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

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

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Regional Small/Mid Cap Strategy Q2 2008 Ferrochina Bloomberg: FRC SP | Reuters: FERR.SI BUY S$1.35 FSSTI : 3,000.19 Price Target : 12-Month S$ 2.75 Potential Catalyst: Earnings growth and execution Analyst Paul Yong CFA +65 6398 7951 paulyong@dbsvickers.com Price Relative 2.70 2.20 1.70 1.20 0.70 0.20 S$ M ay-05 N ov-05 M ay-06 N ov-06 M ay-07 N ov-07 Relative Index Ferrochina (LH S) R e la tive FSST I IN D E X (R H S) Forecasts and Valuation FY Dec (RMB m) 2006A 2007A 2008F 2009F Turnover 3,788 5,915 18,878 24,540 EBITDA 422 596 1,644 2,113 Pre-tax Profit 300 412 1,233 1,653 Net Profit 269 381 1,110 1,455 Net Pft (Pre Ex.) 269 381 1,110 1,455 EPS (S cts) 14.7 14.7 27.0 35.3 EPS Pre Ex. (S cts) 14.7 14.7 27.0 35.3 EPS Gth Pre Ex (%) 84 0 83 31 Diluted EPS (S cts) 14.7 14.7 27.0 35.3 Net DPS (S cts) 1.5 1.0 2.0 2.0 BV Per Share (S cts) 46.9 152.4 178.4 211.8 PE (X) 9.2 9.2 5.0 3.8 PE Pre Ex. (X) 9.2 9.2 5.0 3.8 P/Cash Flow (X) 13.2 11.3 4.3 3.3 EV/EBITDA (X) 7.2 10.7 5.0 3.8 Net Div Yield (%) 1.1 0.7 1.5 1.5 P/Book Value (X) 2.9 0.9 0.8 0.6 Net Debt/Equity (X) 0.6 0.5 0.4 0.3 ROAE (%) 39.2 10.7 16.3 18.1 Consensus EPS (S cts): 27.1 37.6 Sector : Basic Materials Principal Business: Produces coated steel and related products in China 319 269 219 169 119 69 19 Plant visit reinforces our confidence in the group’s outlook Story: We paid a visit to FerroChina’s production plant in Changshu, Jiangsu in mid-March and also had the opportunity to meet up with the Group’s management. Point: FerroChina’s 3 rd reverse cold rolling mill is on track for commercial production by 2Q08 whilst two more galvanizing lines are expected to be up by the second half of the year. After speaking to management, we believe FerroChina’s sales growth in 2008 is likely to be driven mostly by higher volume sales of cold rolled steel coils (CRC), which are currently in short supply and are commanding attractive margins. Demand for high quality galvanized steel also continues to be firm and we expect GP per MT for this product to hold steady, with the Group’s blended GP per MT improving as more higher margin products such as pre-painted galvanized steel coils are produced. At the same time, we have also tweaked our assumptions to match the Group’s current segmental reporting format, which breaks down their products into a) galvanized and pre-painted steel coils, b) cold rolled steel coils and c) others (antisepticised steel coils and cutting & slitting services). We have raised ASP assumptions to reflect current price trends but kept GP per MT largely intact. In summary, we have cut our FY08 earnings estimate by 2% and raised our FY09 earnings estimate by 3%. Relevance: We maintain our BUY call, with a marginally adjusted target price of S$2.75, based on 10x FY08 earnings. At 5x FY08 PER and 3.8x FY09 PER, valuations are undemanding and the Group could be a take-out or investment target for upstream players looking to move into the downstream at this attractive price level. At A Glance Issued Capital (m shrs) 799 Mkt. Cap (S$m/US$m) 1,079 / 780 Major Shareholders She Chun Tai (%) 16.3 CMIA Capital Partner (%) 14.0 Yedong Zhang (%) 5.5 Free Float (%) 64.1 Avg. Daily Vol.(‘000) 7,393 Page 18 www.dbsvickers.com Refer to important disclosures at the end of this report

