Singapore Market Focus SMC Monthly Market Focus SMC Monthly Review of Jan-16 Picks No. Security...

ed: TH / sa: YM

STI : 2,579.23 FSST Small Cap : 374.34 FSST - Mid Cap : 627.23

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

Key Indices

Current % Chng STI Index 2,579.23 -0.1% FS Small Cap Index 373.08 -0.8% USD/SGD Curncy 1.41 -1.2% Daily Volume (m) 926 Daily Turnover (S$m) 982 Daily Turnover (US$m) 696

Source: Bloomberg Finance L.P. SMC Top Picks

Source: DBS Bank Prices as of 2 Feb 2016

DBS Group Research . Equity 4 Feb 2016

Singapore Market Focus

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

Issue No. 2

Look for result boosters

With STI falling by nearly 9% in January, small cap names were not spared and our picks fell by an average of 5.9% since our last issue

We focus our picks on names that should report strong earnings or declare an attractive dividend

Good results - Japfa, Riverstone, mm2, Osim

Dividends - CMH Pacific

Sticking with our conviction picks. Despite the challenging start, we keep four of our five conviction picks intact. We believe Japfa (BUY, TP S$0.90), Riverstone Holdings (BUY, TP S$1.41) and mm2 (BUY, TP S$1.05) should report strong upcoming results that should help their share prices to re-rate. We pick Osim (BUY, TP S$1.28) to replace Sheng Siong given our recent upgrade of the stock on better-than-expected results. Meanwhile, CMH Pacific (BUY, TP S$1.45) is likely to reward shareholders with a final dividend of up to 3.5Scts. Value emerging from P/BV perspective. Following the recent market correction, many Singapore SMC names are trading well below their book values, suggesting that value has started to emerge. Aside from oil & gas-related companies that could potentially face asset impairment charges in the face of depressed oil prices, we highlight a couple of names that offer value: 1) Midas Holdings (BUY, TP S$0.49) is trading at c. 0.5x P/BV despite being profitable, 2) Perennial Real Estate Holdings (BUY, TP S$1.32) is at just 0.5x P/BV and 3) Centurion Corporation (BUY, TP S$0.59) trades at 0.6x P/BV and less than 7x PE. SMC Radars: Best World, Serial System, and Sunningdale. Best World could enter a period of rapid growth if the company successfully breaks into the Chinese direct-selling market while electronic component and product distributor, Serial System, has ambitions to grow beyond the electronic space. Leveraging on its competitive advantages in the manufacture of plastics parts and tooling, Sunningdale is well positioned to tap growth opportunities in the high-volume consumer/IT industry. We also feature leading local F&B group, Jumbo, whose growth is underpinned by new outlets in Shanghai and Singapore, in an Equity Explorer.

Price Mkt Cap Target Price Performance (%)

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

Current China Merchants Hldgs (Pacific)

0.80 1,005 1.45 (8.6) (14.3) BUY

Japfa Ltd 0.48 587 0.90 1.1 (25.2) BUY mm2 Asia 0.69 101 1.05 (13.8) 242.5 BUY Riverstone Holdings Ltd

1.04 539 1.41 (11.7) 84.4 BUY

OSIM International

0.99 514 1.28 (8.3) (49.0) BUY

Price Mkt Cap Target Price Performance (%)

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

Previous China Merchants Hldgs (Pacific)

0.80 1,005 1.45 (8.6) (14.3) BUY

Japfa Ltd 0.48 587 0.90 1.1 (25.2) BUY mm2 Asia 0.69 101 1.05 (13.8) 242.5 BUY Riverstone Holdings Ltd

1.04 539 1.41 (11.7) 84.4 BUY

Sheng Siong Group Ltd

0.84 884 1.01 (0.6) 15.2 BUY

Market Focus

SMC Monthly

Review of Jan-16 Picks

No. Security Desc. Sector Beg. Price

(8-Jan)

Last Price

(02-Feb)

% Change

(1M*)

Target Price Catalyst

1 Japfa Ltd Consumer

Goods

0.490 0.475 - 3.1% 0.90 1) Earnings delivery

2) Expansion

3) Recovery in purchasing power

2 China Merchants

Holdings (Pacific)

Industrials 0.825 0.800 - 3.0% 1.45 1) Earnings execution

2) Upcoming final dividend of 3.5Scts

3 mm2 Asia

Consumer

Services

0.780 0.685 - 12.2% 1.05 1) Growth in local productions

2) Further expansion into Chinese

market

3) Contribution from recent acquisition

4 Sheng Siong Group Consumer

Services

0.830 0.835 + 0.6% 1.01 1) Store growth

2) Margin expansion

5 Riverstone Holdings Health Care 1.200 1.060 - 11.7% 1.42 1) Capacity expansion

2) Earnings delivery

3) Strengthening USD vs Ringgit

*Refers to change in last price between 8th Jan and 2nd Feb

Source: DBS Bank, Bloomberg Finance L.P. Absolute price performance of indices (8th Jan – 2nd Feb): STI: 2751.23 to 2579.23 / - 6.25% FSTS Index: 397.54 to 377.54 / - 5.03% FSTM Index: 650.02 to 630.80 / -2.96% A challenging beginning

Between 8th Jan and 2nd Feb, our picks fell by 5.9% on average, underperforming the small-cap index (FSTS Index) and mid-cap index (FSTM Index), but outperforming the STI, which declined by 5.03%, 2.96% and 6.25%, respectively. Weakness was led by double-digit decline of mm2 Asia and Riverstone, which lost 12.2% and 11.7% of their values, respectively. The mid-cap index held up quite well due to a high concentration of REITS (which make up more than 43% of the index). Sheng Siong, up 0.6%, was the best performer among our picks, while both Japfa and China Merchants Holdings (Pacific) were down about 3%. What happened with mm2 Asia and Riverstone?

mm2 Asia [- 12.2% m-o-m] We believe that the sharp decline in mm2 Asia’s share price over the month was not representative of the film producer’s earnings potential ahead. With no changes in company fundamentals, we think that its share price should re-rate when earnings are delivered as the company takes on more productions and as it expands into the lucrative Chinese market. We thus reiterate our positive outlook for mm2 and BUY call on the stock with TP of S$1.05 – which represents more than 50% upside to current price.

Riverstone Holdings [- 11.7% m-o-m] Despite trading down 11.7% since our last update, Riverstone’s share price has actually held up better than larger peers (Hartalega, Top Glove and Kossan), which fell by 14.6% on average between 8th Jan and 2nd Feb. The sector was sold down after the strengthening Ringgit raised profitability concerns for the rubber glove exporters, whose products are largely priced in USD. However, given Riverstone’s strength in the niche cleanroom segment, which is less price-sensitive and makes up c.50% of revenues, we expect margins to remain intact in the near term.

Market Focus

SMC Monthly

Feb-16: Top 5 Conviction Picks Despite the challenging start to 2016, we keep four of our five conviction picks as we focus on names that should report or have reported strong earnings (Japfa, Riverstone, mm2 and OSIM), or declare an attractive dividend – CMH Pacific.

No. Security Desc. Sector Rating Last Price

(2-Feb)

Target Price Upside (%) Catalyst

1 Japfa Ltd Consumer

Goods

BUY 0.475 0.90 89 1) Earnings delivery

2) Expansion

3) Recovery in purchasing power

2 China Merchants

Holdings (Pacific)

Industrials BUY 0.800 1.45 81 1) Earnings execution

2) Upcoming final dividend of 3.5Scts

3 mm2 Asia

Consumer

Services

BUY 0.685 1.05 53 1) Growth in local productions

2) Further expansion into Chinese market

3) Contribution from recent acquisition

4 OSIM International Consumer

Goods

BUY 0.990 1.28 29 1) Earnings recovery

2) Stable dividend payout of 6.0Scts, or

6% yield

5 Riverstone Holdings Health Care BUY 1.060 1.41 33 1) Capacity expansion

2) Earnings delivery

3) Strengthening USD vs Ringgit

Source: DBS Bank, Bloomberg Finance L.P. mm2 Asia* [MM2 SP, TP S$1.05] As a leading producer of films and TV/online content in Asia, mm2 provides a full suite of services spanning the entire film-making process. Riding on growing demand and support for local production, mm2 will continue to grow its presence in Singapore, Taiwan, and Hong Kong, by offering localised content. In addition, its venture into the lucrative Chinese movie market provides further support for growth as Chinese films are generally characterised by their bigger budgets and higher margins. To strengthen its competitive edge, mm2 recently acquired five cineplexes in Malaysia, which serve as a source of recurring income to the Group, while generating cost savings for its future productions over the longer term, as half of film proceeds are retained by cinema operators. At 21x FYMar16F PE and 12x FY17F PE based on its enlarged share capital, mm2 trades at a c.50% discount to peers’ 27x FY16F PE. Given its smaller size, we apply a 30% discount, or PE of 19x to projected FYMar17F earnings, which implies a 12-month target price of S$1.05.

OSIM International [OSIM SP, TP S$1.28] The retailer and brand owner of healthy lifestyle products for OSIM massage products, GNC chain of supplements in Singapore, Malaysia and Taiwan, and TWG brand of high-end luxury tea cafes and saloons, observed declining sales growth between 3Q12 and 1Q15. However, from 2Q15, the rate of sales decline has been consistently decelerating, likely due to recovering chair sales - which make up the bulk of OSIM’s revenue. We turned positive on OSIM on 29th Jan, after a >40% share price decline since we downgraded the stock in October 2015, and as its recent 4Q15 earnings showed sequential improvement with signs of bottoming out. OSIM has continued to pay 6.0Scts DPS from its strong balance sheet even though core earnings fell by close to 40% in FY15. With earnings decline projected to stabilise and given net cash position of S$200m, we see limited risks of dividend cuts at this stage, and believe that downside risk should therefore be minimal. At below 11x forward PE and dividend yield of c.6%, current valuations appear attractive. Our target price of S$1.28 for OSIM, premised on modest earnings growth in FY16F, is pegged to the stock’s average 7-year historical mean valuation of 14x.

Market Focus

SMC Monthly

Riverstone Holdings [RSTON SP, TP S$1.41] The Malaysian-based manufacturer of niche cleanroom nitrile gloves and healthcare gloves had an exceptional run-up this year from S$0.975 to a peak of S$2.58, before closing the year up 146% at S$2.40 (before bonus issue). The Group completed Phase 2 (of 5) of its expansion plans on schedule in 3Q15, which will add 1bn gloves in annual production capacity to 5.2bn by end-2015. To further capture opportunities from both new and existing customers, Riverstone will be accelerating its expansion plans ahead of schedule. When the five expansion phases are complete (expected by 2018), total production capacity will be raised to a minimum of 8.2bn gloves p.a. Furthermore, Riverstone could grow capacity faster than expected as it recently acquired 9.364 acres of land for the construction of a factory and worker hostels. Going forward, we expect capacity expansion to underpin growth, supported mostly by robust long-term global demand for healthcare gloves amid rising healthcare standards and expenditures, and greater awareness on workplace safety. A strengthening US$ vs Ringgit will also benefit the company as Riverstone receives c.90% of its revenues in US$, while only c.35% of its costs are incurred in US$. We arrive at our 12-month target price of S$1.41 after applying a target valuation multiple of 20x blended FY16/17F PE, which is fair given its smaller capacity. China Merchants Holdings (Pacific) [CMH SP, TP S$1.45] The Chinese toll road operator completed its Jiurui Expressway acquisition and the acquisition of three toll roads in Guangxi Zhuang Autonomous Region over the year, which should propel the Group’s top and bottom lines in the medium to long term. CMHP operates eight toll roads, with a total length of 576km, in four different provinces (Zhejiang, Guangxi Zhuang Autonomous Region, Jiangxi and Guizhou) in China.

Driven by contributions from these recent acquisitions, we project CMHP’s core earnings to grow by nearly 50% from HK$675m in 2014 to HK$1,004m by 2017. Apart from its strong cash flow generation and long-term growth prospects, we also like the company for its attractive dividend yield of almost 9%. Our 12-month target price of S$1.45 is based on DCF valuation with WACC of 9.8%, and offers >80% upside. We see the stock re-rating as it delivers earnings growth.

Japfa Ltd [JAP SP, TP S$0.90] Shares bounced back from a record low of S$0.28 on 15 Sep 2015 after the government ordered day-old-chick (DOC) breeders to cull parent stock to address the oversupply situation in the poultry industry. Breeders have agreed to the culling of 6m poultry parent stock (of which Japfa’s share is 16% or c.960k) and when completed, would reduce the feed cost for Japfa’s breeding division. Combined with the stabilisation of DOC prices above breakeven cost, we anticipate the Group’s breeding segment GPM to recover substantially. At 25% EBITDA CAGR over the next three years, we believe that Japfa, given its last price of S$0.475, remains undervalued at 7.5x forward PE. Looking forward, we expect recovery in the breeding segment, strong growth in China’s raw milk output, Rupiah stabilisation and recovery in purchasing power to boost Japfa’s FY16 earnings.

Source: DBS Bank

Mkt Price Target CAGR

Cap (S$) Price % 15-17

Company FYE (US$m) 2-Feb (S$) Upside Rcmd 15F 16F 17F 15F 16F 17F 15F 16F 17F 15F 16F 17F 15F 16F (%)

China Merchant Holdings Dec 1,006 S$ 0.8 1.45 81% BUY 8.4x 9.6x 8.1x 0.7x 0.7x 0.7x 8.1x 7.1x 6.1x 8% 8% 9% 7.3% 8.6% 1.6

Japfa Ltd Dec 589 S$ 0.475 0.9 89% BUY 13.2x 7.4x 4.7x 0.8x 0.7x 0.6x 7.0x 5.5x 4.4x 6% 10% 14% 0.0% 0.0% 68.5

MM2 Asia Mar 100 S$ 0.69 1.05 53% BUY 27.6x 20.5x 12.4x 7.4x 4.4x 3.2x 13.7x 10.9x 7.3x 45% 28% 30% 0.0% 0.0% 49.1

Riverstone Holdings Dec 544 S$ 1.06 1.41 33% BUY 9.1x 7.4x 6.7x 2.5x 2.1x 1.7x 6.1x 4.7x 4.1x 31% 31% 28% 3.9% 4.9% 16.9

Osim International Dec 514 S$ 0.99 1.28 29% BUY 11.1x 10.8x 10.3x 1.8x 1.7x 1.6x 5.5x 4.7x 4.2x 12% 17% 16% 6.1% 6.1% 3.7

ROAE Div Yield

PE (x) P/BV (x) EV/EBITDA (x) (%) (%)

Market Focus

SMC Monthly

Value emerging on P/BV metrics Following the recent market correction, many Singapore SMC names are trading well below their book value, suggesting that value has started to emerge. Apart from oil & gas-related companies that could potentially face asset impairment charges in the face of depressed oil prices, we highlight a couple of names that offer value: Midas Holdings, Perennial Real Estate Holdings and Centurion Corporation.

10 Lowest P/B Stocks

(All SGX-listed Names With Market Cap S$50m to S$2bn)

No Security Desc. 52 W High 52 W Low Jan-16 Last Price Distance from Peak CY16 P/B* CY16 P/E*

1 Ezra Holdings 0.326 0.054 0.057 82.5% 0.12 - 2 Mermaid Maritime 0.305 0.115 0.120 60.7% 0.23 4.65 3 Krisenergy Ltd 0.615 0.155 0.171 72.2% 0.27 24.58 4 Ying Li International 0.275 0.123 0.131 52.4% 0.29 8.63 5 PACC Offshore 0.560 0.285 0.295 47.3% 0.25 5.60 6 Vard Holdings 0.655 0.145 0.150 77.1% 0.29 56.76 7 Pacific Radiance Ltd 0.785 0.285 0.300 61.8% 0.33 6.68 8 OUE Ltd 2.240 1.635 1.650 26.3% 0.38 25.46 9 Wing Tai Holdings 2.110 1.500 1.535 27.3% 0.38 14.54 10 Ezion Holdings 1.320 0.490 0.515 61.0% 0.37 3.22

*consensus estimates

20 Lowest P/B Stocks

(Only SGX-listed Names Covered by DBS With Market Cap S$50m to S$2bn)

No Security Desc. 52 W High 52 W Low Jan-16 Last Price Distance from Peak CY16 P/B# CY16 P/E#

1 Ezra Holdings 0.326 0.054 0.057 82.5% 0.12 - 2 Mermaid Maritime 0.305 0.115 0.120 60.7% 0.20 4.40 3 Noble Group 1.205 0.270 0.310 74.3% 0.26 3.59 4 PACC Offshore Services

Holdings 0.560 0.285 0.295 47.3% 0.30 10.76 5 Vard Holdings 0.655 0.145 0.150 77.1% 0.32 - 6 Pacific Radiance Ltd 0.785 0.285 0.300 61.8% 0.35 40.09 7 Ezion Holdings 1.320 0.490 0.515 61.0% 0.41 3.76 8 Midas Holdings 0.410 0.225 0.255 37.8% 0.44 8.34 9 Tat Hong Holdings 0.740 0.460 0.465 37.2% 0.46 168.46 10 Banyan Tree 0.560 0.350 0.370 33.9% 0.46 16.85 11 Perennial Real Estate 1.135 0.825 0.845 25.6% 0.48 8.75 12 Nam Cheong 0.350 0.094 0.101 71.1% 0.51 7.94 13 Courts Asia 0.465 0.315 0.340 26.9% 0.59 8.15 14 Indofood Agri 0.790 0.415 0.430 45.6% 0.61 13.26 15 Cosco Corporation 0.630 0.285 0.335 46.8% 0.61 - 16 Centurion Corporation 0.595 0.355 0.355 40.3% 0.62 6.61 17 Far East Hospitality Trust 0.865 0.575 0.640 26.0% 0.67 17.42 18 Japfa Ltd 0.655 0.280 0.470 28.2% 0.70 7.48 19 China Merchants 1.145 0.780 0.785 31.4% 0.71 9.42 20 OUE Commercial REIT 0.805 0.565 0.630 21.7% 0.71 20.36

# DBS estimates

Market Focus

SMC Monthly

Source: DBS Bank, Bloomberg Finance L.P. O&G names dominate the list of low P/BV stocks, as: 1) Profitability and ROEs are expected be badly impacted by

the low oil price environment, and

2) A prolonged oil price depression could lead to asset impairments and a lowering of book value.

Instead, we turn our attention to non-O&G names that offer value: 1) Midas Holdings [ MIDAS SP, TP S$0.49]

We see value in Midas’ share at c. 0.5x FY16F P/BV currently, which is near -2SD of its mean of 0.8x forward P/BV, as we project that the Group’s earnings should begin to recover more substantially from 2016 onwards when contribution from its new aluminium plate and sheet plant kicks in. We also see potential for more order wins given the firm demand for high-speed and metro trains in China and abroad. As earnings improve and ROE increases, we see the stock re-rating towards our 12-month TP of S$0.49.

2) Perennial Real Estate Holdings [ PREH SP, TP S$1.32]

Currently trading at a 60% discount to our RNAV estimates of S$2.16, we think that current valuations have already priced in most uncertainties regarding the Group’s ambitious plans to grow its business (especially in China where it has a limited operating track record). Furthermore, with huge value-unlocking potential in development projects which will be progressively completed from 2016 onwards, and as earnings are underpinned by a stable portfolio of operational investment properties in Singapore and China, and recurring property management fees, we believe that our 12-month target price of S$1.32 pegged to a 40% discount to RNAV is fair.

3) Centurion Corporation [ CENT SP, TP S$0.59]

Centurion appears attractive in our view, as it is currently trading at 0.6x FY16F P/BV and <7x FY16F PE, which are more than -1SD of its average historical mean of 1.1x forward P/BV and 12x forward PE respectively. Given its success in executing its aggressive bed growth strategy thus far, we are optimistic about the Group’s long-term potential and believe that the stock could re-rate towards our 12-month TP of S$0.59 as earnings are delivered.

Security Desc. Last Price

(02-Feb)

Target Price Upside (%) Catalysts

Midas Holdings

0.250 0.490 96% 1) Earnings recovery 2) Contract wins

Perennial Real Estate Holdings

0.870 1.320 52% 1) Execution of property development projects

Centurion Corporation

0.360 0.590 64% 1) Acquisitions / developments

A v g : 0 .7 8 x

+ 1 sd : 0 . 9 6 x

+ 2 sd : 1 . 1 5 x

‐1 sd : 0 .6 x

‐ 2 s d : 0 . 4 1 x

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

F eb -1 2 Fe b -1 3 Fe b -1 4 F e b -1 5 Fe b -1 6

( x )

A v g : 1 .1 x

+ 1 sd : 1 . 5 1 x

+ 2 sd : 1 . 9 1 x

‐ 1 s d : 0 . 6 9 x

‐ 2 s d : 0 . 2 8 x0.2

0.7

1.2

1.7

2.2

F eb -1 2 Fe b -1 3 Fe b -1 4 F e b -1 5 Fe b -1 6

( x )

0 . 2

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S e p - 1 4 J a n - 1 5 M a y - 1 5 S e p - 1 5 J a n - 1 6

( x )

Avg: 0.68 x

Market Focus

SMC Monthly

Broad Singapore SMC Market in Review: Down > 5% m-o-m amidst gloom in Jan-16

Rolling 2-year relative performance

Source: DBS Bank, Bloomberg Finance L.P. Singapore's equity market is off to a shaky start in 2016, with the Straits Times Index (STI), FTSE Mid Cap Index (FSTM Index) and FTSE Small Cap Index (FSTS Index) losing 8.8%, 5.4% and 6.0% respectively in January. The Singapore equity market has had a challenging start to the year, which was not unexpected given the current volatile environment and weak investor confidence, and as crude prices fell to 12-year lows of under US$28/bbl on 20th Jan (although it rebounded to almost US$35/bbl by month-end). During the month, the indices fell by as much as 12% from December’s close, but the subsequent rebound in oil prices in late Jan provided some respite. While both the FSTS and FSTM outperformed the STI in Jan-16, demand for small caps was weak - as evidenced by the steep decline in average traded volume of close to 40% y-o-y for the FSTS Index.

