Stock Picks

Indofood Agri Resources: Neutral (DMG, 31 Dec)
An update with management uncovers that Indofood's selling prices of cooking oil and fats in Indonesia has been revised downwards by 10-15% on average, due to the steep decline of crude palm oil (CPO) price since its highs in mid July. We have adjusted our FY09 valuations to take into account a 10% decline in margarine's and a 15% decline in cooking oil's selling prices, from 9M08 average selling prices. Management has said that it's maintaining its target to expand oil palm planted area to 250,000 ha by end 2010. Assuming no new plantings were carried out in 4Q08, this works out to approximately 38,000 ha of new plantings per year in 2009 and 2010. However, in view of the current credit tightening environment, management has also indicated that they are reviewing non-essential capital expenditure currently. We are maintaining our CPO price assumption of RM1,500/tonne for FY09 (CPO futures for Jan 09 delivery is RM1,675/tonne) and a 10% year-on-year CPO production. However, taking into account the reduction in selling prices for cooking oil and margarine, FY09 earnings has been revised downwards by 48% to IDR802b. Factoring in a P/E of 7x our FY09F earnings (7x being the average of 10-year historical low P/E valuation for Indonesian and Singapore listed plantation companies), we derive a new target price of S$0.51 (S$1.12 previously) and downgrade our call on the stock to neutral.

Cosco Corporation: Sell (DMG, 31 Dec)
Cosco Corporation (Cosco) has issued a profit guidance note stating that the financial year ending 2008 would show lower profits compared to 2007 due to provision for doubtful debts and higher material costs. Cosco would be making provisions for doubtful debts as the company has recently received requests for payment delays from several ship owners. We have previously expressed our concerns that a heavy concentration of bulk carrier newbuilds in its order backlogs are from smaller ship owners with weak balance sheets and poor financing means. In the wake of the credit crunch, these smaller ship owners may have difficulties financing the new ships as banks tightened the lending. Cosco is also experiencing higher material costs arising from steel procured during the boom times. We understand that procurement of steel is typically made six months prior to the start of construction of the vessels. Given that the management has previously guided that 40 bulk carriers are scheduled for delivery in 2009, we believe Cosco's current steel inventory cost is significantly higher than the market prices of steel today. We believe Cosco is fully incapable of passing the higher material costs to the customers, hence giving rise to lower margins. In addition, Cosco has rescheduled the delivery dates for seven 57.000 dwt bulk carriers after reaching an agreement with a European and Asian shipowner. While we opine that rescheduling of contract delivery dates would imply revenue recognition at later years, we believe this should provide a relief for Cosco as its yards are being developed at a slower pace than originally planned. While we have previously factored in 20% cancellation orders in our estimates, we are putting our earnings estimates under review pending further clarifications with the management.Meanwhile, we are maintaining our target price of S$0.68 and our SELL rating.

SMRT: Neutral (DMG, 30 Dec)
A recent poll of property analysts by The Business Times indicated that retail rents in Singapore's prime areas may decline by as much as 13% in 2009. The study indicated that rents for retailers in areas such as Orchard Road may fall between 5% and 13% and as much as 7% at suburban malls. Besides generating operating profit from its rail businesses, SMRT derives 20% of its operating profit from commercial space rental. For 2QFY09, SMRT recorded a 44.7% year-on-year surge in commercial space rental revenue to S$14.2m, following a 11.7% YoY increase in lettable space to 26,592 sqm. Looking ahead, we expect some earnings weakness coming from falling retail rents. SMRT leases out its retail space for 3-yr periods, and the rental rates are fixed at the onset of the rental period. For renewals that take place in 2009, we can expect lower rates than those renewed in 2008. SMRT remains NEUTRAL with a S$1.65 price target.