Regional Small/Mid Cap Strategy Q2 2008 Ferrochina Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2006A 2007A 2008F 2009F FY Dec 2006A 2007A 2008F 2009F Turnover 3,788 5,915 18,878 24,540 Net Fixed Assets 562 3,581 4,105 3,980 Cost of Goods Sold (3,420) (5,396) (17,148) (22,310) Invts in Associates & JVs 355 0 0 0 Gross Profit 368 519 1,730 2,230 Other LT Assets 374 4,151 4,151 4,151 Other Opng (Exp)/Inc (75) (85) (262) (342) Cash & ST Invts 366 585 716 1,013 Operating Profit 293 435 1,468 1,888 Other Current Assets 1,327 4,566 8,275 10,757 Other Non Opg (Exp)/Inc 0 0 0 0 Total Assets 2,985 12,883 17,247 19,902 Associates & JV Inc 106 117 0 0 Net Interest (Exp)/Inc (99) (139) (235) (235) ST Debt 475 2,289 2,289 2,289 Exceptional Gain/(Loss) 0 0 0 0 Other Current Liab 924 3,128 6,422 7,703 Pre-tax Profit 300 412 1,233 1,653 LT Debt 446 1,167 1,167 1,167 Tax (31) (31) (123) (198) Other LT Liabilities 284 26 26 26 Minority Interest 0 0 0 0 Shareholder’s Equity 856 6,274 7,343 8,717 Preference Dividend 0 0 0 0 Minority Interests 0 0 0 0 Net Profit 269 381 1,110 1,455 Total Cap. & Liab. 2,985 12,883 17,247 19,902 Net Profit before Except. 269 381 1,110 1,455 EBITDA 422 596 1,644 2,113 Non-Cash Wkg. Capital 403 1,438 1,853 3,054 Net Cash/(Debt) (555) (2,871) (2,740) (2,442) Sales Gth (%) 73.3 56.1 219.1 30.0 EBITDA Gth (%) 108.7 41.2 175.8 28.5 Opg Profit Gth (%) 56.7 48.5 237.6 28.6 Net Profit Gth (%) 84.1 41.7 191.1 31.1 Effective Tax Rate (%) 10.2 7.5 10.0 12.0 Cash Flow Statement (RMB m) Rates & Ratio FY Dec 2006A 2007A 2008F 2009F FY Dec 2006A 2007A 2008F 2009F Pre-Tax Profit 300 412 1,233 1,653 Gross Margins (%) 9.7 8.8 9.2 9.1 Dep. & Amort. 23 44 176 225 Opg Profit Margin (%) 7.7 7.4 7.8 7.7 Tax Paid (21) (40) (18) (123) Net Profit Margin (%) 7.1 6.4 5.9 5.9 Assoc. & JV Inc/(loss) (106) (117) 0 0 ROAE (%) 39.2 10.7 16.3 18.1 Chg in Wkg.Cap. (68) (306) (520) (1,276) ROA (%) 11.1 4.8 7.4 7.8 Other Operating CF 32 (14) 0 0 ROCE (%) 20.7 7.6 13.7 15.6 Net Operating CF 160 (20) 871 478 Div Payout Ratio (%) 10.0 10.6 7.3 5.5 Capital Exp.(net) (161) (712) (700) (100) Net Interest Cover (x) 2.9 3.1 6.2 8.0 Other Invts.