.2x PE), AP Oil Intl (9.6x), Hengxin Technology (4.8x), Hock Lian Seng (6.6x), Mun Siong Engineering (9.9x),

Hai Leck Holdings (6.1x), Metro Holdings (9.9x), Parkson Retail (3.4x) and SHS Holdings (8.4x). Potentially attractive dividend yield also on offer. Another interesting aspect of this set of screened stocks is that most of them have historically paid dividends, some of which are at fairly attractive levels. Companies that offer a historical yield of 5% or more include CDW Holding (9.7%), OKP Holdings (5.4%), Hock Lian Seng (6.9%), China Minzhong (5.5%), Hai Leck Holdings (10.5%), Powermatic Data (5%) and Fu Yu Corp (7.6%). Amongst these names, Hock Lian Seng and Hai Leck Holdings are the most intriguing as they are also trading at just 6.6x and 6.1x PE respectively, while trading at 71% and 66% of net cash per share.

Market Focus

Small Mid Caps Radar

Explorations SunMoon (S$0.068, SMOON SP) SunMoon, a global distributor and marketer of fresh fruits, vegetables and products, has an asset-light, consumer-centric and brand-focused business model. SunMoon’s strategy is to tap on its expanding distribution network, growing geographical area and increasing product range. The proposed entry of Yiguo E-Commerce, which has a strategic partnership with Alibaba, not only provides working capital for SunMoon but also fast-tracks its expansion plan in China. FY16F is still expected to be loss-making as the group has just emerged from a lengthy debt restructuring exercise. But with the entry of Yiguo, sales could surge fivefold from <$20m in FY15 to about S$100m in FY17F with shorter cash conversion cycle and the asset-light business model. SunMoon also plans to expand further into higher-margin, non-perishable products like jelly and fruit snacks. Asset-light business model Mainboard-listed SunMoon was embroiled in a lengthy debt restructuring from 2008 to October 2015. The group has since shifted towards an asset-light consumer-centric and brand-focused business model by tapping on its strong brand equity and expanding on the distribution network of over 13,000 points of sales across Asia and the Middle East, geographical area and product range (Network x Geography x Product) business model. Targeting China, the largest and fastest-growing market in Asia-Pacific. To gain access to China, SunMoon is working with Harvest Season, a fast-growing wholesale and retail fruit business with six retail stores in the PRC that are supplemented by an online sales channel. This partnership has since attracted the attention of Shanghai Yiguo E-commerce Co. Ltd (Yiguo), a leading fresh food e-commerce player in China. Just last week, Yiguo has proposed to invest S$24m (including warrant conversion) in SunMoon. SunMoon will place out 333.3m new shares at 4.5 cents per share with free warrants to Yiguo on the basis of one warrant for every two placement shares subscribed, with an exercise price of 5.4 cents per share. Post-placement, Yiguo will own a 51% stake in the enlarged share capital of SunMoon. Leveraging on Yiguo, which has a strategic partnership with Alibaba. Yiguo was established in 2005, and does global sourcing of products in various categories including fruits, vegetables, seafood, meat, poultry & eggs, pantry & beverage, and desserts. Yiguo has been in a strategic partnership with Alibaba.com since 2014. The partnership with Alibaba.com helps Yiguo to capitalise on Alibaba’s huge user traffic, strong fresh food online platforms, and rich online operation experiences. Vertical integration, expanding both upstream and downstream The entry of Yiguo will help SunMoon to fast-track its expansion plan, and to further cement SunMoon

as a global distributor and marketer of branded high-quality fruits and food products. SunMoon will be able to leverage on Yiguo’s network, infrastructure and logistic strengths to further expand its B2B channels and B2C ambitions. Yiguo's dominant e-commerce position in China will also allow SunMoon to expand its footprint in the China marketplace, as well as to rapidly increase its supply sources. SunMoon can tap into Yiguo’s suppliers and increase its range of fruit products. SunMoon, a global distributor and marketer of fresh fruits, vegetables and products, has an asset-light, consumer-centric and brand-focused business model. The proposed entry of Yiguo E-Commerce, which has a strategic partnership with Alibaba, not only provides working capital for SunMoon but also to fast-track its expansion plan in China.

Source: Bloomberg Finance L.P., DBS Bank

Analyst Ling Lee Keng; +65 6682 3703 [email protected]

At A Glance Issued Capital (m shrs) 318.8 Market Cap (S$m/US$m) 21.7 / 15.7 Major Shareholders (%) Loh Gary Hock Chua 25.3 Qap Capital Pte Ltd 4.0 Tan Kah Boh 2.8 Free Float (%) 67.9 Avg Daily Vol (m shrs) 3.3

Valuation FY Dec (S$ m) 2012 2013 2014 2015 Turnover 29.4 34.4 15.9 14.1 EBITDA (0.9) (0.4) (1.8) (3.3) Pre-tax Profit (2.0) 11.7 (2.8) (4.2) Net Profit (2.5) 11.1 (2.1) (2.1) EPS (S cts) (0.80) 3.47 (0.66) (0.66) EPS Gth (%) (429.4 (536.2 (119.0 (0.2) Net DPS - - - - BV Per Share (S cts) (26.9) 4.5 4.0 3.5 PE (X) (8.5) 2.0 (10.3) (10.3) EV/EBITDA (X) (47.4) (46.1) (11.8) (5.1) Net Div Yield (%) - - - - P/Book Value (X) (0.3) 1.5 1.7 1.9 Net Debt/Equity (X) 1.1 cash cash cash ROA (%) -10.25 47.12 -7.48 -10.60 ROE (%) 11.96 77.19 -16.62 -18.77

0

50

100

0.00

0.10

0.20

SunMoon (LHS) Relative STI Index (RHS)

Relative IndexS$ Relative IndexS$

Market Focus

Small Mid Caps Radar

Putting in place ERP system to support growing network, geography and products SunMoon has selected NetSuite OneWorld, a cloud-based Enterprise Resource Planning (ERP) software, for its ERP needs and to implement solutions that support SunMoon’s Network x Geography x Product strategy. The move will help SunMoon manage and optimise its expanding network and geography, and transform from a traditional trading company into a consumer-centric distributor and marketer of branded high-quality fruits, vegetables and products. Expanding to higher-margin non-perishable products SunMoon has plans to increase production of higher-margin non-perishable products, packaged in the form of juices or snacks. Strong brand name; well-positioned to meet growing demand SunMoon’s products come with the SunMoon Quality Assurance, backed by internationally recognised accreditations such as HACCP; Good Manufacturing Practice (GMP); AIB (Excellent), ISO 22000, Halal and Kosher Certification. With its strong brand equity, SunMoon is well positioned to meet increasing global demand for premium-grade agricultural produce and fuel growth in existing and new markets. Key Risks Yiguo not able to come on board The entry of Yiguo would not only provide working capital for SunMoon but also fast-track its expansion plan in China. Failure to get Yiguo on board could delay SunMoon’s expansion plan in China and also the rest of the world. Longer-than-expected cash conversion cycle The cash conversion cycle (CCC) is an efficiency ratio that measures the number of days which a company’s cash is tied up in inventories and accounts receivable, and is aimed at assessing how effective a company is at managing its working capital. In simple terms, it is how quickly a dollar paid to a supplier is converted into a dollar (or more) received from a customer. A longer-than-expected CCC could affect the group’s cashflow.

Non-perishable products

Source: DBS Bank, company

Revenue trend

Source: DBS Bank, company

Pretax profit / (loss)* trend

-4.4

-2.4

9.7

-2.8-4.2

-6

-4

-2

0

2

4

6

8

10

12

FY11 FY12 FY13 FY14 FY15

S$m

*Amount attributable to continuing operations Source: DBS Bank, company

Fruit Cups Juices

Snacks Frozen Fruit Sticks

14.613.6

11.4

15.9

14.1

0

2

4

6

8

10

12

14

16

18

FY11 FY12 FY13 FY14 FY15

S$m

Market Focus

Small Mid Cap

Page 5

APPENDICES

Market Focus

Small Mid Cap

Page 6

APPENDIX (1) Review of September 2016 Picks #

No. Security Desc. Sector Rating

(08-Sep)

Beg. Price

(08-Sep)

Last Price

(07-Oct)

% Price Change

(1M*)

Absolute Return

(%)

1 China Aviation Oil Oil & Gas BUY 1.375 1.385 + 0.7% + 0.7%

2 Cityneon Holdings Support Services BUY 0.985 0.940 - 4.6% - 4.6%

3 Katrina Group Consumer Services BUY 0.315 0.310 - 1.6% - 1.6%

4 Singapore O&G Health Care BUY 1.150 1.210 + 5.2% + 5.2%

*Refers to change in last price between 8 Sep and 7 October

#Shown are 4 out of our 5 top picks. For full list, please refer to September issue: Safety First as Dark Clouds Gather

Source: DBS Bank, Bloomberg Finance L.P Indices gained 0.2% on average since last issue (8 Sep – 7 Oct): FTSE STI: 2893.65 to 2875.24 // -0.6% FSTS Index: 387.21 to 389.57 // +0.6% FSTM Index: 696.35 to 700.99 /+0.7% Our picks were generally flat, but lost 0.6% on average, which was mainly due to Cityneon’s 4.6% decline m-o-m Singapore’s equity markets fared slightly better than expected during the seasonally volatile month of September, as the indices (FTSE STI, FTSE Small Cap and FTSE Mid Cap indices) erased losses from mid-September – edging into positive territory (albeit barely) with marginal gains of 0.2% on average since our last issue:

Index Performance (8 Sep – 7 Oct)

94

95

96

97

98

99

100

101

102

8/9/2016 15/9/2016 22/9/2016 29/9/2016 6/10/2016

FTSE STI FSTS FSTM


Meanwhile, our conviction picks underperformed as they declined by a modest 0.6%, which we think was mainly due to profit-taking on Cityneon (which is still up c.190% YTD) and Katrina Group, which closed slightly lower. Of our conviction picks, Singapore O&G was the best-performing, gaining 5.2% m-o-m.

CITN SP vs STI (8 Sep – 7 Oct)

0.82

0.84

0.86

0.88

0.9

0.92

0.94

0.96

0.98

1

2760

2780

2800

2820

2840

2860

2880

2900

2920

8/9/2016 15/9/2016 22/9/2016 29/9/2016 6/10/2016

FTSE STI CITN SP Equity


Market Focus

Small Mid Cap

Page 7

APPENDIX (2) Company Profiles for October 2016 Conviction Picks

No. Security Desc. Sector Rating Last Price

(7-Oct)

Target Price Upside/

(Downside)

Catalyst

1 China Aviation Oil Oil & Gas BUY 1.385 1.70 23% 1) Earnings growth and delivery

2) Value-accretive acquisitions

2 Cityneon Holdings Support

Services

BUY 0.940 1.37 46% 1) Securing third IP

3 Ezion Holdings Oil & Gas BUY 0.345 0.58 68% 1) Oil price recovery

2) Vessel delivery

4 Katrina Group Consumer

Services

BUY 0.310 0.43 39% 1) New outlets /regional expansion

2) Online sales

5 Singapore O&G Health Care BUY 1.210 1.50 24% 1) Successful new recruitments of

medical practitioners

2) Acquisition of new

specialisations and/or markets

Source: DBS Bank, Bloomberg Finance L.P. 1) China Aviation Oil [CAO SP, TP S$1.70]

We like CAO given its unique proposition on two fronts. Firstly, its monopoly in the supply of jet fuel in China should allow the group to benefit from the long-term growth in the Chinese international air travel market, which in our opinion, carries fairly low risk (owing to the cost-plus pricing model CAO enjoys for its domestic business).

Its domestic scale and strong backing from its parent have also been instrumental to the group’s ability to secure jet fuel supply contracts outside of China thus far. The group has successfully increased its total non-PRC supply locations to 42 other international airports, and is expected to add more ahead.

Secondly, we also like CAO for its unique exposure to Shanghai Pudong International Airport through its 33% stake in SPIA, the sole supplier of jet fuel at the airport.

In addition, with net cash of almost US$169m as at 1Q16, we believe that CAO could be on the lookout for acquisitions to further grow the scale and reach of its business and profits.

Our target price of S$1.70 is based on 12x FY17F PE, which we believe is reasonable against the projected 18% EPS CAGR over FY15-17F.

2) Cityneon Holdings [CITN SP, TP S$1.37]

Cityneon has evolved to become a creator of innovative and interactive exhibits revolving around Marvel’s The Avengers and Hasbro’s Transformers franchises, with the acquisition of Victory Hill Exhibitions (VHE) in September 2015.

While it will operate its Las Vegas exhibits, VHE primarily develops travelling exhibits which will be operated by local partners, and upfront licensing fees should account for a large portion of VHE’s takings; execution risk is thus minimal, while the business model is scalable. We now expect VHE to have a total of seven sets by end-2017 (from six sets previously) and eight by end-2018; Cityneon's earnings are forecasted to ramp up rapidly from ~S$1m in FY15 to S$7.4m in FY16F and S$19.3m in FY17F. Further upside could stem from securing a third IP (Star Wars or Jurassic World, for example), which we have not factored into our earnings.

Trading at a low FY17F PE-to-growth multiple of <0.1x with explosive FY15-FY18F EPS CAGR growth of about 300%, Cityneon is attractive to investors seeking growth and unique ideas in the entertainment industry. Our target price of S$1.37 is pegged to peer average of 17x FY17F earnings,

Market Focus

Small Mid Cap

Page 8

and represents an upside of about 46% over the current share price of S$0.940. 3) Ezion Holdings [EZI SP, TP S$0.58]

Ezion provides liftboats/service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East. As of end-June 2016, it has a total of 26 service rigs delivered and 17 service rigs in operation. Despite the weak oil & gas market, we believe Ezion remains an attractive investment as its liftboat/service rig assets support the more resilient production stage of the offshore E&P value chain, and these assets offer an attractive substitute to the traditional workboat/barge combination used to support production platform maintenance. In terms of the business outlook, vessel deliveries of 2/7/2 units in 2016/2017/2018 respectively – all which have secured back-to-back contracts – are expected to contribute to the bottomline. Additionally, an MOU inked with one of China’s top IPPs – Huadian – to support Chinese offshore windfarm installations holds potential. Rate reductions and contract terminations remain a key risk for Ezion; we have prudently assumed a 15% p.a. reduction in our model. Ezion’s share price, currently trading at 0.4x P/BV, has been dragged down by its recent rights issue, as well as weak sentiment in the wake of the Swiber incident in Singapore, but we believe this is unjustified. We have a BUY call on Ezion with a TP of S$0.58 based on a 0.6x FY16 P/BV peg. 4) Katrina Group [KTG SP, TP S$0.43]

Katrina is an F&B restaurant brand owner and operator in Singapore and China. Currently operating nine different F&B brands across its 34 stores (including two in China), Katrina endeavours to grow regionally in Malaysia, Indonesia and Vietnam, and targets to reach 60 stores by 2019. The group has also established a fast-growing online business which generates a sizeable S$100,000 in monthly receipts, and has recently positioned itself to grow further through a deal with Foodpanda. Driven by slight margin expansion as the online business grows, more store openings and the realisation of regional expansion plans, we project double-digit earnings growth of 13-17% for FY17-18F. The stock currently trades at an undemanding 13x FY17F PE, below the peer average of 20x. We peg our valuation for Katrina at 18x FY17F PE (or 10% discount to the peer average).

5) Singapore O&G [SOG SP, TP S$1.50]

Singapore O&G (SOG) is a chain of medical practices, specialising in women’s health. It derives 60% of its revenue from its obstetrics and gynaecology (O&G) services, leveraging on the healthcare segment which is predominantly served by the private sector (57% of babies are delivered through the private sector).

Apart from plans to grow its market share in the O&G segment via the recruitment of new doctors, SOG has also been diversifying into higher-margin complementary services, such as its cancer-related and newly acquired dermatology and aesthetics business, which should continue to leverage on referrals from its existing bread-and-butter O&G business to deliver growth.

Further, we could also see an acceleration of growth through the acquisition of new specialisations as management hopes to start a new paediatrics division in 2017 (subject to the successful recruitment of competent paediatricians), and is also exploring other expansion opportunities into new specialisations or markets.

Following the strong set of 1H16 results, we have raised our earnings forecast for FY16F/17F by 13%/11%, and lifted our TP (based on the average of PE multiple of 30x and DCF valuation) to S$1.50, from S$1.05 previously.

Market Focus

Small Mid Cap

Page 9

APPENDIX (3) Historical Performance of Previous Conviction Picks

Conviction Picks - Jan 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY -3.0% 2 Japfa Ltd BUY -3.1% 3 mm2 Asia BUY -12.2% 4 Riverstone Holdings BUY -11.7% 5 Sheng Siong Group BUY 0.6% 4-Feb-16 Replaced with new conviction

idea Simple Average: -5.9% vs STI: -6.3%

Conviction Picks - Feb 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY 3.8% 2 Japfa Ltd BUY 10.5% 3 mm2 Asia BUY 42.9% 8-Mar-16 Re-rated near TP 4 OSIM International BUY 23.7% 8-Mar-16 Re-rated near TP and downgraded

to HOLD on 8-Mar-16 5 Riverstone Holdings BUY -10.8%

Simple Average: 14.0% vs STI: +9.5%

Conviction Picks - Mar 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY -1.2% 2 Ezion Holdings BUY -14.3% Replaced with new conviction

idea 3 Japfa Ltd BUY 11.4% 4 Innovalues Ltd BUY 19.3% 5 Riverstone Holdings BUY 2.6%

Simple Average: 3.6% vs STI: -0.4%

Conviction Picks - Apr 2016 No. Sec. Desc. Rcmd Absolute

Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY 0.6% 2 Courts Asia BUY -1.5% 5-May-16 Replaced with new conviction

idea 3 Innovalues Ltd BUY 4.1% 5-May-16 Downgraded to HOLD on 4-May-

16 4 Japfa Ltd BUY 20.5% 5 mm2 Asia BUY 8.9% 6 Riverstone Holdings BUY 0.5% 5-May-16 Replaced with new conviction

idea Simple Average: 5.5% vs STI: -0.0%

Source: DBS Bank

Market Focus

Small Mid Cap

Page 10

Conviction Picks – May 2016

No. Sec. Desc. Rcmd Absolute Performance

Date Removed

Comments

1 China Merchants Holdings (Pacific) BUY 23.6% 14-Jun-16 Replaced with new conviction idea 2 Japfa Ltd BUY 10.6% 3 mm2 Asia BUY 22.7% 4 UMS Holdings BUY -4.8% 11-May-16 Downgraded to HOLD on 11-May-16 5 Nam Cheong FULLY

VALUED 5.5% 14-Jun-16 Replaced with new conviction idea


Conviction Picks – Jun 2016#


Date Removed

Comments

1 Cityneon Holdings BUY 11.5% 2 Japfa Ltd BUY 12.2% 3 Jumbo Group BUY 10.3% 15-July-16 Replaced with new conviction idea 4 mm2 Asia BUY 0.7%

Simple Average: 6.4% vs STI: 4.4%

#Shown are 4 out of our 5 top picks. For full list, please refer to June issue: The Hunt for GARP

Conviction Picks – Jul 2016#


Date Removed

Comments

1 China Aviation Oil BUY 6.2% 2 Cityneon Holdings BUY 12.5% 3 Japfa Ltd BUY -2.9% 26-July-16 Downgraded to HOLD on 26-July-16 4 mm2 Asia BUY 2.9%


#Shown are 4 out of our 5 top picks. For full list, please refer to July issue: Ambitions for Growth

Conviction Picks – Aug 2016#


Date Removed

Comments

1 China Aviation Oil BUY -10.7% 2 Cityneon Holdings BUY -4.8% 3 mm2 Asia BUY +12.1% Replaced with new conviction idea 4 Singapore O&G BUY -2.5%

Simple Average: -1.1% vs STI: +0.6%

#Shown are 4 out of our 5 top picks. For full list, please refer to August issue: Seeking Resilience Amidst Uncertainty

Source: DBS Bank

Market Focus

Small Mid Cap

Page 11

Conviction Picks – Sep 2016#


Date Removed

Comments

1 China Aviation Oil BUY +0.7% 2 Cityneon Holdings BUY - 4.6% 3 Katrina Group BUY -1.6% 4 Singapore O&G BUY +5.2%

Simple Average: -0.6% vs STI: -0.6%

#Shown are 4 out of our 5 top picks. For full list, please refer to September issue: Safety First as Dark Clouds Gather

Source: DBS Bank

Market Focus

Small Mid Cap

Page 12

APPENDIX (4) FSTS & FSTM Indices in September 2016

Top 5 Performing Sectors - FSTM Top 5 Performing Sectors - FSTS

ICB Sector No. of

Constituents

Net Market

Cap % Chg

ICB Sector No. of

Constituents

Net Market

Cap % Chg

(S$ m) (1m) (S$ m) (1m)

General Industrials 1 1,351 27.7

Oil Equipment, Services & Distribution

7 806 20.1

Construction & Materials

1 1,140 9.8 Oil & Gas Producers 1 33 18.9

Real Estate Investment & Services

3 4,235 6.8

Mining 1 84 7.8

Industrial Transportation 3 6,069 4.9

Technology Hardware & Equipment

1 140 4.0

Travel & Leisure 4 2,795 3.7 Travel & Leisure 1 534 2.3

Bottom 5 Performing Sectors – FSTM Bottom 5 Performing Sectors - FSTS

ICB Sector No. of

Constituents

Net Market

Cap % Chg

ICB Sector No. of

Constituents

Net Market

Cap % Chg

(S$ m) (1m) (S$ m) (1m)

Mobile Telecommunications

1 719 (10.1) Chemicals 1 127 (26.3)

Industrial Engineering

1 1,554 (2.0) Gas, Water & Multiutilities

1 254 (6.9)

Electronic & Electrical Equipment

1 2,248 (2.0) Media 1 711 (6.6)

Software & Computer Services

1 528 (1.5) General Retailers

3 349 (3.1)

Financial Services

1 673 (1.1) Industrial Engineering

4 910 (2.3)

Source: DBS Bank, FTSE

Market Focus

Small Mid Cap

Page 13

APPENDIX (5) SMC Screener: Ranked by Investment Metrics* (as at 30 September 2016)

*based on 30 Sep 2016 prices Source: DBS Bank, Bloomberg Finance L.P.