Jan-16

Avg Daily Value

Avg Daily Volume % Chg (1y)

(S$ m) (m shares) Value Volume

STI Index 0.83 312.41 10.6% 29.1%

FS Small Cap Index

0.05 153.49 (36.7%) (25.0%)

FS Mid Cap Index

0.18 226.31 19.3% 23.1%

Source: DBS Bank, FTSE

6 0

7 0

8 0

9 0

1 0 0

1 1 0

1 2 0

S T I In d e x F S T S In d e x F S T M In d e x

Jan-16 Closing

Price % Chg (1M)

STI Index 2629.11 (8.8%)

FS Small Cap Index

379.29 (6.0%)

FS Mid Cap Index

631.33 (5.4%)

Dec-15 Closing

Price % Chg (1M)

STI Index 2882.73 (14.3%)

FS Small Cap Index

403.51 (18.0%)

FS Mid Cap Index

667.53 (10.8%)

Basic Materials, 2.45

Consumer Goods, 5.65

Consumer Services, 13.44

Financials, 49.59

Health Care, 2.33

Industrials, 18.93

Oil & Gas, 3.4

Technology, 2.67

Utilities, 1.56

FTSE ST Small Cap Industry Breakdown

Consumer Goods, 7.45

Consumer Services, 8.15

Financials, 48.06

Health Care, 3.97

Industrials, 25.26

Oil & Gas, 1.4

Technology, 0.89

Telecommunications, 1.38

Utilities, 3.44FTSE ST Mid Cap Industry Breakdown

Market Focus

SMC Monthly

-50% -40% -30% -20% -10% 0% 10% 20%

Ezra Holdings

Vard Holdings

Cosco Corporation

Nam Cheong

Noble Group

Yandlord Group

Ascendas Hospitality Trust

Frasers Centrepoint Trust

Petra Foods

Tiger Airways

Source: DBS Bank, Bloomberg Finance L.P.

Best and worst performing SMCs in DBS’s coverage in January

In January, SMC names under our coverage that bucked the trend include Petra Foods, Frasers Centrepoint Trust, Ascendas Hospitality Trust and Yanlord Group. Business still under pressure - Petra Foods (+9.0% m-o-m). Petra Foods has been trending downwards since mid-2015, after it ceased its distribution operations in Singapore, and as it delivered a disappointing performance in 3Q15. In January, the stock gained 9% as the market corrected after the chocolate distributor closed at a 3-year low of S$2.05 on 6th January. Current valuations remain lofty at 24x-36x PE on our FY16F/17F forecasts, especially as poor consumer sentiment and volatile exchange rates continue to weigh on Petra’s earnings. While an earlier-than-expected earnings recovery could give rise to upside earnings risk, we maintain our FULLY VALUED call with TP of S$2.05, pegged to 26x FY16-17F blended earnings. Strong reversions drive 1Q16 DPU to new high - Frasers Centrepoint Trust (+3.0% m-o-m). FCT ended the month in positive territory helped by yet another record quarterly DPU, which was attributable to higher net property income. Frasers Centrepoint Trust remains one of our top picks in the retail sector due to its assets’ near-monopoly positioning in the north. We believe the transitional period during the course of AEI at Northpoint will be managed well, and that Causeway Point should continue to surprise on the upside and support earnings and price performance. We currently have a BUY call with TP of S$2.04.

Owing to the low oil price environment, O&G players such as Ezra Holdings, Vard Holdings and Nam Cheong continue to lead decline. Expect no respite from losses – Ezra Holdings (-42.4% m-o-m). Following Ezra’s steeper-than-expected 1Q16 losses and proposed 8-into-1 share consolidation exercise, Ezra’s share prices plummeted another 21% to close the month down 42% at S$0.057. Post results, we reduced our sum-of-the-parts target price to S$0.10 and downgraded the stock to HOLD as we lower our P/BV valuation peg for the subsea business to account for the weak outlook. While Ezra’s current valuations look depressed, we do not see any investment merit for the stock given the weak oil price outlook, potential heavy losses and vulnerability to interest rate hikes.

Market Focus

Small Mid Caps Radar

SMC Radar Best World International (S$0.315, BEST SP) Best World is the first direct-selling company to be listed in Singapore. At 8x FY16F PE, the Group trades at a 40% discount to larger peers’ 13x FY16F PE, which appears fair given its much smaller scale. We think that the stock could rerate when Best World successfully breaks into China’s direct selling market, which is a key catalyst for the company’s future growth. A prospective yield of 3.2% is also on offer. Best World International was founded in Singapore in 1990,

and in July 2004 became the first direct-selling company to be listed on the SGX. The company operates in the personal care and wellness industry, and has been growing its regional presence through subsidiaries across ten markets, namely: Singapore, Thailand, Taiwan, Indonesia, Malaysia, Vietnam, Hong Kong, China, Korea and the Philippines.

The Group’s key operating segments can be broadly categorised as follows:

(a) Direct selling:

Best World generates the bulk of its revenues (about S$60.3m or 80% of FY14 revenues) via its hierarchical direct-selling programme, where the company’s products are sold by their distribution networks (of independent distributors and members) through direct interactions with end-customers. The company currently practises direct selling in all its active markets except China. As at November 2015, Best World’s application for direct selling licence in China was still in progress.

(b) Export The Group also exports its products to distribution or import agents in the PRC and Myanmar, and earns a trading profit. Contribution from this segment is lower, at c. 10.5% of FY14 revenues, or S$7.9m.

(c) Manufacturing / Wholesale The acquisition of Best World (Zhejiang) Pharmaceutical Co., Ltd, a GMP (Good Manufacturing Practice) certified manufacturer of dietary supplements in Hangzhou in February 2014, provided the Group with immediate access to the downstream manufacturing/wholesale channel. Post acquisition, Best World registered manufacturing sales of S$7.0m for FY14, which represents c.9.4% of the Group’s FY14 revenues.

Following its geographical expansion into new markets such as Korea, Vietnam and the Philippines, new product launches, and acquisition of Best World (Zhejiang), Best World was able to grow its top line at a CAGR of 11.0%, from S$48.8m in 2010 to a record revenue of S$75.3m in 2014.

Over the same period, membership also grew at a CAGR of 13.3%, from approximately 229,000 in 2010 to over 377,000 by 2014. Best World defines “members” as individuals who have made purchases within the last 12 months. As majority of its members (up to 97%) are consumers rather than distributors, we think that the growing membership base is a good indication of the quality and demand for Best World’s products.

According to the company, skin care products remain the primary driver of sales, and typically make up about 60% of the Group’s total revenues.

Source: Bloomberg Finance L.P., DBS Bank

At A Glance Issued Capital (m shrs) 221 Market Cap (S$m/US$m) 70/49 Major Shareholders (%)

D2 Investment Pte Ltd 34.9 Shi Jinyu 7.0 Moi Tan Doreen Nee 5.6

Free Float (%) 42.8 Avg Daily Vol (m shrs) 0.5 Forecasts and Valuation FY Dec (S$ m) 2011 2012 2013 2014 Turnover 41.5 48.2 41.1 75.3 EBITDA 3.5 5.0 1.2 7.4 Pre-tax Profit 0.3 2.4 1.9 5.7 Net Profit 0.3 1.8 1.4 4.1 EPS (S cts) 0.1 0.8 0.7 1.8 EPS Gth (%) (88.8) 556.9 (20.6) 183.7 Net DPS (S cts) - 1.2 0.3 0.8 BV Per Share (S cts) 23.6 23.3 24.1 25.6 PE (X) 237.9 36.2 45.6 16.1 P/Cash Flow (X) (1,253.8) (24.2) (434.6) 6.5 EV/EBITDA (X) 10.2 7.7 32.4 4.5 Net Div Yield (%) 0.0% 4.1% 1.0% 2.7% P/Book Value (X) 1.2 1.3 1.2 1.2 Net Debt/Equity (X) CASH CASH CASH CASH ROA (%) 0.5% 3.1% 2.3% 4.8% ROE (%) 0.6% 3.8% 2.9% 7.3%

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Best World International Ltd (LHS) Relative STI Index (RHS)

Relative IndexS$ Relative IndexS$

Page 9

Market Focus


After the US, China has the biggest market for direct-selling activities. According to the World Federation of Direct Selling Associations, direct retail sales in China grew at a CAGR of 18.7% between 2011 and 2014 to US$30.2bn in 2014. Given the sheer size of the Chinese market, and potential for growth, venturing into the PRC direct-selling market remains a primary driver of future growth for Best World. Given the stringent requirements for the award of direct-selling licences in China, the acquisition of Best World (Zhejiang) Pharmaceutical Co. Ltd enabled the Group to meet the final condition of holding a local manufacturing licence. However, the company only expects the approval to be granted in late 2016. When that happens, we believe that Best World’s direct-selling segment could undergo a period of rapid growth.

Best World also seeks to grow the Group inorganically via

M&A to tap into businesses (upstream and downstream) with synergistic properties, and as a means to gain immediate access to new markets such as Japan and Europe.

While Best World does not have a prescribed dividend policy, it has maintained dividend payouts above 30% since 2006. Assuming a dividend payout of S$0.01 per share in FY16, similar to the Group’s T12M distributions, we estimate a prospective yield of 3.2% for FY16.

Key risks: (1) Weakening currencies of key markets of operation against the SGD may negatively impact the Group’s performance as revenues are dominated in the respective local currencies, (2) Apart from the product range, independent distributors are the driving force behind the success of direct-selling companies and may be subjected to substantial reputational risk if policies are not in place to identify and remedy incompetency or errant practices of the sales force, (3) As products are discretionary in nature, demand could be susceptible to weak economic conditions.

Valuation at 8x FY16F PE represents a c.40% discount to

larger peers’ 13x FY16F PE (such as Amway, Nu Skin and Herbalife), which is fair given Best World’s much smaller scale. Best World’s revenue is about 25% and 2% of peers such as Amway and Nu Skin respectively. However, we believe that the stock could re-rate if Best World successfully breaks into the Chinese direct-selling market – which is a key catalyst for the Group’s growth prospects in the medium term.

Best World International: Product Range

Source: Company

Overall Membership Growth

Source: Company, DBS

FY14 Geographical Breakdown of Revenue (S$ m)

Source: Company, DBS Paul YONG, CFA +65 6682 3712 [email protected] Singapore Research Team

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

FY2010 FY2011 FY2012 FY2013 FY2014 9M15

Premium Skincare

Personal Care

Nutrition Wellness

Air Purifier Skincare Products

Air Ionizer Skincare Devices

Health Supplements

Weight Management

products

Lingerie

Personal Care

Products

Singapore, 11.7%

Taiwan, 30.2%

China, 17.2%

Philippines, 24.6%

Indonesia, 3.8%

Others, 12.5%

Market Focus


SMC Radar Serial System Ltd (S$0.117, SERL SP) Serial System is principally a distributor of electronic components and consumer electronic products, with ambitions to grow beyond the electronic space. At 5x T12M PE, the Group trades at a c.35% discount to larger peers’ 8x T12M PE, possibly due to Serial System’s recent acquisitions and diversification into non-core businesses, such as laundry and catering services. Notwithstanding the diversification, valuations seem undemanding at 5x T12M PE and 9.4% prospective yield. Consistent delivery and/or growth of earnings and dividends could see the stock rerate. Established in 1988, Serial System is the largest electronic

component distributor listed in Singapore, with annual revenues exceeding S$1bn since 2013. Over the last 28 years, the company has expanded its network steadily and now has 58 offices and 10 warehouses across key Asian markets including Singapore, China, Hong Kong, India, Indonesia, Taiwan and Thailand.

Serial System’s core competency has traditionally been in the distribution of electronic components such as sensors, integrated circuits, optoelectronic components and semiconductors. This segment remains a key revenue segment for the Group, and contributed above US$1.0bn or 99.5% to the Group’s FY14 revenue.

At end-Dec 2014, as part of the Group’s strategy to extend its existing networks to the distribution of finished consumer products, Serial System acquired Serial I-Tech Group - GSH Corporation Ltd’s trading and distribution arm for fast-moving consumer goods, consumer electronics, IT, photographic and timepiece products. More recently, on 26 Jan 2016, the Group also completed its acquisition of Achieva Technology Pte. Ltd., which is the distribution and trading entity of Achieva Limited. These acquisitions provided the Group with access into new markets such as Australia, the United Arab Emirates, Kazakhstan, Cambodia and Bangladesh, which also bodes well for the existing electronic components distribution business. As the supply chain and operations of both Serial I-Tech and Achieva Technology are gradually integrated into the Group, we expect uplift in margins from the streamlining of costs and better economies of scale.

In addition to its distribution business, Serial System is also

invested in other businesses such as: investment holding and trading, rental of investment properties, outdoor advertising media and hospitality solutions, ethylene oxide sterilisation, assembly and distribution of medical devices and the provision

of laundry services for the hospitality industry. As at 9M15, investments in associates totalled US$18.9 m.

Most recently, in Aug 2015, Serial System completed its acquisition of a 21% equity stake in Tong Chiang Group, a dinner delivery service based in Singapore.

While the revenue contribution from other businesses is comparatively low at US$4.7m, or 0.5% of FY14 revenues, gross margins tend to be higher for these non-core businesses, at c.50% as compared to 8-12% for the electronic components distribution business.

Source: Bloomberg Finance L.P., DBS Bank

At A Glance Issued Capital (m shrs) 896 Market Cap (S$m/US$m) 109/77 Major Shareholders (%)

Bak Heng Goh 39.6 Seng Hui Goi 11.0 Tee Yih Jia Food Man 2.8

Free Float (%) 45.9 Avg Daily Vol (m shrs) 0.5 Forecasts and Valuation

FY Dec (US$ m) 2011 2012 2013 2014

Turnover 770.3 822.2 1,022.3 1,312.9 EBITDA 21.4 20.9 24.7 34.8 Pre-tax Profit 16.4 12.9 18.0 26.4 Net Profit 12.9 9.9 14.0 20.4

EPS (S cts) 2.1 1.6 2.2 3.2 EPS Gth (%) (20.2) (23.2) 41.5 45.4 Net DPS (S cts) 0.6 0.5 0.5 1.0 BV Per Share (S cts) 20.0 19.9 21.5 25.0 PE (X) 5.7 7.4 5.3 3.6 P/Cash Flow (X) (4.0) 4.4 (2.5) (56.4) EV/EBITDA (X) 9.2 8.3 9.3 7.6 Net Div Yield (%) 5.4% 4.5% 4.6% 8.5% P/Book Value (X) 0.6 0.6 0.5 0.5 Net Debt/Equity (X) 0.7 0.5 0.9 1.0 ROA (%) 3.7% 3.0% 3.2% 3.6% ROE (%) 10.0% 7.8% 10.1% 12.6%

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Page 11

Market Focus


Even as the electronic components industry faces headwinds from weaker global economic expansion, the industry has still been gaining momentum on the rising importance of the Internet of Things (IoT), as the proliferation of smart devices and wireless applications lead to increasing demand for electronic components such as integrated circuits and chips. As one of the largest electronic distribution networks within the Asia Pacific, and with existing relationships with leading component manufacturers such as Texas Instruments, Avago Technologies, TE Connectivity and OSRAM Opto Semiconductors, we think Serial System is well positioned to benefit from these trends.

Consistent with the Group’s three-pronged strategy, Serial

System will focus on improving operational efficiency and cost controls through the utilisation of internal forecasting system, centralised asset management and greater adoption of electronic data interchange (EDI), which should lead to the gradual improvement of margins.

The Company also endeavours to expand its product portfolio and deepen penetration into the higher-value automotive segment, mobile devices and enterprise cloud solutions.

Going forward, Serial System remains open to investments in both related and non-core businesses that are margin-accretive or synergistic and will be looking to acquire market access into Europe and the US via M&A or JVs within the next five years.

Serial Systems typically maintains a payout close to 40%, but does not have a fixed dividend policy. Assuming a dividend payout of 1.1 Scts per share in FY16, similar to the Group’s T12M distributions, we estimate a prospective yield of 9.4% for FY16.

Key risks: (1) Aggressive diversifications into non-related businesses could stretch the Group’s resources, (2) Ability to integrate newly acquired businesses – Serial I-Tech Group and Achieva Technology, (3) Slowdown of the general economy could weaken demand for semiconductors and electronic components.

Valuation of 5x T12M PE represents a c.35% discount to

larger peers’ 8x T12M PE, which is likely due to Serial System’s diversification into non-related businesses. However, given the growth prospects for these non-core businesses, current valuations appear undemanding. Further, the stock could re-rate if Serial System can successfully integrate and streamline newly acquired related businesses into the Group, and if it demonstrates prudence in its non-related business acquisitions.

Serial System’s Three-Pronged Strategy

Source: Company, DBS Bank

FY14 Segmental Breakdown of Revenue (US$ m)


FY14 Geographical Breakdown of Revenue (%)

Source: Company, DBS Bank Paul YONG, CFA +65 6682 3712 [email protected] Singapore Research Team

Three-Pronged Strategy

Increase revenue through expansion of product portfolio

Drive greater internal efficiencies to improve margin

Deepen penetration in existing markets and widen geographical reach

Singapore, 11.7%

Taiwan, 30.2%

China, 17.2%

Philippines, 24.6%

Indonesia, 3.8%

Others, 12.5%

Market Focus


SMC Radar Sunningdale Tech (S$0.80, SUNN SP) One of the biggest one-stop turnkey plastic solutions provider, Sunningdale‘s competitive advantages lie in its tooling capabilities, expertise in high cosmetic parts, credibility in the healthcare and automotive business and the scalable robust system and processes that have been built over the years. Current valuation is attractive, at c.0.4x FY15E P/BV and offers a dividend yield of 5%, based on 4cts DPS. FY15E PE is estimated at about 4-5x, which is at a steep discount to peers of about 9x. We expect group earnings to grow at about 5% per year, driven by the Automotive and Healthcare segments. Sunningdale is a leading manufacturer of precision plastic

components. The group provides one-stop, turnkey plastic solutions, with capabilities ranging from product & mould designs, mould fabrication, injection moulding, complementary finishings, through to the precision assembly of complete products.

Sunningdale is focusing on serving four key business segments – Automotive, Consumer / IT, Healthcare and Mould Fabrication. 1) Automotive

In the automotive segment, Sunningdale designs and manufactures decorative plastic parts such as trim plates for automotive stereo systems, navigation systems, air registers and climate controls (also known as bezels), speedometers, steering switches and design covers. Tapping on the on-going outsourcing trends from the US, Europe and Japan, steadily increasing demand and long product life cycle, the automotive industry continues to offer strong growth opportunities for the group. In 3Q15, the Automotive segment contributed 33% of total revenue, vs 26% in FY14. The group hopes to register higher growth for this segment, especially from North America. 2) Consumer / IT

Sunningdale manufactures plastic parts for many consumer products, including but not limited to smart cards, consumer electronics & peripherals, telecommunication keypads, eco-green products, etc. With robust quality practices coupled with its manufacturing capabilities, Sunningdale Tech is well-positioned to tap on the growth opportunities in this fast-paced and high-volume industry. Sunningdale’s focus is on producing niche components for the mid to high end market. This unit accounted for 41% and 44% of group revenue for 3Q15 and FY14 respectively.

3) Healthcare

With extensive knowledge and experience in manufacturing medical device components, Sunningdale is well positioned to service the healthcare industry. Medical products tend to have a longer gestation period. This unit is expected to register double-digit growth, coming from a small base. 4) Mould Fabrication

Sunningdale Tech has more than 200 designers and 10,000 sqm of mould manufacturing area in Singapore and China, supporting no less than 2000 moulds fabricated annually.

Source: Bloomberg Finance L,P, DBS Bank

At A Glance Issued Capital (m shrs) 187 Market Cap (S$m/US$m) 149 / 105 Major Shareholders (%) Boon Hwee Koh 8.2 Goi Seng Hui 8.2 Yarwood Engineering 8.2 Free Float (%) 65.3 Avg Daily Vol (m shrs) 0.2

Forecasts and Valuation FY Dec (S$ m) 2011 2012 2013 2014 Turnover 426.1 451.3 476.0 475.6 EBITDA 22.5 43.9 48.6 38.0 Pre-tax Profit (8.5) 12.9 19.1 28.2 Net Profit (11.8) 9.6 13.6 27.7 EPS (S cts) (9.00) 7.29 10.41 21.11 EPS Gth (%) n.m. n.m. 42.7 102.8 Net DPS 0.03 0.06 0.035 0.04 BV Per Share (S cts) 225.0 219.3 235.2 234.4 PE (X) (8.9) 11.0 7.7 3.8 P/Cash Flow (X) (0.2) 0.1 0.0 0.1 EV/EBITDA (X) 7.3 3.6 2.7 5.1 Net Div Yield (%) 3.7 7.5 4.3 5.0 P/Book Value (X) 0.4 0.4 0.3 0.3 Net Debt/Equity (X) 0.0 0.0 cash 0.1 ROA (%) -2.88 2.40 3.28 4.63 ROE (%) -4.97 4.09 5.40 9.07

0

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Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Sunningdale Tech Ltd (LHS) Relative STI Index (RHS)


Page 13

Market Focus


Restructuring to meet demand

Sunningdale is constantly restructuring to meet the evolving needs of its customers in the fast-paced technology space. It has undergone several rounds of restructuring in the last couple of years, including the merger with Tech Group Asia in July 2005. Tech Group merged with Omni Mold in October 2003. The latest is the acquisition of First Engineering in Dec 2014. All three targets – Tech Group, Omni Mold and First Engineering were previously listed on SGX. Sunningdale has now emerged to be one of the largest precision plastic companies in this region.

