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Singapore

Regional Small/MidMarket
Cap Strategy Focus
Q4 2008
Country Assessment
Small/Mid Cap Strategy
DBS Group Research . Equity 05 January 2009

Singapore
Survival of the fittest
We see the bear market rally that started in 4Q08
extending into 1Q 09. Our 1Q strategy focuses on
companies with strong balance sheets that give them the
ability to ride out the recession.

Markets managed to find a short-term low in 4Q08 as investors bet that 1) the
frozen credit markets may start to thaw following recent aggressive measures by
central banks to inject liquidity, 2) valuation has fallen to previous crisis troughs,
the recent stock market correction has priced in weak FY08 earnings and poor
economic data and 3) global efforts to pump prime economies could shorten
the global recession
Still, we remain mindful of the current credit crunch on small and medium size
companies. With earnings downgrades still an on-going process, our stock
selection adds focus on companies with strong balance sheets that should
enable them to weather and emerge from the current crisis as stronger entities.
We take a positive view of recent plans to review capital expenditure by Ezra as
well as its improved charter rates that are backed by long-term contracts. We
also like ASL Marine’s good earnings visibility and net cash position in FY09.
Among S-chips, we view the Chinese government’s initiatives to shift its weight
from exports to domestic consumption as positive for China Hongxing, which is
backed by 17Scts net cash per share. We also pick water treatment company,
Epure for its more defensive business model and good net cash position.
Our final pick is Raffles Medical in light of the defensive nature of the healthcare
sector, the company’s strong operating cashflow and net cash position.

Yeo Kee Yan (65) 6398 7955 keeyan@dbsvickers.com


Ling Lee Keng (65) 6398 7970 leekeng@dbsvickers.com

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Market Focus
Small/Mid Cap Strategy

Market Data
52-Week
Closed Chng Net -6 mth -12 mth
Indices 12 Dec 08 -1 mth -1 mth (%) -3 mth (%) (%) (%) High Low

FSSTI 1,740 (44) (2.4) (32.3) (42.4) (50.7) 3531 1474


FTSE Mid Cap 342 (27) (7.3) (40.7) (55.0) (61.7) 908 299
FTSE Small Cap 291 (15) (4.8) (38.4) (54.9) (66.5) 867 257

Transactions: YTD*
STI (bn) 63.3
FTSE Mid Cap (bn) 43.6
FTSE Small Cap (bn) 58.0
Source: Bloomberg
* Start 10 Jan 08

PERFORMANCE REVIEW
Relative Performance - Small cap picks vs FSTS & FSTM
Last quarter, in particular October, saw global equity indices 1.2
experience the worst fall in recent history, with the impact of
1.0
the global credit crisis deepening spurring the collapse of
more financial institutions. Concerted efforts by global 0.8

central banks to cut interest rates and to roll out economic 0.6
stimulus packages managed to prevent the market from free
0.4
falling. However, sentiment remained cautious.
0.2
Small cap stocks were hit harder, as a result of a flight to
0.0
quality. Against this backdrop, our small cap stock picks Sep-08 Oct-08 Nov-08
were not spared. Our small cap portfolio fell 32.7% Q-o-Q Celestial Ezra Pan United
on a price-weighted basis, vs 38.4% and 40.7% drop in the Parkway Life REIT FSTS FSTM

FS Small Cap Index (FSTS) and FS Mid Cap Index (FSTM) Source: Bloomberg, DBS Vickers
respectively.
STI vs FS Mid and Small Cap
Among our four picks, both Ezra and Celestial STI FTSE Small and
4,000 1000
mid Cap
underperformed the FSTS and FSTM most of the time. Ezra
900
was hit by falling oil prices and concerns about funding for 3,500
800
its high capex needs while margins for Celestial were
affected by high raw materials. High dividend yield stocks 3,000 700

Parkway Life REIT and Pan United Corp, outperformed the 600
market during the 3-month period. 2,500
500

400
2,000
300

1,500 200
J an-08 Mar-08 J un-08 Aug-08 Nov -08

FS STI FTSE Small Cap FTSE Mid Cap

Source: Bloomberg, DBS Vickers

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Market Focus
Small/Mid Cap Strategy

Average daily turnover volume eased from above 1.2bn to FTSE Volume Traded (mil shares)
around the 1bn mark shortly after the market recovered 3,000 m 50%
from its low in end October as sentiment remained cautious. 45%
Turnover for mid cap stocks accounted for an average of 2,500 40%
20% of total volume in 4Q08 while small cap stocks 35%

accounted for an average of 17% during the same period. 2,000 30%
25%
1,500 20%
15%
1,000 10%
5%
500 0%
J an-08 Mar-08 J un-08 Sep-08 Nov-08