Jardine Cycle & Carriage: Neutral (DMG, 30 Dec)
Unit sales of motorcars declined 9.6% month-on-month in November. It sold 27,248 cars during the month, compared with 30,154 in October. This was better than its earlier estimate of 20,839 motorcars. However, Astra's market share improved to 59%, from 55% in October, despite the overall Indonesian motorcar market experiencing slower sales. The overall market recorded 46,122 units of motorcars being sold in November. This was 15.9% lower month-on-month. As for motorcycles, Astra recorded a 3.8% month-on-month increase to 230,544 units in November to increase its market share of the domestic motorcycle market from 43% in October to 47% in November. Its subsidiary, United Tractors announced that its sales of Komatsu vehicles fell to 200 units in November 2008, from 434 units a year ago. Despite that, sales of Komatsu vehicles rose from 3,281 units a year earlier to 4,204 units for the first 11 months of 2008. United Tractors had earlier announced that it may not be able to hit its target of 4,750 units for 2008. We are maintaining our NEUTRAL recommendation for the stock with a target price of S$11.18. We have an estimate earnings of US$462.6m (EPS: US$1.15) for FY08 and US$474.4m (EPS: US$1.12) for FY09.

ST Engineering: Buy (DMG, 26 Dec)
ST Engineering's Land Systems unit ST Kinetics landed two contracts from the UK Ministry of Defence (MOD) last week, totaling over S$400m. The first is a £150m (S$330m) deal for the supply of Bronco All Terrain Tracked Carriers (ATTC). Known as "WARTHOG" by the MOD, it is expected to give an increase in protection against roadside bombs and is used for Urgent Operational Requirement (UOR). The Bronco is said to deliver increases in range, payload and internal capacity over existing vehicles currently being deployed in Afghanistan. The deliveries will commence in 3Q09, with the bulk to be delivered in 2010. The other contract involves the supply of 40mm High Velocity High Explosive Dual Purpose (HV HEDP) and High Velocity Flash & Bang (HV F&B) rounds ammunition worth £35m (S$77.2m). This is a repeat of the S$42.5m HV HEDP 40mm munitions order made in Feb 08. Initial delivery is targeted to be in 3Q09 and be completed by 1H11. Both orders will not have an impact on the financials in the current year. We estimate earnings to grow 2.1% to S$514.2m in FY08 and 10.4% to S$567.7mm in FY09. At S$2.31, ST Engineering is trading at 13.5x FY08 and 12.2x FY09 earnings. It offers an attractive yield of 7.4% to 8.2% over the current two years. Maintain BUY.

Land Transport Sector: (DMG, 22 Dec)
      ♦ ComfortDelgro (BUY\Target S$1.63)
      ♦ SMRT (NEUTRAL\Target S$1.65)
WTI crude oil price averaged US$44/barrel in the first 18 days of Dec 08, one-third the Jun 08 peak level of US$134/barrel. Soft crude oil prices will translate to lower electricity expenses (for rail operations) and lower diesel costs (for bus operations). ComfortDelgro has partially hedged its fuel requirements till Jun 09. Hence, the recent sharp decline in crude oil price will only have a muted impact on its 1H09 earnings. But going ahead, we expect the earnings enhancement to be quite significant. SMRT has a 6-mth electricity contract till Mar 09 (the rate being 30% higher than the previous 6-mth contract). We therefore expect the benefits of lower electricity prices to only filter through in FY10. Our sensitivity analysis shows that a 10% fall in crude oil price (from our current base case of US$70/barrel for 2009 and US$63/barrel for 2010) will raise ComfortDelgro's FY09 net profit by 8.8% and SMRT's FY10 net profit by 5.7%. The greater sensitivity for ComfortDelgro is attributed to its greater dependence on land transport operations for its operating earnings, whereas SMRT derives 20% of its operating profit from commercial space rental (which is not sensitive to crude oil price changes).

China Sky Chemical Fibre: Hold (Phillip Securities, 22 Dec)
China Sky Chemical Fibre Co Limited is involved in the manufacture and sale of chemical fibres, mainly high-end nylon fibres, with a wide and diverse range of commercial applications ranging from high-end sportswear and casual wear to other consumer products. We initiate coverage on China Sky Fibre with a HOLD rating at a fair value estimate of S$0.35. This represents a potential upside of 18.6% from its last traded price of S$0.295. However, we are skeptical about the fibre sector and the poor equity market conditions due to the global economic slowdown.