Top 10 Prospective Dividend Yield (FY16 DBS Estimates)

Company Name (%) Soilbuild Business Space REIT 8.9

Cache Logistics Trust 8.8

IREIT Global 8.4

UMS Holdings 8.1

Cambridge Industrials 8.1

Religare Health Trust 8.0

Ascendas Hospitality Trust 7.6

Keppel Infrastructure Trust 7.4

OUE Commercial REIT 7.2

Frasers Commercial Trust 7.1 Average 8.0

Top 10 Potential Upside (DBS Estimates of 12-month TP)

Company Name (%) Ezion Holdings 112.0

Midas Holdings 65.2

Perennial Real Estate Holdings 50.9

Cityneon Holdings 50.8

Trendlines Group 50.0

Katrina Group 42.5

iFAST Corporation 36.9

Yoma Strategic Holdings 35.4

Procurri Corporation Limited 31.4

Jumbo Group 29.0 Average 50.4

Lowest P/BV (FY16 DBS Estimates)

Company Name (x) Pacific Radiance Ltd 0.20

Ezra Holdings 0.21

Nam Cheong 0.25

Vard Holdings 0.31

Mermaid Maritime 0.32

Noble Group 0.32

PACC Offshore Services Holdings 0.41

Midas Holdings 0.49

Tat Hong Holdings 0.53

Far East Hospitality Trust 0.65 Average 0.37

Lowest PE (FY16 DBS Estimates)

Company Name (x) Mermaid Maritime 8.89

Courts Asia 9.46

CSE Global 9.62

Japfa Ltd 9.81

China Aviation Oil 11.22

Innovalues 11.40

Midas Holdings 12.21

Procurri Corporation Limited 12.24

Cambridge Industrials 12.59

UMS Holdings 12.74 Average 11.02

Top 10 Net Cash to Share Price (FY16 DBS Estimates of Net Cash to Last Price)

Company Name (%) CSE Global 30.9%

China Aviation Oil 27.7%

Trendlines Group 21.9%

Super Group 19.7%

UMS Holdings 17.6%

Innovalues 17.4%

Jumbo Group 14.5%

Venture Corporation 14.1%

iFAST Corporation 12.7%

Katrina Group 12.3% Average 18.9

Top 10 2-yr EPS CAGR (FY15-17 DBS Estimates)

Company Name (%) Ascendas Hospitality Trust 465.4

Cityneon Holdings 351.2

Indofood Agri 242.9

Trendlines Group 194.0

Perennial Real Estate Holdings 160.5

Ascendas India Trust 147.5

Delfi Ltd 64.7

Midas Holdings 53.0

mm2 Asia 51.7

Jumbo Group 43.9 Average 177.5

Market Focus

Small Mid Cap

Page 14

APPENDIX (6) DBS SMC Universe (as at 30 September 2016) Breakdown by Sector Breakdown by Rating

Source: DBS Bank

SMC Universe (US$50m to US$2bn Market Cap)

S/n Security Description Rating Market

Cap (S$ m)

Last Price

(Sep-16)

Target Price

(12 month)

Upside /

Downside

PE

FY16

PE

FY17

P/BV

FY16

EPS Growth

(%, FY16)

1 SembCorp Marine FV 2,727 1.305 1.20 -8% 16.6 16.3 1.1 nm

2 Mapletree Logistics Trust BUY 2,674 1.070 1.15 8% 15.5 14.7 1.1 -9.8

3 Raffles Medical HOLD 2,673 1.530 1.43 -7% 36.0 34.0 4.1 5.9

4 SMRT ACCEPT OFFER 2,565 1.680 1.28 -24% 29.2 36.3 2.7 -19.9

5 SPH REIT HOLD 2,547 1.000 0.99 -1% 20.8 20.1 1.068 3.6

6 Venture Corporation HOLD 2,506 9.020 9.20 2% 14.9 14.2 1.3 8.0

7 M1 FV 2,232 2.400 2.15 -10% 13.4 13.9 5.1 -6.5

8 Frasers Centrepoint Trust BUY 2,021 2.200 2.29 4% 20.9 21.3 1.2 -10.3

9 Noble Group HOLD 1,987 0.152 0.18 15% nm 15.9 0.322 nm

10 Keppel Infrastructure Trust BUY 1,948 0.505 0.56 11% 81.3 91.4 1.6 1.0

11 Ascott Residence BUY 1,883 1.140 1.31 15% 19.5 18.8 0.8 26.9

12 Starhilll Global REIT BUY 1,789 0.820 0.87 6% 20.8 15.1 0.9 -48.7

13 Sheng Siong Group BUY 1,594 1.060 1.18 12% 24.2 22.4 6.4 15.9

14 Parkway Reit BUY 1,573 2.600 2.75 6% 21.1 20.9 1.5 21.9

15 Perennial Real Estate Holdings

BUY 1,449 0.875 1.32 51% 17.2 2.6 10.0 3.7

16 Japfa Ltd BUY 1,429 0.810 0.97 20% 9.8 8.6 1.364 53.9

17 Frasers Logistics & Industrial Trust

BUY 1,418 0.995 1.10 10% 18.1 17.0 1.144 51.5

18 CapitaLand Retail China HOLD 1,405 1.615 1.65 2% 16.9 15.6 1.0 15.2

19 CDL Hospitality Trust BUY 1,387 1.400 1.65 18% 15.4 15.4 0.9 1.1

20 Delfi Ltd HOLD 1,277 2.090 2.42 16% 30.6 22.9 4.807 102.5

21 Bumitama Agri BUY 1,273 0.725 0.81 12% 14.4 10.5 2.1 -2.8

22 OUE Hospitality Trust BUY 1,216 0.680 0.75 11% 17.4 16.9 0.8 -25.0

23 China Aviation Oil BUY 1,159 1.340 1.70 27% 11.2 9.9 1.311 23.0

24 Frasers Commercial Trust BUY 1,120 1.405 1.49 6% 16.4 16.1 0.9 -10.5

25 Far East Hospitality Trust HOLD 1,088 0.605 0.65 7% 16.7 17.0 0.6 -13.6

26 Keppel DC Reit BUY 1,077 1.220 1.22 0% 16.2 17.1 1.3 18.3

27 Yoma Strategic Holdings BUY 1,025 0.590 0.80 35% 60.1 30.7 1.501 nm

28 Ascendas India Trust BUY 1,004 1.080 1.07 -1% 18.8 17.4 1.6 469.7

29 OUE Commercial REIT HOLD 907 0.700 0.73 4% 21.4 20.4 0.7 65.3

30 Super Group HOLD 886 0.795 0.87 10% 18.3 18.3 1.624 -0.5

9%

10%

3%

6%

17%

12%3%

33%

6%

1%Consumer Goods

Consumer Services

Financials

Health Care

Industrials

Oil & Gas

Real Estate

REITS

Technology

Telecommunications

38

6

24

1BUY

FV

HOLD

ACCEPT THE OFFER

Market Focus

Small Mid Cap

Page 15

SMC Universe (US$50m to US$2bn Market Cap) (Cont’d)

S/n Security Description Rating Market

Cap (S$ m)

Last Price

(Sep-16)

Target Price

(12 month)

Upside /

Downside

PE

FY16

PE

FY17

P/BV

FY16

EPS Growth

(%, FY16)

31 Religare Health Trust HOLD 836 1.045 0.95 -9% 16.2 15.2 1.2 9.5

32 Ascendas Hospitality Trust BUY 824 0.735 0.80 9% 23.7 23.8 0.88 3110.6

33 Cache Logistics Trust HOLD 802 0.895 0.93 4% 13.1 13.8 1.0 2.7

34 Soilbuild Business Space REIT BUY 728 0.700 0.79 13% 13.1 12.7 0.831 1.3

35 Cambridge Industrials HOLD 717 0.550 0.60 9% 12.6 12.4 0.8 0.9

36 Manulife US REIT BUY 699 1.118 0.93 -16% 19.2 17.1 1.081 4.1

37 Del Monte Pacific HOLD 680 0.350 0.37 6% 13.6 10.2 1.599 -28.7

38 Riverstone Holdings HOLD 667 0.900 0.96 7% 16.0 14.5 3.574 -1.6

39 Indofood Agri HOLD 628 0.450 0.48 7% 17.9 9.2 0.7 503.1

40 Cosco Corporation HOLD 593 0.265 0.30 14% nm nm 0.9 nm

41 PACC Offshore Services H ldi

HOLD 571 0.315 0.33 4% nm 69.0 0.411 nm

42 Ezion Holdings BUY 570 0.275 0.58 112% 8.6 7.3 0.326 -60.7

43 IREIT Global HOLD 454 0.735 0.77 5% 12.8 13.5 1.2 90.4

44 mm2 Asia BUY 417 0.810 0.95 17% 23.1 17.9 5.835 78.2

45 Midas Holdings BUY 386 0.230 0.38 65% 12.2 10.3 0.485 98.3

46 Jumbo Group BUY 382 0.595 0.77 29% 21.1 17.8 7.68 75.2

47 Pan-United Corp FV 339 0.605 0.53 -12% 22.1 21.2 1.241 -31.6

48 Tat Hong Holdings HOLD 301 0.480 0.56 17% nm nm 0.5 nm

49 Innovalues BUY 281 0.855 1.07 25% 11.4 9.6 2.849 5.4

50 Singapore O & G BUY 280 1.175 1.50 28% 30.0 26.2 7.43 59.6 51 UMS Holdings HOLD 264 0.615 0.61 -1% 12.7 10.8 1.4 -39.6

52 iFAST Corporation BUY 230 0.875 1.20 37% 38.0 32.7 2.889 -50.3

53 Courts Asia BUY 222 0.430 0.45 6% 9.5 9.3 0.7 18.5

54 Cityneon Holdings BUY 221 0.905 1.37 51% 29.4 11.3 3.8 679.7

55 CSE Global HOLD 214 0.415 0.41 -1% 9.6 9.7 0.859 -27.4

56 Vard Holdings HOLD 182 0.154 0.18 15% nm nm 0.3097 nm

57 Ezra Holdings FV 168 0.057 0.06 5% nm nm 0.214 nm

58 Procurri Corporation Limited BUY 143 0.510 0.67 31% 12.2 8.6 1.8645 -14.3

59 Mermaid Maritime HOLD 143 0.101 0.09 -6% 8.9 1939.1

0.3186 139.7

60 Nam Cheong FV 109 0.052 0.04 -21% nm nm 0.25 nm

61 Pacific Radiance Ltd FV 98 0.137 0.11 -20% nm nm 0.1988 nm

62 Trendlines Group HOLD 81 0.160 0.24 50% 14.7 14.4 0.6711 744.6

63 Katrina Group BUY 69 0.300 0.43 42% 14.2 12.6 4.7223 6.4 Source: DBS Bank, Bloomberg Finance L.P.

Market Focus

Small Mid Cap

Page 16

COMPANY GUIDES

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:YM

BUY Last Traded Price: S$1.45 (STI : 2,892.52) Price Target : S$1.70 (18% upside) (Prev S$1.62) Potential Catalyst: Earnings growth and delivery; value-accretive acquisitions Where we differ: Slightly below consensus due to lower GP/tonne estimates

Analyst Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team

What’s New 2Q16 net profit grew 32% y-o-y to US$23.6m, mainly on

higher volumes and share of profits from SPIA Ahead, supply business should still see good growth and likely

to see more challenging trading environment in 2H16, but should be offset by SPIA’s firm growth

Earnings forecasts raised by 6%/5% to US$75.4m/US$85.4m for FY16F/17F

Maintain BUY with higher TP of S$1.70

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 17,061 8,987 7,299 8,454 EBITDA 55.6 66.2 80.6 91.0 Pre-tax Profit 51.0 63.6 78.5 89.0 Net Profit 49.2 61.3 75.4 85.4 Net Pft (Pre Ex.) 49.2 61.3 75.4 85.4 Net Pft Gth (Pre-ex) (%) (30.0) 24.7 23.0 13.3 EPS (S cts) 7.67 9.56 11.8 13.3 EPS Pre Ex. (S cts) 7.67 9.56 11.8 13.3 EPS Gth Pre Ex (%) (30) 25 23 13 Diluted EPS (S cts) 7.67 9.56 11.8 13.3 Net DPS (S cts) 2.03 2.85 3.53 4.00 BV Per Share (S cts) 86.4 92.5 101 110 PE (X) 18.9 15.1 12.3 10.9 PE Pre Ex. (X) 18.9 15.1 12.3 10.9 P/Cash Flow (X) 19.6 17.8 24.6 42.0 EV/EBITDA (X) 15.0 11.4 8.6 7.1 Net Div Yield (%) 1.4 2.0 2.4 2.8 P/Book Value (X) 1.7 1.6 1.4 1.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 9.1 10.7 12.2 12.6 Earnings Rev (%): 6 5 Consensus EPS (S cts): 11.9 14.2 Other Broker Recs: B: 4 S: 0 H: 1

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

Scaling new heights with SPIA

Maintain BUY with higher TP of S$1.70 as we lift earnings for FY16F/17F by 6%/5% on higher optimism over associate performance. 2Q16 net profit jumped 32% y-o-y to US$23.6m, bringing total profit for 1H16 up 48.6% to US$47.8m on 1) higher supply and trading volumes, 2) higher trading gains, and 3) c.50% increase in the share of profits from associated companies – primarily SPIA, which alone contributed >60% of 1H16 net profit.

While the supply business should still see good growth ahead, we have lowered volume and GP/tonne estimates as we expect a more challenging trading environment in 2H16. However, we think that SPIA’S firm performance should more than offset trading challenges, if any.

Sole supplier of imported jet fuel in China with growing international presence. With monopoly on the supply of bonded jet fuel to China’s civil aviation industry, CAO should benefit from the long-term growth of China’s international air travel market. Furthermore, with the backing of SOE parent China National Aviation Fuel Group (CNAF), CAO has expanded its business to the marketing and supply of jet fuel at 42 international airports outside China, and further growing its reach, volumes, and ultimately greater economies of scale.

Firm outlook for prized asset 33%-owned associate, SPIA. As the exclusive supplier of jet fuel to Pudong International Airport, Shanghai Pudong International Airport Aviation Fuel Supply Company (SPIA) has and should continue to benefit from rising air traffic at the airport, which is driven by the continued development of Shanghai as China’s key financial centre.

Net cash and strong balance sheet could fund acquisition-driven growth. With net cash of c.US$169m at the end of 1H16, and strong support from its parent CNAF, we believe that CAO could be on the lookout for acquisitions to further grow the scale and reach of its business and profits.

Valuation: Raise TP to S$1.70 based on 12x FY17F PE. We think that 12x earnings against the projected 18% EPS CAGR over FY15-FY17F is reasonable, and believe that the group is poised to see a structural re-rating of its valuation multiple on sustained earnings growth, especially if CAO can utilise its strong cash balance to further accelerate growth through M&A.

Key Risks to Our View: Weaker demand for air travel and execution risk. A sustained slowdown in demand for air travel could impact jet fuel demand and volumes. Further, the group could also face execution risk in its trading business and prospective M&A activities.

At A Glance Issued Capital (m shrs) 865 Mkt. Cap (S$m/US$m) 1,250 / 932 Major Shareholders (%) China National Aviation Fuel 51.0 BP Plc 20.1

Free Float (%) 28.9 3m Avg. Daily Val (US$m) 2.3 ICB Industry : Oil & Gas / Oil & Gas Producers

DBS Group Research . Equity 2 Aug 2016

Singapore Company Guide

China Aviation Oil Version 1 | Bloomberg: CAO SP | Reuters: CNAO.SI Refer to important disclosures at the end of this report

62

82

102

122

142

162

182

202

222

0.5

0.7

0.9

1.1

1.3

1.5

Jul-12 Jul-13 Jul-14 Jul-15 Jul-16

Relative IndexS$

China Aviation Oil (LHS) Relative STI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

China Aviation Oil

WHAT’S NEW

Profits soar for China Aviation Oil, mainly as contributions from crown jewel SPIA grows 38% y-o-y in 2Q16

CAO’s 2Q16 net profit grows 32% y-o-y. 2Q16 net profit jumped 32% y-o-y to US$23.6m, bringing total profit for 1H16 up 48.6% to US$47.8m on 1) higher supply and trading volumes, 2) higher trading gains, and 3) c.50% increase in the share of profits from associated companies – primarily SPIA, which alone contributed >60% of 1H16 net profit.

Cash position still healthy. Net cash position declined 25% from a high of US$227m in 1Q16, partly as dividends totalling US$19.3m were paid over the quarter and on the increase in bank borrowings to support higher working capital requirements for the Group’s trading activities, but remained healthy at US$169m (or 17.9% of market cap) as at 1H16.

Possible trading challenges in 2H16, but still positive on growth outlook. Barring unforeseen circumstances, we think CAO’s jet fuel supply business should continue to benefit from the robust long-term growth of China’s international air travel market and on further expansion of its aviation marketing business (or jet fuel supply business outside of the PRC).

Management cautioned that the lack of clarity in the underlying oil market could pose challenges for CAO’s trading business in 2H16. Holding a similar view, we have lowered volume (for trading and supply) and GP/tonne estimates.

However, we think that associate performance – which has been really firm considering that the expected increase in air traffic from the Shanghai Disneyland (only opened in late June 2016) has not showed up yet – should more than offset trading challenges, if any.

Higher TP of S$1.70 as we lift earnings for FY16F/17F by 6%/5%. Although we lowered our GP/tonne estimates for FY16F/17F from US$2.11/US$2.28 to US$1.67/US$1.72, our overall earnings forecasts were still moderately lifted by 6%/5% for FY16F/17F as we have increased our estimates for associated contributions by US$13.4m/US$12.3m on higher optimism over SPIA’s growth prospects - given SPIA’s firm performance to date.

Based on our target valuation multiple of 12x FY17F earnings, this translates to a higher TP of S$1.70, from S$1.62 previously.

Quarterly / Interim Income Statement (US$m)

FY Dec 2Q2015 1Q2016 2Q2016 % chg yoy % chg qoq

Revenue 2,524 1,464 3,023 19.8 106.5

Cost of Goods Sold (2,515) (1,451) (3,013) 19.8 107.7

Gross Profit 9.20 13.2 9.90 7.6 (24.9)

Other Oper. (Exp)/Inc (3.9) (2.3) (4.3) 11.3 82.6

Operating Profit 5.36 10.8 5.62 4.9 (48.1)

Other Non Opg (Exp)/Inc 0.0 0.0 0.0

Associates & JV Inc 13.5 14.2 19.4 43.5 36.6

Net Interest (Exp)/Inc (0.3) (0.1) (0.2) 16.5 (57.0)

Exceptional Gain/(Loss) 0.0 0.0 0.0

Pre-tax Profit 18.6 24.9 24.8 33.2 (0.4)

Tax (0.8) (0.7) (1.2) 42.4 58.7

Minority Interest 0.0 0.0 0.0

Net Profit 17.8 24.2 23.6 32.8 (2.2)

Net profit bef Except. 17.8 24.2 23.6 32.8 (2.2)

EBITDA 18.9 25.0 25.0 32.5 (0.1)

Margins (%)

Gross Margins 0.4 0.9 0.3

Opg Profit Margins 0.2 0.7 0.2

Net Profit Margins 0.7 1.6 0.8

Source of all data: Company, DBS Bank


Company Guide

China Aviation Oil

CRITICAL DATA POINTS TO WATCH

Earnings Drivers: Sole importer of jet fuel into the PRC with growing international presence… Leveraging on the network of its parent, China National Aviation Fuel Group Corporation (CNAF) – a state-owned enterprise and the largest aviation transportation logistics services provider in the PRC – China Aviation Oil (Singapore) Corporation Ltd (CAO) has monopoly in the supply of imported jet fuel (or bonded jet fuel) to 17 international airports in China.

With the backing of its parent, CAO has also expanded its business to the marketing and supply of jet fuel to airline companies at 41 international airports outside of the PRC, spanning across Asia Pacific, North America, Europe and the Middle East.