Offer one-stop services With about 10 manufacturing facilities, the group is able to share technology and skills across all its facilities. By leveraging on each facility, Sunningdale is also able to offer customers a strong suite of capabilities across the entire value chain, to provide seamless support to its customers and cater to their specific requirements in this rapidly changing market.

Expanding geographic footprint; cost savings from new plant in China The group currently has manufacturing facilities across Singapore, Malaysia (Johor), China (Tianjin, Shanghai, Suzhou and Zhongshan), Latvia (Riga), Mexico (Guadalajara), and recently set up operations in Brazil and Thailand. It is expanding its geographic footprint to serve its customers. Sunningdale has also bought a piece of land in Chuzhou, China. Operational in 2H16, the group would be able to enjoy some cost savings as labour cost in Chuzhou is about half of that in Shanghai.

Diversified customer base Sunningdale’s customer base spans across continents to include leading American, European, Japanese and Korean multi-national corporations and original equipment manufacturers. About 80% of its revenue is from the top 34 blue chip companies and about half of this from top 10 companies. The largest customer accounts for about 15% of total revenue, for various services provided across the value chain. There are a handful of customers accounting for about 3% to 5% of total revenue. Risks

Challenging outlook The business environment continues to be challenging. Increases to the minimum wage and slow growth in China and pricing pressures from customers continue to squeeze margins.

Currency risks Sunningdale’s revenues are mainly denominated in USD, while costs are denominated primarily in Singapore dollars, Malaysian ringgit and the Chinese renminbi. The wild swing in currencies will affect margins.

Revenue trend

0

50

100

150

200

250

300

350

400

450

500

2009 2010 2011 2012 2013 2014

CAGR: 5%

S$m

Source: DBS Bank, company

Net profit and margin trend

-4

-3

-2

-1

0

1

2

3

4

5

6

7

-15

-10

-5

0

5

10

15

20

25

30

2009 2010 2011 2012 2013 2014

Net Profit Net Profit Margin (%)

S$m %


FY14 segmental revenue breakdown

Automotive, 26%

Consumer / IT, 44%

Healthcare, 8%

Mould Fabrication,

22%


FY14 geographical revenue breakdown


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

China & Hong Kong, 45%

Singapore & Malaysia, 41%

Others, 15%

Page 2

Market Focus


APPENDICES

Page 15

Market Focus


APPENDIX (1) FSTS & FSTM Indices

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)

Food Producers 4 3,731 1.8

General Retailers 6 713 3.5

Real Estate Investment Trusts

16 21,704 (1.9)

Oil & Gas Producers

1 53 3.0

Travel & Leisure 5 3,215 (2.6) Financial

Services 1 156 2.7

Media 1 865 (3.1) Travel & Leisure 4 927 0.8

Health Care Equipment & Services

2 1,987 (3.5)

Food & Drug Retailers 2 510 (2.1)

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)

General Industrials

1 1,378 (22.5) Support Services

1 55 (26.0)

Industrial Engineering

2 2,256 (17.4) Oil Equipment, Services & Distribution

9 528 (24.6)

Software & Computer Services

1 444 (15.9) Chemicals 1 30 (22.5)

Oil Equipment, Services & Distribution

1 699 (15.1) Electronic & Electrical Equipment

1 37 (20.9)

Mobile Telecommunications

1 692 (15.1) Beverages 1 13 (17.5)

Source: DBS Bank, FTSE

Market Focus


APPENDIX (2) SMC Screener: Ranked by Investment Metrics*

*based on 29 Jan 2016 prices Source: DBS Bank, Bloomberg Finance L.P.

Top 10 Prospective Dividend Yield (CY16 DBS Estimates)

Company Name (%) Asian Pay Television Trust 12.3

Noble Group 9.7

Cache Logistics Trust 9.6

Religare Health Trust 9.3

Mapletree Greater China Commercial Trust 9.2

IREIT Global 9.2

Cambridge Industrials 9.2

Croesus Retail Trust 9.1

Soilbuild Business Space REIT 8.8

China Merchants 8.8 Average 9.5

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

Company Name (%) Mermaid Maritime 126.5

Ezion Holdings 94.1

Midas Holdings 92.1

Japfa Ltd 91.5

Banyan Tree 90.0

China Merchants 84.3

Vard Holdings 83.2

ARA Asset Management 81.6

Yoma Strategic Holdings 75.3

China Everbright Water 68.1 Average 88.7

Lowest P/B (CY16 DBS Estimates)

Company Name (x) Ezra Holdings 0.12

Mermaid Maritime 0.20

Noble Group 0.26

PACC Offshore Services Holdings 0.30

Vard Holdings 0.32

Pacific Radiance Ltd 0.35

Ezion Holdings 0.41

Yandlord Group 0.43

Midas Holdings 0.44

Tat Hong Holdings 0.46 Average 0.33

Lowest P/E (CY16 DBS Estimates)

Company Name (x) Noble Group 3.59

Ezion Holdings 3.76

Mermaid Maritime 4.40

Centurion Corporation 6.61

Yandlord Group 6.89

Japfa Ltd 7.48

Del Monte Pacific 7.49

CSE Global 7.54

Nam Cheong 7.94

Courts Asia 8.15 Average 6.39

Top 10 Net Cash to Share Price (FY15 DBS Estimates of Net Cash to Last Price)

Company Name (%) OSIM International 26.4

iFAST Corporation 17.6

Super Group 14.1

CSE Global 9.9

Sheng Siong Group 9.9

Venture Corporation 9.6

Petra Foods 4.5

ARA Asset Management 4.0

Riverstone Holdings 2.3

Raffles Medical 1.5 Average 10.0

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

Company Name (%) Midas Holdings 100.9

Indofood Agri 98.4

Banyan Tree 92.3

Frasers Hospitality Trust 70.8

Japfa Ltd 66.8

Petra Foods 51.4

Croesus Retail Trust 35.3

Yandlord Group 31.7

OUE Commercial REIT 28.9

Noble Group 26.7 Average 60.3

Page 17

Market Focus


APPENDIX (3) DBS SMC Universe 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

(Jan-16)

Target Price

(12 month)

Upside /

Downside

P/E

CY16

P/B

CY16

EPS Growth

(CY16)

1 First Resources HOLD 2,766 1.745 1.85 6% 15.2 2.1 7.0

2 Mapletree Industrial Trust BUY 2,749 1.540 1.62 5% 14.5 1.2 -0.6

3 Raffles Medical HOLD 2,335 4.060 4.34 7% 30.5 3.8 8.3

4 Mapletree Logistics Trust BUY 2,335 0.940 1.15 22% 12.3 0.9 4.0

5 SPH REIT HOLD 2,331 0.920 0.99 8% 19.2 1.0 3.6

6 SMRT HOLD 2,324 1.525 1.50 -2% 23.4 2.4 -5.6

7 Mapletree Greater China Commercial Trust BUY 2,309 0.840 1.11 32% 14.0 0.7 13.0

8 M1 HOLD 2,164 2.310 2.60 13% 12.2 4.8 -1.0

9 Venture Corporation BUY 2,159 7.800 9.00 15% 12.4 1.1 11.8

10 Noble Group HOLD 2,026 0.310 0.42 35% 3.6 0.3 32.0

11 Yandlord Group BUY 1,988 1.020 1.35 32% 6.9 0.4 44.6

12 Ascott Residence BUY 1,781 1.150 1.33 16% 15.9 0.9 9.1

13 Keppel Infrastructure Trust BUY 1,774 0.460 0.56 21% 51.7 1.4 26.2

14 Frasers Centrepoint Trust BUY 1,743 1.900 2.04 8% 17.4 1.0 -2.0

15 Starhilll Global REIT BUY 1,603 0.735 0.84 14% 13.3 0.8 -28.4

16 CITIC Envirotech BUY 1,601 1.420 1.60 13% 23.7 1.7 -21.4

17 China Merchants BUY 1,409 0.785 1.45 84% 9.4 0.7 -12.2

18 Petra Foods FV 1,406 2.300 2.05 -11% 36.0 3.7 53.5

19 Perennial Real Estate Holdings BUY 1,399 0.845 1.32 56% 8.7 0.5 79.5

20 Parkway Reit BUY 1,367 2.260 2.50 11% 17.8 1.3 6.2

21 CDL Hospitality Trust BUY 1,288 1.305 1.54 18% 13.8 0.8 -3.0

22 Sheng Siong Group BUY 1,255 0.835 1.01 21% 20.6 5.1 8.6

23 China Everbright Water BUY 1,222 0.470 0.79 68% 11.9 0.9 28.5

24 Bumitama Agri HOLD 1,194 0.680 0.86 27% 13.6 1.9 0.2

25 CapitaLand Retail China Trust BUY 1,189 1.410 1.69 20% 14.0 0.9 4.1

26 Far East Hospitality Trust HOLD 1,145 0.640 0.71 11% 17.4 0.7 -8.0

27 ARA Asset Management BUY 1,027 1.030 1.87 82% 11.2 2.1 4.5

28 Frasers Hospitality Trust BUY 1,005 0.735 0.83 13% 17.4 0.9 189.0

29 OUE Hospitality Trust BUY 975 0.730 0.91 25% 13.2 0.8 1.2

30 Frasers Commercial Trust BUY 913 1.160 1.53 32% 13.6 0.8 -10.5

11%

10%

3%

4%

22%

10%

5%

31%

3% 1%

Consumer Goods

Consumer Services

Financials

Health Care

Industrials

Oil & Gas

Real Estate

REITS

Technology

Telecommunications

44

3

26 BUY

FV

HOLD

Market Focus


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

S/n Security Description Rating Market

Cap (S$ m)

Last Price

(Jan-16)

Target Price

(12 month)

Upside /

Downside

P/E

CY16

P/B

CY16

EPS Growth

(CY16)

31 Asian Pay Television Trust HOLD 891 0.620 0.77 24% 12.6 0.7 34.1

32 Keppel DC Reit BUY 883 1.000 1.14 14% 13.3 1.1 18.3

33 Ascendas Hospitality Trust BUY 850 0.760 0.74 -3% 23.9 1.1 2.9

34 Super Group HOLD 841 0.755 0.85 12% 17.8 1.6 7.9

35 Japfa Ltd BUY 829 0.470 0.90 91% 7.5 0.7 76.4

36 Ezion Holdings BUY 822 0.515 1.00 94% 3.8 0.4 24.5

37 OUE Commercial REIT HOLD 810 0.630 0.67 6% 20.4 0.7 50.0

38 Riverstone Holdings BUY 786 1.060 1.41 33% 15.6 4.4 23.1

39 Cache Logistics Trust BUY 776 0.870 0.96 10% 11.3 1.0 10.7

40 Yoma Strategic Holdings BUY 772 0.445 0.78 75% 19.6 0.9 50.3

41 OSIM International BUY 753 1.015 1.28 26% 11.1 1.8 2.8

42 Cosco Corporation FV 750 0.335 0.32 -3% nm 0.6 nm

43 Religare Health Trust HOLD 750 0.940 0.97 3% 14.6 1.0 9.5

44 Ascendas India Trust BUY 740 0.800 0.91 14% 13.7 1.2 2.6

45 First Sponsor BUY 725 1.230 1.57 28% 11.8 0.7 13.2

46 Del Monte Pacific HOLD 680 0.350 0.35 -1% 7.5 1.3 63.3

47 Soilbuild Business Space REIT BUY 677 0.725 0.84 16% 13.1 0.9 5.5

48 Cambridge Industrials HOLD 675 0.520 0.61 17% 10.7 0.8 1.0

49 Indofood Agri HOLD 600 0.430 0.52 21% 13.3 0.6 231.3

50 PACC Offshore Services Holdings HOLD 535 0.295 0.35 17% 10.8 0.3 15.4

51 Croesus Retail Trust HOLD 515 0.810 0.86 6% 13.6 0.9 87.2

52 IREIT Global BUY 411 0.670 0.77 15% 11.7 1.1 29.9

53 Pan-United Corp HOLD 330 0.590 0.61 4% 11.3 1.1 4.7

54 iFAST Corporation BUY 322 1.235 1.61 30% 23.1 4.2 15.4

55 Midas Holdings BUY 310 0.255 0.49 92% 8.3 0.4 211.9

56 Tat Hong Holdings HOLD 292 0.465 0.52 12% 168.5 0.5 nm

57 Banyan Tree BUY 281 0.370 0.70 90% 16.9 0.5 16.7

58 Centurion Corporation BUY 266 0.355 0.59 66% 6.6 0.6 13.3

59 CSE Global HOLD 227 0.440 0.49 11% 7.5 0.9 -9.4

60 Pacific Radiance Ltd BUY 215 0.300 0.42 40% 40.1 0.4 -59.8

61 Nam Cheong HOLD 212 0.101 0.15 49% 7.9 0.5 23.4

62 Overseas Education Limited HOLD 193 0.465 0.71 52% 12.9 1.1 6.1

63 Courts Asia HOLD 178 0.340 0.41 19% 8.2 0.6 2.5

64 Vard Holdings FV 177 0.150 0.27 83% nm 0.3 nm

65 Mermaid Maritime BUY 170 0.120 0.27 126% 4.4 0.2 -1.0

66 Ezra Holdings HOLD 168 0.057 0.08 40% nm 0.1 nm Source: DBS Bank, Bloomberg Finance L.P.

Page 19

Market Focus


COMPANY PROFILES

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverageuniverse. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.

ed: TH / sa: JC

NOT RATED S$0.45 STI : 2,562.45Return *: 2 Risk: Moderate Potential Target * : 12-Month S$ 0.53 (19% upside)

Analyst Alfie Yeo +65 6682 3717 [email protected]

Andy Sim +65 6682 3718 [email protected]

Price Relative

Forecasts and Valuation FY Sep (S$m) 2014A 2015A 2016F 2017F Revenue 112 123 136 161 EBITDA 18.6 18.3 20.1 23.7 Pre-tax Profit 15.6 15.1 13.6 19.1 Net Profit 11.5 10.6 9.53 13.4 Net Pft (Pre Ex.) 11.4 10.3 12.1 13.4 EPS (S cts) 1.80 1.65 1.49 2.09 EPS Pre Ex. (S cts) 1.78 1.61 1.89 2.09 EPS Gth (%) 35 (8) (10) 40 EPS Gth Pre Ex (%) 37 (9) 17 10 Diluted EPS (S cts) 1.80 1.65 1.49 2.09 Net DPS (S cts) 0.20 0.16 0.45 0.63 BV Per Share (S cts) 7.35 8.88 7.70 9.16 PE (X) 24.8 26.9 29.9 21.3 PE Pre Ex. (X) 25.0 27.6 23.5 21.3 P/Cash Flow (X) 17.5 19.1 17.0 12.6 EV/EBITDA (X) 12.9 12.8 11.9 9.7 Net Div Yield (%) 0.5 0.4 1.0 1.4 P/Book Value (X) 6.1 5.0 5.8 4.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 27.4 20.4 17.9 24.8

Consensus EPS (S cts): 2.40 2.70 Other Broker Recs: B: 2 S: 0 H: 0

ICB Industry : Consumer Services ICB Sector: Food & Drug Retailers Principal Business: Jumbo is an operator of F&B outlets in Singapore and China. Its anchor brand Jumbo Seafood is widely recognised for its signature Chili Crab dish. Other brands include JPOT, Ng Ah Sio Bak Kut Teh, Chui Huay Lim Teochew Cuisine, JCafé, Singapore Seafood Republic

Spreading its spice Leading F&B operator in Singapore with 14

outlets in Singapore and three in China

Growth underpinned by new outlets, M&A andhigher productivity from existing operations

Currently trades at 24x FY16F PE, belowSingapore-listed F&B peer average of 27-28x

The Business Chili Crab seafood restaurant. Jumbo is a leading F&B group in Singapore widely recognised for its signature Chili Crab dish. It currently operates five restaurant brands through 14 outlets in Singapore and three outlets in Shanghai, China.

Growth via more outlets. Growth is underpinned by new outlets in Shanghai and Singapore. Jumbo targets to open at least four new outlets in Singapore and China over the next two years. With a population of 25m people in Shanghai vs 5m and five Jumbo Seafood outlets in Singapore, there is available headroom to open more Jumbo Seafood stores in Shanghai. Singapore’s expansion is more geared towards better operating efficiencies even though there is still room for new outlets to open, albeit slower than in Shanghai. Centralising the locations of its central kitchen, corporate headquarters and R&D kitchen with new equipment and a larger premise would improve operating efficiencies and productivity from the central kitchens to the restaurants. Other growth drivers include M&A.

The Stock Trading below Singapore peers. Jumbo currently trades at 23.5x FY16F PE, below Singapore-listed restaurant / QSR / food retailer peer average of 27-29x PE but above regional peers' 21-24x. Our fair value based on 28x FY16F PE is S$0.53.

What could go wrong with this stock? Jumbo faces the risks of typical restaurant operators. Margin and cost dampeners include higher rents, short supply of seafood, and higher labour costs. Food safety, weak consumer sentiment, non-renewal of leases and weather issues could potentially affect footfall and revenue growth. With operations in China and JV operations in Japan, Jumbo is also susceptible to SGD-Yuan and SGD-Yen FX.

At A Glance

Issued Capital (m shrs) 641 Mkt. Cap (S$m/US$m) 285 / 200 Major Shareholders

JBO Holdings Pte Ltd (%) 57.9 Tan Gee Jian (%) 6.6 Orchid 1 Investments Pte Ltd (%) 6.2

Free Float (%) 19.8 3m Avg. Daily Val (US$m) 3.5

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

DBS Group Research . Equity 29 Jan 2016

Singapore Equity Explorer

Jumbo Group Bloomberg: JUMBO SP | Reuters: JUMB.SI Refer to important disclosures at the end of this report

89

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0.3

0.3

0.4

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0.5

Nov-15

Relative IndexS$

Jumbo Group (LHS) Relative STI INDEX (RHS)

SMC Research

Equity Explorer

Jumbo Group

Page 2

REVENUE DRIVERS

Leading seafood restaurant operator in Singapore. Jumbo

Group Limited has a total of 14 food and beverage (“F&B”) outlets

in Singapore and three F&B outlets in the People’s Republic of China

(the “PRC”), under five restaurant brands. Jumbo manages two F&B

outlets in Singapore that are effectively owned by its associated

companies. Through its associated companies, Jumbo holds

investments in one, and paid licensing fees in relation to four F&B

outlets located in Japan. Jumbo also engages in retail sales of its

signature dishes' packaged sauces and spice mixes through its

outlets, selected stores, supermarkets, travel agencies and online via

the Jumbo eShop, and provides catering services in Singapore.

Jumbo Seafood a key revenue contributor. Jumbo Seafood

brand which comprises five outlets in Singapore and three in

Shanghai contributed close to three quarters of revenue in FY15.

With Jumbo Seafood in China accounting for 9% of revenue, its five

Jumbo Seafood outlets in Singapore contributed 65% of the

group’s total revenue. This works out to an average annual revenue

of S$16m per Jumbo Seafood outlet in Singapore. Jumbo serves

more than 6,800 diners (across all restaurant brands) and more than

1.6 tons of crabs each day.

Revenue driven by customer traffic. Close to all of Jumbo’s sales

are through dine-in. Revenue is as such driven by footfall and

customer traffic. Jumbo tends to enjoy higher traffic during seasonal

and festive periods including Chinese New Year, and occasions such

as Mothers’ Day and Father’s Day. It also enjoys higher traffic in July

and August from higher tourist arrivals. The crowd for dinner in

Singapore is currently running close to full while lunch has more

room to grow. Reservations are to be made for specified times

during dinner and are conditional upon customers leaving after

occupying the tables for a certain time. This allows it to turn its

tables over to accommodate a new cycle of customers.

COST STRUCTURE

Food, staff and rental costs make up 73.5% of sales. Operating

margin for FY15 was 11%, with COGS comprising 37% of sales,

staff costs 28%, rental 8.5%, utilities 3%, and other opex 11%. As

of January 2016, Jumbo employed approximately 800 staff and

leased approximately 124,000 sqft of restaurant space. Key cost

items for COGS are mainly food ingredients including seafood,

meat, poultry, vegetables and fruit.

KEY OPERATING ASSETS

One HQ and central kitchen. Jumbo owns one central kitchen

located in Kaki Bukit with a floor area of approximately 10,000 sqft.

The central kitchen prepares sauces and marinades, processes fresh

food ingredients and prepares semi-finished food products. It also

prepares packaged sauces and spice mixes for retail sales. Apart

from the central kitchen, the same property with a total floor area of

close to 20,000 sqft also houses its corporate headquarters.

Chart 1: Revenue Breakdown FY15 (By brand)

Chart 2: Revenue Breakdown FY15 (By geography)

Table 1: Average revenue per customer is S$63

Singapore S$ Note FY15 revenue S$123m (1) Jumbo Seafood contribution 74% (2) Jumbo China contribution 9% (3) Jumbo Seafood Singapore 65% (4)=(2)-(3) Jumbo Seafood Singapore revenue S$80m (5)=(4)x((1) Jumbo Seafood revenue per day S$222,000 (6)=(5)/360 Avg annual revenue per outlet S$16m (7)=(5)/5 Revenue per outlet per day S$44,000 (8)=(7)/360 Average no. of customers per day 3.500 (9) Average revenue per customer S$63 (6)/(9) Chart 3: Cost breakdown

Source: Company, IPO prospectus, DBS Bank

Jumbo 74%

Others26%

Singapore91%

PRC9%

COGS41%

Employee benefits expense

32%

Operating lease expenses

9%

Utilities expense3%

Depreciation expense

3%

Other operating expense

12%

Equity Explorer

Jumbo Group

Page 3

GROWTH PROSPECTS

Shanghai is China’s key growth market. Jumbo already has

three outlets in Shanghai and plans to open more restaurants there.