Li Heng Chemical Fibre Technologies Limited: Hold (Phillip Securities, 22 Dec)
Li Heng Chemical Fibre Technologies Limited is principally engaged in the manufacture and sale of high-end nylon yarn products in the PRC. Their two production facilities in Changle City, Fujian Province, PRC, are strategically located amongst clusters of textile and garment manufacturing industries, which happen to be their main customers as well. We initiate coverage on LiHeng Chemical Fibre with a HOLD rating at a fair value estimate of S$0.325. From the last traded price of S$0.28, our target price shows a potential upside of 16.1% however, we have placed a HOLD call on the company on the back of a poor sector outlook coupled with weakening fibre demand due mainly to the global economic slowdown.

SGX: Sell (DMG, 19 Dec)
Average daily turnover (ADT) was S$0.96b for the first 11 trading days of Dec 08 for the Singapore Exchange (SGX). Though this is close to Nov 08's S$1.04b, it represents a sharp 31% decline from Oct 08's S$1.40b. The average value per share traded has also fallen from Oct 08's S$1.03 to Dec 08's S$0.86 – suggesting a shift towards trading of smaller cap stocks. However, we note that Dec is seasonally a month of weaker trading volumes due to the holiday season. Hence, despite the weakness in Dec, we are maintaining our FY09 and FY10 ADT assumptions of S$1.19b and S$1.24b respectively. After recording very strong futures trading volume of 6.47m and 6.84m in Sep and Oct 08 respectively, futures turnover fell to 4.44m in Nov 08, with a 1.69m month-on-month decline in Nikkei futures trading volume. We do not read this positively as derivatives clearing fees account for 29% of 1QFY09 overall revenue. SGX traded at mid-teens P/E in 2005, when FY05 ADT fell 14.5% year-on-year. We believe a fair P/E rating is 13x, factoring in the more severe decline this time round – we are assuming FY09 ADT to fall 47%. Our target price of S$3.95 is pegged to this 13x P/E rating. Based on the current price of S$5.40 (and applying a 13x P/E rating), the market is assuming a FY10 ADT of S$2.1b, which we feel is unachievable. Maintain SELL on SGX.

Singapore REITS: Neutral (DBS Group Research, 18 Dec)
An estimated one third of the S-REITS' total indebtedness of $4.9 billion is due to be rolled over in 2009. The tight credit market environment would mean that access to funding would be crucial, while increasing competition for funds would lead to an increase in cost of debt. Overall interest cost in the S-REIT sector would rise above 4% from the present 3.2%. For every 50 basis point hike in average interest cost, distribution per unit (DPU) would be eroded by 10% to 15%. Among S-REITS, those with gearing closer to the 50% loan-to-value mark and riskier sub-sectors such as office would have greater re-capitalisation possibilities. These include Frasers Commercial Trust with a current loan to asset ratio of about 49%. In the longer run, the higher-geared REITS such as CapitaMall Trust, Ascendas Reit (A-Reit) and CapitaCommercial Trust may look to strengthen their balance sheet when equity markets recover. Given that the headwinds from refinancing and re-capitalisaton rise as asset writedowns, particularly in the office segment, filter through, our strategy would be selective. In terms of large-cap stock picks, we prefer A-Reit for its long lease tenure. In the mid-cap sphere, we favour Parkway Life Reit and Frasers Centrepoint Trust with their resilient business model and attractive valuations.