Owing to its domestic monopoly, CAO should benefit from the long-term growth of China’s international air travel market. Coupled with its ongoing international expansion, we expect jet fuel volumes supplied and traded to grow at a 4.5% CAGR from c.12m in FY15 to almost 13m by FY17F.

Optimising of margins through trading activities. As CAO enjoys cost-plus pricing (we estimate gross profit of US$3.02/tonne) for its China jet fuel supply 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).

Management cautioned that the lack of clarity in the underlying oil market could pose challenges to CAO’s trading business in 2H16. Sharing similar concerns, we have since lowered our GP/tonne assumptions by 21% and 16% to US$1.67 and US$1.92 for FY16F and FY17F respectively.

Contributions from associates, including prized asset SPIA. Arguably CAO’s best-performing asset, SPIA has never had a cash call since the group first invested in Shanghai Pudong International Airport’s exclusive supplier of jet fuel in 2002, and has historically close to 90% share in the annual income contributions from CAO’s associated companies. Notably, SPIA alone contributed c.61.3% of the group’s FY15 profit, and continues to perform firmly as it contributed c.62% of CAO’s 1H16 net profit.

With two new runways added in the last 18 months, which has doubled the capacity of the airport, and additional satellite concourse expected to be completed by 2019, capacity at China’s second-largest airport is expected to be raised from 60m to 80m passengers p.a., which should underpin SPIA’s long-term growth prospects.

Nearer term, given SPIA’s consistently firm performance - even as expected air traffic increases from the recent opening of Shanghai Disneyland have yet to show up, we think that contributions from the associate should more than offset trading challenges (if any) in 2H16.

Jet Fuel Volumes (m tonnes)

Other Oil Product Volumes (m tonnes)

Implied Average Jet Fuel Price (USD/bbl)

Gross Profit per Tonne (US$)

Contribution from Associates (US$ m)

Source: Company, DBS Bank

10.4

12.1 11.9 12.213

0.0

1.9

3.7

5.6

7.5

9.4

11.2

13.1

2013A 2014A 2015A 2016F 2017F

6.1

8.3 8.3

9.910.4

0.0

2.1

4.3

6.4

8.5

10.6

2013A 2014A 2015A 2016F 2017F

151141

74

5762

0

31

62

92

123

154

2013A 2014A 2015A 2016F 2017F

3.19

1.34

1.76 1.67

1.92

0.00

0.64

1.29

1.93

2.57

3.22

2013A 2014A 2015A 2016F 2017F


Company Guide

China Aviation Oil

Balance Sheet:

Strong balance sheet with a net cash position of c.US$169m as at end-2Q16. With net cash of US$169m even after paying dividends of US$19.3m in 2Q16, we believe that 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.

Share Price Drivers: 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 Group acquired a 39% stake in refueller CNAF Hong Kong Refuelling Limited.

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 refuelling stations, pipelines going into airports and storage facilities.

We believe that the eventual 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, pose direct threats to the tourism and air travel industry which in turn, could weigh on global demand for jet fuel.

Potential mark-to-market losses for associates. As SPIA and CNAF-HKR hold inventories of fifteen 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 (CAO SP) is principally engaged in the supply and trading of bonded jet fuel, with monopoly in China and a growing international presence.

Apart from jet fuel, the Group also trades and/or supplies other transportation fuel (such as fuel oil, gas oil and aviation gas) and has varying equity stakes in oil-related assets. These assets include airport refuelling facilities (SPIA and CNAF HKR), pipelines (TSN-PEKCL) and storage facilities (Xinyuan and OKYC).

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


8.0

8.5

9.0

9.5

10.0

10.5

11.0

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

0.1

0.1

0.2

0.2

0.3

0.3

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

US$m

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015A 2016F 2017F

Avg: 8.4x

+1sd: 10.1x

+2sd: 11.9x

‐1sd: 6.6x

‐2sd: 4.9x4.1

5.1

6.1

7.1

8.1

9.1

10.1

11.1

12.1

13.1

Jul-12 Jul-13 Jul-14 Jul-15

(x)

Avg: 0.96x

+1sd: 1.12x

+2sd: 1.29x

‐1sd: 0.79x

‐2sd: 0.62x

0.5

0.7

0.9

1.1

1.3

1.5

1.7

Jul-12 Jul-13 Jul-14 Jul-15

(x)


Company Guide

China Aviation Oil

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F

Jet Fuel Volumes (m 10.4 12.1 11.9 12.2 13.0 Other Oil Product 6.07 8.29 8.28 9.94 10.4 Implied Average Jet Fuel 151 141 74.4 56.6 62.0 Gross Profit per Tonne 3.19 1.34 1.76 1.67 1.92 Contribution from 46.5 43.2 42.3 58.8 62.9

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F

Revenues (US$m)

Middle distillates 12,456 13,508 7,010 5,493 6,377 Other oil products 3,116 3,553 1,978 1,806 2,077 Total 15,572 17,061 8,987 7,299 8,454

Income Statement (US$m)

FY Dec 2013A 2014A 2015A 2016F 2017F

Revenue 15,572 17,061 8,987 7,299 8,454 Cost of Goods Sold (15,519) (17,034) (8,952) (7,262) (8,409) Gross Profit 52.5 27.4 35.4 37.0 45.0 Other Opng (Exp)/Inc (21.2) (16.5) (13.1) (16.8) (18.4) Operating Profit 31.3 10.9 22.3 20.2 26.5 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 46.5 43.2 42.3 58.8 62.9 Net Interest (Exp)/Inc (5.3) (3.1) (1.0) (0.5) (0.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 72.4 51.0 63.6 78.5 89.0 Tax (2.2) (1.9) (2.3) (3.1) (3.6) 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 70.2 49.2 61.3 75.4 85.4 Net Profit before Except. 70.2 49.2 61.3 75.4 85.4 EBITDA 79.5 55.6 66.2 80.6 91.0 Growth

Revenue Gth (%) 5.2 9.6 (47.3) (18.8) 15.8 EBITDA Gth (%) 10.3 (30.1) 19.1 21.7 12.9 Opg Profit Gth (%) 11.5 (65.1) 104.8 (9.4) 31.0 Net Profit Gth (Pre-ex) (%) 6.1 (30.0) 24.7 23.0 13.3 Margins & Ratio

Gross Margins (%) 0.3 0.2 0.4 0.5 0.5 Opg Profit Margin (%) 0.2 0.1 0.2 0.3 0.3 Net Profit Margin (%) 0.5 0.3 0.7 1.0 1.0 ROAE (%) 14.3 9.1 10.7 12.2 12.6 ROA (%) 4.2 3.2 5.5 8.9 9.5 ROCE (%) 5.9 1.9 3.7 3.1 3.7 Div Payout Ratio (%) 19.4 26.5 29.8 30.0 30.0 Net Interest Cover (x) 5.9 3.5 21.5 40.5 53.0


We adjust our GP/tonne assumptions downward on the expectation of a more challenging trading environment in 2H16.

Tax rate to remain low as CAO receives tax incentives under Singapore’s Global Trader Programme.


Company Guide

China Aviation Oil


FY Dec 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016

Revenue 2,524 2,399 1,973 1,464 3,023 Cost of Goods Sold (2,515) (2,386) (1,965) (1,451) (3,013) Gross Profit 9.20 12.9 8.00 13.2 9.90 Other Oper. (Exp)/Inc (3.9) (4.1) (5.7) (2.3) (4.3) Operating Profit 5.36 8.80 2.30 10.8 5.62 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 13.5 9.73 9.75 14.2 19.4 Net Interest (Exp)/Inc (0.3) (0.2) (0.2) (0.1) (0.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 18.6 18.3 11.9 24.9 24.8 Tax (0.8) (0.6) (0.4) (0.7) (1.2) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 17.8 17.7 11.4 24.2 23.6 Net profit bef Except. 17.8 17.7 11.4 24.2 23.6 EBITDA 18.9 18.5 12.0 25.0 25.0

Growth

Revenue Gth (%) 21.3 (4.9) (17.8) (25.8) 106.5 EBITDA Gth (%) 24.0 (1.7) (35.0) 107.7 (0.1) Opg Profit Gth (%) (8.9) 64.2 (73.9) 371.7 (48.1) Net Profit Gth (Pre-ex) (%) 23.9 (0.3) (35.6) 111.6 (2.2) Margins

Gross Margins (%) 0.4 0.5 0.4 0.9 0.3 Opg Profit Margins (%) 0.2 0.4 0.1 0.7 0.2 Net Profit Margins (%) 0.7 0.7 0.6 1.6 0.8

Balance Sheet (US$m)

FY Dec 2013A 2014A 2015A 2016F 2017F

Net Fixed Assets 7.38 6.79 6.21 5.64 5.06 Invts in Associates & JVs 268 270 266 275 285 Other LT Assets 9.90 9.96 9.43 8.70 7.97 Cash & ST Invts 56.3 94.3 171 235 284 Inventory 113 38.1 56.8 46.1 53.4 Debtors 1,267 959 337 281 313 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 1,721 1,379 846 851 948

ST Debt 28.6 0.0 0.0 0.0 0.0 Creditor 1,163 819 247 196 234 Other Current Liab 0.37 0.02 0.01 3.15 3.56 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 6.23 6.24 6.16 6.16 6.16 Shareholder’s Equity 524 554 593 645 705 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 1,721 1,379 846 851 948

Non-Cash Wkg. Capital 217 179 147 127 129 Net Cash/(Debt) 27.7 94.3 171 235 284 Debtors Turn (avg days) 29.9 23.8 26.3 15.4 12.8 Creditors Turn (avg days) 27.6 21.2 21.7 11.1 9.3 Inventory Turn (avg days) 1.5 1.6 1.9 2.6 2.2 Asset Turnover (x) 9.2 11.0 8.1 8.6 9.4 Current Ratio (x) 1.2 1.3 2.3 2.8 2.7 Quick Ratio (x) 1.1 1.3 2.1 2.6 2.5 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 0.5 N/A N/A N/A N/A Z-Score (X) NA NA NA NA NA


Contribution from SPIA alone represented >60% of 1H16 net profit.

With net cash of US$169m as at 1H16, CAO is well able to finance value-accretive M&A opportunities internally, if they arise.


Company Guide

China Aviation Oil

Cash Flow Statement (US$m)

FY Dec 2013A 2014A 2015A 2016F 2017F

Pre-Tax Profit 72.4 51.0 63.6 78.5 89.0 Dep. & Amort. 1.80 1.50 1.56 1.56 1.56 Tax Paid (2.3) (2.6) (2.2) 0.0 (3.1) Assoc. & JV Inc/(loss) (46.5) (43.2) (42.3) (58.8) (62.9) Chg in Wkg.Cap. (97.5) 36.1 33.1 16.4 (2.4) Other Operating CF 1.20 4.34 (1.7) 0.0 0.0 Net Operating CF (70.8) 47.2 52.1 37.7 22.1 Capital Exp.(net) (0.1) (0.2) (0.3) (0.3) (0.3) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV (5.0) 0.0 0.0 0.0 0.0 Div from Assoc & JV 38.8 35.2 37.2 49.9 52.9 Other Investing CF (1.3) 0.07 0.19 0.0 0.0 Net Investing CF 32.4 35.0 37.2 49.6 52.6 Div Paid (11.6) (13.7) (12.8) (22.6) (25.6) Chg in Gross Debt 26.9 (28.6) 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (2.0) (1.6) (0.3) 0.0 0.0 Net Financing CF 13.4 (43.9) (13.0) (22.6) (25.6) Currency Adjustments 0.26 (0.4) (0.1) 0.0 0.0 Chg in Cash (24.9) 38.0 76.2 64.7 49.1 Opg CFPS (S cts) 4.16 1.73 2.96 3.32 3.81 Free CFPS (S cts) (11.1) 7.33 8.09 5.85 3.41


Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

Price

12-mth Target Price

Rat ing

1: 29 Apr 16 0.87 1.04 NOT RATED

2: 07 Jul 16 1.30 1.62 BUY

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

1

2

0.50

0.70

0.90

1.10

1.30

1.50

Jul-15 Nov-15 Mar-16

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM, PY

BUYLast Traded Price: S$1.005 (STI : 2,867.40) Price Target 12-mth: S$1.37 (36% upside) (Prev S$1.20)

Potential Catalyst: Securing of third IP; entry of strategic investor Where we differ: Assume more sets of exhibits Analyst Lee Keng LING +65 6682 3703 [email protected]

What’s New 1H16 results above expectations; driven by newly

acquired VHE

Potential catalysts include securing third IP and

entry of strategic investor

Maintain BUY with a higher TP of S$1.37

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 96.5 101 127 149 EBITDA 2.63 15.1 34.6 43.3 Pre-tax Profit 0.79 9.37 24.9 31.3 Net Profit 0.87 7.41 19.3 24.0 Net Pft (Pre Ex.) 0.87 7.41 19.3 24.0 Net Pft Gth (Pre-ex) (%) (62.9) 750.3 161.1 24.2 EPS (S cts) 0.39 3.08 8.03 9.98 EPS Pre Ex. (S cts) 0.39 3.08 8.03 9.98 EPS Gth Pre Ex (%) (85) 680 161 24 Diluted EPS (S cts) 0.39 3.08 8.03 9.98 Net DPS (S cts) 0.40 0.0 0.0 0.0 BV Per Share (S cts) 22.4 23.7 31.7 41.7 PE (X) 254.8 32.7 12.5 10.1 PE Pre Ex. (X) 254.8 32.7 12.5 10.1 P/Cash Flow (X) 76.8 nm 10.5 7.6 EV/EBITDA (X) 79.7 16.9 7.1 5.1 Net Div Yield (%) 0.4 0.0 0.0 0.0 P/Book Value (X) 4.5 4.2 3.2 2.4 Net Debt/Equity (X) CASH 0.2 0.1 CASH ROAE (%) 2.3 13.9 29.0 27.2 Earnings Rev (%): - - - Consensus EPS (S cts): 3.2 7.5 9.9 Other Broker Recs: B: 3 S: 0 H: 0

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

Catalysts in sight Impressive results with new business segment incorporated. Cityneon’s strong set of 1H16 results was driven by newly acquired VHE. Net profit of S$4.7m accounts for 63% of our FY16F forecast of S$7.4m. Trading at a low FY17F PE-to-growth multiple of <0.1x with explosive FY15-FY18F EPS CAGR growth of about 300%, Cityneon is attractive to investors seeking growth and unique ideas in the entertainment industry. An expanding project pipeline, plans to add a third Intellectual property rights (IP), and potential tie-ups with strategic investors like CMC Holdings are catalysts.

Scalable business model with low execution risk. Cityneon’s earnings are directly correlated with the number of exhibits it has. The group recently announced its forthcoming openings in Singapore (October 2016), Taipei, Taiwan (June 2017) and Sydney, Australia (December 2017). We believe that more sets would be needed to fulfill the overwhelming demand. We expect a total of seven sets by end-2017, and eight sets by 2018.

Potential for third IP. There is a huge pool of franchises that meet management’s criteria of box office of >US$1bn and with sequels in the pipeline. Some attractive options include Star Wars, Jurassic Park, Batman and Spiderman. We expect the Victory Hill Exhibitions (VHE) team to leverage their credentials in developing the Avengers and Transformers exhibits to leapfrog to the next IP.

Valuation:

Maintain BUY with higher TP of S$1.37. Maintain BUY with a higher TP of S$1.37, up from S$1.20, based on peer average PE valuation of 17x FY17F earnings, instead of 15x previously. The sector has re-rated; peers' share prices have shot up 15-20% in the last two months.

Key Risks to Our View:

VHE’s limited track record. VHE was formed in 2012 and the first exhibition was in New York in 2014.

At A Glance

Issued Capital (m shrs) 245 Mkt. Cap (S$m/US$m) 246 / 183 Major Shareholders (%) Star Publications 52.5 Tan Aik Ti 16.4

Free Float (%) 31.1 3m Avg. Daily Val (US$m) 3.1 ICB Industry : Consumer Services / Media



Cityneon Holdings Version 4 | Bloomberg: CITN SP | Reuters: CNHL.SI Refer to important disclosures at the end of this report


Company Guide

Cityneon Holdings

WHAT’S NEW

1H16 results above expectations

Highlights Strong set of results driven by newly acquired VHE 1H16 revenue increased by 13.8% y-o-y to S$46.3m, mainly contributed by the acquisition of VHE in September 2015, which is classified under the Intellectual Properties Rights (IPR) segment. Revenues from IPR were mainly generated from both the travelling and permanent exhibitions. The revenue contributions from the group’s travelling Avengers S.T.A.T.I.O.N. set in Paris, the recently opened Las Vegas’ immersive attraction and the licence deal in China for Transformers travelling set all contributed to the strong 1H16 performance. 1H16 net profit of S$4.7m accounts for 63% of our FY16F forecast of S$7.4m.

The old Cityneon business, which consists of Exhibition Services, Experiential Environment, Event Management and Interior Architecture, registered a 11% drop in revenue to S$36.1m. Gross profit surged by 88.2% y-o-y to S$18m, mainly contributed by IPR. Excluding IPR, gross profit margin of the old business improved to 25% in 1H16, from 23% in 1H15. The improvement is mainly driven by higher-margin projects.

Our take

Outlook The IPR business will continue to be the focus for the group as the operating landscape remains challenging for the old business on the back of the uncertain global economic outlook.

Project pipeline In terms of project pipeline, the travelling Avengers set is expected to be launched in Singapore in October 16, followed by Taiwan and Australia in 2017. The group is also targeting to launch its new Transformers sets in Las Vegas and China in the next few months.

Potential catalysts 1) Securing third IP

There is a huge pool of franchises that meet the management’s criteria of box office of >US$1bn and with sequels in the pipeline. Some attractive options include Star Wars, Jurassic Park, Batman and Spiderman. We expect the VHE team to leverage on their credentials in developing the Avengers and Transformers exhibits to leapfrog to the next IP.

2) Entry of strategic investorChina remains an important market for the group, in addition to its current focus in Las Vegas, US. We would not rule out further collaboration with CMC Holdings or other strategic investors as the business is still in the growth phase. Back in May, Cityneon entered into a placement agreement with CMC, a media and entertainment investment with an operating platform in China. This enhances collaboration opportunities between the two entities and also paves the way for growth.

Valuation and recommendation We maintain our earnings forecasts for FY16F despite the outperformance as the bulk of contribution from Paris had already been factored in 1H16. Though 2H16 will include partial contribution from Singapore, but given its smaller population, the contribution will be much smaller.

Maintain BUY with a higher TP of S$1.37, up from S$1.20, based on peer average PE valuation of 17x FY17F earnings, instead of 15x previously. The sector has re-rated up; peers' share prices have shot up 15-20% in the last two months. Merlin Entertainments, Europe’s leading and the world’s second-largest visitor attraction operator, reported a resilient set of interim results despite challenging market conditions. Viad Corp, which provides experiential services within the exhibition and events industry and the travel and recreation industry, reported 2Q16 results that beat consensus.


Company Guide

Cityneon Holdings

Quarterly / Interim Income Statement (S$m)

FY Dec 1H2015 2H2015 1H2016 chg yoy chg hoh

Revenue 41 56 46 13.8% -17.0% Cost of Goods Sold (31) (42) (28) -9.0% -32.6% Gross Profit 10 14 18 88.2% 30.7% Other Oper. (Exp)/Inc (10) (12) (12) 17.8% -2.5% Operating Profit (1) 2 6 n.m. 260.7% Other Non Opg (Exp)/Inc 0 0 0 - -

Associates & JV Inc 0 0 0 - -

Net Interest (Exp)/Inc 0 0 0 - -

Exceptional Gain/(Loss) 0 0 0 - -

Pre-tax Profit (1) 2 6 n.m. 274.6% Tax 0 0 (1)

Minority Interest 0 0 0 - -

Net Profit (1) 2 5 n.m. 196.6% Net profit bef Except. (1) 2 5 n.m. 196.6% EBITDA 0 3 8 n.m. 176.3% Margins (%)

Gross Margins N/A 42.0 46.2

Opg Profit Margins N/A 11.1 15.0

Net Profit Margins N/A 7.3 13.2



Company Guide

Cityneon Holdings


Earnings Drivers:

Scalable business model. The first set had cost around US$8-9m to build but subsequent sets cost only about one-third of the original cost per set. Thus, Cityneon is able to achieve operational leverage with every subsequent set built. The group recently announced its forthcoming openings in Singapore (October 2016), Taipei, Taiwan (June 2017) and Sydney, Australia (December 2017). We believe that more sets would be needed to fulfill the overwhelming demand. We expect a total of seven sets by end-2017, and eight sets by 2018. With the increasing demand, Cityneon has expanded its creative team with two senior-level hires and is now equipped with both breadth and depth to produce and create innovative concepts to capture visitors’ interest.

The 7-8 exhibition sets would enable Cityneon to hold exhibitions in various parts of the world. Only the Las Vegas sets in the US are permanent ones; 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 operator and also from 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.

Manageable execution risk. Furthermore, execution risk is minimal for the travelling exhibits as the bulk of the risk is borne by the operator. Only the two permanent sets in Las Vegas need to assume operating risks.