Total V olume (LHS)


FTSE Small Cap V ol vs Tot V ol % (RHS)
FTSE Mid Cap V ol vs Tot V ol % (RHS)

Source: Bloomberg, DBS Vickers

GROWTH AND VALUATION

Growth and Valuation – Large Caps vs Small / Mid Caps


PE (x) Earnings Growth (%)
2007 2008F 2009F 2007 2008F 2009F
Basic Materials 22.5 6.1 3.3 -41% 267% 86%
Consumer Goods 19.9 7.7 11.6 2% 159% -34%
Consumer Services 8.1 10.3 10.9 21% -22% -5%
Financials 8.4 8.5 9.2 20% -2% -7%
Health Care 15.3 15.7 14.8 35% -3% 6%
Industrials 7.5 7.8 8.6 35% -3% -9%
Oil & Gas 2.3 4.9 5.1 79% -54% -4%
Real Estate 10.5 9.8 9.3 48% 8% 5%
REITS 10.5 9.1 9.3 27% 15% -2%
Technology 3.7 19.2 (7.7) 34% -81% -350%
Telecommunications 10.9 12.4 12.1 3% -12% 3%
Large Caps 9.2 9.2 10.1 21% -1% -8%

Basic Materials 5.2 4.6 4.4 47% 13% 4%


Consumer Goods 4.8 4.3 4.1 61% 12% 4%
Consumer Services 14.3 14.0 12.4 99% 2% 13%
Financials 4.5 4.0 3.7 128% 10% 9%
Health Care 11.8 11.3 9.9 36% 4% 14%
Industrials 7.0 6.0 5.8 99% 17% 2%
Oil & Gas 5.6 3.6 3.4 24% 54% 7%
Real Estate 4.8 6.7 5.0 48% -29% 34%
REITS 13.7 7.9 7.7 64% 74% 2%
Technology 5.0 5.8 7.5 169% -13% -23%
Telecommunications 6.0 6.3 7.8 -10% -5% -19%
Small / Mid Caps 6.3 5.9 5.5 63% 6% 9%
DBSV Universe 8.7 8.7 9.2 26% 0% -5%
Small Cap Ex Pty & Fin 6.0 5.3 5.2 70% 14% 2%

Small vs Large Caps -32% -36% -46%


Small Caps Ex Pty v Large Caps -34% -42% -48%
Source: DBS Vickers

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Market Focus
Small/Mid Cap Strategy

Market de-rated further in 4Q08. Our small/mid caps FY08 package) and SP Chemicals (takeover offer). Healthcare was
and FY09 PE declined to 6.0x and 5.5x as at end 4Q08 from generally more defensive in the down market.
7.9x and 6.2x respectively when compared to the previous
quarter. Small/mid caps continue to trade at much lower
valuation multiples compared to large caps, which are Small/Mid Cap Sector Performance (Sorted in ascending
trading at 9.5x FY08 and 10.2x FY09. Further earnings order on 3-month performance)
downgrades reduced growth to 6% FY08 and 9% FY09, Chng Chng Chng Chng
much lower than the 10% FY08 and 29% FY09 during 3Q. 1m 3m 6m 12m
Nevertheless, the revised earnings growth for small/mid caps Oil & Gas -3.5 -53.2 -72.3 -77.7
are still much better than zero growth for large caps in FY08 REITS -11.8 -47.2 -59.5 -65.9
and negative 7% growth in FY09. Real Estate -3.0 -47.0 -63.5 -76.9
Industrials -6.9 -43.4 -56.4 -64.8
Oil & Gas and Financials the worst hit. Oil & Gas, REITs and Total -4.5 -41.9 -58.9 -69.6
Real Estate were the worst hit sectors in 4Q08. Oil & Gas Financials -11.3 -40.1 -60.3 -67.8
sector eased 52.8% on a 3-mth basis on the back of more Telecommunications -9.5 -39.7 -48.6 -47.9
than 50% fall in oil prices and concerns of order Technology -12.3 -38.2 -51.5 -61.5
cancellations. Stocks like Jaya, Swiber and ASL Marine were Consumer Services 8.5 -33.8 -54.4 -61.0
among the top 20 most oversold stocks. REITS and Shipping Consumer Goods 1.7 -32.1 -54.8 -67.3
Trusts were hit by fears about re-financing issues arisingamid Health Care 6.6 -30.0 -44.1 -49.4
the current credit crisis. 35% of the most oversold stocks Basic Materials 0.7 -9.0 -44.4 -66.2
featured here are Shipping Trusts and REITS. Basic Materials’ Source: DBS Vickers
performance was skewed by Midas (beneficiary of stimulus