Li Heng Chemical Fibre: Hold (Kim Eng, 18 Dec)
Li Heng's nylon yarn prices have also declined in tandem with raw material costs to about RMB21,000/ton, a 16% decline from November. We estimate single digit gross margins in 4Q08, given that Li Heng is still digesting the higher-priced raw materials purchased in 3Q08. Capacity utilization rates have held up in both October and November at around 90%. The construction of the polyamide chip plant is on track for trial production possibly by Jun'09. With cost benefits from vertical integration likely to be reaped only from FY10F, we are reducing our FY08F revenue and earnings estimates by 3% and 9% on expectations of a weaker 4Q mainly as a result of falling average selling prices (ASP). Chances are high that industrial demand in 2009 will continue to shrink and raw material prices is unlikely to be supported, leading to even lower product prices. Our gross margin estimates are lowered to 26% in FY09F from 27%, in line with the management's take on normalized industry margins. Measures such as increasing export tax rebates and lowering import taxes on raw materials by the Chinese authorities could mark the bottoming of industry profits in 2009. Our FY08/09F EPS estimates are 15% and 36% below the mean estimates. With possible downside to ASP, we believe further earnings downgrades by the market are highly likely. Meanwhile, we are lowering the target price to $0.31.

Pan Hong: Neutral (DMG, 17 Dec)
Pan Hong has attained a modest take-up rate of 41% for Huzhou Liyang Jingyuan (HLJ) Phase 2, a 150-unit residential project which it launched two weeks ago. A total of 61 units were transacted at an average selling price of RMB4,950 psm, slightly under our estimates of RMB5,000 psm. Assuming a breakeven price of RMB3,000 psm, they would contribute 41¢ share to NAV when completed and handed over in 2Q09. Despite the weakening sentiments surrounding China's real estate sector and deteriorating operating environment for property developers, Pan Hong was able to sell close to half of the project within a short period of time from the launch date. We view this positively, and attribute it to a confluence of factors, including Pan Hong's proven track record in Huzhou (having completed 7 projects here), the buyers' genuine owner-occupier profile, as well as the project's quality and good location. Of late, there has been a slew of government policies aimed at bolstering the role of the financial sector in supporting economic growth. At the same time, the Chinese government could be implementing more sector-specific policies in the near term. Any catalyst would have to rely on the rate at which the government's various policies hit the ground running coupled with a global recovery in real estate sentiments. Pan Hong does have a relatively strong balance sheet – current net gearing ratio of 0.33x and cash position of RMB111.9m. In light of the above, we maintain our NEUTRAL call for the stock with a target price of S$0.25.

Singapore Airlines: Buy (DBS Group Research, 16 Dec)
SIA's November operating stats showed that its passenger airline business continues to hold up well, as load factor was quite firm at 78.1%. Cargo continued to fare poorly with load factor declining by 4.2 percentage points (ppt) to 60.3% even as capacity was cut by 6.4%. We expect the demand situation to deteriorate further and we should also see capacity growth being curtailed and perhaps even being cut to hold up load factors. In summary, the passenger airline is starting to show signs of weakness, which is expected but numbers are still tracking above our expecations for now. Meanwhile, the substantial decline in fuel price recently (more than 60% from peak) should help mitigate lower demand (and load factor) for the Group's cargo business. We continue to like SIA for its strong balance sheet, attractive dividend yield and believe it can continue to remain fairly profitable even as demand drops. Trading below book of S$13, with net cash of over S$3 per share and a prospective dividend yield of 8.6%, we rate SIA a BUY with S$14 target price.

Parkway Holdings: Buy (DMG, 16 Dec)
Parkway has been able to execute its strategies in growing revenue intensity. In 9M08, it recorded a 5.9% year-on-year (yoy) increase in net revenue per adjusted patient day to S$1,850. Going forward, Parkway plans to focus more on complex cases that would generate more revenue. This would help to offset the expected lower hospital admissions due to the economic downturn. Its achievements in the medical field have given Parkway the edge over peers, to draw patients to its medical facilities. The group has also secured the 1.7ha Novena Terrace/Irrawaddy Road hospital site, with a bid of S$1.28b. The land parcel has been fully paid on 20 May 2008. This site can be developed into a 500-bed private hospital. The hospital is expected to be operationally ready in 2011 and Parkway would be in a good position to capture the influx of medical tourists. The group also operates hospitals and medical centres across the region, allowing it to draw foreign patients to its Singapore operations, and also contribute to earnings. Having a regional exposure also helps to boost Parkway's brand name. On top of that, with hospitals in the region, Parkway is also in a position to capture the portion of medical tourists who opt for treatments in the neighbouring countries. With a strong brand name and regional footprint, Parkway is positioned to draw patients to its medical facilities, even in the economic downturn. Parkway is a larger healthcare provider, compared with its peers, in terms of market capitalization and operations. Hence, we ascribe a PE of 13x for its healthcare services and hospital business. Based on our valuation, we arrive at a 12-month target price of S$1.45 for the counter.