Project pipeline till 2017 VHE targets to launch Transformers in Las Vegas and China by the end of 2016. For next year, VHE intends to venture into Middle East, rest of Asia and others parts of China. There are no limits on locations for its IP rights. VHE can venture into any part of the world with the two existing franchises. Though it makes more business sense to target the larger cities first, VHE has vast opportunities as there are >30 cities globally with populations of >10m.

Strong pipeline of Avengers/Transformers movies bodes well for attracting visitors Marvel has a strong movie pipeline stretching to 2020. The pipeline includes Guardians of the Galaxy 2, Thor and Spiderman in 2017; Avengers Infinity War part 1, Black Panther and Ant-man in 2018; Avengers Infinity War part 2, Captain Marvel and Inhumans in 2019, and yet-to-be-named movies in 2019/2020. For Transformers, there are four more films in the next ten years, with Transformers 5 slated to be released in June 2017.

The Las Vegas permanent attraction

Earnings contribution breakdown

Project pipeline assumption for 2016/2017 Country Announced / Assumed Exhibition Las Vegas * Announced – exhibition started in

May 2016 Avengers

Las Vegas * Announced – exhibition expected to start in October 2016

Transformers

Paris Announced – exhibition from April 2016 to September 2016

Avengers

Australia Announced – exhibition expected to start in December 2017

Avengers

Singapore Announced – exhibition expected to start in October 2016

Avengers

China Announced – exhibition expected to start in December 2016

Transformers

Taiwan Announced – exhibition expected to be opened no later than 15 June 2017

Avengers

China Assumed Avengers Sweden Assumed Avengers Middle East Assumed Transformers Europe Assumed Transformers

*permanent set

Historical box office takings – Avengers and Transformers


1.9

10.1 10.924.4

8.2

12.88

0.9

1.1

1.1

0.73

0

5

10

15

20

25

FY15 FY16F FY17F FY18F

Las Vegas perm set Travelling sets Old Cityneon business

S$m

Name of movieRelease Date

#Rank by gross takings for that year

Gross takings (US$m)

Grossing of the average movie

that yearTransformers Jul-07 3 319 15.4Iron Man May-08 2 318 16.0The Incredible Hulk Jun-08 17 135 16.0Transformers: Revenge of the Fallen

Jun-09 2 402 20.8

Iron Man 2 May-10 3 312 19.1Thor May-11 10 181 16.8Captain America: The First Avenger

Jul-11 12 177 16.8

Transformers: Dark of the Moon

Jun-11 2 352 16.8

The Avengers May-12 1 623 16.4Iron Man 3 May-13 2 409 15.9Thor: The Dark World Nov-13 12 206 15.9Transformers: Age of Extinction

Jun-14 7 245 14.9

Captain America: The Winter Soldier

Apr-14 4 260 14.9

Avengers: Age of Ultron May-15 3 459 15.9Ant-Man Jul-15 14 180 15.9

Total: 4,580


Company Guide

Cityneon Holdings

Balance Sheet:

Expansion should increase debt levels, but gearing will remain low in FY16. We believe the group will take on incremental debt of ~S$10m in the near term to fund the building of new exhibits, increasing net gearing to 0.1x in FY16, but positive cash flows should bring the group back into a net cash position in FY17, barring other unexpected capex outlays. Thus, at this point, gearing remains insignificant.

Share Price Drivers:

Potential for third IP There is a huge pool of franchises that meet the management’s criteria of box office of >US$1bn and with sequels in the pipeline. Some attractive options include Star Wars, Jurassic Park, Batman and Spiderman. We expect the VHE team to leverage on their credentials in developing the Avengers and Transformers exhibits to leapfrog to the next IP. Entry of strategic investor paves way for growth China remains an important market for the group, in addition to its current focus in Las Vegas, US. We would not rule out further collaboration with CMC Holdings or other strategic investors as the business is still in the growth phase. Back in May, Cityneon entered into a placement agreement with CMC, a media and entertainment investment with an operating platform in China.

Key Risks:

Limited track record for VHE VHE was formed in 2012 and the first exhibition was in New York in 2014. Earnings dependent on number of visitors Though Cityneon will usually receive upfront payment fees from operators to use its exhibits, 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, key stakeholders control more than half of the group. Shares in Cityneon are tightly held, with a free float of about 30%. Star Media still holds about 52.6% after the placement while CEO Ron Tan holds 16.4%.

Company Background

With the acquisition of Victory Hill Exhibitions (VHE) in September 2015, 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 two IP rights – with Marvel Entertainment to use Avengers S.T.A.T.I.O.N. till 2024 and with HASBRO Studios for the Transformers franchise till year 2023.


Capital Expenditure

ROE (%)

Victory Hill Exhibitions – two distinct models


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)

Half of the 20%

goes to Marvel or H

asbro

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


Company Guide

Cityneon Holdings

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (S$m)

Old Business 78.0 96.5 79.5 70.0 77.0 Victory Hill Exhibitions 0.0 0.0 21.0 57.3 72.0 Total 78.0 96.5 101 127 149

Net Profit (S$m)

Old Business 2.35 0.87 1.10 1.07 0.73 Victory Hill Exhibitions n.a. n.a. 5.6 18.3 23.4 Total 2.35 0.87 7.41 19.3 24.0

Net Profit Margins (%)

Old Business 3.0 0.9 1.4 1.5 0.9 Victory Hill Exhibitions n.a. n.a. 30.0 31.9 32.5 Total 3.0 0.9 7.4 15.2 16.1

Income Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 78.0 96.5 101 127 149 Cost of Goods Sold (55.9) (73.2) (64.0) (64.3) (73.1) Gross Profit 22.1 23.3 36.5 63.0 76.0 Other Opng (Exp)/Inc (19.3) (22.2) (27.0) (38.1) (44.2) Operating Profit 2.78 1.15 9.48 24.9 31.8 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.02 0.02 0.02 0.02 Net Interest (Exp)/Inc (0.3) (0.4) (0.1) (0.1) (0.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2.51 0.79 9.37 24.9 31.3 Tax (0.2) 0.04 (1.9) (5.5) (7.2) Minority Interest 0.03 0.04 (0.1) (0.1) 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2.35 0.87 7.41 19.3 24.0 Net Profit before Except. 2.35 0.87 7.41 19.3 24.0 EBITDA 4.02 2.63 15.1 34.6 43.3 Growth

Revenue Gth (%) 15.1 23.7 4.2 26.7 17.0 EBITDA Gth (%) 65.8 (34.4) 475.0 128.6 25.2 Opg Profit Gth (%) 142.3 (58.8) 727.6 163.1 27.5 Net Profit Gth (Pre-ex) (%) 162.2 (62.9) 750.3 161.1 24.2 Margins & Ratio

Gross Margins (%) 28.3 24.1 36.3 49.5 51.0 Opg Profit Margin (%) 3.6 1.2 9.4 19.6 21.3 Net Profit Margin (%) 3.0 0.9 7.4 15.2 16.1 ROAE (%) 10.0 2.3 13.9 29.0 27.2 ROA (%) 4.5 1.2 7.9 17.2 17.4 ROCE (%) 5.6 1.0 10.2 21.4 21.1 Div Payout Ratio (%) 0.0 101.6 0.0 0.0 0.0 Net Interest Cover (x) 10.4 3.1 79.1 352.0 63.9


Includes contribution from the Avengers set in Paris and Las Vegas, as well as partial upfront licence fee to be recognised in FY16 for the 2-year agreement in China


Company Guide

Cityneon Holdings


FY Dec 1H2014 2H2014 1H2015 2H2015 1H2016

Revenue 30 48 41 56 46 Cost of Goods Sold (20) (36) (31) (42) (28) Gross Profit 10 12 10 14 18 Other Oper. (Exp)/Inc (10) (10) (10) (12) (12) Operating Profit 0 3 (1) 2 6 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 0 2 (1) 2 6 Tax 0 0 0 0 (1) Minority Interest 0 0 0 0 0 Net Profit 0 2 (1) 2 5 Net profit bef Except. 0 2 (1) 2 5 EBITDA 1 4 0 3 8

Growth

Revenue Gth (%) (31.5) 57.3 (14.7) 37.1 (17.0) EBITDA Gth (%) (77.4) 472.7 (104.7) (1,670.9) 171.8 Opg Profit Gth (%) (91.7) 949.2 (122.8) (397.8) 260.7 Net Profit Gth (Pre-ex) (%) (95.6) 1,722.1 (132.1) (322.2) 196.6 Margins

Gross Margins (%) 32.7 25.5 23.5 24.6 38.8 Opg Profit Margins (%) 0.8 5.3 (1.4) 3.1 13.4 Net Profit Margins (%) 0.4 4.7 (1.8) 2.8 10.1

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 2.26 16.0 29.6 35.3 32.8 Invts in Associates & JVs 0.0 0.38 0.39 0.41 0.42 Other LT Assets 1.21 10.7 16.3 14.8 13.4 Cash & ST Invts 23.9 24.3 8.45 17.6 42.1 Inventory 0.32 0.19 0.36 0.36 0.41 Debtors 18.6 26.0 35.8 45.3 53.1 Other Current Assets 9.88 9.95 9.95 9.95 9.95 Total Assets 56.2 87.6 101 124 152

ST Debt 13.4 11.7 11.7 11.7 11.7 Creditor 14.8 23.8 17.7 17.8 20.2 Other Current Liab 2.18 0.97 2.86 6.43 8.19 LT Debt 0.0 0.0 10.0 10.0 10.0 Other LT Liabilities 0.22 1.10 1.10 1.10 1.10 Shareholder’s Equity 25.1 49.6 57.0 76.3 100 Minority Interests 0.49 0.45 0.51 0.57 0.60 Total Cap. & Liab. 56.2 87.6 101 124 152

Non-Cash Wkg. Capital 11.8 11.4 25.6 31.5 35.1 Net Cash/(Debt) 10.5 12.6 (13.2) (4.1) 20.4 Debtors Turn (avg days) 93.8 84.4 112.2 116.3 120.5 Creditors Turn (avg days) 88.2 98.2 129.6 118.3 112.5 Inventory Turn (avg days) 1.9 1.3 1.7 2.4 2.3 Asset Turnover (x) 1.5 1.3 1.1 1.1 1.1 Current Ratio (x) 1.7 1.7 1.7 2.0 2.6 Quick Ratio (x) 1.4 1.4 1.4 1.8 2.4 Net Debt/Equity (X) CASH CASH 0.2 0.1 CASH Net Debt/Equity ex MI (X) CASH CASH 0.2 0.1 CASH Capex to Debt (%) 7.5 38.8 81.8 64.3 34.6 Z-Score (X) 3.7 4.4 4.5 4.9 4.8



Company Guide

Cityneon Holdings

Cash Flow Statement (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 2.51 0.79 9.37 24.9 31.3 Dep. & Amort. 1.24 1.47 5.65 9.66 11.5 Tax Paid 0.03 (0.2) 0.0 (1.9) (5.5) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 5.85 0.80 (16.1) (9.5) (5.4) Other Operating CF (0.1) 0.07 0.0 0.0 0.0 Net Operating CF 9.55 2.89 (1.1) 23.1 32.0 Capital Exp.(net) (1.0) (4.5) (17.8) (14.0) (7.5) Other Invts.(net) 0.0 (1.1) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (0.4) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.08 (10.0) (7.0) 0.0 0.0 Net Investing CF (0.9) (16.0) (24.8) (14.0) (7.5) Div Paid 0.0 (0.9) 0.0 0.0 0.0 Chg in Gross Debt 0.73 (3.1) 10.0 0.0 0.0 Capital Issues 0.0 15.7 0.0 0.0 0.0 Other Financing CF 0.0 0.87 0.0 0.0 0.0 Net Financing CF 0.69 12.6 10.0 0.0 0.0 Currency Adjustments 0.39 0.85 0.0 0.0 0.0 Chg in Cash 9.71 0.39 (15.8) 9.19 24.5 Opg CFPS (S cts) 4.18 0.95 6.22 13.5 15.5 Free CFPS (S cts) 9.65 (0.7) (7.8) 3.82 10.2



Source: DBS Bank

Analyst: Lee Keng LING

Assume 7 sets by end-2017 and 8 sets for 2018

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: DT

BUYLast Traded Price: S$0.51 (STI : 2,745.39) Price Target : S$0.85 (66% upside) Potential Catalyst: Oil price recovery, successful windfarm venture Where we differ: More conservative on charter rates

Analyst Pei Hwa Ho +65 6682 3714 [email protected]

What’s New 1Q16 results broadly in line; forex loss was offset

by disposal gain

Trimmed FY16-17 earnings forecasts by 3-5% afteradjusting the delivery schedule

Expect sequential improvement in 2H16

Reiterate BUY; TP S$0.85

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015A 2016F 2017F Revenue 387 351 339 461 EBITDA 309 267 266 286 Pre-tax Profit 226 38 115 99 Net Profit 224 37 114 98 Net Pft (Pre-Ex, Aft Pref Div)*

179 95 80 91

EPS (S cts) 19.3 3.2 9.7 8.4 EPS Pre Ex, Aft Pref Div (S cts) 15.5 8.2 6.8 7.7 EPS Gth (%) 26 (84) 207 (14) EPS Gth Pre Ex, Aft pref div (%)

21 (47) (18) 14

Net DPS (S cts) 0.1 0.0 0.0 0.0 BV Per Share (S cts) 93.2 95.1 105.5 113.2 PE (X) 2.6 16.1 5.2 6.1 PE Pre Ex, Aft Pref Div (X) 3.3 6.2 7.5 6.6 P/Cash Flow (X) 2.8 2.8 3.1 2.5 EV/EBITDA (X) 6.3 7.9 7.5 7.0 Net Div Yield (%) 0.2 0.0 0.0 0.0 P/Book Value (X) 0.5 0.5 0.5 0.5 Net Debt/Equity (X) 0.9 1.1 1.0 0.9 ROAE (%) 24.5 2.1 9.1 7.1 Earnings Rev (%): (4) (7) Consensus EPS (S cts): 7.0 9.4 Other Broker Recs: B: 9 S: 1 H: 2

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

Good entry point Maintain BUY on Ezion with a TP of S$0.85, based on 0.7x FY16 P/BV. Given the recent pullback to near YTD low, we believe it’s time to accumulate Ezion, given the decent 1Q16 performance and improving prospects. We remain optimistic on Ezion’s ability to survive through this downturn with its solid management team, network and assets. Re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades in 2H16, delivery of newbuild liftboats, and successful diversification of customer base to win new charter contracts.

1Q16 core profits in line. 1Q16 headline profit of US$15.5m (-59% y-o-y) looks largely in line, making up 17% of our full-year estimate. There was a significant forex loss of S$14.6m, arising from exchange loss on notes payable due to the strengthening SGD against USD. This was offset by the S$13.2m gain on disposal of a service rig.

Windfarm venture shaping up. China has set a target of 5GW of installed offshore wind capacity by 2015 and 30GW by 2020 in its current 5-year plan. It is behind schedule with only approximately 2.5GW offshore wind capacity installed. A liftboat could facilitate installation of 200MW offshore wind capacity a year. Assuming 27.5GW wind capacity to be installed over the next five years or 5.5GW per year, 25-30 liftboats would be required in China. Ezion has signed a MOU with one of the top five IPPs in China and several partners to speed up the installation of offshore windfarms using liftboats.

Valuation: We value Ezion based on 0.7x FY16 P/BV, arriving at a target price of S$0.85. This implies a 66% upside potential.

Key Risks to Our View: Rate reduction and contract terminations We estimate that every 1% decline in average day rates will reduce Ezion’s bottom line by 3%. We have prudently assumed a 20% rate reduction in FY16 and a further 5% in FY17. Five service rigs are due for charter renewals in FY16. Besides, the Mexican contracts appear to be at risk of termination as these consist of the few units that are deployed for drilling and there have been several cancellations in that region. Competition might be keener ahead with more new entrants attracted to the growing liftboat market.

At A Glance

Issued Capital (m shrs) 1,595 Mkt. Cap (S$m/US$m) 814 / 596 Major Shareholders (%) Thiam Keng Chew 14.2 Prudential 10.5 Commonwealth Bank of Austr 8.5

Free Float (%) 59.7 3m Avg. Daily Val (US$m) 7.4 ICB Industry : Oil & Gas / Oil Equipment; Services & Dist

DBS Group Research . Equity 13 May 2016


Ezion Holdings Version 8 | Bloomberg: EZI SP | Reuters: EZHL.SI Refer to important disclosures at the end of this report

67

117

167

217

267

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

May-12 May-13 May-14 May-15 May-16

Relative IndexS$

Ezion Holdings (LHS) Relative STI INDEX (RHS)


Company Guide

Ezion Holdings

WHAT’S NEW

1Q16 results in line

Results review

1Q16 core profit in line. 1Q16 headline profit of US$15.5m (-59% y-o-y) looks largely in line, making up 17% of our full-year estimate. We note that there was a significant forex loss of S$14.6m, arising from exchange loss on notes payable due to the strengthening SGD against USD. This was offset by the S$13.2m gain on disposal of a service rig.

Performance was weaker sequentially. On a sequential basis, we estimate that core profit was probably 15% below 4Q15 (which would be around S$20m after adding back US$12m share of losses from Ausgroup).

Gross margin expanded 1.4ppt q-o-q to 25.2%, though still a far cry from 46.1% a year ago.

Net gearing stood at 1.1x as of March 2016, similar to end-December 2015.

Warrants issued and listed. As end-February, Ezion proposed a 1-for-5 bonus warrants issue exercisable within four years from issuance date at an exercise price of S$0.50 (last closing price). The warrants have been issued and listed on 27 April. If fully exercised, share cap could be enlarged by c.20% and Ezion would receive gross proceeds of c.S$162m, which would be utilised for investment, debt repayment and working capital purposes.

Key takeaways from briefing

1. Vessel deliveries. In 1Q16, one service rig was completedand two were redelivered, but these were squared off bythree service rigs that were removed for conversion,upgrade and redevelopment. Excluding unit #10 thatwas taken out for conversion into MOPU, total fleetstood at 26 units and operating fleet at 17 units as ofend-March 2016. We have trimmed FY16-17 earningsforecasts by 3-5%, after fine-tuning our deliveryschedule and adjusting for the divestment of 51% stakesin two Indonesian rigs.

2. Partial divestment and re-flagging of two Indonesiaunits. Ezion has divested a 51% stake in Unit #6 to itsIndonesia partner in order to reflag it under Indonesia.On a positive note, the divestment resulted in a sizeabledisposal gain of US$13m. We understand Unit #4 is alsoearmarked for re-flagging, possibly by end-2Q. A similardisposal gain could be expected. We have factored thisin our model. Going forward, joint-operation accountingapplies to these two units.

3. Windfarm venture shaping up. Ezion has resolved thekey issues, i.e. marine regulatory, flagging, taxation, etc.,with the formation of partnerships in China. An officialagreement could be announced in the next couple ofweeks and we could potentially see maiden contributionfrom the windfarm business by 3Q16. As of now, threeservices rigs are expected to be deployed for Chineseoffshore windfarm segment.

4. Potential provision for Pemex receivables? Pemex hasseemingly been holding back payment over the past oneyear. It remains debatable if provision is required for thethree JV units. Assuming a one-year delay in payment forEzion’s three 50:50 JV units with Swissco, receivableswould be c.US$30m (Ezion’s share).

5. Dilemma on hedging SGD-denominated notes. Ezionsaw an unusual US$14.6m forex loss in 1Q16, arisingfrom the strengthening SGD against USD on SGD-denominated notes. This came about as managementdeferred the rollover of hedges expired end-2015 inanticipation of a weakening SGD, which unexpectedlyworked out against its favour. Management is nowmonitoring the market condition before entering intohedges.

6. 2H16 recovery. Operationally, 2Q16 is expected to bestable in 2Q16. We may see disposal gain of aboutS$13m if the divestment of a 51% stake in the secondIndonesian unit is concluded. If the trend ofstrengthening USD continues, we may also see someforex gain. We look forward to a stronger 2H16 with there-delivery of units under repair/upgrade/conversion andmaiden contribution from the windfarm business.


Company Guide

Ezion Holdings


FY Dec 1Q2015 4Q2015 1Q2016 % chg yoy % chg qoq

Revenue 90.1 84.8 82.1 (8.9) (3.1)

Cost of Goods Sold (48.6) (64.6) (61.4) 26.3 (4.9)

Gross Profit 41.5 20.2 20.7 (50.2) 2.3

Other Oper. (Exp)/Inc (3.7) (2.4) (4.3) 14.2 78.0

Operating Profit 37.8 17.8 16.4 (56.5) (7.8)

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

Associates & JV Inc 8.16 (3.0) 8.22 0.7 nm

Net Interest (Exp)/Inc (4.7) (5.6) (7.6) (63.8) (35.6)

Exceptional Gain/(Loss) 0.0 (72.3) (1.5) nm 98.0

Pre-tax Profit 41.3 (63.1) 15.6 (62.3) nm

Tax (0.3) (0.5) (0.1) (73.7) (84.2)

Minority Interest 0.0 0.0 0.0 nm nm

Net Profit 41.0 (63.5) 15.5 (62.2) nm

Net profit bef Except. 41.0 8.73 17.0 (58.7) 94.2

EBITDA 75.8 50.1 60.2 (20.5) 20.2

Margins (%)



Net Profit Margins 45.5 (74.9) 18.9



Company Guide

Ezion Holdings


Earnings Drivers:

Charter-backed fleet expansion. Since the delivery of its first liftboat, the Lewek Leader, in January 2010, Ezion has expanded its fleet rapidly to 26 service rigs (excluding unit #10 that was taken out for conversion into MOPU). Based on the existing schedule, management expects another 2/7/2 units to come on stream by in 2016/17/18. All the vessels under construction have already secured back-to-back contracts and will start contributing to earnings upon delivery to customers.