With a population of 25m people vs 5m and five Jumbo Seafood

outlets in Singapore, there is available headroom to open more

Jumbo Seafood stores in Shanghai. Management feels it has higher

chances of success in China since the market 1) has a similar taste as

Singapore, and 2) is more accepting of newer tastes. It has adopted

a focused approach in its expansion in China, targeting high profile

malls in Shanghai. China enjoys higher average revenue per head

(S$67) than in Singapore (S$63). The key difference is a pricing

premium from cost of importing crabs and ingredients (herbs, etc.)

into China.

Room to expand in Singapore. Singapore’s expansion is more

geared towards better operating efficiencies even though there is

still room for new outlets to open, albeit slower than in Shanghai.

With new IPO proceeds, it will centralise the locations of its central

kitchen, corporate headquarters and R&D kitchen which are

currently located in various units of the Eunos Technolink industrial

complex. New equipment and a larger premise would improve

operating efficiencies and productivity from the central kitchens to

the restaurants. While dinner in Singapore has been running close to

full, there is room to grow for lunchtime dining. Expansion will be

done for existing outlets if it manages to secure available adjacent

shop space.

Stable margin outlook. FY14 net profit growth (36.8%) was

strong due to 1) revenue increase from customer traffic and average

spend, and 2) better operating margin from relatively lower COGS

and rental rates. However, FY15 suffered net profit decline (-9.5%)

from higher staff and operating lease expenses. Going forward, we

believe margins will be stable as higher costs in Singapore is likely to

be offset by lower rents and higher average spend in China.

MANAGEMENT & STRATEGY

Managed by family members. Jumbo remains largely a family

run business. CEO and Chairman Mr Ang Kiam Meng is the son of

Jumbo’s founder, major shareholder and Managing Director of

Jumbo. Seafood Pte Ltd Mr Ang Hon Nam. Two executive directors

are the wife and sister of the Chairman. Ten other family members,

including the Chairman’s daughter, also hold key positions in

Jumbo. This also helps to increase its quota for foreign manpower at

its restaurants. Key executives in Jumbo are compensated above

S$250,000 annually.

Growth via more outlets. Management’s strategy is to grow via

new outlets in Singapore and Shanghai. Jumbo targets to open at

least four new outlets in Singapore and China over the next two

years. There are no plans to start another brand as there is more

leverage in extending its menu and offering into other food

categories (i.e. non-live seafood). Its core strategy in China is to build

up a core team of locals with Singaporeans as the management

team in Shanghai, over the next 3-5 years. In Singapore, it finds

more cost efficiency in expanding existing stores to units next door

than to open an entirely new outlet.

Table 2: Operates 14 outlets in Singapore and 3 in Shanghai

Singapore Opened Area sqft Jumbo Seafood East coast 1987 20,484 Jumbo Seafood Riverside 2002 5,447 Jumbo Seafood Riverwalk 2004 5,965 Jumbo Seafood NSRCC 2006 7,309 Jumbo Seafood Dempsey 2008 6,129 JPOT Vivocity 2009 6,405 JPOT Tampines 2012 6,674 JPOT Parkway Parade 2014 4,790 JCafe NSRCC 2014 7,697 Ng Ah Sio Bak Kut Teh Rangoon Road 2010 2,637 Ng Ah Sio Bak Kut Teh MBS 2011 191 Ng Ah Sio Bak Kut Teh Tanjong Katong 2012 2,798 Ng Ah Sio Bak Kut Teh Keng Lee Road 2012 1,343 Chui Huay Lim Authentic Teochew Cuisine 2011 10,172 Shanghai China Opened Area sqft Jumbo Seafood iAPM 2013 12,239 Jumbo Seafood Raffles City 2015 7,368 Jumbo Seafood IFC 2016 6,997 Associates/JVs Opened Area sqft Yoshimaru Ramen Bar Holland Village 2009 750 Singapore Seafood Republic RWS 2010 8,224 Table 3: Key Competitors

Seafood restaurants Outlets in Singapore Roland Restaurant 1 No Signboard 4 Palm Beach 1 House of Seafood 2 Long Beach Seafood 5 Mellban Seafood 2 Red House Seafood 2 Tung Lok Seafood (including Dancing Crab) 4 Table 4: Key Management Team

Name Appointment Mr Ang Kiam Meng CEO and Exec Chairman Mdm Tan Yong Chuan Jacqueline Exec Director Mrs Christina Kong Chwee Huan Exec Director Mr Tay Peng Huat CFO Table 5: Related employees

Name Appointment Mr Ang Hon Nam MD of Jumbo Seafood Pte Ltd Mr Ng Nam Huat Dir of operations Jumbo (East coast) Mr Ng Nam Soon Dir of bus. dev’t Jumbo (East coast) Ms Chia Li Ting Amy Senior Marketing executive Mr Ang Kiam Lian Dir of China business operations Ms Ang Yun Lin Angie Corporate Finance executive Mr Darren Eng Kiam Hong Senior Trainer Mr Ng Kiam Chuan Food preparation personnel Mdm Goh Guay Ngoh Guest relations officer Mdm Wendy Ang Chui Yong Dir of QA and central kitchen ops Dr Kong Kim Kok Dir of IT Table 6: Management Remuneration Structure

Name 2015 estimated Mr Ang Kiam Meng S$500,001-S$750,000 Mdm Tan Yong Chuan Jacqueline S$500,001-S$750,000 Mrs Christina Kong Chwee Huan S$250,001-S$500,000 Mr Tan Cher Liang >S$250,000 Mr Richard Tan Kheng Swee >S$250,000 Dr Lim Boon Soon >S$250,000

Source: Company, IPO prospectus, DBS Bank

Equity Explorer

Jumbo Group

Page 4

Key Assumptions

FY Sep 2012A 2013A 2014A 2015A 2016F 2017F No of outlets Singapore 12.0 12.0 14.0 14.0 14.0 16.0 No of outlets PRC 0.0 1.00 1.00 2.00 3.00 4.00 Sales per outlet S$m 7.31 7.51 7.49 7.67 7.97 8.05 Segmental Breakdown

FY Sep 2012A 2013A 2014A 2015A 2016F 2017F Revenues (S$m) Singapore 87.7 97.6 106 112 117 135 PRC 0.0 0.0 6.53 11.1 18.2 25.5 Total 87.7 97.6 112 123 136 161 Income Statement (S$m)

FY Sep 2012A 2013A 2014A 2015A 2016F 2017F Revenue 87.7 97.6 112 123 136 161 Cost of Goods Sold (35.8) (37.9) (42.0) (45.5) (50.2) (59.6) Gross Profit 51.8 59.7 70.4 77.3 85.4 101 Other Opng (Exp)/Inc (43.5) (50.5) (56.2) (63.9) (70.6) (83.8) Operating Profit 8.35 9.29 14.2 13.4 14.8 17.6 Other Non Opg (Exp)/Inc 0.19 0.46 1.25 1.37 1.37 1.50 Associates & JV Inc 0.08 0.06 0.09 0.06 0.06 0.06 Net Interest (Exp)/Inc 0.0 0.01 0.0 0.07 0.0 0.0 Exceptional Gain/(Loss) 0.28 0.21 0.10 0.26 (2.6) 0.0 Pre-tax Profit 8.87 10.0 15.6 15.1 13.6 19.1 Tax (1.2) (0.5) (1.8) (1.8) (1.6) (2.3) Minority Interest (1.1) (1.0) (2.3) (2.7) (2.5) (3.4) Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 6.60 8.56 11.5 10.6 9.53 13.4 Net Profit before Except. 6.32 8.35 11.4 10.3 12.1 13.4 EBITDA 10.2 12.6 18.6 18.3 20.1 23.7 Growth Revenue Gth (%) nm 11.4 15.1 9.2 10.4 18.7 EBITDA Gth (%) nm 22.7 48.1 (1.9) 9.8 18.0 Opg Profit Gth (%) nm 11.2 52.4 (5.4) 10.7 18.7 Net Profit Gth (Pre-ex) (%) nm 32.1 36.8 (9.5) 17.4 10.4 Margins & Ratio Gross Margins (%) 59.1 61.2 62.6 62.9 63.0 63.0 Opg Profit Margin (%) 9.5 9.5 12.6 10.9 10.9 10.9 Net Profit Margin (%) 7.5 8.8 10.2 8.6 7.0 8.3 ROAE (%) N/A 25.5 27.4 20.4 17.9 24.8 ROA (%) N/A 16.4 17.9 13.7 11.7 15.3 ROCE (%) N/A 22.3 24.2 17.4 19.0 19.8 Div Payout Ratio (%) 21.0 19.8 11.3 9.4 30.0 30.0 Net Interest Cover (x) 272.5 NM NM NM 515.4 814.1 Source: Company, DBS Bank

Margins Trend

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

2013A 2014A 2015A 2016F 2017F

Operating Margin % Net Income Margin %

Ramp-up of new Shanghai outlets

Increase in staff and operating lease expenses

Assume 30% dividend payout

Margin increase due to lower COGS through alternative sourcing and reduction in consumable wastages.

Increase in customer traffic and average spend.

IPO expenses

Lower rental expenses as percentage of sales due to relatively lower rentals from new Shanghai outlet.

Assume 4 new outlets in Singapore and Shanghai over the next two years

Equity Explorer

Jumbo Group

Page 5

Balance Sheet (S$m)

FY Sep 2012A 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 10.3 11.4 12.0 14.0 12.2 13.6 Invts in Associates & JVs 0.17 0.23 0.36 0.42 0.48 0.54 Other LT Assets 1.02 1.02 1.10 1.10 1.10 1.10 Cash & ST Invts 31.5 39.7 50.8 60.4 58.1 70.8 Inventory 0.46 0.54 1.22 1.03 1.24 1.47 Debtors 3.68 4.61 5.35 6.60 6.59 7.83 Other Current Assets 0.01 0.0 0.20 0.0 0.0 0.0 Total Assets 47.2 57.6 71.0 83.5 79.7 95.4 ST Debt 0.14 0.23 0.23 0.18 0.18 0.18 Creditor 11.6 13.7 13.8 14.2 15.4 18.3 Other Current Liab 1.91 2.59 3.96 3.23 3.23 3.23 LT Debt 0.92 1.07 0.88 0.65 0.65 0.65 Other LT Liabilities 0.33 0.33 0.09 0.09 0.09 0.09 Shareholder’s Equity 30.3 36.9 47.1 56.9 49.4 58.8 Minority Interests 1.95 2.81 4.91 8.27 10.7 14.2 Total Cap. & Liab. 47.2 57.6 71.0 83.5 79.7 95.4 Non-Cash Wkg. Capital (9.4) (11.1) (11.0) (9.8) (10.8) (12.2) Net Cash/(Debt) 30.5 38.4 49.7 59.6 57.3 70.0 Debtors Turn (avg days) N/A 15.5 16.2 17.8 17.8 16.4 Creditors Turn (avg days) N/A 131.3 128.9 121.5 116.5 111.9 Inventory Turn (avg days) N/A 5.2 8.2 9.8 9.0 9.0 Asset Turnover (x) NM 1.9 1.7 1.6 1.7 1.8 Current Ratio (x) 2.6 2.7 3.2 3.9 3.5 3.7 Quick Ratio (x) 2.6 2.7 3.1 3.8 3.4 3.6 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 (%) 526.7 206.4 318.9 252.0 240.7 722.0 Source: Company, DBS Bank

Asset Breakdown (2015)

Net Fixed Assets -17.0%

Assocs'/JVs -0.5%

Bank, Cash and Liquid

Assets -73.2%

Inventory -1.3%

Debtors -8.0%

Equity Explorer

Jumbo Group

Page 6

Cash Flow Statement (S$m)

FY Sep 2012A 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 8.87 10.0 15.6 15.1 13.6 19.1 Dep. & Amort. 1.62 2.76 3.13 3.46 3.82 4.53 Tax Paid (0.8) (0.8) (0.8) (2.5) (1.6) (2.3) Assoc. & JV Inc/(loss) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) Chg in Wkg.Cap. 1.09 1.02 (1.2) (0.7) 1.06 1.42 Other Operating CF (0.6) (0.1) (0.3) (0.4) 0.0 0.0 Net Operating CF 10.1 12.9 16.3 15.0 16.8 22.7 Capital Exp.(net) (5.6) (2.7) (3.5) (2.1) (2.0) (6.0) Other Invts.(net) 0.08 1.02 0.11 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.15 (0.1) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.08 0.0 0.0 0.0 Other Investing CF (0.7) (0.8) (1.2) 0.10 0.0 0.0 Net Investing CF (6.2) (2.3) (4.7) (2.0) (2.0) (6.0) Div Paid (1.4) (1.7) (1.3) (1.0) (54.6) (4.0) Chg in Gross Debt 0.94 (0.2) (1.1) (0.9) 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 37.5 0.0 Other Financing CF (1.1) (0.6) 0.66 0.0 0.0 0.0 Net Financing CF (1.5) (2.4) (1.7) (1.9) (17.1) (4.0) Currency Adjustments 0.0 0.01 0.02 0.14 0.0 0.0 Chg in Cash 2.35 8.17 10.0 11.2 (2.3) 12.7 Opg CFPS (S cts) 1.41 1.85 2.74 2.45 2.45 3.32 Free CFPS (S cts) 0.70 1.59 2.00 2.01 2.31 2.61 Source: Company, DBS Bank

Capital Expenditure

VALUATIONS

Currently trading below Singapore restaurants / QSRs /

kitchens but above regional peers. The stock currently trades at

23.5x FY16F PE, below Singapore-listed peers of 27-29x but above

regional peer average of 21-24x. Our peer average is made up of

regional restaurants, QSRs, and food retailers (ex-grocery retailers).

Based on peer average, we believe a 28x PE multiple is fair and

hence our fair value for the stock works out to be S$0.53 per share.

Risk Assessment: Moderate Category Risk Rating Wgt Wgtd Score

1 (Low) - 3 (High) Earnings 2 40% 0.8 Financials 1 20% 0.2 Shareholdings 1 40% 0.4 Overall 1.4

Strong cash generation ability, balance sheet in net cash.

Jumbo has the ability to generate positive free cashflows. Operating

cashflows generated annually is strong and in excess of S$10m,

while capex per store is relatively low at S$1-2m. The business is in

net cash of S$57.3m, worth approximately S$0.09 per share.

Working capital is generally positive since payable days are close to

four months, while inventory and collection days collectively range

from 25-30 days.

Low free float, key stakeholders control more than half of

the company. Shares in Jumbo are tightly held, with free float at

14%. The founding shareholders, staff and cornerstone

shareholders control more than 80% of the company.

Table 7: Peer Comparison

Source: Thomsonreuters, DBS Bank

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

S$m

Company

Mark et Cap

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

P/Sales (x )

ROE (%)

Operat ing Margin

(%)

Net Margin

(%)

Div idend Y ield (%)

Singapore listed restaurants/food retailers

Breadtalk Group Ltd 221 1.08 30.7x 28.7x 18.6x 3.0x 0.5x 23% 1.1% 2.1% 1.3%ABR Holdings Ltd 101 0.72 18.7x N/A N/A 1.5x 1.4x 10% 7.6% 7.7% 3.5%

Old Chang Kee Ltd 56 0.66 11.9x N/A N/A 2.3x 0.9x 21% 7.4% 7.4% 4.5%

Japan Foods Holding Ltd 49 0.39 12.0x N/A N/A 2.3x 0.9x 17% 5.6% 7.6% 5.0%

Sakae Holdings Ltd 41 0.41 47.5x N/A N/A 1.1x 0.6x 8% 1.1% 2.1% 3.6%Soup Restaurant Group Ltd 39 0.19 87.4x N/A N/A 5.4x 1.4x 8% 1.1% 2.3% 4.0%Select Group Ltd 36 0.35 6.7x N/A N/A 2.1x 0.3x 38% 3.7% 4.1% 4.2%TUNG LOK RESTAURANTS (2000) LTD 18 0.09 42.0x N/A N/A 1.7x 0.3x -9% -8.8% 0.7% 0.0%

Pavillon Holdings Ltd 14 0.05 nm N/A N/A 0.5x 1.1x N/A -10.9% -4.8% N/A

Neo Group Ltd 62 0.61 N/A N/A N/A N/A N/A N/A N/A N/A N/ASingapore av erage 26.6x 28.7x 18.6x 2.2x 0.8x 14% 0.9% 3.2% 3.3%

Regional restaurants/food retailersJollibee Foods Corp 4,464 204.00 39.2x 38.5x 31.5x 6.9x 2.1x 19% 6.8% 5.5% 0.9%

MK Restaurant Group PCL 1,371 54.25 24.0x 21.8x 19.0x 3.7x 3.1x 17% 17.6% 14.0% 3.7%

Berjaya Corporation Bhd 386 0.35 2.1x 2.2x N/A 0.2x 0.2x 22% 5.5% -1.5% 2.8%Oldtown Bhd 169 1.68 15.0x 15.0x 15.9x 2.2x 1.8x 14% 16.4% 11.9% 3.7%

A sean ex Singapore av erage 20.1x 19.4x 22.1x 3.3x 1.8x 18% 11.6% 7.5% 2.8%

Regional av erage 24.6x 21.2x 21.3x 2.5x 1.1x 16% 4.2% 4.6% 3.1%

Estimated IPO proceeds

Includes S$51.7m dividends paid to vendor shareholders upon successful listing

ASIAN INSIGHTS VICKERS SECURITIES

ed: JS / sa: YM

BUYLast Traded Price: S$0.80 (STI : 2,579.23) Price Target : S$1.45 (81% upside)

Potential Catalyst: Earnings growth and execution

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

Price Relative

Forecasts and Valuation FY Dec (HK$ m) 2014A 2015F 2016F 2017F Revenue 2,019 2,271 2,762 3,033 EBITDA 1,900 2,054 2,511 2,759 Pre-tax Profit 1,348 1,548 1,514 1,733 Net Profit 739 932 853 1,004 Net Pft (Pre Ex.) 675 714 853 1,004 EPS (S cts) 11.2 12.4 8.4 9.8 EPS Pre Ex. (S cts) 10.3 9.5 8.4 9.8 EPS Gth (%) 7 11 (33) 18 EPS Gth Pre Ex (%) 6 (7) (12) 18 Diluted EPS (S cts) 11.2 12.4 8.4 9.8 Net DPS (S cts) 7.0 7.0 7.0 7.0 BV Per Share (S cts) 96.8 108.7 111.2 114.1 PE (X) 7.1 6.4 9.6 8.1 PE Pre Ex. (X) 7.8 8.4 9.6 8.1 P/Cash Flow (X) 4.4 3.9 5.1 4.5 EV/EBITDA (X) 5.8 8.1 7.1 6.1 Net Div Yield (%) 8.8 8.8 8.8 8.8 P/Book Value (X) 0.8 0.7 0.7 0.7 Net Debt/Equity (X) 0.4 0.6 0.5 0.4 ROAE (%) 11.6 8.4 7.5 8.6 Earnings Rev (%): - 0 0 Other Broker Recs: B: 2 S: 0 H: 0


Growing Greatness Acquisitions to drive bottom line expansion. The recently completed acquisitions of Jiurui Expressway and three toll roads in Guangxi Zhuang Autonomous Region should propel the group’s top and bottom lines in the medium to long term. We project CMHP’s core earnings will grow by nearly 50% from HK$675m in 2014 to HK$1,004m by 2017F, driven by contribution from these recent acquisitions.

Value-accretive acquisitions a potential catalyst. Over the last four years, the group has acquired six expressways, disposed off a Class 1 highway (Yuyao Highway), and its property development business in New Zealand, which have streamlined and expanded its core expressway business. We believe the group will continue to look for expressway acquisitions to expand its business, which could be a catalyst for a re-rating of its share price.

Consistent and attractive dividend yields. CMHP has been consistently paying attractive dividends to its shareholders (7Scts per share per annum in the last two years). We project CMHP will maintain 7Scts payout for FY15 and FY16 (<85% payout), translating into an attractive dividend yield of >8.5%.

Valuation:

Our 12-month target price of S$1.45 is based on DCF valuation with WACC of 9.8%, and offers >80% upside. We see the stock re-rating as it delivers earnings growth.

Key Risks to Our View:

Exposure to Chinese economy and regulatory risks. Key risks for the group are a) its 100% exposure to the Chinese economy and Rmb, b) its earnings would be negatively impacted if toll rate tariffs are revised downwards.