(net) (66) 156 0 0 Asset Turnover (x) 1.6 0.7 1.3 1.3 Invts in Assoc. & JV (243) 0 0 0 Debtors Turn (avg days) 68.7 100.1 76.6 88.5 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 72.9 133.4 99.5 112.2 Other Investing CF (3) 0 0 0 Inventory Turn (avg days) 61.7 89.6 52.3 58.4 Net Investing CF (474) (557) (700) (100) Current Ratio (x) 1.2 1.0 1.0 1.2 Div Paid (37) (31) (40) (81) Quick Ratio (x) 0.6 0.6 0.7 0.8 Chg in Gross Debt 7 684 0 0 Net Debt/Equity (X) 0.6 0.5 0.4 0.3 Capital Issues 0 0 0 0 Capex to Debt (%) 17.5 20.6 20.3 2.9 Other Financing CF 401 (1) 0 0 N. Cash/(Debt)PS (RMB cts) (155.2) (355.8) (339.6) (302.7) Net Financing CF 370 652 (40) (81) Opg CFPS (RMB cts) 63.7 56.2 172.5 217.5 Net Cashflow 56 75 131 298 Free CFPS (RMB cts) (0.4) (144.0) 21.2 46.9 Quarterly / Interim Income Statement (RMB m) Segmental Breakdown FY Dec 1Q2007 2Q2007 3Q2007 4Q2007 FY Dec 2006A 2007A 2008F 2009F Turnover 1,124 1,004 1,162 2,626 Revenues (RMB m) Cost of Goods Sold (1,016) (911) (1,046) (2,424) GI and PPGI 2,689 6,595 8,100 10,800 Gross Profit 108 93 116 202 Cold Rolled Steel 0 1,200 6,938 9,900 Other Oper. (Exp)/Inc (25) (25) (29) (6) P/O and Others 1,100 3,248 3,840 3,840 Operating Profit 83 68 87 197 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 27 36 58 (4) Total 3,789 11,043 18,878 24,540 Net Interest (Exp)/Inc (29) (29) (34) (48) Gross Profit (RMB m) Exceptional Gain/(Loss) 0 0 0 0 GI and PPGI 268 757 945 1,260 Pre-tax Profit 81 75 112 145 Cold Rolled Steel 0 113 625 810 Tax (9) (1) (10) (12) P/O and Others 99 162 160 160 Minority Interest 0 0 0 0 Net Profit 72 74 102 133 Net profit bef Except. 72 74 102 133 Total 367 1,033 1,730 2,230 EBITDA 116 111 146 222 Gross Profit Margins (%) GI and PPGI 10.0 11.5 11.7 11.7 Sales Gth (%) (7.6) (10.6) 15.7 126.0 Cold Rolled Steel N/A 9.4 9.0 8.2 EBITDA Gth (%) 3.6 (4.7) 32.2 52.1 P/O and Others 9.0 5.0 4.2 4.2 Opg Profit Gth (%) (5.0) (17.9) 27.8 125.6 Net Profit Gth (%) 30.7 2.6 37.6 30.5 Gross Margins (%) 9.6 9.3 10.0 7.7 Total 9.7 9.4 9.2 9.1 Opg Profit Margins (%) 7.4 6.8 7.5 7.5 Net Profit Margins (%) 6.4 7.4 8.8 5.1 Source: Company, DBS Vickers Page 19