Rate reduction an uncertainty. While we expect sequential improvement from the maiden contribution of the ten new service rigs to be delivered this year and resumption of the ten vessels currently under repair at yards, the pace of earnings growth is dependent on the magnitude of rate reduction. With oil price hovering at low levels, rate renegotiation is inevitable. Against this backdrop, we have factored in a 20-25% discount in 2016-2017.

Pick-up in offshore logistic revenue. Ezion’s Australian offshore logistic fleet comprises ten tugs and 30 ballastable barges. Ballastable barges, which have specially reinforced decks, have been modified to carry heavy offshore platforms and jackets. Demand for such high-end vessels has fallen off the cliff since 4Q14, with the construction of major Australian LNG projects coming to an end. This was exacerbated by depressed oil prices that have discouraged customers from exercising charter options after the initial term of 18 months.

We estimate overhead costs to be around US$20m a year, taking into account depreciation, crew costs and interest expense. Upside potential would come from a stronger-than-expected demand or disposal of the fleet, which has a carrying value of around US$250m. However, we believe it is not easy to find buyers in the current climate.

Contract wins from windfarm expansion to fuel growth. During the peak of its contract wins, Ezion won 12/9/7 new charter contracts in 2012/13/14 respectively. The contracting pace is expected to slow down, constrained by Ezion’s stretched balance sheet. But the unexpected collapse in oil prices has accelerated the decline as some customers have held back the award of new contracts or have negotiated down charter rates.

We believe demand will continue to grow in this region as liftboats/service rigs are in early stages of the industry cycle, to substitute workboats and barges that are traditionally used to support offshore production platforms. Ezion enjoys first-mover advantage to tap the industry’s growth. In addition, its recent venture into offshore windfarm could be a medium-term growth engine as well.

Total fleet

Operating fleet


18

21

2628

35

0.0

4.4

8.8

13.3

17.7

22.1

26.5

30.9

35.4

2013A 2014A 2015A 2016F 2017F

18 18 18

24

35

0.0

7.1

14.3

21.4

28.6

35.7

2013A 2014A 2015A 2016F 2017F


Company Guide

Ezion Holdings

Balance Sheet: High net gearing of 1.1x; backed by charter contracts. Apart from the 3-6 units that could be redeployed for windfarm business or converted into MOPU, Ezion’s service rigs are backed by charter contracts on hand. Risks of defaults and cancellations are relatively low, given its reputable clientele base that consists largely of NOCs and IOCs.

Sound financial health. Net debt/EBITDA is expected to hover around 5.5x in 2016. Current ratio of c.1.0x indicates Ezion’s ability to service short-term financing needs that may arise. Ezion should be able to meet its interest payments with c.3x net interest coverage ratio.

Share Price Drivers: Oil price rebound. Oil price is a leading indicator and key re-rating catalyst for O&G sector as the market has widely priced in the weak earnings and new lower norm of oil prices. We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential.

Vessel deliveries. Besides the delivery rescheduling, ten of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/conversions. The resumption of these rigs in 2016 should drive earnings recovery. In addition, Ezion is expected to take delivery of 2/7/2 vessels in 2016/17/18, driving growth into 2017. Key downside risk is a rate reduction greater than the 20-25% factored into our model.

New contracts/renewals at good rates. Securing new/renewal of charter contracts at good rates would alleviate concerns over contract cancellations and rate reductions and thus lower the risk premium ascribed to the company.

Key Risks: Rising interest rates. About 60-70% of its debts have been swapped to fixed rates, lowering the sensitivity. We estimate that every 100-bp increase in interest rates could reduce Ezion's net profit by approximately 4%.

Rate reduction and contract terminations. Five service rigs are due for charter renewals in FY16. In terms of termination, the Mexican contracts appear to be at risk as these consist of the few units that are deployed for drilling and PEMEX has exercised early termination clauses on a couple of drilling rigs last year and is facing liquidity crunch because of the oil price collapse.

Keener competition. The rising acceptance and growing demand for liftboats have attracted new entrants to the market. We estimate that there are c.20 new liftboats currently under construction to be delivered largely in 2017. We believe demand growth should outpace supply growth in the under-penetrated Asia-Pacific region.

Company Background Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East regions. Ezion had a total of 26 service rigs delivered and 17 service rigs in operation as of March 2016. The fleet is expected to grow to 28 vessels by end-2016 and 35 by end-2017.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.2

0.2

0.2

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

US$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2013A 2014A 2015A 2016F 2017F

Avg: 11.6x

+1sd: 14.6x

+2sd: 17.5x

‐1sd: 8.7x

‐2sd: 5.8x5.2

7.2

9.2

11.2

13.2

15.2

17.2

19.2


(x)

Avg: 2.18x

+1sd: 3.28x

+2sd: 4.37x

‐1sd: 1.08x

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5


(x)


Company Guide

Ezion Holdings

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F

Total fleet 18.0 21.0 26.0 28.0 35.0 Operating fleet 18.0 18.0 18.0 24.0 35.0

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F

Revenues (US$ m) Production and 376 312 280 381 Exploration and 10 38 58 79 Others 0 0 1 1

Total 387 351 339 461 Operating profit (US$ m) Production and 195 26 71 88 Exploration and (8) 0 15 16 Others 0 0 1 1 Others (8) 83 15 10 Total 179 109 102 114 Operating profit Margins Production and 51.8 8.4 25.4 23.0 Exploration and (78.6) 0.1 26.1 19.9 Others 99.7 100.0 100.0 100.0 Others N/A N/A N/A N/A Total 46.2 31.1 30.0 24.8

Income Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F

Revenue 282 387 351 339 461 Cost of Goods Sold (149) (191) (233) (229) (327) Gross Profit 133 196 118 109 134 Other Opng (Exp)/Inc (14) (17) (9) (8) (20) Operating Profit 119 179 109 102 114 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 31 28 23 33 34 Net Interest (Exp)/Inc (7) (17) (22) (45) (49) Exceptional Gain/(Loss) 20 36 (72) 26 0 Pre-tax Profit 163 226 38 115 99 Tax (3) (2) (2) (1) (1) Minority Interest 0 0 0 0 0 Net Profit 160 224 37 114 98 Net Profit before Except. 141 188 109 88 98 Preference Dividend (8) (9) (14) (8) (8) Net Pft Pre-Ex, Aft Pref Div 133 179 95 80 91 EBITDA 195 309 267 266 286 Growth Revenue Gth (%) 77.7 37.1 (9.1) (3.5) 36.0 EBITDA Gth (%) 115.7 58.3 (13.6) (0.7) 7.8 Opg Profit Gth (%) 108.5 49.9 (38.9) (6.8) 12.3 Net Profit Gth (%) 103.4 39.4 (83.6) 210.6 (14.0) Net Pft Pre-Ex Aft Perf Div Gth (%) 103.1 34.8 (46.7) (16.6) 14.1

Margins & Ratio Gross Margins (%) 47.2 50.7 33.6 32.3 29.1 Opg Profit Margin (%) 42.3 46.2 31.1 30.0 24.8 Net Profit Margin (%) 56.9 57.9 10.5 33.7 21.3 ROAE (%) 27.2 24.5 2.1 9.1 7.1 ROA (%) 9.4 8.6 0.8 3.4 2.9 ROCE (%) 7.8 7.5 3.7 3.5 3.9 Div Payout Ratio (%) 0.6 0.5 0.0 0.0 0.0 Net Interest Cover (x) 17.5 10.7 5.0 2.2 2.3



Company Guide

Ezion Holdings

Quarterly / Interim Income Statement (US$ m)

FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016

Revenue 90 90 86 85 82 Cost of Goods Sold (49) (59) (61) (65) (61) Gross Profit 42 31 25 20 21 Other Oper. (Exp)/Inc (4) (5) 3 (2) (4) Operating Profit 38 26 28 18 16 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 8 9 9 (3) 8 Net Interest (Exp)/Inc (5) (6) (6) (6) (8) Exceptional Gain/(Loss) 0 0 0 (72) (1) Pre-tax Profit 41 29 31 (63) 16 Tax 0 0 0 0 0 Minority Interest 0 0 0 0 0 Net Profit 41 29 30 (64) 15 Net profit bef Except. 41 29 30 9 17 Preference Dividend 0 0 0 0 0 Net Pft (Pre-Ex, Aft Pref Div) 41 29 30 9 17

EBITDA 76 68 73 50 60

Growth

Revenue Gth (%) (13.8) (0.1) (4.3) (1.7) (3.1) EBITDA Gth (%) (8.3) (9.8) 6.9 (31.5) 20.2 Opg Profit Gth (%) (16.3) (31.4) 6.7 (35.6) (7.8) Net Profit Gth (%) (51.0) (29.4) 4.8 nm nm Margins

Gross Margins (%) 46.1 34.9 29.0 23.8 25.2 Opg Profit Margins (%) 41.9 28.8 32.1 21.0 20.0 Net Profit Margins (%) 45.5 32.2 35.2 (74.9) 18.9

Balance Sheet (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F

Net Fixed Assets 1,464 2,136 2,284 2,256 2,345 Invts in Associates & JVs 194 173 204 237 270 Other LT Assets 5 14 12 12 12 Cash & ST Invts 166 372 230 223 172 Inventory 0 0 0 0 0 Debtors 107 160 193 188 209 Other Current Assets 107 128 186 186 186 Total Assets 2,043 2,981 3,108 3,101 3,195

ST Debt 223 288 375 375 375 Creditor 69 70 116 98 157 Other Current Liab 84 69 109 104 104 LT Debt 863 1,208 1,230 1,135 1,079 Other LT Liabilities 4 33 36 36 36 Shareholder’s Equity 800 1,313 1,241 1,353 1,444 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 2,043 2,981 3,108 3,101 3,195

Non-Cash Wkg. Capital 60 148 153 172 135 Net Cash/(Debt) (920) (1,125) (1,375) (1,287) (1,282) Debtors Turn (avg days) 106.5 125.9 183.4 205.5 157.5 Creditors Turn (avg days) 181.0 288.9 345.8 398.7 247.2 Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.2 0.2 0.1 0.1 0.1 Current Ratio (x) 1.0 1.5 1.0 1.0 0.9 Quick Ratio (x) 0.7 1.2 0.7 0.7 0.6 Net Debt/Equity (X) 1.1 0.9 1.1 1.0 0.9 Net Debt/Equity ex MI (X) 1.1 0.9 1.1 1.0 0.9 Capex to Debt (%) 67.3 34.9 23.8 6.9 15.6 Z-Score (X) 0.9 0.9 0.8 0.9 1.0



Company Guide

Ezion Holdings

Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015A 2016F 2017F

Pre-Tax Profit 163 226 38 115 99 Dep. & Amort. 45 103 135 131 138 Tax Paid (2) (2) (4) (7) (1) Assoc. & JV Inc/(loss) (31) (28) (23) (33) (34) Chg in Wkg.Cap. (5) (62) (32) (13) 38 Other Operating CF (15) (23) 94 0 0 Net Operating CF 155 214 209 194 240 Capital Exp.(net) (731) (522) (382) (104) (228) Other Invts.(net) 22 (19) (4) 0 0 Invts in Assoc. & JV (19) 15 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (5) 6 8 0 0 Net Investing CF (733) (520) (378) (104) (228) Div Paid (1) (1) (1) 0 0 Chg in Gross Debt 532 290 180 (95) (56) Capital Issues 97 272 (87) 0 0 Other Financing CF (14) (30) (38) (2) (8) Net Financing CF 614 530 54 (98) (63) Currency Adjustments (6) (18) (27) 0 0 Chg in Cash 31 206 (142) (7) (51) Opg CFPS (S cts) 11.3 17.5 15.2 13.0 12.7 Free CFPS (S cts) (40.5) (19.5) (10.9) 5.7 0.8



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 14 May 15 1.19 1.50 BUY

2: 19 May 15 1.13 1.50 BUY

3: 21 May 15 1.08 1.50 BUY

4: 22 Jun 15 1.09 1.50 BUY

5: 17 Aug 15 0.66 1.00 BUY

6: 18 Sep 15 0.72 1.00 BUY

7: 26 Oct 15 0.74 1.00 BUY

8: 13 Nov 15 0.66 1.00 BUY

9: 16 Nov 15 0.66 1.00 BUY

10: 15 Dec 15 0.57 1.00 BUY

11: 17 Dec 15 0.60 1.00 BUY12: 11 Jan 16 0.57 1.00 BUY13: 14 Jan 16 0.55 1.00 BUY14: 18 Jan 16 0.50 1.00 BUY

Note : Share price and Target price are adjusted for corporate actions. 15: 25 Jan 16 0.51 1.00 BUY16: 01 Feb 16 0.50 1.00 BUY17: 10 Feb 16 0.50 1.00 BUY18: 15 Feb 16 0.51 1.00 BUY19: 22 Feb 16 0.52 1.00 BUY20: 23 Feb 16 0.50 0.85 BUY21: 02 Mar 16 0.52 0.85 BUY22: 15 Mar 16 0.61 0.85 BUY23: 03 May 16 0.55 0.85 BUY

12

3

4

5

6

78

910

11

12

13

14

15

16

17

18

19

20

21

22

230.46

0.56

0.66

0.76

0.86

0.96

1.06

1.16

1.26

May-15 Sep-15 Jan-16 May-16

S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / JC, PY

BUY(Initiating Coverage) Last Traded Price: S$0.315 (STI : 2,820.59) Price Target 12-mth: S$0.43 (36% upside)

Potential Catalyst: Outlet growth /e-commerce

Analyst Alfie YEO +65 6682 3717 [email protected]

Price Relative

Forecasts and Valuation FY Dec (S$m) 2015A 2016F 2017F 2018F Revenue 52.4 60.4 69.3 84.0 EBITDA 7.38 8.33 9.35 11.0 Pre-tax Profit 5.12 4.31 6.61 7.71 Net Profit 4.26 3.58 5.50 6.40 Net Pft (Pre Ex.) 4.58 4.88 5.50 6.40 EPS (S cts) 1.84 1.55 2.37 2.77 EPS Pre Ex. (S cts) 1.98 2.11 2.37 2.77 EPS Gth (%) 29 (16) 53 17 EPS Gth Pre Ex (%) (1) 6 13 17 Diluted EPS (S cts) 1.84 1.55 2.37 2.77 Net DPS (S cts) 4.32 0.93 1.42 1.66 BV Per Share (S cts) 6.81 6.35 7.30 8.41 PE (X) 17.1 20.4 13.3 11.4 PE Pre Ex. (X) 15.9 15.0 13.3 11.4 P/Cash Flow (X) 10.9 10.9 8.2 6.7 EV/EBITDA (X) 8.5 7.7 6.5 5.2 Net Div Yield (%) 13.7 2.9 4.5 5.3 P/Book Value (X) 4.6 5.0 4.3 3.7 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 31.2 23.5 34.8 35.2

ICB Industry : Consumer Services ICB Sector: Food & Drug Retailers Principal Business: Katrina is an F&B Restaurant brand owner and operator in Singapore and China. Operates nine different F&B brands and concepts including Bali Thai, Streats, Rennthai, Bayang, Muchos, So Pho, Indobox, Hutoang and Honguo, serving mainly Indonesian, Chinese, Mexican and Vietnamese cuisines

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

At A Glance

Issued Capital (m shrs) 232 Mkt. Cap (S$m/US$m) 72.9 / 53.5 Major Shareholders (%) Chian Alan Goh Keng 42.3 Kim Wah Tan 42.3

Free Float (%) 15.4 3m Avg. Daily Val (US$m) 1.6

DBS Group Research . Equity 1 Sep 2016

Singapore Company Focus

Katrina Group Bloomberg: KTG SP | Reuters: KATR.SI Refer to important disclosures at the end of this report

Satiating hunger pangs, online and off

Growth underpinned by new outlets, regional

expansion and online business

Online business to ride on growing e-commerce

market

Project FY17F/FY18F earnings growth 13%/17%,

led by new stores and online business

Initiate with BUY, TP of S$0.43 based on 18x

FY17F PE

New outlets, regional expansion and online sales to

drive growth. Katrina aims to grow into a regional F&B foodservice player, penetrating Malaysia, Indonesia and Vietnam while securing a strong foothold in the Singapore market with more stores and online sales.

Online business set to grow. Katrina’s recent deal to place all nine brands’ food offerings with Foodpanda will help to expand its online business. Currently, the online business operates from three of its own web portals for Bali Thai, Streats and So Pho. Its online sales are already sizeable at S$100,000 per month, equivalent to S$1.2m per year, close to the sales of an average mid-range F&B restaurant in Singapore. We expect increase in online business to enhance overall margins going forward.

Project 13-17% growth for FY17-18F. We project double digit earnings growth throughout our forecast period. This will be driven by slight margin expansion as the online business grows, more store openings, and regional expansion plans. Our projections are consistent with its target to reach 60 stores by 2019, and improving annual sales per store towards industry average for Casual Dining and China full-service restaurants.

Initiate with BUY and S$0.43 TP. The stock currently trades at an undemanding 13.3x FY17F PE, below regional peer average of 20x. Due to its relatively smaller size and lack of overseas presence compared with leading F&B companies in Singapore, we peg our valuation of Katrina at 18x FY17F PE, a 10% discount to peer average. Delivery of growth expectations could potentially re-rate the stock. Initiate with BUY call for 36% upside, target price 43cts.


Company Focus

Katrina Group

INVESTMENT THESIS Profile Rationale

Katrina is a F&B Restaurant brand owner and operator in Singapore and China. Operates nine different F&B brands and concepts including Bali Thai, Streats, Rennthai, Bayang, Muchos, So Pho, Indobox, Hutoang and Honguo, serving mainly Indonesian, Chinese, Mexican and Vietnamese cuisines.

Targets 60 stores by 2019. Katrina currently has 34 stores including two in China and targets to reach 60 stores by 2019. Store growth will mainly be driven by its three key brands Bali Thai, Streats and So Pho both in Singapore and regionally. This is in line with its aim to become a regional player offering various dining concepts.

Aims to be a regional player. Katrina endeavours to grow regionally in Malaysia, Indonesia and Vietnam. It aims to satisfy the growing appetite for alternative cuisine and modern dining concepts in these markets and aspires to ultimately become a provider of various dining concepts regionally through its key brands.

Growing though online channels. Katrina currently has an established and fast-growing online business and has recently positioned itself to grow further through its cooperation with Foodpanda. It is currently well positioned to benefit from the growing demand for foodservices in the online channel.

Valuation Risks

Katrina is trading at 13.3x FY17F PE, compared to peers’ of 20x FY16F PE. Taking a 10% discount to peers given its much smaller size, we arrive at a target PE of 18x to derive our target price of S$0.43 on FY17F EPS. The stock offers a potential 36% upside.

Competition. Katrina operates in a low entry barrier foodservice market. Other foodservice competitors in Singapore include Creative Eateries, Minor Food Group, Japan Foods, RE&S Enterprises, Breadtalk, Sakae Holdings, ABR Holdings, all offers alternate dining concepts.

Consumer spending on F&B foodservice. The foodservice market, especially mid- to high-end dining, is dependent on domestic private consumption. Cautious consumer spending will lead to a downgrade to lower-end food service outlets and home-cooked meals, affecting footfall at Katrina’s outlets.

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.

Source: DBS Bank


Company Focus

Katrina Group

SWOT Analysis

Strengths Weakness

Halal kitchen. Katrina has kitchens that are halal-certified,which allows it to capture a bigger target market, unlike non-halal restaurant players who are restricted to just the non-halal segment.

Cash-generative business. Katrina’s business generatesoperating cashflows of around S$5-7m annually. Its balance sheet is currently (2Q16) in net cash of about 4.5 Scts per share. We believe dividend payout ratio would be attractive at a minimum of 30% for FY16F.

Proprietary brands. Katrina has established its own brandswhich it has built over the years and in the process has garnered brand identity and brand equity customer following. Stronger names in its nine-brand portfolio are Bali Thai, Streats and So Pho.

Online business. Katrina has an established online businesswhich it is fast expanding into F&B web portals like Foodpanda.

Flexibility to refurbish and rebrand existing outlets. As achain store with various brands from Bali Thai, Streats, So Pho, and Hongguo to Indobox, Katrina has options to enter various sub-segments of the foodservice market via any of these names. Rejuvenating store front and changing concepts/names for existing stores give Katrina flexibility to improve the performance of non-performing outlets.

Concentrated in Singapore. Katrina is mainly a Singaporebusiness, with only two stores in China. Almost all of Katrina’s FY15 revenue is concentrated in Singapore. Overseas plans are only beginning to be executed. Prospects are largely tied to the Singapore economy’s appetite for mid- to high-end foodservice consumption.