At A Glance

Issued Capital (m shrs) 1,795 Mkt. Cap (S$m/US$m) 1,438 / 1,006 Major Shareholders

China Merchants Group (%) 75.9 Liu Qiang (%) 6.0 Free Float (%) 18.1 3m Avg. Daily Val (US$m) 0.41 ICB Industry : Industrials / Industrial Transportation


Singapore Company Guide

China Merchants Hldgs (Pacific) Version 2 | Bloomberg: CMH SP | Reuters: CAEP.SI Refer to important disclosures at the end of this report

86

106

126

146

166

186

206

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

Relative IndexS$

China Merchants Hldgs (Pacific) (LHS) Relative STI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide

China Merchants Hldgs (Pacific)

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

New road acquisitions to help drive revenue growth. We project the group’s total revenue to grow from HK$2,019m in FY14 to HK$3,033 by 2017F, or c. 50%, driven largely by contribution from newly acquired roads Jiurui E’way (acquired end-2014), Guiyang E’way, Guixing E’way and Yangping E’way (all three were acquired end-2015). Revenue contribution from these four roads is expected to amount to HK$954m in 2017F or 31.5% of group revenue. Meanwhile, revenue from the more mature Yongtaiwen E’way and Ningbo-Beilun Port E’way are expected to increase at a modest pace. Expect modest traffic volume growth for mature roads, and stronger growth for younger roads. For mature roads like the Yongtaiwen E’way and Ningbo-Beilun Port E’way, we are projecting 3%-4% per annum growth in traffic volumes in the medium to long-term while for the younger, newly acquired roads, traffic volume growth is projected (by independent traffic consultants) to range from the mid-teens to over 20% per annum over the next few years, driven by rapid economic growth in the less developed regions of Jiangxi and Guangxi, as well as increased connections to these roads over time. Beyond 2017, traffic on these young roads are still projected to grow at least in the high single digits to low teens. Stable earnings contribution from JV roads. We expect contribution from the group’s two jointly controlled roads Guiliu E’way and Guihuang Highway, to be stable at between HK$294m to HK$303m over the next few years, as these are fairly mature roads with predictable cash flows and earnings. No rate hike assumed in our projections. Toll rates are determined at the provincial level, and while toll road companies can propose changes to toll rate schemes to the respective provincial government, the final decision lies with the provincial government. Although there have been instances of rate hikes in recent years in various provinces, we have not assumed any rate hikes for any of the group’s toll roads in the short or long term. This represents upside risk to our long term revenue forecasts, and ultimately DCF-based valuation for CMHP. 14% net profit CAGR over 2014 to 2017F. Driven by steady growth in revenue, we project the group’s EBIT to grow by 54% from HK$1,121m in 2014 to HK$1,729m in 2017F. Coupled with stable contribution from jointly controlled roads, this should drive net earnings to grow by c. 50% from HK$675m in 2014 to HK$1,1004m by 2017F.


0

500

1,000

1,500

2,000

2,500

3,000

3,500

2014 2015F 2016F 2017F

Revenue by toll road (HK$m)

Yongtaiwen E'way Ningbo-Beilun Port E'way

Jiurui E'way Guixing E'way

Guiyang E'way Yangping E'way

50.0

51.0

52.0

53.0

54.0

55.0

56.0

57.0

58.0

0.0200.0400.0600.0800.0

1,000.01,200.01,400.01,600.01,800.02,000.0

14 15F 16F 17F

EBIT vs EBIT Margin

EBIT (LHS) HK$m EBIT Margin (RHS) %

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2014 2015 2016 2017

Contribution from JV Roads (HK$m)

Subsidy Income Guiliu E'way Guihuang E'way


Company Guide


Balance Sheet:

Comfortable gearing position following recent rights issue to fund acquisitions. The group recently completed a rights issue that raised S$599.5m in gross proceeds (>99% was taken up by the parent company, China Merchants Group), which will be used to partially fund the Rmb3.04bn acquisition of three toll roads in Guangxi. With the remainder of the consideration to be funded by debt, we estimate that the group’s net debt to equity ratio will rise from 0.36x at the end of 2014 to 0.59x by end-2015F. Thereafter, we project net gearing to subsequently fall to 0.51x by end-2016 and 0.42x by end-2017 on positive free cash flow generation from its toll road operations. Share Price Drivers:

Earnings improvement to drive share price re-rating. Following the acquisition of the three roads in Guangxi, we project CMHP’s core earnings to improve 20% in 2016F to HK$853m, and 18% in 2017F to HK$1,004m. In EPS terms, this translates to a 12% decline (due to dilution from the rights issue) to 8.4Scts in 2016F and 18% growth in 2017F to 9.9Scts. A sustained improvement in earnings could drive a re-rating of its share price. Value-accretive acquisitions a potential catalyst. Over the last four years, the group has acquired six expressways, disposed off a Class 1 highway (Yuyao Highway), and its property development business in New Zealand, which has streamlined and expanded its core expressway business. We believe the group will continue to look for expressway acquisitions to expand its business, which could be a re-rating catalyst for its share price. Key Risks:

Exposed to China’s growth. CMHP's core earnings are derived entirely from its toll road operations in China, which leaves it vulnerable to China's country risks. As the group's functional currency is the Rmb, EPS in S$ terms is subject to SGD-Rmb volatility. Regulatory changes could affect earnings. Any downward revision in tariff rates would hurt the group's bottom line and cash flows. Company Background

China Merchants Holdings (Pacific) currently operates eight toll roads in China, with a total length of 576km, in four different provinces (Zhejiang, Guangxi Zhuang Autonomous Region, Jiangxi and Guizhou) in the country. It is majority-owned by China Merchants Group.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.0

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.2

0.2

0.2

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015F 2016F 2017F

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

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2013A 2014A 2015F 2016F 2017F


HK$

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013A 2014A 2015F 2016F 2017F

Avg: 10.1x

+1sd: 11.1x

+2sd: 12x

‐1sd: 9.1x

‐2sd: 8.2x

7.3

8.3

9.3

10.3

11.3

12.3

13.3

14.3


(x)

Avg: 0.98x

+1sd: 1.11x

+2sd: 1.23x

‐1sd: 0.86x

‐2sd: 0.73x

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


(x)


Company Guide


Income Statement (HK$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 1,886 2,019 2,271 2,762 3,033 Cost of Goods Sold (841) (907) (967) (1,095) (1,148) Gross Profit 1,045 1,113 1,303 1,666 1,884 Other Opng (Exp)/Inc (60) 8 (110) (151) (156) Operating Profit 985 1,121 1,193 1,515 1,729 Other Non Opg (Exp)/Inc 22 24 24 24 20 Associates & JV Inc 248 264 275 280 274 Net Interest (Exp)/Inc (154) (125) (161) (305) (289) Exceptional Gain/(Loss) 49 64 218 0 0 Pre-tax Profit 1,150 1,348 1,548 1,514 1,733 Tax (253) (289) (283) (328) (385) Minority Interest (283) (320) (333) (333) (345) Preference Dividend 6 0 0 0 0 Net Profit 620 739 932 853 1,004 Net Profit before Except. 571 675 714 853 1,004 EBITDA 1,731 1,900 2,054 2,511 2,759 Growth Revenue Gth (%) 30.6 7.1 12.4 21.6 9.8 EBITDA Gth (%) 35.4 9.8 8.1 22.3 9.8 Opg Profit Gth (%) 32.3 13.8 6.4 27.0 14.1 Net Profit Gth (Pre-ex) (%) 48.2 18.2 5.7 19.5 17.6 Margins & Ratio Gross Margins (%) 55.4 55.1 57.4 60.3 62.1 Opg Profit Margin (%) 52.2 55.5 52.5 54.9 57.0 Net Profit Margin (%) 32.9 36.6 41.0 30.9 33.1 ROAE (%) 12.1 11.6 8.4 7.5 8.6 ROA (%) 4.6 4.7 3.6 3.4 4.1 ROCE (%) 6.3 6.2 4.1 5.1 6.0 Div Payout Ratio (%) 50.3 56.4 64.4 82.7 75.4 Net Interest Cover (x) 6.4 9.0 7.4 5.0 6.0



Company Guide


Quarterly / Interim Income Statement (HK$ m)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 529 532 494 537 549 Cost of Goods Sold (219) (260) (219) (221) (214) Gross Profit 310 272 276 316 335 Other Oper. (Exp)/Inc 26 (16) (13) 22 (18) Operating Profit 336 255 263 338 316 Other Non Opg (Exp)/Inc 6 6 6 6 5 Associates & JV Inc 72 45 64 64 64 Net Interest (Exp)/Inc (28) (34) (33) (28) (28) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 385 272 299 379 357 Tax (82) (70) (74) (89) (90) Minority Interest (92) (71) (82) (95) (99) Net Profit 211 131 142 195 168 Net profit bef Except. 211 131 142 195 168 EBITDA 385 272 299 379 357 Growth Revenue Gth (%) 7.0 0.7 (7.1) 8.6 2.2 EBITDA Gth (%) 15.3 (29.3) 9.9 26.9 (6.0) Opg Profit Gth (%) 16.2 (23.9) 2.9 28.7 (6.4) Net Profit Gth (Pre-ex) (%) 16.6 (37.8) 8.4 37.1 (13.7) Margins Gross Margins (%) 58.6 51.1 55.8 58.8 61.0 Opg Profit Margins (%) 63.5 48.0 53.2 63.0 57.7 Net Profit Margins (%) 39.9 24.7 28.8 36.3 30.7

Balance Sheet (HK$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 188 209 195 178 160 Invts in Associates & JVs 1,927 1,702 1,626 1,551 1,475 Other LT Assets 9,285 12,429 22,784 22,126 21,426 Cash & ST Invts 1,448 1,049 1,119 1,123 1,215 Inventory 1 1 1 1 1 Debtors 71 200 200 200 200 Other Current Assets 512 0 0 0 0 Total Assets 13,432 15,591 25,925 25,178 24,476 ST Debt 249 402 402 402 402 Creditor 482 633 633 633 633 Other Current Liab 807 660 1,331 1,331 1,331 LT Debt 3,419 3,845 8,800 7,800 6,800 Other LT Liabilities 713 1,121 1,121 1,121 1,121 Shareholder’s Equity 5,109 6,374 11,082 11,335 11,633 Minority Interests 2,652 2,556 2,556 2,556 2,556 Total Cap. & Liab. 13,432 15,591 25,925 25,178 24,476 Non-Cash Wkg. Capital (706) (1,093) (1,764) (1,764) (1,764) Net Cash/(Debt) (2,220) (3,198) (8,083) (7,079) (5,987) Debtors Turn (avg days) 13.7 36.1 32.1 26.4 24.0 Creditors Turn (avg days) 482.4 556.9 571.1 573.6 560.9 Inventory Turn (avg days) 0.8 0.9 0.9 0.9 0.9 Asset Turnover (x) 0.1 0.1 0.1 0.1 0.1 Current Ratio (x) 1.3 0.7 0.6 0.6 0.6 Quick Ratio (x) 1.0 0.7 0.6 0.6 0.6 Net Debt/Equity (X) 0.3 0.4 0.6 0.5 0.4 Net Debt/Equity ex MI (X) 0.4 0.5 0.7 0.6 0.5 Capex to Debt (%) 0.5 1.2 0.2 0.2 0.3 Z-Score (X) 1.3 1.1 0.7 0.9 1.0


Three new roads acquired in 2015


Company Guide


Cash Flow Statement (HK$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 1,101 1,348 1,548 1,514 1,733 Dep. & Amort. 477 506 563 692 736 Tax Paid (198) (337) (283) (328) (385) Assoc. & JV Inc/(loss) (248) (264) (275) (280) (274) Chg in Wkg.Cap. (28) 88 0 0 0 Other Operating CF 2 (131) 0 0 0 Net Operating CF 1,107 1,209 1,553 1,599 1,811 Capital Exp.(net) (17) (50) (14) (17) (18) Other Invts.(net) 0 (695) (5,326) 0 0 Invts in Assoc. & JV 76 104 104 104 104 Div from Assoc & JV 234 373 247 252 246 Other Investing CF 0 0 0 0 0 Net Investing CF 293 (269) (4,990) 338 332 Div Paid (427) (754) (750) (934) (1,051) Chg in Gross Debt (839) (607) 848 (1,000) (1,000) Capital Issues 0 25 3,409 0 0 Other Financing CF 0 0 0 0 0 Net Financing CF (1,266) (1,335) 3,507 (1,934) (2,051) Currency Adjustments 58 (5) 0 0 0 Chg in Cash 193 (400) 70 4 92 Opg CFPS (HK cts) 104.8 93.0 113.3 85.6 97.0 Free CFPS (HK cts) 100.7 96.2 112.2 84.7 96.0


Target Price & Ratings History

Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 02 Mar 15 1.02 1.35 BUY

2: 04 May 15 1.09 1.35 BUY

3: 25 Jun 15 1.08 1.54 BUY

4: 10 Aug 15 1.03 1.45 BUY

5: 13 Oct 15 0.93 1.45 BUY

6: 06 Nov 15 0.97 1.45 BUY

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

1

2 3

4

5

6

0.74

0.79

0.84

0.89

0.94

0.99

1.04

1.09

1.14

1.19

Feb-15 Jun-15 Oct-15 Feb-16

S$

Acquisition of three toll roads in Guangxi

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM

BUY

Last Traded Price: S$0.48 (STI : 2,579.23) Price Target : S$0.90 (89% upside) Potential Catalyst: Better-than-expected 3Q15 and 4Q15 results Where we differ: We have the lower earnings forecast of only two estimates in Bloomberg Analyst Ben Santoso +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2014A 2015F 2016F 2017F Revenue 2,947 2,818 3,084 3,466 EBITDA 255 238 324 444 EBITEDA (ex. BA gains) 263 277 333 439 Pre-tax Profit 74 103 184 293 Net Profit 31 45 79 126 Net Pft (Pre Ex.) 71 45 79 126 Net Pft (ex. BA gains) 58 45 79 126 EPS (S cts) 2.5 3.6 6.4 10.2 EPS Pre Ex. (S cts) 5.8 3.6 6.4 10.2 EPS Gth (%) (91) 43 78 60 EPS Gth Pre Ex (%) (76) (38) 78 60 Diluted EPS (S cts) 2.5 3.6 6.4 10.2 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 53.6 61.0 67.5 77.7 PE (X) 18.9 13.2 7.4 4.7 PE Pre Ex. (X) 8.3 13.2 7.4 4.7 P/Cash Flow (X) 4.7 4.1 3.6 2.7 EV/EBITDA (X) 6.3 7.0 5.5 4.4 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 0.9 0.8 0.7 0.6 ROAE (%) 5.8 6.3 10.0 14.1 Earnings Rev (%): - - - Consensus EPS (S cts): 3.6 6.3 10.1 Other Broker Recs: B: 1 S: 0 H: 0


Normalising growth Better 3Q15 EBITDA expected. We believe the steep share price correction YTD has more than priced in Day Old Chicks (DOC) oversupply in Indonesia and softer raw milk prices in China. We expect Japfa’s 3Q15 earnings to show a sequential improvement, given higher feed prices and relatively resilient broiler and DOC prices despite steeper translation FX losses from subsidiary Japfa Comfeed’s US$225m bonds. We expect 3Q15 EBITDA to come in at US$70.9-76.0m (+20-28% y-o-y) and earnings (ex. fair value changes in biological assets) of US$7.4-10.1m (16-38% lower y-o-y) Weak purchasing power may linger in the short term. Continued weakness in the Rupiah would progressively raise Japfa’s feedstock costs, and at the same time lift cost of living for Indonesian consumers (implying weaker purchasing power). We expect the DOC oversupply situation to balance out and prices to recover as government-mandated nationwide cull of 6m parent stock takes place (expected in 4Q15). Long-term growth potential remains intact. Japfa is forecast to book EBITDA (excluding biological asset gains/loss and FX gains/losses) CAGR of 15% between 2014 and 2017 – mainly driven by higher dairy volumes. Japfa intends to double its dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. In the Animal Protein segment, we expect Japfa’s combined regional DOC output to expand less aggressively by a 5% CAGR between 2014 and 2017, given DOC overcapacity and weak purchasing power in Indonesia. Demand will continue to be driven by rising per capita income. Valuation: Our SOP-based TP is S$0.90. With Rupiah stabilising, we expect reduced FX losses and recovery in purchasing power in Indonesia next year. Our BUY rating for the counter is reiterated on 89% upside potential. Key Risks to Our View: Japfa’s share price is driven by DOC, broiler and China raw milk price movements and to a certain extent, by USD/IDR exchange rate. A strong recovery in the group’s ASP and/or Rupiah would boost Japfa’s share price higher than our fair value, and vice versa. At A Glance Issued Capital (m shrs) 1,765 Mkt. Cap (S$m/US$m) 842 / 589 Major Shareholders Rangi Management Limited (%) 52.6 Morze International Limited (%) 16.0 Tasburgh Limited (%) 7.2 Free Float (%) 14.8 3m Avg. Daily Val (US$m) 0.3 ICB Industry : Consumer Goods / Food Producers



Japfa Ltd Version 2 | Bloomberg: JAP SP | Reuters: JAPF.SI Refer to important disclosures at the end of this report

34

54

74

94

114

134

154

174

194

214

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Aug-14 Jan-15 Jun-15 Nov-15

Relative IndexS$

Japfa Ltd (LHS) Relative STI INDEX (RHS)


Company Guide

Japfa Ltd

CRITICAL DATA POINTS TO WATCH Earnings Drivers: DOC capacity expansion in Indonesia. Hampered by oversupply in CY14-15, Japfa’s DOC production in Indonesia is due to fall, due to the government-mandated cull of c.960k Parent Stock (Japfa’s estimated share) by end of CY15. Post-culling, Japfa is expected to expand its Indonesian DOC output in line with GDP and population growth. As at end-Jun-15, Japfa has DOC capacity of 630m chicks per annum in Indonesia and 736m chicks per annum in total. Feedmill capacity expansion in Indonesia. Capital expenditure in poultry feedmill capacity is likewise expected to remain on hold until capacity utilisation rates are in excess of 90%. However, we expect continued expansion in fish and shrimp feeds. Volatility of raw material costs (as well as changes in government regulations with regards to importation of raw materials) and exchange rates may adversely affect profitability, if Japfa is unable to pass on cost pressures. Expansions of Animal protein operations in Vietnam, India and Myanmar. The group is expanding its geographical operations in Vietnam for both poultry and swine segments; swine profitability in Vietnam should improve next year on the back of improved genetics. The group has expanded is Myanmar poultry operations into Mandalay this year. Hence, we expect higher earnings vs. last year, following the purchase of the remaining 15% in minority interest earlier this year. Japfa’s operation in India is only marginally increasing its geographical presence, and is expected to expand its feedmill capacity there. Contribution of animal protein operations outside Indonesia is expected to grow at a 9% CAGR between CY14 and CY17F – thanks to steady pricing and capacity expansion. Expansion in dairy farms. The group intends to expand its dairy business in China through continued replication of its successful business model. The fifth farm of the first five-farm hub in Shandong province was completed early this year. A second five-farm hub is planned for construction between this year and CY18 in Inner Mongolia. Farm 6 in Inner Mongolia is expected to start milking by end of this year, and fully milking a quarter thereafter. When completed, the second hub would increase the group’s herd size in China to 120k heads of cattle by end of CY18. Japfa is also expanding its dairy capacity in Malang, East Java to hold an additional 9,000 heads. Completion is expected by the end of this year. Expansion of beef cattle feedlot. Japfa now has a beef cattle feedlot in Shandong province with production capacity of 10,000 heads per annum. The bull calves produced by Japfa’s five dairy farms in Shandong will be the livestock input for the new beef cattle feedlot in China. In Indonesia, imports of cattle are subject to government approvals and regulations, including quotas. Further investment in high-growth Consumer Food brands. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam, as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats.