Regional <strong>Small</strong>/<strong>Mid</strong> <strong>Cap</strong> <strong>Strategy</strong> Q2 2008<br />

Ferrochina<br />

Bloomberg: FRC SP | Reuters: FERR.SI<br />

BUY S$1.35 FSSTI : 3,000.19<br />

Price Target : 12-Month S$ 2.75<br />

Potential Catalyst: Earnings growth <strong>and</strong> execution<br />

Analyst<br />

Paul Yong CFA +65 6398 7951<br />

paulyong@dbsvickers.com<br />

Price Relative<br />

2.70<br />

2.20<br />

1.70<br />

1.20<br />

0.70<br />

0.20<br />

S$<br />

M ay-05 N ov-05 M ay-06 N ov-06 M ay-07 N ov-07<br />

Relative Index<br />

Ferrochina (LH S) R e la tive FSST I IN D E X (R H S)<br />

Forecasts <strong>and</strong> Valuation<br />

FY Dec (RMB m) 2006A 2007A 2008F 2009F<br />

Turnover 3,788 5,915 18,878 24,540<br />

EBITDA 422 596 1,644 2,113<br />

Pre-tax Profit 300 412 1,233 1,653<br />

Net Profit 269 381 1,110 1,455<br />

Net Pft (Pre Ex.) 269 381 1,110 1,455<br />

EPS (S cts) 14.7 14.7 27.0 35.3<br />

EPS Pre Ex. (S cts) 14.7 14.7 27.0 35.3<br />

EPS Gth Pre Ex (%) 84 0 83 31<br />

Diluted EPS (S cts) 14.7 14.7 27.0 35.3<br />

Net DPS (S cts) 1.5 1.0 2.0 2.0<br />

BV Per Share (S cts) 46.9 152.4 178.4 211.8<br />

PE (X) 9.2 9.2 5.0 3.8<br />

PE Pre Ex. (X) 9.2 9.2 5.0 3.8<br />

P/Cash Flow (X) 13.2 11.3 4.3 3.3<br />

EV/EBITDA (X) 7.2 10.7 5.0 3.8<br />

Net Div Yield (%) 1.1 0.7 1.5 1.5<br />

P/Book Value (X) 2.9 0.9 0.8 0.6<br />

Net Debt/Equity (X) 0.6 0.5 0.4 0.3<br />

ROAE (%) 39.2 10.7 16.3 18.1<br />

Consensus EPS (S cts): 27.1 37.6<br />

Sector : Basic Materials<br />

Principal Business: Produces coated steel <strong>and</strong> related products in<br />

China<br />

319<br />

269<br />

219<br />

169<br />

119<br />

69<br />

19<br />

Plant visit reinforces our<br />

confidence in <strong>the</strong> group’s outlook<br />

Story: We paid a visit to FerroChina’s production plant in<br />

Changshu, Jiangsu in mid-March <strong>and</strong> also had <strong>the</strong><br />

opportunity to meet up with <strong>the</strong> Group’s management.<br />

Point: FerroChina’s 3 rd reverse cold rolling mill is on track<br />

for commercial production by 2Q08 whilst two more<br />

galvanizing lines are expected to be up by <strong>the</strong> second half<br />

of <strong>the</strong> year. After speaking to management, we believe<br />

FerroChina’s sales growth in 2008 is likely to be driven<br />

mostly by higher volume sales of cold rolled steel coils<br />

(CRC), which are currently in short supply <strong>and</strong> are<br />

comm<strong>and</strong>ing attractive margins. Dem<strong>and</strong> for high quality<br />

galvanized steel also continues to be firm <strong>and</strong> we expect<br />

GP per MT for this product to hold steady, with <strong>the</strong><br />

Group’s blended GP per MT improving as more higher<br />

margin products such as pre-painted galvanized steel coils<br />

are produced. At <strong>the</strong> same time, we have also tweaked<br />

our assumptions to match <strong>the</strong> Group’s current segmental<br />

reporting format, which breaks down <strong>the</strong>ir products into<br />

a) galvanized <strong>and</strong> pre-painted steel coils, b) cold rolled<br />

steel coils <strong>and</strong> c) o<strong>the</strong>rs (antisepticised steel coils <strong>and</strong><br />

cutting & slitting services). We have raised ASP<br />

assumptions to reflect current price trends but kept GP per<br />

MT largely intact. In summary, we have cut our FY08<br />

earnings estimate by 2% <strong>and</strong> raised our FY09 earnings<br />

estimate by 3%.<br />

Relevance: We maintain our BUY call, with a marginally<br />

adjusted target price of S$2.75, based on 10x FY08<br />

earnings. At 5x FY08 PER <strong>and</strong> 3.8x FY09 PER, valuations<br />

are undem<strong>and</strong>ing <strong>and</strong> <strong>the</strong> Group could be a take-out or<br />

investment target for upstream players looking to move<br />

into <strong>the</strong> downstream at this attractive price level.<br />

At A Glance<br />

Issued <strong>Cap</strong>ital (m shrs) 799<br />

Mkt. <strong>Cap</strong> (S$m/US$m) 1,079 / 780<br />

Major Shareholders<br />

She Chun Tai (%) 16.3<br />

CMIA <strong>Cap</strong>ital Partner (%) 14.0<br />

Yedong Zhang (%) 5.5<br />

Free Float (%) 64.1<br />

Avg. Daily Vol.(‘000) 7,393<br />

Page 18<br />

www.dbsvickers.com<br />

Refer to important disclosures at <strong>the</strong> end of this report

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