Cambridge Industrial Trust (CIT): Buy (DMG, 16 Dec)
CIT has appointed Christopher Dale Calvert as the new CEO of Cambridge Industrial Trust Management (CITM), CIT's REIT manager. We think that the new appointment could signify CIT's intention to look into cross-border assets (including Australia and selected Asian countries) in the medium-long term, as well as further enhancing its Australian identity following the entrance of Oxley Capital Group and National Australia Bank as major stakeholders. On a separate note, CIT has agreed to the terms of an S$390.1m syndicated 3-yr term loan from RBS, HSBC and nabCapital (a division of National Australia Bank). With an effective annual interest rate of 6.6%, the loan will be used to refinance CIT's all existing debt facilities of S$490.0m, of which it has drawn S$369.2m. While the agreed interest rate is higher than our assumed estimates of 5.6% used in our last report on CIT, we believe this is reasonably lesser than what the market was pricing in, which we forecast to be in the range of 10 – 12%. Our last sensitivity analysis has shown that for every 0.5% increase in funding cost, DPU would head down by 0.22¢. Until the final facility documentation is agreed and loan drawdown, we are maintaining our DPU estimates and fair value. More importantly, as CIT is the REIT with the first major loan due for refinancing in 2009, we believe that this even could be a harbinger of better things to come for other REITs with major debt due in 2009. The removal of the refinancing overhang is music to the ears of existing unitholders, and we thus advise prospective investors to buy the stock on its relatively higher yield of 17 – 21% compared to the sector average of 13 – 14%. Maintain BUY at S$0.49.

Sembcorp Marine: Buy (DMG, 16 Dec)
Sembcorp Marine (SCM) has secured a long-term maintenance and refit contract from International Gas Transportation Company Limited (IGTC) to provide repairs, upgrades and other marine services for its fleet of LNG ships. This evergreen Favoured Customer Contract (FCC) is the second award from IGTC, following the clinch of a longevity contract for the life extension of IGTC's LNG vessels on Oct 21. With the signing of this evergreen FCC, six Venture-owned Moss-Rosenberg LNG carriers and one membrane LNG carrier would undergo major refits and regular maintenance in SCM's yards from 2009. This regular maintenance contract could minimize the element of uncertainty and facilitate a stable stream of repair revenue for SCM, especially so if the drastic slowdown in new rig orders contracts is to be a protracted one. As value of this contract is not material, we are maintaining our earnings forecast and target price of S$2.49 based on sum-of-the-part valuation:

Chartered Semiconductor: Hold (OCBC Research, 15 Dec)
Chartered Semiconductor has downgraded its 4Q08 guidance during its mid-quarter update weaker market conditions and customers' intent to keep inventories low. Our check of the actual global semicon sales compiled by World Semiconductor Trade Statistics Organization (WSTS) also revealed that the chip market fell by 10.4% year-on-year (yoy) in October to US$19.3b. While this decline contrasts significantly with an increase of 1.3% yoy in September's actual sales to US$26.3b, the dismal guidance by Chartered suggest that the semicon demand may have deteriorated much faster than expected. Following the dismal mid-quarter update and the pessimistic outlook given by industry watchers, we are again revising down our FY08-09 sales forecasts by 1.1-10.8%. In line with the market de-rating, we are also reducing our fair value from S$0.31 to S$0.17, based on 0.3x FY09F NTA (0.5x FY09F previously). While management has communicated aggressive cost-cutting measures to lower their breakeven utilization level to 75% (still likely to be the highest among its peers) by 4Q09, we are increasingly concerned about execution risks.