Raw & fresh milk output (k MT)

Broiler sales (mn birds)

Consumer foods volume (k MT)

China raw milk price (CNY/kg)

Average USD/IDR rate


151

224

307

457

567

0

72

143

215

286

358

429

501

572

2013A 2014A 2015F 2016F 2017F

288

351368 364

389

0

79

159

238

317

2013A 2014A 2015F 2016F 2017F

85.6

77.482.4

8894.6

0.0

19.3

38.6

57.9

77.2

96.5

2013A 2014A 2015F 2016F 2017F

4.51

4.9

4 4.1 4.14

0.00

0.62

1.24

1.86

2.47

3.09

3.71

4.33

4.95

2013A 2014A 2015F 2016F 2017F

10,84911,879

13,82114,678

14,080

0

3,000

6,000

9,000

12,000

2013A 2014A 2015F 2016F 2017F


Company Guide

Japfa Ltd

Balance Sheet: Japfa’s net debt-to-total equity ratio is forecast to arrive at 70% by end of this year and 68% next year on rising equity. We also assume that the group will refinance its US$225m bonds (due 2018) with Rp500bn bank borrowings Share Price Drivers: DOC oversupply issues. The Indonesian poultry industry is dominated by a few players, which collectively control more than 75% market share. Overinvestment and/or miscalculated demand often lead to depressed DOC and broiler prices on top of an already volatile market. Changes in prices would have instant impact on Japfa’s profitability even with cuts in Parent Stock (PS) numbers. Hence, we believe the completion of nationwide PS culling would send a positive signal to share prices. Rupiah movements. Japfa’s US$225m bonds have created translation FX losses in Japfa’s subsidiary, Japfa Comfeed, together with Rupiah depreciation YTD. Hence, Rupiah movements would impact reported earnings. Key Risks:

Outbreak of diseases. Outbreak of diseases affecting livestock would have material effect on the group's business and financial status. Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than expected price growth Movements in raw material costs and currencies. Japfa is exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power caused delays in passing on raw material costs. Changes in regulations. Changes in government regulations/licensing/interventions/price or volume controls may adversely affect Japfa’s profitability. Vulnerable to liquidity and credit risks Company Background

Japfa Ltd is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia, Vietnam, Myanmar, India and China. The group is the second largest poultry feed and DOC (day-old-chic. The group is involved in production of animal feeds, poultry breeding, poultry commercial farms, beef cattle feedlots, swine breeding, swine commercial farms, dairy farms as well as frozen and ambient temperature consumer food products.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.2

1.3

1.3

1.4

1.4

1.5

1.5

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015F 2016F 2017F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2013A 2014A 2015F 2016F 2017F


US$

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015F 2016F 2017F

Avg: 12.6x

+1sd: 19x

+2sd: 25.4x

‐1sd: 6.2x

-0.1

4.9

9.9

14.9

19.9

24.9

29.9


(x)

Avg: 0.82x

+1sd: 1.01x

+2sd: 1.19x

‐1sd: 0.64x

‐2sd: 0.45x0.4

0.6

0.8

1.0

1.2

1.4


(x)


Company Guide

Japfa Ltd

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Raw & fresh milk output (k 151 224 307 457 567 Broiler sales (mn birds) 288 351 368 364 389 Consumer foods volume 85.6 77.4 82.4 88.0 94.6 China raw milk price 4.51 4.90 4.00 4.10 4.14 Average USD/IDR rate 10,849 11,879 13,821 14,678 14,080 Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (US$ m) Dairy 122 223 246 382 492 Animal protein 2,347 2,513 2,375 2,497 2,737 Consumer foods 228 211 197 204 236 Total 2,697 2,947 2,818 3,084 3,466 EBITDA (US$ m) Dairy 39 70 56 106 153 Animal protein 183 180 212 217 276 Consumer foods 11 9 9 9 10 Total 234 260 277 333 439 EBITDA Margins (%) Dairy 32.0 31.5 22.7 27.7 31.1 Animal protein 7.8 7.2 8.9 8.7 10.1 Consumer foods 4.8 4.3 4.6 4.6 4.3 Total 8.7 8.8 9.8 10.8 12.7 Income Statement (US$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 2,697 2,947 2,818 3,084 3,466 Cost of Goods Sold (2,198) (2,441) (2,293) (2,471) (2,713) Gross Profit 499 506 525 613 753 Other Opng (Exp)/Inc (297) (315) (319) (343) (379) Operating Profit 202 191 206 270 374 Other Non Opg (Exp)/Inc (29) 2 (34) (13) 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (64) (79) (69) (73) (80) Exceptional Gain/(Loss) 6 (40) 0 0 0 Pre-tax Profit 115 74 103 184 293 Tax (33) (15) (21) (37) (59) Minority Interest (40) (28) (38) (68) (108) Preference Dividend 0 0 0 0 0 Net Profit 42 31 45 79 126 Net Profit before Except. 43 58 45 79 126 Net Pft (ex. BA gains) 43 58 45 79 126 EBITDA 227 255 238 324 444 EBITDA (ex. BA gains) 257 263 277 333 439 Growth Revenue Gth (%) 16.2 9.3 (4.4) 9.4 12.4 EBITDA Gth (%) (3.8) 12.3 (6.6) 36.0 37.0 Opg Profit Gth (%) 5.4 (5.1) 7.7 30.8 38.6 Net Profit Gth (%) (21.5) (25.3) 42.6 78.0 59.5 Margins & Ratio Gross Margins (%) 18.5 17.2 18.6 19.9 21.7 Opg Profit Margin (%) 7.5 6.5 7.3 8.7 10.8 Net Profit Margin (%) 1.5 1.1 1.6 2.6 3.6 ROAE (%) 11.4 5.8 6.3 10.0 14.1 ROA (%) 2.3 1.5 1.9 3.2 4.6 ROCE (%) 9.1 8.2 7.9 9.8 12.1 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 3.2 2.4 3.0 3.7 4.6



Company Guide

Japfa Ltd

Quarterly / Interim Income Statement (US$ m)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 785 705 676 704 695 Cost of Goods Sold (661) (580) (568) (582) (557) Gross Profit 123 126 107 122 138 Other Oper. (Exp)/Inc (80) (79) (76) (78) (73) Operating Profit 43 47 31 44 66 Other Non Opg (Exp)/Inc (3) (7) (13) (5) (21) Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (21) (20) (17) (18) (17) Exceptional Gain/(Loss) (2) (35) 7 (18) (9) Pre-tax Profit 17 (15) 9 3 18 Tax (2) (1) (4) (2) (8) Minority Interest (4) 3 2 2 (2) Net Profit 11 (14) 7 3 8 Net profit bef Except. 13 21 0 20 17 EBITDA 59 61 50 63 92 Growth Revenue Gth (%) 2.3 (10.1) (4.2) 4.2 (1.3) EBITDA Gth (%) (36.7) 3.3 (17.7) 25.8 45.3 Opg Profit Gth (%) (34.8) 7.4 (32.6) 40.2 49.3 Net Profit Gth (%) (48.2) nm nm (57.6) 169.5 Margins Gross Margins (%) 15.7 17.8 15.9 17.3 19.9 Opg Profit Margins (%) 5.5 6.6 4.7 6.3 9.5 Net Profit Margins (%) 1.4 (2.0) 1.0 0.4 1.1 Balance Sheet (US$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 653 834 886 941 1,073 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 275 310 409 507 591 Cash & ST Invts 225 287 180 218 239 Inventory 543 598 536 578 634 Debtors 135 151 136 149 168 Other Current Assets 133 148 179 182 225 Total Assets 1,964 2,327 2,326 2,575 2,929 ST Debt 457 476 414 516 622 Creditor 195 233 201 217 238 Other Current Liab 65 25 28 37 49 LT Debt 469 507 468 445 428 Other LT Liabilities 81 91 90 88 86 Shareholder’s Equity 406 662 754 833 960 Minority Interests 291 332 370 438 546 Total Cap. & Liab. 1,964 2,327 2,326 2,575 2,929 Non-Cash Wkg. Capital 550 639 621 655 740 Net Cash/(Debt) (701) (697) (702) (744) (811) Debtors Turn (avg days) 18.1 17.7 18.6 16.9 16.7 Creditors Turn (avg days) 27.9 32.9 35.6 31.7 31.4 Inventory Turn (avg days) 87.7 87.5 92.9 84.6 83.7 Asset Turnover (x) 1.5 1.4 1.2 1.3 1.3 Current Ratio (x) 1.4 1.6 1.6 1.5 1.4 Quick Ratio (x) 0.5 0.6 0.5 0.5 0.4 Net Debt/Equity (X) 1.0 0.7 0.6 0.6 0.5 Net Debt/Equity ex MI (X) 1.7 1.1 0.9 0.9 0.8 Capex to Debt (%) 22.2 29.8 21.8 20.8 26.9 Z-Score (X) 2.1 2.2 2.2 2.2 2.3



Company Guide

Japfa Ltd

Cash Flow Statement (US$ m)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 115 74 103 184 293 Dep. & Amort. 55 62 66 68 71 Tax Paid (33) (38) (21) (37) (59) Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. (80) (88) (20) (73) (114) Other Operating CF 0 0 0 0 0 Net Operating CF 89 125 144 164 220 Capital Exp.(net) (206) (293) (192) (200) (282) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 1 (6) (3) (3) (3) Net Investing CF (205) (299) (195) (202) (285) Div Paid (9) (4) 0 0 0 Chg in Gross Debt 125 68 (101) 79 88 Capital Issues 131 198 48 0 0 Other Financing CF (63) (27) (2) (2) (2) Net Financing CF 183 235 (56) 77 86 Currency Adjustments 0 0 0 0 0 Chg in Cash 68 62 (107) 38 21 Opg CFPS (US cts.) 80.8 12.1 9.3 13.4 18.9 Free CFPS (US cts.) (55.7) (9.5) (2.7) (2.0) (3.5)



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 02 Feb 15 0.64 0.80 BUY

2: 02 Mar 15 0.53 0.76 BUY

3: 04 May 15 0.46 0.54 HOLD

4: 02 Jul 15 0.39 0.46 HOLD

5: 10 Aug 15 0.32 0.46 BUY

6: 18 Aug 15 0.31 0.46 BUY

7: 16 Sep 15 0.30 0.46 BUY

8: 28 Oct 15 0.40 0.46 BUY

9: 03 Nov 15 0.46 0.90 BUY

10: 02 Dec 15 0.50 0.90 BUY

11: 10 Dec 15 0.49 0.90 BUY12: 17 Dec 15 0.49 0.90 BUY13: 25 Jan 16 0.45 0.90 BUY


1

2

3 4

5

6

7

89

10

11

12

13

0.26

0.31

0.36

0.41

0.46

0.51

0.56

0.61

0.66


S$

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM

BUYLast Traded Price: S$0.69 (STI : 2,579.23) Price Target: S$1.05 (53% upside)

Potential Catalyst: Earnings-accretive acquisitions

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

Price Relative

Forecasts and Valuation FY Mar (S$m) 2015A 2016F 2017F 2018F Revenue 24.3 43.9 66.6 78.3 EBITDA 9.92 14.8 21.2 24.9 Pre-tax Profit 6.58 9.79 16.2 19.9 Net Profit 5.08 8.13 13.4 16.5 Net Pft (Pre Ex.) 5.13 8.13 13.4 16.5 Net Pft Gth (Pre-ex) (%) 68.1 58.4 65.1 23.2 EPS (S cts) 2.46 3.34 5.51 6.80 EPS Pre Ex. (S cts) 2.48 3.34 5.51 6.80 EPS Gth Pre Ex (%) 68 35 65 23 Diluted EPS (S cts) 2.46 3.34 5.51 6.80 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 9.28 15.7 21.2 28.0 PE (X) 27.9 20.5 12.4 10.1 PE Pre Ex. (X) 27.6 20.5 12.4 10.1 P/Cash Flow (X) 391.2 13.4 15.4 9.4 EV/EBITDA (X) 13.7 10.9 7.3 5.7 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 7.4 4.4 3.2 2.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 44.5 28.4 29.9 27.7 Earnings Rev (%): - - - Consensus EPS (S cts): 3.3 5.5 6.8 Other Broker Recs: B: 1 S: 0 H: 0


Premier movie producer High-margin business model with impressive growth. mm2 generates revenue by extracting fees from producing and distributing movies. It has a high-margin business model (Gross margin: 40% to 50%, Net margin: c.20%) with impressive growth. We expect mm2 to grow at an EPS CAGR of 40% for FY15 to FY18F, underpinned by growth in local productions as well as its expansion into the China market. The ownership of five cinemas provides a source of recurring income.

Riding on growing demand and support for local production; gaining traction overseas. mm2 is poised to ride on the growing demand for local production and it will continue to grow its presence in Taiwan, Hong Kong and China, by leveraging on the business relationships it has established.

Spreading its wings in China to support growth. mm2 intends to spread its wings to one of the most lucrative movie markets – China. The group has already co-produced severalproductions in China since 2013 and is currently working on a few movies in China. Chinese films generally have bigger budgets and better margins than local productions.

Valuation:

mm2 is trading at 21x FYMar16F PE and 12x FY17F PE, based on its enlarged share capital, compared to peers’ 27x FY16F PE. Taking a 30% discount to peers given its much smaller size, we arrive at a target PE of 19x to derive our target price of S$1.05 on FYMar17F EPS. The stock offers a potential upside of 53%, and trades at an attractive PEG of 0.3x.


No long-term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding. Productions may be adversely affected by delays and cost overruns. The production process is subject to a number of uncertainties, most of which are beyond mm2’s control.

At A Glance


Wee Chye Ang (%) 62.5 Philip Apac Opp Fund (%) 8.4 Yeo Khee Seng (%) 6.2

Free Float (%) 22.9 3m Avg. Daily Val (US$m) 0.53 ICB Industry : Consumer Services / Media



mm2 Asia Edition 1 Version 1 | Bloomberg: MM2 SP | Reuters: MM2A.SI Refer to important disclosures at the end of this report

68

118

168

218

268

318

368

418

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Dec-14 May-15 Oct-15

Relative IndexS$

mm2 Asia (LHS) Relative STI INDEX (RHS)


Company Guide

mm2 Asia


Earnings Drivers:

Acquisitions to strengthen competitive edge and build income base

Post IPO in December 2014, mm2 has made several acquisitions to maintain its competitive advantage. In April, mm2 acquired a 51% stake in Singapore’s leading multi-award winning 3D animation company, Vividthree Productions, to strengthen its competitive advantage as a movie producer. Subsequent to that, mm2 acquired five cineplexes in Malaysia. The ownership of cinemas will provide a source of recurring income to the group and cost savings in the longer term, as mm2 usually has to pay about 50% of its gross intake for rental of cinemas. Cinema operations is a profitable business; and the group could be profitable even with less than 50% of the seats occupied. In December, mm2 acquired a majority stake in a tech set-up that develops interactive solutions for digital users. Consolidating its position in local market As the industry leader, mm2 is poised for more opportunities ahead. Following the successful launch of Ah Boys to Men, production is set to begin on Ah Boys to Men 4 in 2017. The Singapore government is also very supportive of local movies in the forms of grants given to local productions. Going forward, mm2 will leverage on its entrenched position in the local market to propel itself higher. Spreading its wings in China mm2 also intends to spread its wings to one of the most lucrative movie markets – China. The group has already co-produced several productions in China since 2013. It is currently working on a few movies in China. There will be at least three other movie projects that could come to the market beginning 2017. Chinese films generally have bigger budgets and better margins than local productions. On top of producing films that are made and distributed in China, mm2 also hopes to distribute China-made films overseas. mm2 may also look into producing reality TV, which makes up a sizeable segment of the China entertainment market. To further cement its foothold in China, mm2 has placed more shares to Hesheng Media, which is principally involved in the business of film and television investment, production, marketing and distribution in China. Hesheng Media has been a shareholder of the group even prior to mm2’s initial public offering. Together with the recent placement, Hesheng’s stake in mm2 has increased to about 1.5%. Thus, we expect contribution from the China market to increase from FY17 onwards, from 5% in FY15 in terms of total revenue breakdown.

Revenue Contribution

Revenue Breakdown by Segment

FY15 Revenue Breakdown by Country

Profitability Trend


33.7%39.6%

61.6%60.9%

40.1%

30.9%

3.5%

17.3%

4.4%

1.9%

3.0%

3.1%

0

5

10

15

20

25

2013 2014 2015

Others SponsorshipDistribution Production

S$9.9m

S$16.1m

S$24.3mS$m

Singapore73%

Malaysia13%

China5%

Taiwan3%

Hong Kong6%

3

5

7

9

11

13

15

17

19

21

2014A 2015A 2016F 2017F 2018F

S$ m

Operating EBIT Pre tax Profit Net Profit

Grants and other contributions

Sale of share of production / movie revenue rights / scrip rights

Advertising revenue

Sponsorship

Third party licensing agreements

Distribution

Licensing of movies produced / co-produced by mm2 or 3rd parties

Producer fees and consultancy income

Production


Company Guide

mm2 Asia

Balance Sheet:

Decent debt-to-equity ratio. Debt-to-equity ratio as at Sep-15 is 0.32x. We expect mm2 to take on more debt, as the group is constantly on the lookout for acquisitions that can complement its existing business, and also to build its recurring income base. On a debt-to-equity basis, the ratio is expected to fall as the equity base increases. Asset-light business model. More than half of its assets are current assets, consisting of mainly cash and receivables.

Share Price Drivers:

More acquisitions on the card? In just one year since listing in Dec-14, mm2 has made several acquisitions and undertaken a few fund-raising exercises to fund the acquisitions. With the group on an acquisition spree based on the recent purchases of cinemas and related businesses, we would not rule out further acquisitions going forward. Stronger project pipeline, higher productions In terms of project pipeline to March 2017, we are expecting mm2 to produce 10 movies in Singapore with a production estimate of about S$10m, and another 18 films from Malaysia, Taiwan and Hong Kong. In China, mm2 is currently working on a few movies. We are expecting about five movies/dramas with a total production cost estimate of about S$38m that could come on stream by Mar-17. Chinese films generally have bigger budgets and better margins than local productions. A stronger-than-expected project pipeline and higher production budget, especially in China, should help to boost bottom line and drive share price higher.

Key Risks:

No long term financing arrangements for productions. The commencement of each production is dependent on mm2’s ability to secure funding. Productions may be adversely affected by delays and cost overruns. The production process is subject to a number of uncertainties, most of which are beyond mm2’s control. Unable to predict the commercial success of movies produced. The commercial success of its productions is primarily determined by inherently unpredictable audience reactions.

Company Background

mm2 Asia is a leading producer of films and TV/online content in Asia. As a producer, mm2 provides services over the entire filmmaking process – from financing and production to marketing and distribution, and thus has a diversified revenue stream.


Project Pipeline to March 2017 Movies Total production estimate (S$m) Singapore

10 movies 10 Malaysia

6 movies 3 China

5 movies / drama 38 Taiwan

6 movies 11 Hong Kong

6 movies 8 TOTAL 70

Number of movies produced Year Number of movies produced

FY Mar 2012 3 FY Mar 2013 6 FY Mar 2014 8 FY Mar 2015 9

Forward PE Band (x)

PB Band (x)


0.6

0.8

1.0

1.2

1.4

1.6

1.8

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2014A 2015A 2016F 2017F 2018F


Avg: 11.9x

+1sd: 16x

+2sd: 20x

‐1sd: 7.9x

‐2sd: 3.9x3.4

5.4

7.4

9.4

11.4

13.4

15.4

17.4

19.4

21.4


(x)

Avg: 4.32x

+1sd: 5.65x

+2sd: 6.99x

‐1sd: 2.99x

‐2sd: 1.66x1.4

2.4

3.4

4.4

5.4

6.4

7.4


(x)


Company Guide

mm2 Asia

Segmental Breakdown

FY Mar 2014A 2015A 2016F 2017F 2018F Revenues (S$m) Production & Distribution 16.1 24.3 31.8 38.8 50.5 Cinema 0.0 0.0 6.67 20.0 20.0 Other investments 0.0 0.0 5.50 7.80 7.80 Total 16.1 24.3 43.9 66.6 78.3 Gross profit (S$m)

Production & Distribution 5.09 9.58 12.7 17.5 22.7 Cinema 0.0 0.0 3.00 9.00 9.00 Other investments 0.0 0.0 2.48 3.51 3.51 Total 5.09 9.58 18.2 30.0 35.2 Gross profit Margins (%) Production & Distribution 31.6 39.5 40.0 45.0 45.0 Cinema N/A N/A 45.0 45.0 45.0 Other investments N/A N/A 45.0 45.0 45.0 Total 31.6 39.5 41.4 45.0 45.0

Income Statement (S$m)

FY Mar 2014A 2015A 2016F 2017F 2018F Revenue 16.1 24.3 43.9 66.6 78.3 Cost of Goods Sold (11.0) (14.7) (25.7) (36.6) (43.0) Gross Profit 5.09 9.58 18.2 30.0 35.2 Other Opng (Exp)/Inc (1.4) (3.0) (7.3) (12.7) (14.1) Operating Profit 3.72 6.62 10.9 17.3 21.1 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 0.0 (1.1) (1.1) (1.1) Exceptional Gain/(Loss) 0.0 (0.1) 0.0 0.0 0.0 Pre-tax Profit 3.70 6.58 9.79 16.2 19.9 Tax (0.7) (1.5) (1.7) (2.8) (3.4) 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 3.04 5.08 8.13 13.4 16.5 Net Profit before Except. 3.05 5.13 8.13 13.4 16.5 EBITDA 7.16 9.92 14.8 21.2 24.9 Growth Revenue Gth (%) N/A 50.7 80.8 51.7 17.5 EBITDA Gth (%) nm 38.5 49.3 43.1 17.7 Opg Profit Gth (%) nm 78.3 65.0 58.4 21.7 Net Profit Gth (Pre-ex) (%) nm 68.1 58.4 65.1 23.2 Margins & Ratio Gross Margins (%) 31.6 39.5 41.4 45.0 45.0 Opg Profit Margin (%) 23.0 27.3 24.9 26.0 26.9 Net Profit Margin (%) 18.8 20.9 18.5 20.2 21.1 ROAE (%) 166.5 44.5 28.4 29.9 27.7 ROA (%) 34.8 18.5 14.2 15.0 14.7 ROCE (%) 104.8 37.7 19.2 21.1 21.0 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) NM NM 9.6 15.2 18.5


Full-year contributions from the five cinemas


Company Guide

mm2 Asia

Interim Income Statement (S$m)

FY Mar 1H2015 2H2015 1H2016 Revenue 9.7 14.6 12.7 Cost of Goods Sold (4.0) (10.7) (4.3) Gross Profit 5.7 3.9 8.4 Other Oper. (Exp)/Inc (1.2) (1.8) (3.0) Operating Profit 4.5 2.1 5.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 Pre-tax Profit 4.5 2.0 5.4 Tax (0.9) (0.6) (0.9) Minority Interest 0.0 0.0 0.0 Net Profit 3.6 1.5 4.5 Net profit bef Except. 0.0 0.0 0.0 EBITDA 5.3 4.6 6.7 Growth Revenue Gth (%) 51 (13) EBIT Gth (%) (54) 161 Pre Profit Gth (%) (55) 165 Net Profit Gth (Pre-ex) (%) (60) 208 Margins Gross Margins (%) 58.7 26.7 66.1 EBITDA Margins (%) 54.4 31.5 52.6 Net Profit Margins (%) 37.4 10.0 35.5 Balance Sheet (S$m)

FY Mar 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 3.86 6.45 28.8 33.2 37.6 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 0.14 0.01 (3.2) (6.5) (9.7) Cash & ST Invts 0.60 5.76 17.2 23.0 35.8 Inventory 1.49 4.77 5.48 7.80 9.17 Debtors 11.4 20.6 28.9 43.8 51.5 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 17.5 37.6 77.2 101 124 ST Debt 0.10 0.22 0.22 0.22 0.22 Creditor 11.4 14.7 22.8 32.5 38.2 Other Current Liab 0.24 1.46 2.81 3.90 4.53 LT Debt 1.02 0.09 11.3 11.3 11.3 Other LT Liabilities 0.94 1.92 1.92 1.92 1.92 Shareholder’s Equity 3.65 19.2 38.1 51.5 68.1 Minority Interests 0.13 0.0 0.0 0.0 0.0 Total Cap. & Liab. 17.5 37.6 77.2 101 124 Non-Cash Wkg. Capital 1.23 9.19 8.72 15.2 17.9 Net Cash/(Debt) (0.5) 5.45 5.73 11.5 24.3 Debtors Turn (avg days) 128.6 240.0 205.5 199.2 222.2 Creditors Turn (avg days) 273.9 417.3 313.3 308.3 329.4 Inventory Turn (avg days) 35.9 100.2 85.6 74.0 79.1 Asset Turnover (x) 1.8 0.9 0.8 0.7 0.7 Current Ratio (x) 1.1 1.9 2.0 2.0 2.2 Quick Ratio (x) 1.0 1.6 1.8 1.8 2.0 Net Debt/Equity (X) 0.1 CASH CASH CASH CASH Net Debt/Equity ex MI (X) 0.1 CASH CASH CASH CASH Capex to Debt (%) 46.0 645.4 199.8 43.4 43.4


Volatile margins mainly due to different stages of revenue recognition


Company Guide

mm2 Asia


FY Mar 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 3.70 6.58 9.79 16.2 19.9 Dep. & Amort. 3.45 3.29 3.87 3.87 3.87 Tax Paid 0.67 1.50 (0.3) (1.7) (2.8) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (7.0) (12.0) (0.9) (7.6) (3.3) Other Operating CF 1.00 1.00 0.0 0.0 0.0 Net Operating CF 1.87 0.36 12.5 10.8 17.7 Capital Exp.(net) (0.5) (2.0) (23.0) (5.0) (5.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (0.5) (2.0) (23.0) (5.0) (5.0) Div Paid 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 0.0 2.94 11.2 0.0 0.0 Capital Issues 0.0 7.75 10.8 0.0 0.0 Other Financing CF 0.46 (1.7) 0.0 0.0 0.0 Net Financing CF 0.46 9.05 22.0 0.0 0.0 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 1.81 7.43 11.5 5.80 12.7 Opg CFPS (S cts) 4.27 5.98 5.49 7.55 8.65 Free CFPS (S cts) 0.65 (0.8) (4.3) 2.38 5.22



Source: DBS Bank

S.No. DateClosing

PriceT arget Price

Rat ing

1: 06 Oct 15 0.68 0.84 NOT RATED

2: 05 Jan 16 0.77 1.05 BUY


1

2

0.18

0.28

0.38

0.48

0.58

0.68

0.78

0.88


S$

Acquisition of five cinemas and a 3D company

Issue of shares to finance recent acquisitions

Proceeds from IPO

ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa: JC

BUY (Upgrade from FULLY VALUED)

Last Traded Price: S$0.99 (STI : 2,579.23) Price Target : S$1.28 (29% upside)

Potential Catalyst: Earnings recovery Where we differ: Slower earnings recovery than consensus

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

What’s New Core earnings above expectations, excluding one-

offs of S$9m.