Competition. There are many mid-range foodservicerestaurants players in Singapore, each offering their own unique concepts. Direct and indirect competitors are chain casual-dining full-service F&B/restaurant groups such as Creative Eateries, Japan Foods, RE&S Enterprises, Breadtalk, Minor Food Group, Sakae Holdings, ABR Holdings, etc.

F&B business has low entry barriers. F&B foodservicebusinesses have low entry barriers. However, with >30 outlets and growing, Katrina’s economies of scale makes it difficult for new and smaller entrants to compete on cost and profitability.

Opportunities Threats

Franchise opportunities. Katrina mainly operates its ownF&B brands. With its capabilities, it could potentially branch out to be a franchisee and operator of other F&B brands, subject to its desired rate of return and outlook.

Regional growth opportunities. Katrina targets to grow intothe Malaysia, Indonesia and Vietnam markets with its existing brands. This is to meet the growing appetite for alternative cuisine and modern dining concepts in these developing markets. Modes of growth could be through JV partnerships, franchise and self-established outlets.

Acquisition of smaller F&B chains. Katrina currently has netcash of about S$10.5m (2Q16) and minimal gross debt. Its healthy balance sheet allows it to gear up and acquire other F&B chains, capabilities, and resources should there be suitable targets.

Establishing new outlets in Singapore. As with all brandedF&B foodservice chain stores, new malls and commercial properties present opportunities for store expansion.

Ability to lease new premises or renew existing leases.Securing leases for store space is crucial for Katrina’s operations. Non-renewal of leases will mean relocating to new premises and potential loss of regular customers.

Food safety and operating licence. The F&B business islicensed in Singapore by the National Environment Agency. Food safety and hygiene standards must be met. In extreme cases of non-compliance, licences could be revoked.

May be affected by disease outbreaks and poor weather.Business could slow during a health crisis or poor weather such as haze. During Singapore’s haze in October 2015, businesses were disrupted as consumers hid indoors. The Singapore government estimated that the haze cost economic losses is about S$700m.

Source: DBS Bank


Company Focus

Katrina Group

Company Background

F&B restaurant brand owner and operator. Katrina Group Limited was established in 1995 and now operates 32 restaurants in Singapore and two restaurants in China under nine different F&B brands and concepts. The nine brands are Bali Thai, Streats, Rennthai, Bayang, Muchos, SO PHO, Indobox, Hutoang and Honguo. The brands serve mainly Indonesian cuisine, with other cuisine that includes Chinese, Mexican and Vietnamese. Of the group’s nine brands, five are casual dining brands generally located in the heartlands of Singapore and four are contemporary upmarket brands located within the central business district (CBD) of Singapore.

Revenue Breakdown FY15 (By geography)


Top three brands make up approximately two-thirds of store count. Katrina owns and operates three key brands – Bali Thai (Thai cuisine), Streats (Hong Kong café concept), and So Pho (Vietnamese cuisine). These make up about two-thirds of its current store count. The majority of stores, which are concentrated under its three key brands, offer casual dining concepts while a minority of stores offer contemporary upmarket concepts. Average ticket size per head ranges from S$10-15.

Revenue driven by customer traffic. Almost all of Katrina’s sales are derived from dine-ins at its outlets, which is directly influenced by footfall and customer traffic. While there is generally no seasonality in Katrina’s revenue, we identify consumer sentiment, appetite for casual dining and competition to be among the key revenue drivers. To a smaller extent, Katrina generates S$100,000 sales per month in its online segment. This will be driven by increasing demand for food delivery services to homes and offices, etc.

Main bulk of COGS is staff, rental and food costs. Collectively, these form close to 90% of COGS. Food cost includes soup base, noodles, vegetables, meats, seafood, sauces, liquor and beverages for the preparation of the food items sold at outlets. In FY15, the COGS split for cost of beverages and food ingredients/salaries and employee benefits/rental/other expenses were 24.5%/35.7%/27.3%/12.5%. Other expenses are depreciation of furniture and fittings, renovation, kitchen and restaurant equipment, utilities, and miscellaneous direct operating expenses.

Cost Breakdown FY15


Other opex. Distribution and admin expenses were 2.7% and 5.5% of sales in FY15 respectively. Marketing, advertising and promotion, entertainment, sales discount, credit cards and electronic payment charges; transportation and upkeep of motor vehicles are accounted for under selling and distribution costs, while admin expenses comprise salaries and bonuses for administrative staff, directors’ remuneration, depreciation of corporate office fixed assets, office and general maintenance expenses, professional fees; and other indirect expenses.

34 stores currently including two in China


Singapore95%

PRC5%

0

5

10

15

20

25

30

35

FY13 FY14 FY15 Current

China Singapore

COGS - F&B input cost22%

COGS - Rental25%COGS - Direct staff

costs33%

COGS - Others11%

Admin expenses6%

Distribution expenses

3%


Company Focus

Katrina Group

Bali Thai, So Pho and Streats comprise two-thirds of

store network


Competitors include F&B players who operate restaurant brands and food concepts. There are various F&B groups which operate multi-brand casual-dining chain stores in Singapore. They offer various cuisine and dining experiences with a mix of casual and higher-end dining. Key competitors, direct and indirect, include Creative Eateries, Minor Food Group, Japan Foods, RE&S Enterprises, Breadtalk, Sakae Holdings, and ABR Holdings. These companies offer alternative cuisine and dining experiences to Katrina. However, we note that Katrina is stronger in the Indonesian halal cuisine segment as 12 of its 32 Singapore outlets offer Indonesian cuisine.

Mainly positioned in the casual dining mass-market

segment

Brand Cuisine Singapore China

Casual dining

Bali Thai Indonesian and Thai 9 2

Hongguo Yunnan, China 2 -

So Pho Vietnamese 7 -

Streats Hong Kong 7 -

Indobox Indonesian 2 -

Contemporary upmarket

RennThai Thai 1 -

Hutong Northern Chinese 1 -

Bayang Balinese 1 -

Muchos Mexican 2 -

Total 32 2


Direct competitors are mainly Thai, Vietnamese and

Hong Kong casual dining restaurants

Competitor Cuisine

Bangkok Jam Thai

Nam Nam Noodle Bar Vietnamese

Patara Thai

Thai Express Thai

Xin Wang Hong Kong Café Hong Kong

Siam Kitchen Thai


Sales Trend Profitability Trend


Bali Thai Singapore, 9

Hongguo, 2

So Pho, 7

Streats, 7

RennThai, 1

Hutong , 1

Indobox, 2

Bayang, 1

Muchos, 2Bali Thai China, 2


Company Focus

Katrina Group

Management composition

Founded and managed by a husband-and-wife team. Katrina was founded in 1995 by Mr Alan Goh and his wife Ms Catherine Tan. They first operated under the banner Katrina Nasi Padang which served Indonesian and/or Malay cuisine in food courts across Singapore before developing their own restaurant business with the proprietary brand concept. The foodservice business located at food courts has since ceased. Their son, Mr Donovan Goh Shen Shu is a non-executive director of Katrina Group. Key executives in Katrina are compensated above S$250,000 annually. Its CFO has recently resigned and Katrina will be appointing a new CFO going forward. Meanwhile, the finance team will be taking charge of all finance matters.

Three-pronged growth strategy. Management’s strategy is three pronged. Growth will come from outlet expansion in Singapore, store network growth overseas and through the online channels. Katrina has historically opened an average of four new outlets per year (excluding store closures) in Singapore and we expect this trend to persist going forward. The company is looking to expand into regional markets including Vietnam, Malaysia and Indonesia and is scheduled to open two Malaysia stores in the next 12 months. Finally, Katrina is looking to grow its online business by expanding its existing presence from three brands to its other brands. Further to its own online portals, the group has recently signed an agreement with Food Panda to list its foodservice offering on its sales and delivery platform.

Key Management Team

Name and appointment Profile

Mr Alan Goh

CEO and Exec Chairman

Mr Goh is the co-founder and managing director of Katrina Singapore, responsible for business

development and the formulation of strategic directions, expansion plans. He is also responsible for

implementing the goals and objectives, and sourcing new business opportunities and new strategic

locations within Singapore and overseas. Mr Goh holds a Masters of Business Administration (General

Business Administration) from the University of Hull.

Ms Catherine Tan

Exec Director

Ms Tan is the co-founder and director of Katrina Singapore and is responsible for the formulation and

introduction of Katrina’s new concepts and menus. She assists Mr Alan Goh in managing the overall

business development and operations, and is also involved in formulating strategies to improve the

processes in the restaurants and cafes and to continually raise its standards of quality and service. Ms Tan

attained a GCE “O” Level certification in 1975.

Ms Lee Li Eng

Former CFO*

Ms Lee joined Katrina as CFO in October 2015. She is responsible for the overall financial management,

reporting and internal controls matters. She is also in the management team which steers the company’s

strategic direction. Ms Lee has approximately 30 years of experience in audit and accounting. She started

her career as an auditor in 1985 at a mid-tier Certified Public Accountant (CPA) firm before working for

companies and multi-national corporations in the oil & gas, engineering, manufacturing and chemicals

sectors including Hong Leong Group, Flowserve Corporation, Cytec Solvay Group and McDermott

International Inc. as an internal auditor and various finance positions of controller and business partner

roles. She was group financial controller of EnGro Corporation Limited, a company listed on the Mainboard

of the SGX-ST, for five years from August 2009 prior to joining Katrina Group. Ms Lee holds a Bachelor of

Accountancy from the National University of Singapore and is a member of the Institute of Singapore

Chartered Accountants. She is not related to any of the directors or the Chairman.

* A new CFO will be appointed going forward. Finance team will be handling all finance matters. Source: Company, DBS Bank.


Company Focus

Katrina Group

Competitive Strengths

Halal certification opens service to a larger target market. Four of Katrina’s nine brands are halal certified. They are Bali Thai, So Pho, Streats and Indobox . According to the General Household Survey of Singapore in 2015, 14% of Singapore’s resident population are Muslims, or 460,000 people who are aged 15 and above. The halal market is a niche sector, which not every foodservice provider can enter. Besides there are requirements for halal-certified companies to comply with that are a natural entry barrier against more competition.

Halal market makes up 14% of resident population

Source: General Household Survey 2015, DBS Bank

Positioned to grow though online channels

Online business. Katrina already has online presence. It has operated from its own websites and has been outsourcing the delivery function to third parties. The current run rate of online sales from its own websites alone (http://balithaidelivery.com.sg/, http://streatsdelivery.com.sg/, http://sophodelivery.com.sg/) stands at S$100,000 per month. This is equivalent to the one mid-range mass-market foodservice restaurant’s monthly store revenue, without the rental and staff costs. It has recently signed an agreement with online mobile and online food ordering marketplace company Foodpanda to place all its nine brands on the latter's portal to enhance sales.

Economies of scale

Bargaining power for properties. With nine brands under its portfolio, Katrina has better bargaining power for property space over smaller players. It has the capability to collectively negotiate with landlords over two or more outlets. Its unique concepts attract landlords to seek its representation in malls

as well. Besides, it will have better flexibility to offer whichever concept that the landlord desires to secure presence in its desired malls.

Multiple brand representation in various

malls/locations

Mall/location Outlets/brands

Nex Bali Thai, Hongguo, So Pho

RWS Bali Thai, Streats

City Square Mall Bali Thai, Streats

IMM Bali Thai, Streats

JEM Indobox, Streats

Waterway Bali Thai, So Pho

Clarke Quay Muchos, Hutong, Renn Thai, Bayang


Flexibility to rebrand. For non-performing stores which have existing leases to see out, having a portfolio of multiple brands allows Katrina to rebrand for a subsequent opportunity to turn around its profitability. In a recent case, the Indobox outlet at ION was rebranded from Bali Thai. The multi-brand approach provides an alternative strategy over and above tweaking its service, menu and pricing compared to single-concept restaurants.

Shared resources for stores in malls. Multiple outlets and brand representation in a single location will provide opportunities to share common resources such as kitchen space, freeing up more floor area for dining. These could lead to a more robust backend process including delivery, storage and preparation of food ingredients, etc.

Established brand identity

Manages multiple brands that build distinct identity. Katrina manages nine brands, all of which are owned. Brand equity is fully attributed to the company unlike franchises, where the returns are shared with the brand owner. This helps to build an identity that will also resonate with its customers.

Multi-concept strategy. Katrina is a specialist in Indonesian cuisine but has branched out into other cuisines including Vietnamese, Thai, Chinese, Hong Kong café, Mexican, etc. Different concepts will help to lower risks of brand and product concentration, in addition to better bargaining power with landlords and flexibility to rebrand should certain brands be unprofitable.

Buddhism33%

Christianity19%

No Religion18%

Islam14%

Taoism10%

Hinduism5%

Others1%


Company Focus

Katrina Group

Growth Strategies

Positive outlook. Outlook for Katrina remains largely positive. Singapore’s population growth is expected to reach 7m from 5m over the longer term, with scope to develop the online business and overseas expansion. Demographics of developing markets such as Indonesia and Vietnam also support growth, in view of an increase in consumer affluence, growing middle income and willingness to spend on lifestyle and food.

Outlet growth

Four new outlets per year, targets 60 stores by 2019. Katrina aims to ultimately be a regional player that offers various dining concepts. Its store network currently stands at 34 including two in China. Its longer-term plan is to reach a network of 60 stores by 2019. Outlet expansion will be driven locally and regionally. There are plans to launch its three key brands in the Malaysia, Indonesia and Vietnam markets, while it will also seek more store opening opportunities in Singapore. It currently averages four new outlets a year in Singapore (excluding store closures) and is currently capable of sustaining this trend, even more so as landlords’ position in the property market weakens.

Overseas expansion

Targets Malaysia, Indonesia and Vietnam. Katrina is working to bring its brands into these markets and penetration strategy can be mixed. It may not necessarily use its halal brands to penetrate Malaysia and Indonesia and So Pho to break into Vietnam. From a brand management perspective, penetration strategies to break into these markets can include bringing in a new and alternative concept which is not yet prominent in these markets. For Malaysia, it plans to open at least two restaurants in Kuala Lumpur (MyTOWN shopping centre) under So Pho and Streats brands in the next 12 months.

Online presence

More scope for online sales to grow. Currently, the company’s online sales stand at S$100,000 per month. This is from only three brands and sales from its own websites http://balithaidelivery.com.sg/, http://streatsdelivery.com.sg/, and http://sophodelivery.com.sg/. Cooperation with online food delivery companies such as Foodpanda and Deliveroo, will see its menu items appear on their portals, which will improve its menus’ web traffic and enhance its online sales. Expanding into other menu items from the rest of its brands will also help to increase sales traction with customers.

Bali Thai web delivery portal


Capable of delivering better quality of earnings. More importantly, we see online sales as another means to enhance quality of earnings, since it is capable of delivering close to one store’s monthly revenue but not incurring similar labour and rental costs. Net margins for the online business is attractive at >50%. This will improve quality of earnings as the sales mix of online business increases.

Streats web delivery portal



Company Focus

Katrina Group

Industry landscape

Singapore

Fragmented market, close to 30,000 foodservice establishments of various formats in Singapore. Singapore has a strong culture for food and as a cosmopolitan city, it is well stocked with foodservice establishments offering extensive options for international cuisine. Singapore’s foodservice space is fragmented and has close to 30,000 establishments based on data by Euromonitor. The development of malls in the city centre and commercial centres in new and existing towns has proliferated the growth of foodservice establishments, including independent and chain outlets in Singapore.

Number of foodservice outlets 2015

Independ

ent

Chained Total

100% home delivery takeaway 16 143 159

Cafes/Bars 1,657 541 2,198

Full-service restaurants 1,253 453 1,706

Fast food 38 1,499 1,537

Self-service cafeterias 0 5 5

Street stalls/kiosks 20,034 1,999 22,033

Total 22,998 4,640 27,638

Source: Euromonitor, DBS Bank

Chain stores lead consumer foodservice growth, positive for Katrina. Singapore’s consumer food service sales in 2015 was valued at S$11.7bn by Euromonitor and is forecast to grow at 3.3% CAGR from 2015-2020. Chained consumer foodservice sales growth is expected to outpace independent foodservice at 1.2% CAGR to 0.9% CAGR in value. Partly due to brand building, lower base and more structured growth strategies, consumer foodservice chain stores are penetrating Singapore’s foodservice scene faster than independent stores.

3.3% CAGR for Singapore consumer foodservice

market driven by more outlets


Katrina operates in the full-service restaurant space. Full-service restaurants, which is predominantly the space Katrina operates in, contributes about 20% of Singapore’s foodservice market in terms of revenue or S$2.3bn. Considering the c.1,700 outlets in the foodservice restaurant space, the average revenue per year for each outlet is approximately S$1.3m or S$110,000 per month. Full-service restaurants are defined as sit-down establishments with table service which are more focused on relatively higher-quality food and beverage than their quick-service counterparts. Their menus are often comprehensive, offering breakfast, lunch and dinner, etc. Preparation of food products is often more complex than quick-service restaurants.

2015 share of food service categories


Asian full-service restaurant sales to grow at 0.2% CAGR. According to Euromonitor, the value of Asian full-service restaurant sales is forecast to grow by 0.2% CAGR from 2015-2020, driven by outlet and ticket size growth of 0.2% CAGR and 0.4% CAGR respectively. Ticket size per transaction is c.S$15 per head, in line with the industry average.

0.2% CAGR growth for Asian full-service restaurant

sales


1,290

1,295

1,300

1,305

1,310

2015 2016 2017 2018 2019 2020

S$m

0

2000

4000

6000

8000

10000

12000

14000

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

S$m

Independent Chained

100% home delivery takeaway

1%

Cafes/Bars19%

Full-service restaurants

20%

Fast food11%

Self-service cafeterias

0%

Street stalls/kiosks47%

Pizza consumer foodservice

2%


Company Focus

Katrina Group

Singapore F&B foodservices index (Current) NADJ

Source: Thomson Reuters, DBS Bank

Foodservice industry in Singapore

Industry parameters Note 2015

Asian full service restaurants

Sales value (S$m) (1) 1,296

No of outlets (2) 917

Annual sales per outlet per year (S$m) (3)=(1)/(2) 1.4

Sales per outlet per month (S$) (4)=(1)/(2)/12 117,775

Avg daily sales per outlet (S$) (5)=(3)/365 3,872

Avg daily transactions per store (6) 74

Avg ticket size per transaction (S$) (7)=(5)/(6) 52

Annual sales per outlet (S$m )

Casual dining full-service restaurants 1.8

Chained full-service restaurants 1.8


90

92

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102

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108

Jan-

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Jul-1

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-12

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Apr

-13

Jul-1

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Oct

-13

Jan-

14

Apr

-14

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Oct

-14

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Apr

-15

Jul-1

5

Oct

-15

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Apr

-16


Company Focus

Katrina Group

Financials

Profit and Loss

Growth historically driven by new outlets and cost efficiencies. Katrina’s earnings growth is generally driven by both scale and cost efficiencies. Revenue growth has been driven by 1) more outlets and 2) growth in per outlet sales. Having a bigger footprint and garnering share in Singapore’s foodservice market has helped to grow sales. By the same token, higher footfall allows for more leverage on its outlets to generate higher sales per outlet through menu promotions. Although margins have declined in FY15 due to higher operational, staff costs and rental expenses, core net profit remained relatively flat with the help of higher sales from more outlets and better sales leverage.

Growth driven by outlets and cost controls

S$m FY13 FY14 FY15

Revenue 40.7 45.4 52.4

Total outlets 28.0 31.0 32.0

Sales per outlet (S$) 1.45 1.46 1.64

Gross Margins (%) 18.4 18.7 16.8

EBIT Margin (%) 10.9 12.3 10.3

Net Margin (%) 9.1 7.2 8.1

Net Profit before Except. 3.76 4.62 4.58

Net Profit Gth (Pre-ex) (%) nm 22.8 (0.8)


New outlets to drive growth. Katrina aims to reach 60 stores by FY19F. We conservatively assume a sub-60 store network by then, mainly driven by new Singapore stores. We expect more efficiencies with average annual sales per outlet improving and growing as well. But the run rate of S$1.57m in FY18F is still below the chain store foodservice industry average of S$1.8m per outlet. Menu prices for So Pho and Streats have also increased by 10-15% recently. These should help to drive revenue growth over the next two years.

Assumptions

S$m FY15 FY16F FY17F FY18F

Total outlets 32.0 40.0 44.0 52.0

Sales per outlet (S$) 1.64 1.51 1.54 1.57


Online business to scale, expect margin to increase. We see Katrina’s online business picking up. Currently, online sales are S$100,000 per month, equivalent to the sales of one restaurant. This is from only its three brands on their own food portals. Selling online should yield higher leverage from its current kitchen facilities. We believe higher proportion of online sales will help to improve margins as well given that food preparation is leveraged on existing resource. Its latest sign-up with Foodpanda for all its nine brands should also improve sales going forward. We have factored in higher margins due to increased online sales going forward.

So Pho web delivery portal


Balance sheet and cashflow

Cash business, balance sheet in net cash. Katrina has the ability to generate positive free cashflows. Annual operating cashflows generated have ranged from S$5-7m. Capex per store ranges from S$400,000-450,000. There was about S$10.5m of net cash as of 2Q16, equivalent to approximately S$0.045 per share. Working capital is generally positive since payable days are about one month with collection days ranging from 1-2 days.