Small/Mid Cap 20 most oversold stocks in the past 3 months


Pric e/ Div
Mkt Pric e T arget BV Y ld Share Pric e
Company Cap (S$) Pric e % PE ( x ) (x ) (%) Perf ormanc e ( % )
(S$m) 12- Dec (S$) Upside Rc md 08F 09F 08F 08F 3M 6M 12M

J ay a Hldgs 227 0.30 0.23 -22% FV 1.5x 2.7x 0.5x 44.1% (73) (82) (83)
Asia Env ironment 45 0.11 0.10 -3% FV 4.2x 6.3x 0.3x 6.7% (64) (78) (88)
F rasers Commercial Trust 171 0.24 0.31 30% H 6.3x 8.0x 0.2x 24.5% (64) (71) (73)
Pacific Shipping Trust 119 US$ 0.14 US$0.52 271% B 3.3x 3.8x 0.3x 30.6% (63) (66) (67)
Rickmers Maritime 145 0.40 0.63 59% H 5.4x 5.8x 0.3x 32.2% (62) (65) (69)
Epure International 271 0.21 0.34 60% B 5.0x 4.2x 0.9x 0.0% (61) (58) (70)
Bany an Tree 305 0.40 0.37 -8% FV 12.8x 14.2x 0.5x 3.1% (60) (74) (78)
Swiber Hldgs 231 0.55 1.00 83% B 3.3x 2.2x 0.6x 0.0% (59) (79) (84)
Mapletree Logistics Trust 611 0.32 0.57 82% B 4.6x 5.9x 0.4x 22.4% (57) (65) (71)
CSE Global 204 0.40 0.80 100% B 4.0x 4.0x 1.3x 11.3% (56) (63) (68)
ASL Marine 133 0.44 0.84 91% B 2.6x 2.5x 0.6x 9.1% (55) (63) (71)
F irst Ship Lease 253 0.51 1.65 227% B 25.4x 93.7x 0.4x 33.9% (54) (58) (61)
China Sky Chemical F ibre 232 0.29 0.35 25% H 2.1x 2.3x 0.3x 7.3% (54) (68) (85)
Silv erlake Axis 112 0.10 0.13 30% FV 2.5x 6.6x 1.6x 18.6% (53) (70) (82)
Asia Enterprises 49 0.18 0.10 -43% FV 2.1x 1.9x 0.4x 18.8% (53) (57) (62)
Global Testing Corp 33 0.04 0.05 47% FV 8.2x nm 0.2x 0.0% (53) (65) (81)
CSM 470 0.19 0.38 105% H nm nm 0.2x 0.0% (53) (77) (82)
Tat Hong 296 0.60 0.75 26% B 3.3x 3.9x 0.8x 9.8% (52) (71) (81)
Suntec REIT 999 0.65 0.88 35% H 8.8x 7.4x 0.3x 15.8% (51) (58) (62)
K-Reit 392 0.60 0.93 55% H 18.4x 20.1x 0.2x 16.7% (51) (58) (72)

Source: DBS Vickers

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Market Focus
Small/Mid Cap Strategy