Final DPS in line with expectations.

Slightly better earnings visibility.

Upgrade to BUY, TP S$1.28.

Price Relative

Forecasts and Valuation FY Dec (S$m) 2014A 2015A 2016F 2017F Revenue 691 620 640 664 EBITDA 158 109 118 122 Pre-tax Profit 132 71.3 94.8 99.3 Net Profit 102 51.5 67.9 71.0 Net Pft (Pre Ex.) 108 67.5 67.9 71.0 Net Pft Gth (Pre-ex) (%) 9.8 (37.4) 0.6 4.6 EPS (S cts) 13.4 6.79 9.16 9.58 EPS Pre Ex. (S cts) 14.2 8.91 9.16 9.58 EPS Gth Pre Ex (%) 4 (37) 3 5 Diluted EPS (S cts) 12.8 6.79 8.96 9.37 Net DPS (S cts) 6.00 6.00 6.00 6.00 BV Per Share (S cts) 56.7 53.5 56.7 60.3 PE (X) 7.4 14.6 10.8 10.3 PE Pre Ex. (X) 7.0 11.1 10.8 10.3 P/Cash Flow (X) 6.5 12.9 7.6 7.4 EV/EBITDA (X) 3.4 5.5 4.7 4.2 Net Div Yield (%) 6.1 6.1 6.1 6.1 P/Book Value (X) 1.7 1.8 1.7 1.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 28.8 12.3 16.6 16.4 Earnings Rev (%): 0 0 Consensus EPS (S cts): 9.20 10.3 Other Broker Recs: B: 1 S: 3 H: 6


Deep value Upgrade to BUY. We turn positive on OSIM after a >40% share price decline since we downgraded the stock in October 2015. Valuations are attractive with dividend yield at close to 6% and forward PE (c.10x) at close to -1SD of its 7-year mean (14x). 4Q15 earnings showed sequential improvement with signs of bottoming out. We believe this will support DPS and dividend yield going forward. We hence do not see further downside pressure on the stock. Instead, earnings recovery momentum and valuation from a PE basis lead us to believe that OSIM’s share price reflects value. Our PE-based TP of S$1.28 is premised on modest earnings growth in FY16F and its target PE of 14x at historical mean. This represents c. 30% potential return from its current share price, and dividend yield (based on DPS of 6 Scts) at its target price is 4.7%.

Sequential earnings improvement with minimal risk of dividend cut for now. 4Q15 has recorded a smaller than expected earnings decline. Core earnings (S$18m, -35% y-o-y) for 4Q15 was above expectations while the decline in revenue (S$169m, -5% y-o-y) moderating on a sequential basis. Sequential quarter growth in 4Q15 (vs 3Q15) was broad based, led by all three brands and the Hong Kong market. OSIM has continued to pay 6 Scts DPS from its strong balance sheet even though core earnings fell by close to 40%. With earnings decline seen projected to stabilise and its net cash of S$200m, we see limited risks of dividend cuts at this stage. Downside risk should therefore be minimal.

Valuation:

Our target price of S$1.28 is based on 14x FY16F PE. OSIM has strong net cash, cheap PE valuation, and is showing narrowing y-o-y sales decline. Our target PE valuation of 14x is pegged to the stock’s average 7-year historical mean valuation.


Our positive view is based on earnings bottoming out and attractive dividend yield. Earnings risks and hence reduction in DPS would dampen our optimism on the stock.

At A Glance


Chye Hock Sim (%) 68.6 Capital Group Companies Inc (%) 5.2 Free Float (%) 26.2 3m Avg. Daily Val (US$m) 1.5 ICB Industry : Consumer Goods / Leisure Goods



OSIM International Version 2 | Bloomberg: OSIM SP | Reuters: OSIL.SI Refer to important disclosures at the end of this report

61

81

101

121

141

161

181

201

221

0.7

1.2

1.7

2.2

2.7

3.2


Relative IndexS$

OSIM International (LHS) Relative STI INDEX (RHS)


Company Guide

OSIM International

Results Summary and Comparison FY Dec (S$m) FY14 FY15 YoY Chg 4Q14 4Q15 YoY Chg

Sales 691.1 619.6 -10% 177.7 168.7 -5%

Cost of Goods Sold (204.8) (174.8) -15% (54.1) (47.0) -13%

Gross Profit 486.3 444.8 -9% 123.5 121.7 -1%

Other Operating Income 19.1 24.6 29% 3.5 6.1 72%

Distribution Costs (122.0) (126.0) 3% (28.8) (34.5) 20%

Administration Expenses (21.8) (23.2) 6% (5.4) (6.1) 13%

R & D and other expenses (226.2) (235.8) 4% (58.7) (64.1) 9%

Other Operating Expenses (370.0) (385.0) 4% (92.9) (104.8) 13%

EBIT 135.4 84.4 -38% 34.2 23.0 -33%

Non-Operating Income 0.0 0.0 n/a 0.0 0.0 n/a

Interest Income 5.0 6.4 27% 1.8 1.5 -15%

Interest Expense (3.5) (5.0) 43% (1.2) (1.3) 4%

Share of Associates’ or JV Income 1.0 1.5 50% (0.1) 0.3 -558%

Exceptional Gains/(Losses) (5.7) (16.0) 183% (0.7) (9.0) 1276%

Pretax Profit 132.3 71.3 -46% 34.0 14.5 -57%

Tax (30.1) (21.5) -29% (6.3) (5.3) -15%

Minority Interests (0.0) 1.7 -13146% (0.3) 0.3 -205%

Net Profit 102.2 51.5 -50% 27.4 9.4 -66%

Net profit (pre-ex) 107.8 67.5 -37% 28.1 18.4 -35%

Margins (%)

Gross Margin 70.4 71.8 69.5 72.2

SGA % Sales 53.5 62.1 52.3 62.1

EBITDA Margin 22.8 17.4 22.3 17.3

EBIT Margin 19.6 13.6 19.2 13.6

Pre-tax Margin 19.1 11.5 19.1 8.6

Net Margin 14.8 8.3 15.4 5.6 Source: Company, DBS Bank

WHAT’S NEW Core earnings above expectations, excluding one-offs of S$9m. Core earnings (S$18m, -35% y-o-y) for 4Q15 was above expectations while the decline in revenue (S$169m, -5% y-o-y) has moderated on a sequential basis. Growth was broad based, led by all three brands and the Hong Kong market. We had previously tapered our expectations to muted levels as we believed outlook lacked visibility. Headline earnings was S$9m but this included one-offs amounting to S$9m for closure of GNC in Australia and legal fees for TWG. While segment information remains undisclosed, margins were slightly higher as we believe sales mix of TWG had increased. Final DPS in line with expectations. OSIM declared a final quarterly dividend of 2 Scts bringing total DPS to 6 Scts, in line with expectations. Due to OSIM’s strong balance sheet and despite the 63% EPS decline, DPS remained at 6 Scts for the full year. This represents a dividend payout ratio of 86%. Slightly better earnings visibility. We are now less pessimistic on earnings visibility going forward. OSIM will launch new products, expand franchise markets and adopt a more dynamic approach to marketing this year. At GNC, closure of GNC’s loss making Australian business will help the bottom

line. TWG will continue to expand by 15-20 stores this year, while legal fees are likely to be lower this year. Upgrade to BUY, TP S$1.28. Results were in line and therefore we have left our earnings estimates largely intact. Valuations are now attractive with dividend yield at close to 7% and PE valuations at near -1SD of its mean. Our TP of S$1.28 is based on 14x FY16F PE at historical average. BUY for 29% upside. Trades close to -1SD of its 7-year mean


0

6

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24

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10.0

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Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Quarterly earnings (RHS) Fwd PE (LHS)

+ 2 sd

+ 1 sd

Avg

- 1 sd

- 2 sd

(x) S$m


Company Guide

OSIM International


Earnings Drivers:

Five key markets. OSIM primarily operates in five key markets - Singapore, Malaysia, Taiwan, Hong Kong and China - with all other markets indirectly owned and operated. We estimate that OSIM’s massage products contribute close to 60% of total revenue.

Earnings growth visibility likely to improve. We turn less pessimistic on earnings visibility as we can now see some positives from the OSIM, GNC and TWG brands for FY16F. As we had previously observed, sales growth rates (ex TWG consolidation) from 3Q12 to 1Q15 were declining. However from 2Q15, the rate of sales decline had consistently decelerated. We believe recovering chair sales could be driving this and the brighter outlook is validated by plans to focus more on marketing, introduce new products, and expand the OSIM franchise into new markets this year. In addition, costs for labour and rents in Singapore have eased compared to previous quarters, providing further relief to operating expenses. Apart from OSIM’s massage products, GNC’s earnings will also benefit from the closure of its Australian operations which has been loss making. TWG will continue to grow store count and will likely enjoy ramp up of its new opened North Asian outlets in FY16F. Besides, legal costs are likely to be much lower this year.

GNC, more positive post closure of GNC Australia. OSIM is the sole franchisee for GNC in Singapore, Malaysia and Taiwan. This business generally generates stable earnings and delivers positive cashflows. We estimate that GNC contributes about 25% of total sales. Store count has decreased from the peak of 270 in 4Q11 to 197 in 4Q15 partly due to closure of the GNC business in Australia. Following the provision of S$5.6m in 4Q15 for the closure, we are now more optimistic on the GNC business given that GNC Australia was making losses of S$3.5m a year for the past three years. Taiwan now has the most headroom for GNC to scale up.

TWG is growing, legal expenses should be lower in FY16F barring court’s ruling. TWG’s development has been exciting, growing from 26 stores in FY13 to 52 stores by 4Q15. It now has presence in new markets including Korea, Taiwan, Macau and China. 4Q15 saw more store openings including Four Seasons Macau and Tea WG at Elements in Hong Kong. Going forward, there are plans to open another 15-20 stores in 2016. Besides store presence, it is also increasing its market share in supplying to luxury hotel segment in Hong Kong, China and Taiwan. We estimate TWG’s contribution to group net profit (70% stake and after minority interest) to be small at 8-10%. Following S$3.4m recognition for legal expenses in 4Q15, 2016’s legal fees are expected to be much lower, barring potential damages it has to pay should the court order compensation to its plaintiffs.

Store count

Blended sales per store (S$m)

Rate of sales decline is decelerating

Sales mix by geography FY15

EBIT Margins %


871841

783 807836

0

100

200

300

400

500

600

700

800

2013A 2014A 2015F 2016F 2017F

0.74

0.820.79 0.79 0.79

0.00

0.17

0.34

0.50

0.67

0.84

2013A 2014A 2015F 2016F 2017F

(15)

(10)

(5)

0

5

10

15

20

yoy (%)

TWG consolidation

North Asia55%

South Asia40%

America/Africa/Europe/ Middle

East/Oceania7%

0

4

8

12

16

20

07 08 09 10 11 12 13 14 15 16F 17F

(%)


Company Guide

OSIM International

Balance Sheet:

Net cash of S$200m. The business is generally cashflow positive, generating average operating cashflow of S$100m over the past five years. OSIM's 4Q15 balance sheet has S$358m of cash, well equipped to make acquisitions. We believe the company is able to serve out the call option for its convertible bonds in 2017, provided it does not make a significant acquisition. Net cash of S$200m is equal to over 4x annual dividend payments at 6 Scts/share. Therefore, there is no stress on its balance sheet in this respect.


Deep value. We see deep value from a valuation perspective as dividend yield is attractive at close to 7% while PE valuations are below average at near -1SD of its 7-year mean. There is minimal risk of dividend cut as earnings are showing a turnaround. Downside risks for the stock should be supported by dividend yield while upside is now fuelled by earnings recovery. Our PE-based TP of S$1.28 is conservatively premised on modest earnings growth in FY16F and its target PE of 14x at historical mean. Our TP yields an upside of >30%. Upside risk to earnings as our estimates are below consensus.

Key Risks:

Strong reliance on new chair sales to drive turnaround. Due to the significant contribution of OSIM massage products to revenue, new products OSIM massage products are expected to lead sustainable turnaround and drive growth. New products such as uMagic, uGallop 2, limited edit uDiva will be launched soon. uJoy should be leading growth going forward, if earnings turnaround is to be sustainable. Any potential slowdown in market demand for OSIM massage products would hamper earnings recovery.

Litigation cases pose unknown earnings risks. The two ongoing litigation cases in Singapore and Hong Kong where costs remain relatively uncertain are two unknowns that could spring negative surprises which could yet dampen earnings. Apart from legal fees, there are also potential expenses on damages which OSIM may or may not have to pay, depending on the court’s ruling.

Consumer sentiment. OSIM is ultimately a retailer of lifestyle products, and its fortune depends on discretionary consumption. Poor consumption sentiment will be a drag on demand while strong consumption cycle will fuel demand for its products.

Company Background

OSIM is a retailer and brand owner of healthy lifestyle products. The company is the brand owner manufacturer and retailer for the OSIM line of massage chairs and related products worldwide; a sole franchisee for the GNC chain of nutritional supplement retail stores in Singapore, Malaysia, and Taiwan; and a majority owner of the TWG brand of high-end luxury tea cafes and saloons.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

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0.30

0.40

0.50

2013A 2014A 2015F 2016F 2017F


0.0

5.0

10.0

15.0

20.0

25.0

2013A 2014A 2015F 2016F 2017F


S$m

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2013A 2014A 2015F 2016F 2017F

Avg: 16.3x

+1sd: 21.1x

+2sd: 26x

‐1sd: 11.4x

‐2sd: 6.6x5.9

10.9

15.9

20.9

25.9


(x)

Avg: 5.04x

+1sd: 6.58x

+2sd: 8.11x

‐1sd: 3.51x

‐2sd: 1.98x

1.2

2.2

3.2

4.2

5.2

6.2

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(x)


Company Guide

OSIM International

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F Store count 871 841 783 807 836 Blended sales per store 0.74 0.82 0.79 0.79 0.79

Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F Revenues (S$m) North Asia 353 366 341 355 377 South Asia 250 279 248 252 255 America / Africa / Europe / 45.0 46.0 31.0 31.8 32.5 Total 648 691 620 640 664

Income Statement (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Revenue 648 691 620 640 664 Cost of Goods Sold (193) (205) (175) (179) (186) Gross Profit 455 486 445 460 478 Other Opng (Exp)/Inc (332) (351) (360) (368) (381) Operating Profit 123 135 84.4 92.5 96.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 2.92 0.98 1.47 1.47 1.47 Net Interest (Exp)/Inc (0.4) 1.54 1.41 0.85 1.39 Exceptional Gain/(Loss) 3.35 (5.7) (16.0) 0.0 0.0 Pre-tax Profit 129 132 71.3 94.8 99.3 Tax (27.6) (30.1) (21.5) (28.6) (30.0) Minority Interest 0.0 0.0 1.70 1.70 1.70 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 102 102 51.5 67.9 71.0 Net Profit before Except. 98.2 108 67.5 67.9 71.0 EBITDA 140 158 109 118 122 Growth Revenue Gth (%) 7.6 6.7 (10.4) 3.2 3.8 EBITDA Gth (%) 8.6 13.0 (31.1) 8.6 3.3 Opg Profit Gth (%) 6.9 9.8 (37.7) 9.6 4.2 Net Profit Gth (Pre-ex) (%) 13.0 9.8 (37.4) 0.6 4.6 Margins & Ratio Gross Margins (%) 70.3 70.4 71.8 72.0 72.0 Opg Profit Margin (%) 19.0 19.6 13.6 14.5 14.5 Net Profit Margin (%) 15.7 14.8 8.3 10.6 10.7 ROAE (%) 43.5 28.8 12.3 16.6 16.4 ROA (%) 17.7 13.3 6.3 8.5 8.6 ROCE (%) 21.9 16.7 8.6 9.6 9.7 Div Payout Ratio (%) 44.5 45.4 86.4 65.5 62.7 Net Interest Cover (x) 278.4 NM NM NM NM



Company Guide

OSIM International

Quarterly / Interim Income Statement (S$m)

FY Dec 4Q2014 1Q2015 2Q2015 3Q2015 4Q2015 Revenue 178 150 159 142 169 Cost of Goods Sold (54.1) (44.1) (43.7) (40.1) (47.0) Gross Profit 124 106 116 101 122 Other Oper. (Exp)/Inc (89.4) (87.2) (86.0) (88.4) (98.7) Operating Profit 34.2 18.6 29.8 13.1 23.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (0.1) 0.43 0.49 0.30 0.25 Net Interest (Exp)/Inc 0.54 0.0 0.54 0.69 0.22 Exceptional Gain/(Loss) (0.7) (1.0) (2.0) (4.0) (9.0) Pre-tax Profit 34.0 18.0 28.8 10.0 14.5 Tax (6.3) (4.9) (6.9) (4.3) (5.3) Minority Interest (0.3) 0.49 0.49 0.45 0.28 Net Profit 27.4 13.5 22.4 6.17 9.40 Net profit bef Except. 28.1 14.5 24.4 10.2 18.4 EBITDA 39.6 24.5 36.0 19.2 29.4 Growth Revenue Gth (%) 12.3 (15.7) 6.4 (11.2) 19.2 EBITDA Gth (%) 20.1 (38.0) 46.9 (46.8) 53.2 Opg Profit Gth (%) 26.9 (45.6) 60.4 (56.2) 76.1 Net Profit Gth (Pre-ex) (%) 31.1 (48.3) 68.0 (58.3) 80.9 Margins Gross Margins (%) 69.5 70.6 72.6 71.7 72.2 Opg Profit Margins (%) 19.2 12.4 18.7 9.2 13.6 Net Profit Margins (%) 15.4 9.0 14.0 4.4 5.6

Balance Sheet (S$m)

FY Dec 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 25.2 36.4 33.5 28.5 23.5 Invts in Associates & JVs 18.5 18.4 21.7 23.2 24.6 Other LT Assets 219 211 217 207 198 Cash & ST Invts 291 456 385 418 455 Inventory 72.5 71.6 78.2 80.7 83.7 Debtors 42.0 42.6 37.6 38.8 40.3 Other Current Assets 12.5 17.8 17.9 17.9 17.9 Total Assets 680 854 790 814 842 ST Debt 155 17.2 13.2 13.2 13.2 Creditor 107 77.0 76.6 79.0 82.0 Other Current Liab 35.2 64.0 50.4 50.4 50.4 LT Debt 0.06 168 173 173 173 Other LT Liabilities 39.1 35.7 29.4 29.4 29.4 Shareholder’s Equity 271 438 397 420 447 Minority Interests 72.7 53.6 50.9 49.2 47.5 Total Cap. & Liab. 680 854 790 814 842 Non-Cash Wkg. Capital (15.4) (8.9) 6.71 7.98 9.50 Net Cash/(Debt) 136 271 199 232 269 Debtors Turn (avg days) 22.6 22.3 23.6 21.8 21.7 Creditors Turn (avg days) 201.2 183.5 184.8 183.7 182.2 Inventory Turn (avg days) 128.9 143.7 180.3 187.6 186.0 Asset Turnover (x) 1.1 0.9 0.8 0.8 0.8 Current Ratio (x) 1.4 3.7 3.7 3.9 4.1 Quick Ratio (x) 1.1 3.2 3.0 3.2 3.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 7.4 12.7 7.7 5.4 5.4 Z-Score (X) 0.0 0.0 0.0 0.0 0.0