Strong cash position

S$m FY13 FY14 FY15 FY16F

Operating cashflow 5.99 5.78 6.71 6.66

Collection days N/A 2.6 1.7 1.6

Payable days N/A 35.4 35.3 34.4

Net cash 4.81 7.02 10.1 8.53

Net cash/share (Scts) 2.1 3.0 4.3 3.7



Company Focus

Katrina Group

Strong ROAE

Driven by good margins, asset turnover and leverage. We assess Katrina to have strong ROAE of >30%. Net margins are above peer average at 7-8%, asset turnover is above 2x and asset-to-average equity is at 1-2x.

Strong ROAE

S$m FY13 FY14 FY15 FY16F

Revenue 40.7 45.4 52.4 60.4

Net profit 3.70 3.29 4.26 3.58

Net margin (%) 9.1 7.2 8.1 5.9

Total assets 17.2 19.2 23.5 22.8

Equity 10.3 11.5 15.8 14.7

ROAE (%) N/A 30.2 31.2 23.5


Earnings projection

Lower margins in 1H16. Katrina’s 1H16 sales growth of 14.5% was driven by 5 new outlets opened in 2H15. Higher rental leases and depreciation from new outlets also led to gross margin declining to 18.5%.Higher marketing and promotions for online business and staff costs also led to higher SG&A expenses, resulting in lower operating margins.

1H16 results snapshot (S$m)

FY Dec 1H2015 1H2016 % chg yoy

Revenue 24.8 28.4 14.5

Cost of Goods Sold (20.5) (23.7)

Gross Profit 4.28 4.69 9.5

Other Oper. (Exp)/Inc (1.5) (2.4)

Operating Profit 2.75 2.35 -14.5

Net Interest (Exp)/Inc 0.0 0.0

Exceptional Gain/(Loss) (0.3) (0.6)

Pre-tax Profit 2.48 1.75 -30%

Tax (0.4) (0.4)

Net Profit 2.09 1.39 -33.4

Net profit bef Except. 2.35 1.98 -15.7

EBITDA 3.62 3.51 -3.0

Margins (%)

Gross Margins 17.3 16.5

Opg Profit Margins 11.1 8.3

Net Profit Margins 8.4 4.9


New stores, price increase, online growth to drive earnings. We expect 2H16 to pick up contributed by these three factors. Katrina has increased prices of its Streats and So Pho brands by 10-15%. Both Streets and So Pho outlets comprise close to 45% of all outlets in Singapore. We assess that the price increase is capable of increasing sales by another 5% assuming volumes remain unchanged and the price adjustment remains reasonably in line with its competitors. In addition to price increase, online sales is expected to pick up as well. The ramp up for online business has been fast, starting from January 2016. Its online footprint is currently small with scope to increase brands and delivery locations. We expect the partnership with Foodpanda to increase transaction volumes going forward. We have assumed net margins of 50% in this segment which should drive earnings even more. New stores to a lesser extent will add to sales. However, we do not expect aggressive contribution to earnings compared to online business and price increase.

Expect earnings pickup in 2H16

FY Dec 1H2016 2H2016 2016F

Revenue 28.4 32.0 60.4

Cost of Goods Sold (23.7) (26.1) (49.8)

Gross Profit 4.69 5.92 10.6

Other Oper. (Exp)/Inc (2.4) (2.7) (5.1)

Operating Profit 2.35 3.21 5.56

Net Interest (Exp)/Inc 0.0 0.05 0.05

Exceptional Gain/(Loss) (0.6) (0.7) (1.3)

Pre-tax Profit 1.75 2.56 4.31

Tax (0.4) (0.4) (0.7)

Net Profit 1.39 2.20 3.58

Net profit bef Except. 1.98 2.90 4.88

EBITDA 3.51 4.82 8.33

Margins (%)






Company Focus

Katrina Group

Valuation and recommendation

Project earnings growth of 13-17% growth for FY17-18F, led by new stores, higher sales per store and online business. Core growth for Katrina will be driven by store expansion, with upside from ramp-up of online sales and opening of regional outlets. Our earnings growth projection is led by outlet growth towards a target of 60 stores by FY19F. Our revenue growth assumption is not aggressive as annual sales per outlet of S$1.57m is below market average for casual dining full-service restaurants and chained full-service restaurants in Singapore. We have also factored in margin increase to account for more online sales activity.

Trading within historical valuations

Source: DBS Bank

Initiate with BUY, TP S$0.43. The stock currently trades at 13.3x FY17F PE, below regional peer average of 20x. Our peer average is made up of regional restaurants, QSRs, and foodservice players. We see Katrina growing quickly in Singapore through store expansion, online sales and overseas plans. We peg our valuation of Katrina at 18x FY17F PE, a 10% discount to regional peer average due to its smaller scale. Our TP derived from this is thus S$0.43. Initiate coverage with a BUY recommendation.

PE Band

Source: DBS Bank

Trading below regional peer average of c.20x FY17F PE

Source: Thomson Reuters, DBS Bank

Company Rat ing

Mark et Cap

(US$m) Px Last PE (A ct ) PE (Yr 1) PE(Yr 2)P/BV (x )

P/Sales (x )

ROE (%)

Gross Margin

(%)

Operat ing Margin

(%)

Net Margin

(%)

Div idendYield(%)

NetGearing

(%)

Katrina Group Ltd BUY 53 0.32 15.9x 15.0x 13.3x 5.0x 1.2x 24% 17.6% 9.2% 5.9% 2.9% cash

Singapore list ed foodserv ice play ers

JUMBO Group Ltd BUY 287 0.61 37.8x 21.6x 18.3x 7.9x 2.8x 29% 62.2% 14.0% 11.1% 2.2% cash

BreadTalk Group Ltd Not rated 211 1.03 44.5x 22.5x 16.2x 2.3x 0.5x 6% 52.9% 4.1% 1.2% 1.5% 90%

ABR Holdings Ltd Not rated 103 0.70 18.6x na na 1.4x 1.4x 8% 45.9% 9.0% 7.6% 3.6% -83%

Old Chang Kee Ltd Not rated 64 0.72 19.7x na na 2.5x 1.2x 14% 63.1% 8.3% 6.7% 4.2% -32%Japan Foods Holding Ltd NOT RATED 46 0.36 13.2x 16.6x 17.2x 2.0x 1.0x 12% 84.2% 6.5% 6.0% 5.6% cash

Sakae Holdings Ltd Not rated 32 0.32 na na na 1.1x 0.5x -10% 65.6% -1.4% -4.8% 3.3% 64%

Soup Restaurant Group Ltd Not rated 46 0.20 54.0x na na 5.7x 1.5x 9% 77.1% 1.2% 2.4% 5.1% -81%

Select Group Ltd Not rated 54 0.52 10.2x na na 2.9x 0.5x 29% 66.8% 5.3% 4.5% 3.9% 105%

Tung Lok Restaurants (2000) Ltd Not rated 19 0.10 42.6x na na 1.6x 0.3x 4% 72.2% 0.3% 0.7% 0.0% -69%

Pavillon Holdings Ltd Not rated 19 0.07 na na na 0.6x 2.2x -6% 10.2% -16.6% -15.6% nm -81%

Neo Group Ltd Not rated 67 0.61 26.7x 12.4x 8.9x 3.2x 0.7x 20% 60.5% 4.9% 4.8% 1.6% 197%

Singapore av erage 29.7x 18.3x 15.1x 2.8x 1.1x 10% 60.1% 3.2% 2.2% 3.1% 12.3%

Regional foodserv ice play ersJollibee Foods Corp FULLY VALUE 5,662 245.00 54.5x 41.8x 35.3x 7.6x 2.3x 19% 18.6% 6.6% 5.5% 0.9% cash

MK Restaurant Group PCL BUY 1,421 54.00 21.8x 19.0x 23.2x 3.5x 2.7x 19% 65.8% 18.0% 14.4% 4.2% cash

Berjaya Corporation Bhd Not rated 407 0.34 na na na 0.2x 0.2x -3% na 6.7% -1.8% 3.0% 138%

Oldtown Bhd BUY 215 1.94 17.9x 15.9x 15.2x 2.4x 2.2x 15% 37.2% 17.9% 13.2% 4.6% cash

A sean ex Singapore av erage 31.4x 25.6x 24.6x 3.4x 1.9x 13% 41% 12.3% 7.8% 3.2% 138.1%Regional av erage 30.1x 21.4x 19.2x 3.0x 1.3x 11% 56% 5.6% 3.7% 3.1% 24.9%

9.0 10.0 11.0

12.0 13.0 14.0 15.0 16.0 17.0 18.0

Jul-1

6

Au

g-16

Au

g-16

Au

g-16

Au

g-16

Au

g-16

(x)

+1sd

+2sd

Avg

-1sd

-2sd

0.15

0.20

0.25

0.30

0.35

0.40

Jul-1

6

Jul-1

6

Jul-1

6

Jul-1

6

Aug

-16

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-16

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-16

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-16

Aug

-16

Aug

-16

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-16

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-16

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-16

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-16

Aug

-16

Aug

-16

Aug

-16

Aug

-16

Aug

-16

9x

11x

13x

15x

(SS$)

17x


Company Focus

Katrina Group

Key Risks

Competition. Katrina operates in a low-entry-barrier foodservice market. Other foodservice competitors in Singapore include Creative Eateries, Minor Food Group, Japan Foods, RE&S Enterprises, Breadtalk, Sakae Holdings, ABR Holdings, all offering alternate dining concepts.

Loss of halal certification. Katrina has four brands (Bali Thai, So Pho, Streats and Indobox) which are halal certified, of which three are its key brands. There is an obligation to fulfil all halal and MUIS requirements. The halal certification for operating various food establishments is valid for one or two years as stipulated by MUIS. Loss of such a licence will put Katrina’s key brands and earnings contribution in jeopardy.

Consumer spending on F&B foodservice. The foodservice market, especially mid- to high-end dining, is dependent on domestic private consumption. Cautious consumer spending will lead to a downgrade to lower-end food service outlets and home-cooked meals, affecting footfall at Katrina’s outlets.

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.


Company Focus

Katrina Group

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

No of stores 28.0 31.0 32.0 40.0 44.0 52.0

Annual sales per store 1.45 1.46 1.64 1.51 1.54 1.57

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Revenues (S$m)

Singapore 38.2 42.4 50.1 56.5 64.0 78.4

PRC 2.54 3.01 2.39 2.75 2.80 2.86

Online 0.0 0.0 0.0 1.20 2.45 2.81

Total 40.7 45.4 52.4 60.4 69.3 84.0

Net profit (S$m)

Singapore 3.94 3.25 4.49 2.99 4.23 5.02

PRC (0.2) 0.04 (0.2) 0.0 0.0 0.0

Online 0.0 0.0 0.0 0.60 1.23 1.40

Total 3.70 3.29 4.26 3.58 5.45 6.42

Net profit Margins (%)

Singapore 10.3 7.7 9.0 5.3 6.6 6.4

PRC (9.3) 1.4 (9.6) (0.4) 0.0 0.0

Online N/A N/A N/A 50.0 50.0 50.0

Total 9.1 7.2 8.1 5.9 7.9 7.6


Still below industry average for Casual Dining and Chained full-service restaurants.

Targets close to 60 outlets by 2019

S$100,000 sales per month from online

Full 12 month operation of new outlets

Growth driven by more volumes including Foodpanda

Our assumed margin flowthrough from online is 50%


Company Focus

Katrina Group


FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Revenue 40.7 45.4 52.4 60.4 69.3 84.0

Cost of Goods Sold (33.2) (36.9) (43.6) (49.8) (56.8) (69.0)

Gross Profit 7.48 8.48 8.83 10.6 12.5 15.0

Other Opng (Exp)/Inc (3.0) (2.9) (3.4) (5.1) (5.9) (7.3)

Operating Profit 4.44 5.59 5.40 5.56 6.58 7.65

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

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc 0.0 (0.1) 0.03 0.05 0.04 0.06

Exceptional Gain/(Loss) (0.1) (1.3) (0.3) (1.3) 0.0 0.0

Pre-tax Profit 4.34 4.17 5.12 4.31 6.61 7.71

Tax (0.6) (0.9) (0.9) (0.7) (1.1) (1.3)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 3.70 3.29 4.26 3.58 5.50 6.40

Net Profit before Except. 3.76 4.62 4.58 4.88 5.50 6.40

EBITDA 5.60 7.24 7.38 8.33 9.35 11.0

Growth

Revenue Gth (%) nm 11.6 15.5 15.2 14.6 21.3

EBITDA Gth (%) nm 29.1 1.9 12.9 12.2 17.8

Opg Profit Gth (%) nm 25.9 (3.4) 2.8 18.3 16.3

Net Profit Gth (Pre-ex) (%) nm 22.8 (0.8) 6.4 12.8 16.5

Margins & Ratio

Gross Margins (%) 18.4 18.7 16.8 17.6 18.0 17.8

Opg Profit Margin (%) 10.9 12.3 10.3 9.2 9.5 9.1

Net Profit Margin (%) 9.1 7.2 8.1 5.9 7.9 7.6

ROAE (%) N/A 30.2 31.2 23.5 34.8 35.2

ROA (%) N/A 18.1 20.0 15.5 22.7 23.3

ROCE (%) N/A 36.8 31.2 30.1 32.7 33.4

Div Payout Ratio (%) 0.0 0.0 234.6 60.0 60.0 60.0

Net Interest Cover (x) 103.3 58.3 NM NM NM NM


Margins Trend

Expect margin uplift from price increase and pick-up of online business

IPO expense

Led by higher net margins from online business

Assume 60% payout

Write off for shutting China stores

Increase in operations and restaurant staff costs.

S$10m dividend for FY15 to founders


Company Focus

Katrina Group


FY Dec 1H2015 2H2015 2015A 1H2016 2H2016F 2016F

Revenue 24.8 27.7 52.4 28.4 32.0 60.4

Cost of Goods Sold (20.5) (23.2) (43.6) (23.7) (26.1) (49.8)

Gross Profit 4.28 4.55 8.83 4.69 5.92 10.6

Other Oper. (Exp)/Inc (1.5) (1.9) (3.4) (2.4) (2.7) (5.1)

Operating Profit 2.75 2.66 5.40 2.35 3.21 5.56

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

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc 0.0 0.04 0.03 0.0 0.05 0.05

Exceptional Gain/(Loss) (0.3) (0.1) (0.3) (0.6) (0.7) (1.3)

Pre-tax Profit 2.48 2.64 5.12 1.75 2.56 4.31

Tax (0.4) (0.5) (0.9) (0.4) (0.4) (0.7)

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 2.09 2.17 4.26 1.39 2.20 3.58

Net profit bef Except. 2.35 2.23 4.58 1.98 2.90 4.88

EBITDA 3.62 3.76 7.38 3.51 4.82 8.33

Growth (%)

Revenue Gth nm nm 15.5 14.5 15.5 15.2

EBITDA Gth nm nm 1.9 (3.0) 28.1 12.9

Opg Profit Gth nm nm (3.4) (14.5) 20.6 2.8

Net Profit Gth (Pre-ex) nm nm (0.8) (15.7) 30.0 6.4

Margins

Gross Margins (%) 17.3 16.4 16.8 16.5 18.5 17.6

Opg Profit Margins (%) 11.1 9.6 10.3 8.3 10.0 9.2

Net Profit Margins (%) 8.4 7.8 8.1 4.9 6.9 5.9 Source: Company, DBS Bank

Sales growth from new outlets including two in Malaysia, Clementi, Raffles City and Ngee Ann City, price increase of 10-15%, additional online sales


Company Focus

Katrina Group

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 6.35 6.79 7.35 8.18 7.21 7.44

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0

Other LT Assets 2.64 2.89 3.52 3.52 3.52 3.52

Cash & ST Invts 5.38 7.39 10.3 8.70 12.5 15.9

Inventory 0.0 0.0 0.0 0.0 0.0 0.0

Debtors 0.40 0.25 0.24 0.28 0.33 0.39

Other Current Assets 2.46 1.92 2.09 2.09 2.09 2.09

Total Assets 17.2 19.2 23.5 22.8 25.6 29.3

ST Debt 0.20 0.20 0.17 0.17 0.17 0.17

Creditor 3.04 3.81 4.26 4.61 5.25 6.38

Other Current Liab 2.33 2.73 2.32 2.32 2.32 2.32

LT Debt 0.37 0.17 0.0 0.0 0.0 0.0

Other LT Liabilities 1.01 0.83 0.97 0.97 0.97 0.97

Shareholder’s Equity 10.3 11.5 15.8 14.7 16.9 19.5

Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0

Total Cap. & Liab. 17.2 19.2 23.5 22.8 25.6 29.3

Non-Cash Wkg. Capital (2.5) (4.4) (4.2) (4.6) (5.2) (6.2)

Net Cash/(Debt) 4.81 7.02 10.1 8.53 12.3 15.7

Debtors Turn (avg days) N/A 2.6 1.7 1.6 1.6 1.6

Creditors Turn (avg days) N/A 35.4 35.3 34.4 33.3 32.3

Inventory Turn (avg days) N/A N/A N/A N/A N/A N/A

Asset Turnover (x) NM 2.5 2.5 2.6 2.9 3.1

Current Ratio (x) 1.5 1.4 1.9 1.6 1.9 2.1

Quick Ratio (x) 1.0 1.1 1.6 1.3 1.7 1.8

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

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

Capex to Debt (%) 684.9 548.1 1,640.2 2,130.2 1,065.1 2,130.2


Asset Breakdown

Net cash of 4.5 Scts per share as of 2Q16


Company Focus

Katrina Group


FY Dec 2013A 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 4.34 4.17 5.12 4.31 6.61 7.71

Dep. & Amort. 1.16 1.64 1.97 2.77 2.77 3.36

Tax Paid (0.8) (0.6) (0.9) (0.7) (1.1) (1.3)

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

Chg in Wkg.Cap. 1.21 (0.6) 0.16 0.31 0.60 1.06

Other Operating CF 0.07 1.22 0.32 0.0 0.0 0.0

Net Operating CF 5.99 5.78 6.71 6.66 8.87 10.8

Capital Exp.(net) (3.9) (2.0) (2.8) (3.6) (1.8) (3.6)

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

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0

Other Investing CF 0.0 0.0 0.0 0.0 0.0 0.0

Net Investing CF (3.9) (2.0) (2.8) (3.6) (1.8) (3.6)

Div Paid (2.0) (2.0) 0.0 (12.2) (3.3) (3.8)

Chg in Gross Debt (0.2) (0.2) (0.2) 0.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 7.50 0.0 0.0

Other Financing CF (0.8) 0.58 (0.6) 0.0 0.0 0.0

Net Financing CF (3.0) (1.6) (0.8) (4.7) (3.3) (3.8)

Currency Adjustments 0.02 0.01 0.0 0.0 0.0 0.0

Chg in Cash (0.9) 2.12 3.17 (1.6) 3.77 3.38

Opg CFPS (S cts) 2.07 2.76 2.83 2.74 3.57 4.22

Free CFPS (S cts) 0.89 1.61 1.70 1.32 3.05 3.12


Capital Expenditure

Gross proceeds from IPO

Includes S$10m dividend to Mr Alan Goh and Ms Catherine Tan for FY15

Assume S$450,000 capex per new store

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:JC, PY

BUY Last Traded Price: S$1.20 (STI : 2,869.82) Price Target 12-mth: S$1.50 (26% upside) Potential Catalyst: Successful new recruits of medical practitioners and expansion into new complementary medical services Where we differ: One of the few with research coverage on this stock Analyst Rachel TAN +65 6682 3713 [email protected] Andy SIM CFA +65 6682 3718 [email protected]

What’s New 1H16 net profit almost doubled to S$5.2m

Earnings from organic operations jumped 41% y-

o-y, new dermatology unit contributed 28% to

earnings

EBIT margin expanded 2ppts; cancer unit turns

profitable

Price Relative

Forecasts and Valuation FY Dec (S$ m) 2015A 2016F 2017F 2018F Revenue 16.4 28.6 32.9 38.0 EBITDA 6.30 11.3 13.3 15.3 Pre-tax Profit 6.18 10.8 12.4 14.3 Net Profit 5.34 9.32 10.7 12.3 Net Pft (Pre Ex.) 5.34 9.32 10.7 12.3 Net Pft Gth (Pre-ex) (%) 25.7 74.6 14.8 15.2 EPS (S cts) 2.45 3.91 4.49 5.17 EPS Pre Ex. (S cts) 2.45 3.91 4.49 5.17 EPS Gth Pre Ex (%) 1 60 15 15 Diluted EPS (S cts) 2.45 3.91 4.49 5.17 Net DPS (S cts) 2.14 3.41 3.92 4.51 BV Per Share (S cts) 11.0 15.8 16.4 17.0 PE (X) 48.8 30.6 26.6 23.1 PE Pre Ex. (X) 48.8 30.6 26.6 23.1 P/Cash Flow (X) 40.8 30.2 24.2 21.1 EV/EBITDA (X) 37.5 23.1 19.6 17.1 Net Div Yield (%) 1.8 2.9 3.3 3.8 P/Book Value (X) 10.8 7.6 7.3 7.0 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 29.8 30.2 27.9 30.9 Earnings Rev (%): 13 11 8 Consensus EPS (S cts): 3.60 4.10 4.80 Other Broker Recs: B: 3 S: 0 H: 0

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

Strong growth from all fronts Maintain BUY rating, raised TP to S$1.50. We maintain our buy rating and remain positive on Singapore O&G (SOG)’s growth prospects. Key potential catalysts are i) better-than-expected growth from its cancer and dermatology divisions, ii) expansion into new specialisations such as paediatrics, and iii) better-than-expected improvement in margins. Strong 1H16 results from all divisions. 1H16 net profit almost doubled to S$5.2m (+91% y-o-y), from both forming 62% of streets’ FY16 estimates. The growth was partially contributed by the consolidation of Dr Joyce Lim’s dermatology medical practice and partially from strong organic growth (+41% y-o-y). Key positives: i) margins expanded 2 ppts, ii) increase in obstetrician & gynecology (O&G) division’s market share, and iii) cancer division has turned profitable. Expanding into higher-margin complementary specialised services. With the O&G business now achieving >1,500 births per annum, management believes that O&G would be able to support a new paediatrics division. Management hopes to start the new division in 2017, subject to successful recruitment of competent pediatricians. Management continues to explore new expansion opportunities both in new specialisations and/or new markets. We believe other complementary services to explore include in-vitro fertilization (IVF). High dividend payout. SOG has a high dividend payout policy of 90%, to align the interests of its medical practitioners (who together own a 78% stake), offering dividend yields of 3-4%. Valuation:

We increase our FY16F-FY18F earnings by 6%-11% by raising our EBIT margins and assuming higher contributions from its cancer division. We raised our target price to S$1.50 (from S$1.05), based on the average of PE multiple (raised PE multiple to 30x at 15% discount to peer) and DCF valuation. Key Risks to Our View:

Key risks that could derail our thesis includes i) Execution risks due to lack of track record, ii) highly dependent on a few key doctors, and iii) low liquidity. At A Glance Issued Capital (m shrs) 238 Mkt. Cap (S$m/US$m) 285 / 212 Major Shareholders (%) Tung Lan Heng 29.4 Keen Whye Lee 18.9 Suan Tiong Beh 10.2

Free Float (%) 24.3 3m Avg. Daily Val (US$m) 0.19 ICB Industry : Health Care / Health Care Equipment & Services



Singapore O&G Version 1 | Bloomberg: SOG SP | Reuters: SINP.SI Refer to important disclosures at the end of this report


Company Guide

Singapore O&G

WHAT’S NEW

Strong growth from all fronts

Strong 1H16 results from both organic and inorganic growth. Singapore O&G (SOG) delivered a strong set of results. 1H16 net profit almost doubled to S$5.2m (+91% y-o-y); 62% of streets’ FY16 estimates. This was partially contributed by the consolidation of Dr Joyce Lim’s aesthetics and dermatology medical practice that was acquired at end-2015 and partially from strong organic growth. Excluding the new dermatology division, net profit grew 41% y-o-y.

