MARKET PULSE: Telcos, Yangzijiang and Midas (2 Mar 2012)

Stock Name: Yangzijiang
Company Name: YANGZIJIANG SHIPBLDG HLDGS LTD

Research House: OCBC

Price Call: BUY

Target Price: 1.51

Stock Name: MIDAS
Company Name: MIDAS HLDGS LIMITED

Research House: OCBC

Price Call: HOLD

Target Price: 0.39

MARKET PULSE: Telcos, Yangzijiang and Midas

02 Mar 2012

KEY IDEA Telcos: 4QCY11 Review - OVERWEIGHT Both M1 and StarHub put in pretty decent showing in their 4QCY results recently, mostly meeting our forecasts, although SingTel slightly disappointed due to its volatile Associates contribution. Going forward, all the three telcos expect their Singapore operations to remain stable or show modest growth, buoyed by continued customer additions and increasing mobile data usage. But with more smartphone users likely to use data-based means to communicate, we expect EBITDA margins to remain flat or even trend slightly lower. Nevertheless, thanks to their strong cashflow-generative businesses, the telcos have kept their dividend payout guidance, thus keeping their yields attractive. The telco shares have largely underperformed the broader market and were mostly flat YTD, whereas the STI has surged some 12.6%. But with markets likely to remain volatile, we believe that the telcos' defensive earnings and attractive yields offer a safe harbour for the less risk-adverse investors. Maintain OVERWEIGHT. (Carey Wong) MORE REPORTS Yangzijiang Shipbuilding: Coping well in a difficult environment Yangzijiang Shipbuilding (YZJ) reported a 16% rise in revenue to RMB15.7b and a 35% increase in net profit to RMB4.0b in FY11 such that the latter was 5.7% and 7.8% higher than ours and the street's full year estimates, respectively. Gross profit margin was higher at 30.2% in 4Q11 vs. 20.9% in 4Q10; this is due to reclassification of interest income from the group's investments under total revenue. The group's yards will be busy this year, but the earnings outlook beyond 2H13 is dimmer. Management is proactively seeking ways to mitigate the effects of a challenging shipbuilding market and if executed well, we believe YZJ will emerge as a stronger after an industry consolidation. However, due to the difficult external environment and inherent risks in some of the group's initiatives, we lower our peg to 9x FY12F core earnings, resulting in a lower fair value estimate of S$1.51 (prev. S$1.60). Maintain BUY. (Low Pei Han) Midas Holdings: JV secures RMB526.9m in contracts Midas Holdings (Midas) announced last evening that its 32.5% owned JV company, Nanjing SR Puzhen Rail Transport (NPRT) has clinched a contract worth RMB526.9m. This entails the supply of 23 train sets (or 115 cars) for the Suzhou Metro Line 2 Project, with delivery expected from 2013 to 2014. We estimate that this latest contract win would increase NPRT's order book to ~RMB7.5b. This development highlights the improving sentiment for China's metro industry, following the Shanghai metro train crash in Sep 2011. Recall that Midas recently secured contracts totalling RMB82.8m for two China metro projects in Dec last year. Nevertheless, we opine that the major catalyst for Midas' share price would likely come from high-speed contract wins instead. The share of profits from NPRT to Midas has also been lumpy. FY11 saw a 81.9% plunge in contribution from NPRT, but we expect conditions to improve in FY12. Maintain HOLD and S$0.39 fair value estimate. (Wong Teck Ching Andy)

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NEWS HEADLINES - Stocks and commodities gained, while Treasuries dropped, as US jobless claims reached a four-year low and borrowing costs for France and Spain decreased. Reports of a pipeline explosion in Saudi Arabia sent oil prices upwards and tempered gains in stocks. - Dairy Farm's FY11 profit rose 18% to US$484m after revenue climbed 15% to US$10.45b. - Raffles Education's subsidiary will be divesting four parcels of land in the Langfang Development Zone of China's Hebei province for RMB1.05b (S$208m). - United Fiber System and Texchem-Pack Holdings both gave notice yesterday that they have recorded pre-tax losses for the three most recently completed financial years.