Company Guide

OSIM International


FY Dec 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 129 132 71.3 94.8 99.3 Dep. & Amort. 21.7 29.8 31.2 32.5 32.5 Tax Paid (29.2) (26.0) (38.8) (28.6) (30.0) Assoc. & JV Inc/(loss) (2.9) (1.0) (1.5) (1.5) (1.5) Chg in Wkg.Cap. 3.87 (16.0) (5.8) (1.3) (1.5) Other Operating CF (9.5) (2.3) 1.58 0.0 0.0 Net Operating CF 113 117 58.0 96.0 98.9 Capital Exp.(net) (11.5) (23.6) (14.2) (10.0) (10.0) Other Invts.(net) (3.8) (3.8) (9.7) 0.0 0.0 Invts in Assoc. & JV (7.0) 0.0 (2.6) 0.0 0.0 Div from Assoc & JV 1.36 1.21 0.69 0.0 0.0 Other Investing CF 16.5 3.19 5.29 0.0 0.0 Net Investing CF (4.4) (23.0) (20.5) (10.0) (10.0) Div Paid (36.2) (45.5) (45.9) (44.5) (44.5) Chg in Gross Debt 4.57 134 (4.0) 0.0 0.0 Capital Issues (7.5) 0.0 0.0 0.0 0.0 Other Financing CF (2.3) (15.1) (52.2) 0.0 0.0 Net Financing CF (41.4) 73.4 (102) (44.5) (44.5) Currency Adjustments 6.19 0.85 2.93 0.0 0.0 Chg in Cash 73.6 168 (61.5) 41.5 44.4 Opg CFPS (S cts) 15.1 17.4 8.42 13.1 13.5 Free CFPS (S cts) 14.1 12.3 5.77 11.6 12.0



Source: DBS Bank

S.No. DateClosing

PriceT arget Price

Rat ing

1: 04 Feb 15 2.02 1.94 HOLD

2: 06 May 15 1.74 1.82 HOLD

3: 24 Jul 15 1.54 1.61 HOLD

4: 02 Sep 15 1.47 1.61 HOLD

5: 28 Oct 15 1.44 1.22 FULLY VALUED

6: 29 Jan 16 1.02 1.28 BUY


12

3

4

5

6

0.73

0.93

1.13

1.33

1.53

1.73

1.93

2.13


S$

ASIAN INSIGHTS VICKERS SECURITIES

BUYLast Traded Price: S$1.06 (STI : 2,579.23) Price Target: S$1.41 (33% upside)

Potential Catalyst: Capacity growth and earnings execution Where we differ: We are more bullish than consensus

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

Singapore Research Team

Price Relative

Forecasts and Valuation FY Dec (RMm) 2014A 2015F 2016F 2017F Revenue 399 581 772 913 EBITDA 100 171 214 245 Pre-tax Profit 81.1 143 178 202 Net Profit 71.0 126 155 172 Net Pft (Pre Ex.) 71.0 126 155 172 Net Pft Gth (Pre-ex) (%) 22.4 77.0 23.1 11.1 EPS (S cts) 3.24 5.73 7.05 7.83 EPS Pre Ex. (S cts) 3.24 5.73 7.05 7.83 EPS Gth Pre Ex (%) 19 77 23 11 Diluted EPS (S cts) 3.24 5.73 7.05 7.83 Net DPS (S cts) 1.17 2.07 2.55 2.83 BV Per Share (S cts) 17.0 20.6 25.1 30.1 PE (X) 32.4 18.3 14.9 13.4 PE Pre Ex. (X) 32.4 18.3 14.9 13.4 P/Cash Flow (X) 36.6 18.2 14.7 12.9 EV/EBITDA (X) 22.1 12.8 10.1 8.7 Net Div Yield (%) 1.1 2.0 2.4 2.7 P/Book Value (X) 6.2 5.1 4.2 3.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.4 30.5 30.8 28.4 Earnings Rev (%): - - - Consensus EPS (S cts): 9.99 11.9 13.3 Other Broker Recs: B: 4 S: 0 H: 2


More room to grow Lifting our 12-month TP to S$1.41 after raising FY16F/17F earnings by 4%/8% on higher USD/MYR forecasts and margin assumptions, and as we revise target valuation multiple from 18x to 20x blended FY16/17 PE as the sector has re-rated. We have lifted our ASPs (in Ringgit terms) even as we expect some of the currency gains from a strengthening US$ to be passed on to customers, and have also raised margin assumptions slightly to account for better economies of scale ahead.

Strong performance to continue into 4Q15. Benefitting from low raw material prices, robust demand and as three new production lines were commissioned in 3Q15 – boosting production capacity by 13% to 5.2bn gloves, we expect top and bottom line to grow in 4Q15 by 55.8% and 62.0% to RM175m and RM36m respectively. This should bring FY15’s net profit strongly up 77% y-o-y to RM126m.

Capacity expansion to underpin future growth, with long-term upside from recent acquisition of adjoining land. Riverstone plans to double its annual capacity from 4.2bn gloves in 2014 to at least 8.2bn gloves by 2018 to support growth in both its cleanroom and healthcare glove segments, which could more than double earnings from RM71m in FY14 to RM172m by FY17. Furthermore, Riverstone is able to grow capacity faster than expected as it recently acquired 9.364 acres of land for the construction of a factory and worker hostels.

Valuation: Maintain BUY; raising 12-month TP to S$1.41. As larger peers have re-rated to 31x CY15F PE, we raise our target valuation multiple for Riverstone from 18x to 20x blended FY16/17F PE. This implies a c.35% discount vs 28% previously, which is fair given its smaller capacity. As an export play, we also like Riverstone as a beneficiary of the strong US$ vs RM and its share price should further re-rate as earnings are delivered.


Global economic slowdown could impact cleanroom sales – which makes up c.50% of FY15 revenue. While margins for cleanroom gloves tend to be resilient, demand for cleanroom gloves could be threatened in the event of a slowdown in the global economy.

At A Glance


Ringlet Investments (%) 50.8 Wai Keong Lee (%) 13.0 Free Float (%) 33.5 3m Avg. Daily Val (US$m) 0.48 ICB Industry : Health Care / Health Care Equipment & Services



Riverstone Holdings Version 2 | Bloomberg: RSTON SP | Reuters: RVHL.SI Refer to important disclosures at the end of this report

82

282

482

682

882

1082

1282

0.2

0.7

1.2

1.7

2.2


Relative IndexS$

Riverstone Holdings (LHS) Relative STI INDEX (RHS)


Company Guide

Riverstone Holdings


Earnings Drivers:

Growth in global demand for healthcare gloves, at least in near-to-medium term. The Malaysian Rubber Glove Manufacturers Association (MARGMA) estimates that demand for healthcare gloves is likely to grow at 8-12% p.a. between 2014 and 2020. As a relatively new entrant in the healthcare glove industry and with ambitions to grow revenue from this segment quickly to drive its earnings, we project a ramp-up in Riverstone’s healthcare glove production at a 25.6% CAGR between FY13 and FY17F. Long-term trends also indicate favourable demand prospects. According to MARGMA, the global demand ratio of natural rubber and synthetic (nitrile) rubber gloves shifted from 74:26 in 2009 to 53:47 in 2014. On the back of rising awareness of latex allergies in emerging economies and low cost of the synthetic variety, we expect the ratio to shift away from natural rubber gloves – the preference of customers in the long run. Principally engaged in the manufacture of nitrile gloves, Riverstone could be a beneficiary of the long-run substitution by nitrile gloves. Capacity expansion to underpin growth. To capitalise on the favourable demand growth outlook in both the short and long-term, Riverstone will continue to expand its manufacturing capacity to a minimum of 8.2bn gloves by 2018. We expect new production capacities to propel top-line growth at a CAGR of 26.4% between FY13 and FY17F, as they gradually come on stream. Beneficiary of strong US$ vs Ringgit. Riverstone generates a surplus in US$ as it receives c.90% of its revenues in US$, while c.35% of its costs are incurred in US$, and will benefit from a strong US$ versus the Ringgit. All else being constant, strengthening of the US$ by 1% could boost net profit in RM terms by c.1.2%. Greater efficiency from higher automation and larger scale should help to maintain margins. As Riverstone scales up on its production and further automation efforts, we expect net margins to be maintained within the range of 19-21% between FY14 and FY17F, which should support stable growth in net profit from RM58m in FY13 to RM1172m in FY17F.

Capital Expenditure (RM$m)

Production Capacity (m gloves)

Cleanroom Gloves (m gloves)

Healthcare Gloves (m gloves)

Utilization Rate


11.5

94.1

50

76

97

0.0

12.2

24.5

36.7

49.0

61.2

73.5

85.7

98.0

2013A 2014A 2015F 2016F 2017F

2,790 2,873

3,998

5,265

6,325

0

1,300

2,600

3,900

5,200

2013A 2014A 2015F 2016F 2017F

795 804

1,019

1,185

1,423

0

300

600

900

1,200

2013A 2014A 2015F 2016F 2017F

1,995 2,068

2,978

4,080

4,965

0

600

1,200

1,800

2,400

3,000

3,600

4,200

4,800

2013A 2014A 2015F 2016F 2017F

0.9 0.9 0.9 0.9 0.91

0.00

0.18

0.37

0.55

0.74

0.92

2013A 2014A 2015F 2016F 2017F

CAGR 22.7%

CAGR 15.7%

CAGR 25.6%


Company Guide

Riverstone Holdings

Balance Sheet:

Healthy balance sheet. Riverstone has been in a net cash position over the observed period. Our projections show that Riverstone should be able to fund capital expenditures from 2015 to 2017 internally. Forecast net fixed asset growth at a CAGR of c.14.7% between 2014 and 2017. With capacity expected to nearly double in 2018 from 2014 levels, we project the group’s net fixed assets to jump by c.50% from RM228m in 2014 to RM343m in 2017.


Opportunities for inorganic growth. Due to the stringent requirements for the establishment of cleanroom facilities, Riverstone does not rule out the possibility of acquiring quality cleanroom glove manufacturing companies in the future. Cultivation of new markets for cleanroom products. As cleanroom products are manufactured in controlled environments and are subject to stringent requirements, they are able to deliver much higher margins relative to healthcare gloves. The ability to cultivate new markets for cleanroom products, similar to what Riverstone recently achieved with its diversification into the consumer electronics sector, should help to boost earnings.

Key Risks:

Global economic slowdown could impact cleanroom sales. A slowdown in the general economy could lead to declines in discretionary spending and manufacturing activity in the HDD industry. Although Riverstone has been gradually reducing its exposure to HDDs, down from historical highs of up to 70%, they still make up c.50% of Riverstone’s cleanroom portfolio today. Intensifying competition could erode profitability. While we believe that oversupply over the next few years is unlikely, the influx of healthcare gloves beyond 2017 could threaten Riverstone’s market share and pricing power if it fails to advance on the technological front.

Company Background

Riverstone Holdings (RSTON SP) is a natural rubber and nitrile (synthetic rubber) glove manufacturer specialising in cleanroom and healthcare gloves. It is also engaged in the manufacture and distribution of other ancillary products such as finger cots, packaging bags and face masks.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

1.2

1.2

1.3

1.3

1.4

1.4

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2013A 2014A 2015F 2016F 2017F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

2013A 2014A 2015F 2016F 2017F


RM

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2013A 2014A 2015F 2016F 2017F

Avg: 9.3x

+1sd: 12x

+2sd: 14.8x

‐1sd: 6.5x

‐2sd: 3.8x3.4

8.4

13.4

18.4

23.4

28.4

33.4


(x)

Avg: 2.5x

+1sd: 3.77x

+2sd: 5.04x

‐1sd: 1.23x

0.0

2.0

4.0

6.0

8.0

10.0

12.0


(x)


Company Guide

Riverstone Holdings

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Capital Expenditure 11.5 94.1 50.0 76.0 97.0 Production Capacity (m 2,790 2,873 3,998 5,265 6,325 Cleanroom Gloves (m 795 804 1,019 1,185 1,423 Healthcare Gloves (m 1,995 2,068 2,978 4,080 4,965 Utilization Rate 0.90 0.90 0.90 0.90 0.91

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RMm) Cleanroom Gloves 173 198 295 368 433 HealthcareGloves 173 191 275 392 468 Other Cleanroom 11.2 10.3 10.8 11.4 11.9 Total 358 399 581 772 913 Gross Profit (RMm)

Cleanroom Gloves 65.9 75.4 114 140 162 HealthcareGloves 31.2 33.4 64.7 86.3 93.6 Other Cleanroom 0.74 0.12 0.12 0.13 0.14 Total 97.8 109 178 226 256 Gross Profit Margins (%) Cleanroom Gloves 38.0 38.0 38.5 38.0 37.5 HealthcareGloves 18.0 17.5 23.5 22.0 20.0 Other Cleanroom 6.6 1.1 1.1 1.1 1.1 Total 27.3 27.3 30.7 29.3 28.1

Income Statement (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 358 399 581 772 913 Cost of Goods Sold (260) (290) (403) (545) (657) Gross Profit 97.8 109 178 226 256 Other Opng (Exp)/Inc (25.2) (27.8) (35.7) (48.6) (54.1) Operating Profit 72.6 81.1 143 178 202 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 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 72.6 81.1 143 178 202 Tax (14.7) (10.2) (17.1) (23.1) (30.3) 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 58.0 71.0 126 155 172 Net Profit before Except. 58.0 71.0 126 155 172 EBITDA 91.6 100 171 214 245 Growth Revenue Gth (%) 15.5 11.6 45.6 32.7 18.3 EBITDA Gth (%) 42.1 9.7 70.2 24.9 14.8 Opg Profit Gth (%) 50.3 11.7 75.9 24.5 13.7 Net Profit Gth (Pre-ex) (%) 46.2 22.4 77.0 23.1 11.1 Margins & Ratio Gross Margins (%) 27.3 27.3 30.7 29.3 28.1 Opg Profit Margin (%) 20.3 20.3 24.5 23.0 22.1 Net Profit Margin (%) 16.2 17.8 21.6 20.0 18.8 ROAE (%) 20.1 20.4 30.5 30.8 28.4 ROA (%) 16.6 17.3 26.3 27.0 24.9 ROCE (%) 19.2 19.7 29.6 30.1 27.8 Div Payout Ratio (%) 38.1 36.1 36.1 36.1 36.1 Net Interest Cover (x) NM NM NM NM NM


Cleanroom gloves enjoy higher margins, which are also more resilient, as compared to healthcare gloves.

Modest decline in operating margins as Riverstone ramps up on its marketing activities to match the growth in its output capacity, especially since it is relatively new in the healthcare glove supply business.


Company Guide

Riverstone Holdings

Quarterly / Interim Income Statement (RMm)

FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 103 112 127 129 151 Cost of Goods Sold (76.2) (82.4) (87.0) (90.2) (103) Gross Profit 26.5 29.6 40.2 38.8 48.0 Other Oper. (Exp)/Inc (6.7) (7.2) (7.3) (6.6) (7.9) Operating Profit 19.8 22.4 32.9 32.2 40.1 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 0.0 0.0 0.0 0.0 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 19.8 22.4 32.9 32.2 40.1 Tax (3.2) (0.1) (5.9) (5.2) (4.8) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 16.5 22.4 27.0 27.0 35.3 Net profit bef Except. 16.5 22.4 27.0 27.0 35.3 EBITDA 24.4 27.9 38.8 38.7 47.1 Growth Revenue Gth (%) 6.0 9.1 13.6 1.4 16.8 EBITDA Gth (%) 3.4 14.0 39.5 (0.4) 21.8 Opg Profit Gth (%) 4.0 13.5 46.7 (2.1) 24.6 Net Profit Gth (Pre-ex) (%) 2.8 35.5 20.7 (0.1) 30.9 Margins Gross Margins (%) 25.8 26.4 31.6 30.1 31.9 Opg Profit Margins (%) 19.2 20.0 25.9 25.0 26.6 Net Profit Margins (%) 16.1 20.0 21.2 20.9 23.5

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 153 228 249 289 343 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 12.4 3.11 3.11 3.11 3.11 Cash & ST Invts 114 79.4 110 134 153 Inventory 35.7 42.1 39.0 53.0 67.2 Debtors 62.5 86.7 111 148 183 Other Current Assets 2.50 1.81 1.81 1.81 1.81 Total Assets 381 441 515 629 751 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 39.3 50.4 44.1 60.0 72.3 Other Current Liab 5.58 5.68 5.68 5.68 5.68 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 13.0 13.1 13.1 13.1 13.1 Shareholder’s Equity 323 372 452 551 660 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 381 441 515 629 751 Non-Cash Wkg. Capital 55.8 74.5 102 137 174 Net Cash/(Debt) 114 79.4 110 134 153 Debtors Turn (avg days) 61.5 68.2 62.2 61.4 66.1 Creditors Turn (avg days) 66.0 60.4 46.1 37.3 39.4 Inventory Turn (avg days) 50.0 52.4 39.5 33.0 35.8 Asset Turnover (x) 1.0 1.0 1.2 1.3 1.3 Current Ratio (x) 4.8 3.7 5.3 5.1 5.2 Quick Ratio (x) 3.9 3.0 4.4 4.3 4.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 29.3 25.4 28.4 23.8 21.3


Tax claims should be made progressively, but finalized in 4Q when the company has better visibility of earnings.

Margins were bolstered both y-o-y and q-o-q on the back of stronger glove demand, strengthening of the USD against the Malaysian Ringgit, and efficiency gains from greater automation.


Company Guide

Riverstone Holdings

Cash Flow Statement (RMm)

FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 72.6 81.1 143 178 202 Dep. & Amort. 19.0 19.4 28.4 35.9 43.2 Tax Paid (10.3) (14.8) (17.1) (23.1) (30.3) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (2.1) (25.2) (28.0) (34.7) (36.5) Other Operating CF 0.99 2.32 0.0 0.0 0.0 Net Operating CF 80.2 62.8 126 156 178 Capital Exp.(net) (40.0) (75.4) (50.0) (76.0) (97.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (40.0) (75.4) (50.0) (76.0) (97.0) Div Paid (22.5) (25.4) (45.3) (55.8) (62.0) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 30.3 1.00 0.0 0.0 0.0 Net Financing CF 7.86 (24.4) (45.3) (55.8) (62.0) Currency Adjustments 1.89 2.38 0.0 0.0 0.0 Chg in Cash 50.0 (34.6) 30.6 24.0 19.4 Opg CFPS (sen) 3.85 4.02 7.02 8.69 9.81 Free CFPS (sen) 1.88 (0.6) 3.47 3.64 3.71



Source: DBS Bank

S.No. DateClosing

PriceTarget Price

Rat ing

1: 06 Nov 15 1.07 1.24 BUY

2: 04 Jan 16 1.20 1.41 BUY


1

2

0.52

0.72

0.92

1.12

1.32

1.52

1.72

1.92

2.12

2.32


S$

We expect future dividend payouts to remain close to current levels.

Market Focus


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

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) 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 expr essed 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.

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 (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.

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 this report. As of 4 Feb 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).

Market Focus


COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have a proprietary

positions in Ascendas India Trust, Ascendas Hospitality Trust, Ascott Residence Trust, Cache Logistics Trust, Cambridge Industrial Trust, CapitaLand Retail China Trust, CDL Hospitality Trusts, Cosco Corporation, Croesus Retail Trust, Ezion Holdings, Ezra Holdings, Far East Hospitality Trust, Frasers Centrepoint Trust, Frasers Hospitality Trust, Indofood Agri Resources, Keppel DC REIT, Keppel Infrastructure Trust, M1, Mapletree Greater China Commercial Trust, Mapletree Industrial Trust, Mapletree Logistics Trust, Midas Holdings, Noble Group, Parkway Life REIT, OUE Hospitality Trust, Overseas Union Enterprise, SMRT, Soilbuild Business Space Reit, SPH Reit, Venture Corporation , Wing Tai, Yanlord Land Group, Ying Li International, YTL Starhill Global REIT recommended in this report as of 31 Dec 2015.

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., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Ascott Residence Trust, Cache Logistics Trust, Croesus Retail Trust, Far East Hospitality Trust Frasers Hospitality Trust, Keppel DC REIT, Soilbuild Business Space Reit, YTL Starhill Global REIT as of 31 Dec 2015.

4. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates beneficially own a total of 5% of any class of common equity securities of Croesus Retail Trust as of 31 Dec 2015.

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 ARA Asset Management, Cache Logistics Trust, Croesus Retail Trust, Del Monte Pacific, Ezra Holdings, Frasers Hospitality Trust, iFAST Corp Ltd, IREIT Global, Keppel DC REIT, Keppel Infrastructure Trust , OUE Commercial REIT, Perennial Real Estate Holdings, Soilbuild Business Space Reit, , Tiger Airways as of 31 Dec 2015.

DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for ARA Asset Management,Cache Logistics Trust, Croesus Retail Trust, Del Monte Pacific, Ezra, Frasers Hospitality Trust, iFAST Corp Ltd, IREIT Global, Keppel DC REIT, Keppel Infrastructure Trust, OUE Commercial REIT, Soilbuild Business Space Reit, Holdings, Tiger Airways in the past 12 months, as of 31 Dec 2015

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.

6. Directorship/trustee interests: Woo Foong Pheng (Mrs Ow Foong Pheng), a member of DBS Group Holdings Board of Directors, is a Director of Mapletree Greater China as of 28 Feb 2015.

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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.

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Market Focus


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.

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United Kingdom

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

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

Company Regn. No. 196800306E

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