1H16 EBIT margins expanded 2ppts y-o-y to 44%.EBIT margins expanded 2 ppts y-o-y to 44%, contributed by the increase in the average prices for its O&G division and the cancer division turning profitable, recording a net margin of 21%. The new dermatology division posted a good margin of 34%.

O&G division: babies delivered rose 7% y-o-y to 801. O&G division’s revenue grew 7.9% to S$8.4m, comprising 60% of the group’s revenue (SOG’s largest division). In 1H16, SOG recorded 801 deliveries vs 749 deliveries in 1H15. SOG’s market share improved marginally from 3.9% as at end-FY15 to 4% (based on total number of births in Singapore). According to management, most of the doctors recorded higher deliveries. Dr Natalie Chua recorded the largest improvement with the number of deliveries increasing by 67%. Her contribution to SOG’s numbers improved from 9% to 15%.

Dermatology division: Second largest division at 31% of group’s revenue. SOG’s new dermatology division recorded 1H16 revenue and net profit of S$4.3m and S$1.5m respectively, comprising 31% and 28% of the group’s revenue and net profit respectively, on track to meet Dr Joyce’s Lim’s S$2.5m profit guarantee. The dermatology division is now SOG’s second largest division.

Cancer division: Turned profitable. The cancer division continues to record strong revenue growth, expanding 34% h-o-h. The cancer division has turned profitable with a decent net margin of 21%. Albeit small (9% of group revenue), we believe the cancer division will continue to show strong growth with a new breast surgeon, Dr Lim Siew Kuan who just joined in May 2016.

Potential entry into Paediatrics in 2017. With the O&G business now achieving >1,500 births per annum, management believes that O&G would be able to support a new paediatrics division. Management hopes to start the new division in 2017 subject to successful recruitment of competent pediatricians. Management continues to explore new expansion opportunities both in new specialisations and/or new markets.

Interim dividend of 1.53 Scents. SOG declared an interim dividend of 1.53 Scents, representing a dividend payout of 70%.

Maintain BUY, raised TP to S$1.50. We increase our FY16F-FY18F earnings by 6%-11% by raising our EBIT margins to 37% (assuming flat margins y-o-y) and assuming higher contributions from its cancer division. We raised our target price to S$1.50 from S$1.05 previously, based on the average of PE multiple (raised our target PE multiple to 30x; reducing the discount to its peer to 15% from 28% previously following SOG’s strong performance thus reducing its execution risks) and DCF valuation.

We maintain our buy rating and remain positive on SOG’s growth prospects. Key potential catalysts are i) better-than-expected growth from its cancer and dermatology divisions, ii) expansion into new specialisations such as paediatrics, andiii) better-than-expected margin improvement.


Company Guide

Singapore O&G

Interim Income Statement (S$m)

FY Dec 1H2015 2H2015 1H2016 % chg yoy % chg hoh

Revenue 8 9 14 80.5 60.5

Gross Profit 8 9 14 80.5 60.5

Other Oper. (Exp)/Inc (4) (6) (8) 72.9 31.8

Operating Profit 3 3 6 91.0 120.5

Other Non Opg (Exp)/Inc 0 0 0 - -

Associates & JV Inc 0 0 0 - -

Net Interest (Exp)/Inc 0 0 0 - -

Exceptional Gain/(Loss) 0 0 0 - -

Pre-tax Profit 3 3 6 91.0 114.2

Tax (1) 0 (1) 92.3 275.3

Minority Interest 0 0 0 - -

Net Profit 3 3 5 90.7 96.7

Net profit bef Except. 3 3 5 90.7 96.7

EBITDA 3 3 6 89.2 108.6

Margins (%)





Company Guide

Singapore O&G


Earnings Drivers:

Growing its market share in O&G. Singapore O&G (SOG) is a chain of medical practices, specialising in women’s health. It derives 60% of its revenue from its obstetrics and gynaecology (O&G) services, leveraging on the healthcare segment which is predominantly served by the private sector (57% of babies are delivered through the private sector).

In its effort to increase fertility rate, the Singapore government continues to provide incentives including baby bonus, tax benefits and more recently, the extension of paternal leave. SOG currently has five doctors specialising in O&G and has plans to further expand its market share in this segment via the recruitment of new doctors. SOG is well positioned to benefit from the potential increase in birth rate.

Diversifying into higher-margin complementary services. SOG has the potential to grow its women’s cancer-related, and newly acquired dermatology and aesthetics businesses by leveraging on referrals from its existing bread-and-butter O&G business. SOG aims to achieve equal revenue contributions from four key segments in the medium term. In line with its goal to be an integrated women’s health medical practice, we believe other complementary services to explore includes paediatrics, IVF and child care services.

Expanding into new markets. In the longer-term, SOG aspires to have a regional presence and continues to explore overseas opportunities in countries including Indonesia, Myanmar, IndoChina, Malaysia and China.

Up to 8-year service agreements with key doctors. SOG signed 5-year service agreements with key doctors who were 'acquired' together with the doctors’ medical practices (‘acquired’ doctors), mostly expiring in Dec 2019. The ‘acquired’ doctors receive two-fold remunerations, i.e. a basic salary and bonus of up to 20% on earnings generated above a minimum targeted earnings.

Number of clinics have doubled to 10. SOG currently operates ten clinics in six locations. SOG’s O&G specialist medical practitioners are accredited to perform deliveries and O&G surgeries in all major private hospitals in Singapore including Parkway Group of Hospitals, Mount Alvernia Hospital and Thomson Medical Centre. Similarly, its women cancer specialists are accredited to perform surgeries in all major private hospitals including Parkway Group of Hospitals, Mount Alvernia Hospital and Raffles Medical Hospital, and public hospitals including Khoo Teck Phuat Hospital.

Market share of babies delivered (%)

No. of doctors

No. of patient visits

Revenue breakdown by business segment

Revenue (S$’m) and net margin (%)


O&G91%

Cancer-re lated

9%

FY15A Revenue breakdown

O&G61%

Aesthetics31%

Cancer-re lated

8%

FY16F Revenue breakdown

31.4 32.5 32.6 32.5 32.4

15.0

17.0

19.0

21.0

23.0

25.0

27.0

29.0

31.0

33.0

35.0

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2014 2015 2016F 2017F 2018F

Ne

t m

argi

n (%

)

Re

venu

e (S

$'m

)

Revenue Net margins


Company Guide

Singapore O&G

Balance Sheet:

Net cash. SOG has the ability to generate positive free cash flow as recurring capex requirements are small. It is currently in net cash position. While a more efficient capital structure may benefit the company better, it now provides SOG with ample war chest for acquisition of medical practices to expand its business and potential expansion into regional markets.

Share Price Drivers:

Strong organic earnings growth. As a newly listed company (in 2015) coupled with the lack of historical earnings growth, we believe consistent strong organic earnings growth would be a strong testament to its ability to execute its strategy and to deliver earnings growth.

Successful inorganic growth. With the lack of a track record in acquisitions, we believe the ability to achieve earnings growth from its acquisitions would instill more confidence in future M&A activities.

High dividend payout. With SOG’s high dividend payout policy, dividends will continue to grow as earnings expand. We believe sustainable high dividend yields would be a catalyst for the share price.

Key Risks:

Execution risks; lacks track record. SOG lacks a track record in quality recruitment, successful retention of doctors, and successful acquisitions of new medical practices.

Dependent on key doctors. SOG is dependent on its key doctors and there could be earnings risk should it fail to renew their service contracts which expire in 2019.

Low liquidity. With a market cap of US$141m and ADV of US$0.05m, SOG is a small cap with liquidity risks.

COMPANY BACKGROUND

Medical practice specializing in Women’s Health. Singapore O&G (SOG) is a chain of medical practices, specialising in women’s health mainly in obstetrics and gynaecology (O&G). It currently operates ten clinics in six locations with nine medical practitioners. Currently, SOG offers 3 major women’s specialised medical services, namely, obstetrics and gynaecology, women’s cancer-related and dermatology and aesthetics.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide

Singapore O&G

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F

Market share of babies 0.06 0.07 0.07 0.09 0.10 No. of doctors 7.00 7.00 10.0 12.0 14.0 No. of patient visits 9,726 10,067 11,275 12,966 14,911

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F

Revenues (S$m)

O&G 13.5 14.9 17.5 20.7 24.6 Cancer-related 0.09 1.54 2.15 2.80 3.63 Dermatology 0.0 0.0 8.93 9.38 9.84

Total 13.6 16.4 28.6 32.9 38.0 Operating profit (S$m) O&G 5.09 6.13 7.00 8.29 9.82 Cancer-related (0.1) (0.1) 0.49 0.64 0.84 Dermatology 0.0 0.0 3.13 3.28 3.45

Total 5.04 6.06 10.6 12.2 14.1 Operating profit Margins

O&G 37.9 41.2 40.0 40.0 40.0 Cancer-related (57.4) (4.6) 23.0 23.0 23.0 Dermatology N/A N/A 35.0 35.0 35.0

Total 37.2 36.9 37.2 37.1 37.1


FY Dec 2014A 2015A 2016F 2017F 2018F

Revenue 13.6 16.4 28.6 32.9 38.0 Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0 Gross Profit 13.6 16.4 28.6 32.9 38.0 Other Opng (Exp)/Inc (8.5) (10.4) (18.0) (20.7) (23.9) Operating Profit 5.04 6.06 10.6 12.2 14.1 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.13 0.17 0.18 0.17 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 5.04 6.18 10.8 12.4 14.3 Tax (0.8) (0.8) (1.5) (1.7) (1.9) 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 4.25 5.34 9.32 10.7 12.3 Net Profit before Except. 4.25 5.34 9.32 10.7 12.3 EBITDA 5.23 6.30 11.3 13.3 15.3 Growth

Revenue Gth (%) 56.8 21.2 74.1 15.1 15.6 EBITDA Gth (%) 35.9 20.4 78.9 18.2 14.8 Opg Profit Gth (%) 35.5 20.1 75.4 15.0 15.4 Net Profit Gth (Pre-ex) (%) 36.1 25.7 74.6 14.8 15.2 Margins & Ratio

Opg Profit Margin (%) 37.2 36.9 37.2 37.1 37.1 Net Profit Margin (%) 31.4 32.5 32.6 32.5 32.4 ROAE (%) 45.6 29.8 30.2 27.9 30.9 ROA (%) 36.5 25.1 21.6 18.3 21.3 ROCE (%) 45.6 30.4 27.2 24.5 29.8 Div Payout Ratio (%) 34.9 87.2 87.2 87.2 87.2 Net Interest Cover (x) NM NM NM NM NM


Acquired an aesthetics business at end-2015

Assumptions based on net margin of 28%

Earnings growth from the consolidation of aesthetics business


Company Guide

Singapore O&G


FY Dec 2H2014 1H2015 2H2015 1H2016

Revenue 6.92 7.72 8.69 13.9 Cost of Goods Sold 0.0 0.0 0.0 0.0 Gross Profit 6.92 7.72 8.69 13.9 Other Oper. (Exp)/Inc (4.9) (4.5) (5.9) (7.8) Operating Profit 1.98 3.24 2.81 6.20 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.02 0.10 0.04 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 Pre-tax Profit 1.98 3.27 2.91 6.24 Tax (0.3) (0.6) (0.3) (1.1) Minority Interest 0.0 0.0 0.0 0.0 Net Profit 1.71 2.71 2.63 5.17 Net profit bef Except. 1.71 2.71 2.63 5.17 EBITDA 2.17 3.36 3.05 6.36

Growth Revenue Gth (%) 4.5 11.6 12.5 60.5EBITDA Gth (%) (30.8) 55.1 (9.3) 108.6Opg Profit Gth (%) (35.3) 63.8 (13.4) 120.5Net Profit Gth (%) (32.7) 58.8 (3.1) 96.7 Margins Gross Margins (%) 100.0 100.0 100.0 100.0Opg Profit Margins (%) 28.6 42.0 32.3 44.4Net Profit Margins (%) 24.7 35.1 30.3 37.1

Balance Sheet (S$m)

FY Dec 2014A 2015A 2016F 2017F 2018F

Net Fixed Assets 0.60 0.68 1.93 1.23 0.44 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 0.84 0.99 26.0 26.0 26.0 Cash & ST Invts 11.3 24.2 24.7 24.1 24.1 Inventory 0.20 0.28 0.42 0.48 0.56 Debtors 1.93 1.48 2.97 3.42 3.95 Other Current Assets 0.0 0.0 2.74 2.74 2.74 Total Assets 14.9 27.6 58.7 58.0 57.7

ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 1.75 1.65 2.96 3.41 3.94 Other Current Liab 1.24 1.89 9.98 11.4 13.1 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 0.01 0.09 8.09 4.09 0.09 Shareholder’s Equity 11.9 24.0 37.7 39.1 40.6 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 14.9 27.6 58.7 58.0 57.7

Non-Cash Wkg. Capital (0.9) (1.8) (6.8) (8.2) (9.8) Net Cash/(Debt) 11.3 24.2 24.7 24.1 24.1 Debtors Turn (avg days) 44.8 37.9 28.4 35.4 35.3 Creditors Turn (avg days) (2,454.3) (2,584.3) (1,306.0) (1,055.0) (1,126.2) Inventory Turn (avg days) (411.6) (367.5) (198.2) (150.0) (160.2) Asset Turnover (x) 1.2 0.8 0.7 0.6 0.7 Current Ratio (x) 4.5 7.3 2.4 2.1 1.8 Quick Ratio (x) 4.4 7.3 2.1 1.9 1.6 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH



Company Guide

Singapore O&G


FY Dec 2014A 2015A 2016F 2017F 2018F

Pre-Tax Profit 5.04 6.18 10.8 12.4 14.3 Dep. & Amort. 0.19 0.24 0.64 1.10 1.19 Tax Paid (0.5) (0.2) (1.5) (1.5) (1.7) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 0.42 0.38 (0.3) (0.1) (0.1) Other Operating CF (0.2) (0.2) (0.2) (0.2) (0.2) Net Operating CF 4.92 6.39 9.43 11.8 13.5 Capital Exp.(net) (0.4) (0.3) (0.4) (0.4) (0.4) Other Invts.(net) 0.0 0.0 (6.0) (4.0) (4.0) Invts in Assoc. & JV 2.51 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 0.0 0.04 0.17 0.18 0.17 Net Investing CF 2.13 (0.3) (6.2) (4.2) (4.2) Div Paid (2.2) (3.4) (2.7) (8.1) (9.3) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 10.2 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (2.2) 6.81 (2.7) (8.1) (9.3) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 4.87 12.9 0.46 (0.6) 0.0 Opg CFPS (S cts) 2.58 2.76 4.09 4.97 5.71 Free CFPS (S cts) 2.61 2.79 3.79 4.77 5.51



Source: DBS Bank

Analyst: Rachel TAN, Andy SIM CFA

Staggered payment for the acquisition of aesthetics business

Market Focus

Small Mid Cap

Page 17

DBS Bank Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters:

1 (>20% potential returns over the next 12 months)

2 (0 - 20% potential returns over the next 12 months)

3 (negative potential return over the next 12 months)

The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment)

Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock.

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: 10 Oct 2016 08:37:00

Dissemination Date: 10 Oct 2016 11:58:28

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

Market Focus

Small Mid Cap

Page 18

(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 10 Oct 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have proprietary positions in Ezion Holdings, Soilbuild Business Space Reit, Cache Logistics Trust, Cambridge Industrial Trust, Religare Health Trust, Ascendas Hospitality Trust, Keppel Infrastructure Trust, Frasers Commercial Trust, Midas Holdings, Ezra Holdings, Noble Group, Far East Hospitality Trust, Venture Corporation, Indofood Agri Resources, Sembcorp Marine, Mapletree Logistics Trust, SMRT, SPH REIT, M1, Frasers Centrepoint Trust, Ascott Residence Trust, YTL Starhill Global REIT, Parkway Life Real Estate Investment Trust, Frasers Logistics & Industrial Trust, CapitaLand Retail China Trust, CDL Hospitality Trusts, OUE Hospitality Trust, Keppel DC REIT, Manulife US REIT, Cosco Corporation recommended in this report as of 31 Aug 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Soilbuild Business Space Reit, Cache Logistics Trust, Frasers Commercial Trust, Far East Hospitality Trust, Mapletree Logistics Trust, M1, Ascott Residence Trust, YTL Starhill Global REIT, Frasers Logistics & Industrial Trust, CapitaLand Retail China Trust, CDL Hospitality Trusts, Keppel DC REIT, Manulife US REIT recommended in this report as of 31 Aug 2016.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Soilbuild Business Space Reit, Cache Logistics Trust, Frasers Commercial Trust, Ascott Residence Trust, YTL Starhill Global REIT, Frasers Logistics & Industrial Trust, CDL Hospitality Trusts, Keppel DC REIT, Manulife US REIT as of 31 Aug 2016.

5.

Compensation for investment banking services: DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Ezion Holdings, Courts Asia, Nam Cheong Ltd, Soilbuild Business Space Reit, Cache Logistics Trust, Religare Health Trust, OUE Commercial REIT, Frasers Commercial Trust, Perennial Real Estate Holdings, Procurri Corporation, Pacific Radiance Ltd, Ezra Holdings, Noble Group, Mapletree Logistics Trust, Ascott Residence Trust, Parkway Life Real Estate Investment Trust, Frasers Logistics & Industrial Trust, OUE Hospitality Trust, Manulife US REIT as of 31 Aug 2016. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Ezion Holdings, Courts Asia, Soilbuild Business Space Reit, Cache Logistics Trust, Frasers Commercial Trust, Perennial Real Estate Holdings, Procurri Corporation, Pacific Radiance Ltd, Noble Group, Mapletree Logistics Trust, Ascott Residence Trust, Frasers Logistics & Industrial Trust, OUE Hospitality Trust, Manulife US REIT in the past 12 months, as of 30 Aug 2016 DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Market Focus

Small Mid Cap

Page 19

RESTRICTIONS ON DISTRIBUTION

General 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 DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.) For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Market Focus

Small Mid Cap

Page 20

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd. 12 Marina Boulevard, Marina Bay Financial Centre Tower 3

Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

singapore market focus small mid cap monthly · ezion provides liftboats/service rigs and offshore...

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