STRATEGY/THEMES AND STOCK PICKS susceptible to the economic slowdown compared to high-
end consumables. Hongxing offers good value at current
A Bear market rally Just as bull markets consolidate for value as stock is backed by 17Scts net cash per share and
breathers, so do counter-trend rallies interrupt bear markets. offering 16.5% EPS CAGR over FY09 and FY10.
As stocks reeled from a massive sell off across the board (2) Beneficiary of China’s massive USD583bil stimulus plan.
during 4Q08, there is optimism that stock prices have The recently announced stimulus package include plans for
touched a temporary floor following the US government’s environmental protection that could be beneficial for waste
efforts to save big corporations such as Citigroup and US and water treatment companies. Our second pick is leading
auto manufacturers, global government’s concerted efforts water and wastewater treatment company Epure. The
to pump prime their respective economies and unfreeze company has a strong net cash of 14cts/share, and is in a
credit markets (e.g. the USD 700bil bailout plan, China’s strong financial position which enables it to finance BOT
USD583bil economic stimulus and Singapore’s SGD2.3bil projects and future working capital through internally
stimulus plan to encourage bank to give credit). generated funds. Current valuation is compelling at 4.7x
Going ahead, investors can look forward to year-end FY09 PER.
window dressing activities and Singapore’s budget (3) Rebound in oil price lifts oversold O&M stocks Oil price
scheduled on January 22nd. , US President elect Obama’s has fallen nearly 70% since peaking out at USD147pbl. Our
pledge to revive the economy and create jobs should average oil price assumption for 2009 is USD60pbl, which is
continue to see bargain hunting on minor dips ahead of his about 40% higher compared to current price. Our technical
swearing in ceremony on January 20th next year. analyst sees strong support for oil price at USD38-40pbl.
Despite near-term positives, we remain mindful of the on- Our picks are Ezra and ASL Marine. We view Ezra’s recent
going credit crisis and the vulnerability of small companies. announcement to review its orders for 5 multi-functional
As banks impose stricter lending criterions, we prefer to stay support vessels positively as it signals a preference towards
away from companies with high gearing and poor operating cash conservation, thus improving on its current net debt
cash flows. position even as growth continues to be underpinned by
Focus on strong balance sheet Thus, in addition to attractive long-term charter contracts. ASL Marine’s strong balance
PE valuations, we think a strong balance sheet is a must. Our sheet and good earnings visibility from its large shipbuilding
additional criterions are companies with net cash (or slight order book coupled with sustained strong demand for ship
net debt), an Altman’s Z-score (a formula for predicting repair and chartering services justifies the company as our
bankruptcy, the lower the score, the higher chance of next pick in the O&M sector. ASL also offers an attractive
bankruptcy) of at least 2.0 and good operating cash flows. dividend yield of c. 11%.
There should be no sharp increase in debtor’s turnover days. (4) Healthcare sector as defensive Our final pick is Raffles
(1) Beneficiary of China’s focus on domestic consumption Medical. Besides the defensive nature of its business, the
China Hongxing is expected to benefit from the Chinese company boasts of a strong operating cash flow and has a
government’s initiatives to focus on domestic consumption. strong net cash position that should increase from S$9mil as
Its sportswear products, which cater to mid-to-low end of Sept08 to S$16mil by end 2008. Its healthy balance sheet
consumers in 2nd and 3rd tier cities in China, are less will see it through this period of uncertainty. It is trading at
its historical low valuation of c. 10x PE
.
1Q09 Small/Mid Cap Stock Picks
FYE Mkt Price Target EV/EBITDA P/BV Div Yld ROE Val/Day
Company Cap (S$) Price % PE (x) (x) (x) (%) (%) 6m
(S$m) 12-Dec (S$) Upside Rcmd 08E 09F 08E 08E 08E 08E ($000s)

ASL Marine Jun 133 0.44 0.84 91 Buy 2.6 2.5 2.0 0.6 9.1 31 253
China Hongxing Dec 533 0.21 0.33 56 Buy 5.0 4.3 1.0 0.6 4.0 13 6,719
Epure International Dec 271 0.21 0.34 60 Buy 5.0 4.2 1.5 0.9 0.0 20 469
Ezra Holdings Aug 404 0.69 1.25 81 Buy 5.0 4.5 4.6 0.7 26.1 55 4,545
Raffles Medical Dec 334 0.645 0.76 17 Buy 11.6 10.1 7.5 1.5 3.9 14 226
Source: DBS Vickers

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Market Focus
Small/Mid Cap Strategy

DBSV 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 (0-15% total return over the next 12 months for small caps, 0-10% 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

DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson
(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and
Bloomberg (DBSR GO). For access, please contact your DBSV salesperson.

GENERAL DISCLOSURE/DISCLAIMER
This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers
Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This
report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by
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The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to
its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general
circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation
and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in
substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability
whatsoever for any direct or consequential loss arising from any use of this document 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. DBSVH is a wholly-
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have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform
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DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as
a manager or co-manager 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.

ANALYST CERTIFICATION
The research analyst 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 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 5
Jan 2009, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities
recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the securities
recommended in this report as of 31 Dec 2008
2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered
broker-dealer, beneficially own a total of 1% or more of any class of common equity securities of the Pacific Shipping
Trust as of 5 Jan 2008
3. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered
broker-dealer, may beneficially own a total of 5% or more of any class of common equity securities of Pacific Shipping
Trust as of 5 Jan 2009.
4. Compensation for investment banking services:
i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past
12 months, and within the next 3 months receive or intends to seek compensation for investment banking services
from the ASL Marine,Parkway Life REIT,Pacific Shipping Trust, Mapletree Logistics Trust, Silverlake Axis
ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in any

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Market Focus
Small/Mid Cap Strategy

investment banking transaction as a manager or co-manager 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.

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