Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...

Regional Small/Mid Strategy Q2 2008
Country Assessment
STRATEGY AND STOCKS PICKS
1Q08 Small Cap Picks
(S$m)
Price
25 Mar 08
Price
17 Dec 07
Chng
(%)
Boustead 1.92 2.33 -18%
China Sky 0.985 1.87 -47%
Ferro China 1.35 1.76 -23%
The Hour Glass 0.83 0.94 -11%
Hsu Fu Chi 0.93 1.18 -21%
Raffles Medical 1.21 1.55 -22%
Source: DBS Vickers
Our small cap top picks fell 23.2% on a priceweighted
basis as the 1Q market sell-down affected all
stocks. Still, the figure betters the 25.2% fall suffered
by the FTSE Small Caps index. Our strategy in sticking
to branded consumer and defensive plays in
anticipation of market uncertainties has better
protected investors during the 1Q market sell-down as
Hour Glass, Boustead and Hsu Fu Chi declined by a
relatively less dramatic 11%,18%, and 21%
respectively. China Sky underperformed as oil prices
escalated above USD100pbl and margin concerns
drove investors out of S-chips generally.
Our continued cautious stance going into 2Q qualifies
ARA as one of our picks. The stock offers investors an
opportunity to invest in a stable fee-income business
backed by real estate asset performance and
valuation. Growth potential of its business model
remains intact following a better than expected FY07
net profit of S$34m. Distribution yield of 8.1% for
FY09 is attractive.
While many investors fretted about missing buying
opportunities at lower valuations last year as the stock
market rose, the recent market sell-down has forced
valuations down to attractive levels again. This has
presented trading opportunities in 2Q.
We will be selective in this area given that the market
uncertainties that resulted in the 1Q sell-off are still
present going into the start of 2Q. We prefer
companies that can either (i) continue to grow its
bottom line strongly over the next 2 years or (ii) have a
high level of net cash.
Ferrochina is expected to deliver a stunning 291%
jump in net profit during FY08 to RMB1.11bn as the
contribution from its acquisition of Superb Team and
capacity expansion kicks into full force this year.
Valuations are extremely attractive at 5.0x (FY08) and
3.8x (FY09). Management also reassured that they are
able to pass on recent rises in iron ore and steel prices
to customers
China Hongxing (CHHS), a Beijing Olympics play, is
our second pick for an oversold rebound play in 2Q.
The recent S-chips sell-off has affected the SGX-listed
sports shoes plays more than their counterparts in HK.
CHHS’s FY08 PE of 14.9x implies that the discount to
Li Ning has widened to 50%. This is despite the fact
that CHHS is now closer to Li Ning in terms of revenue
and earnings compared to six months ago. Likewise,
value is also emerging for China Sports, which fell
47.7% in 1Q due to the sector de-rating. The stock is
now trading at only 6.9x (FY08) and 5.2x (FY09)
despite EPS growth of 43% and 35% in FY08 and
FY09 respectively.
Our final pick is Ezra. Its Saigon Shipyard is expected
to be fully operational by 2009, paving the way for
more fabrication, installation and commissioning
projects. FY08 and FY09 net earnings (pre-ex) are
expected to rise by 70% and 76% to S$60m and
$106m respectively. The 53% fall in stock price from
its peak of $3.88 in mid-November last year has
brought FY08 and FY09 PE valuations (pre-ex) down
to 17.8x and 10.1x respectively.
2Q08 Small Cap Top Picks
FYE Mkt Price Target PE PE EV/EBITDA P/BV Div Yld ROAE Val/Day
Company Cap (S$) Price % (x) (x) (x) (x) (%) (%) 6m
(S$m) 25 Mar (S$) Upside 08F 09F 08F 08F 08F 08F ($000s)
ARA Asset Mgmt Dec 413 0.71 1.13 60% 11.2x 8.8x 7.8x 3.7x 6.3% 35% 5,681
China Hongxing Dec 1,473 0.58 0.90 55% 14.9x 11.6x 9.0x 1.9x 1.3% 14% 19,049
Ezra Holdings Aug 1,078 1.84 3.15 71% 17.8x 10.1x 13.7x 1.6x 2.7% 50% 4,907
FerroChina Dec 1,079 1.35 2.75 104% 5.0x 3.8x 5.0x 0.8x 1.5% 16% 12,320
Source: DBS Vickers
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