S-REIT: Neutral (OCBC Research, 12 Dec)
We generally think S-REITs are oversold. As capital appreciation-seekers abandon the sector en masse, we see a new 'REIT as value' story emerging. While we expect share price volatility to continue for these institutional favorites, value hunters have an opportunity to selectively pick up some good assets at what we think are really good valuations. We expect substantial declines in capital values and rentals in the office sector – but to a large extent unit prices already reflect these concerns. The impact of global events on the retail and industrial sectors has been slower to register in market consciousness. The industrial sector is quite leveraged as a whole and it may be too early to make the call that risks are fully priced in. Within our coverage universe, we have BUY ratings on Suntec REIT (fair value: S$0.90), CapitaMall Trust (fair value: S$1.94) and LMIR Trust (fair value: S$0.39).

Venture Corp: Buy (OCBC Research, 11 Dec)
Venture Corp was among one of the worst performers in November, down nearly 22% versus the FSSTI’s 3% fall, hit by a myriad of reasons. Key among them were its exclusion from the MSCI Singapore index, the persistent and unwanted concerns over its CDO exposure, lingering worries over its investment in DMX, as well as weakening electronics demand. As the outlook for its business remains mixed at best, we pencil in a further 15% decline in FY09 revenue and 27% slide in operating profit. In line with our lower FY09 estimates, our fair value drops from S$7.36 to S$6.06. But we remain confident of management's good track record of controlling cost, and believe Venture should ride out the storm with minimal collateral damage and emerge stronger in 2010..

Bright World Precision Machinery: Buy (OCBC Research, 11 Dec)
As the global economies slip into recession, we believe that capital equipment makers would be inevitably affected. Despite this, we continue to like Bright World for its feasible long-term prospects, sound fundamentals and healthy margins. China Machine Tool and Tool Builders Association (CMTBA) had in mid-November predicted that China's machine tool and tools industry would maintain a steady and fast growth of 25% in 2008, and that it would continue to be driven by strong demand for high-end and large heavy-duty machine tools going forward. Nevertheless, we ease our FY09 sales forecast by 5.7% to assume a drearier macro picture, which in turn yield a slightly lower fair value of S$0.40. However, we believe the Chinese government has the capacity to boost the domestic demand and stimulate the economy. Any potential stimulus tools employed in the future, should help to encourage technological spending and tame the deceleration pace.

Karin Technology: Buy (OCBC Research, 11 Dec)
Karin Technology had provided us with a rather encouraging business update recently, despite the tough economic environment. For 1Q09 (July-Sep 2008), we note that it has achieved similar revenue year-on-year. While its IT infrastructure segment has been experiencing weakness within the Financial Services Institution (FSI) sector, strong sales from other sectors have been able to cushion the slowdown. In face of the global economic crisis and severe credit conditions, Karin has also been stepping up its risk management process to maintain a healthy cash flow position. We continue to favor Karin for its sound management, proactive risk controls and proven track record. While we note that Karin may possibly face diminishing demand for components distribution in view of overall slowdown in hardware spending, we believe its well-diversified product mix and exposure to IT infrastructure are likely to help it weather through the economic slowdown. As such, we maintain our Buy call and S$0.18 fair value.

Valuetronics Holdings: Buy (OCBC Research, 11 Dec)
In line with the overall weakness in the global electronics market, we believe that EMS/ODM companies are likely to encounter slowdown in demand for their products. However, while demand specific to electronics marketplace is likely to soften as the end markets erode, the global contract manufacturing market is still expected to expand, according to iSuppli. Within the EMS/ODM space, we particularly like Valuetronics for its strong financial position (zero debt, strong cash hoard of HK$83m), healthy margins and strong customer base. Nevertheless, we also acknowledge that its operating environment is likely become more challenging, where its peers compete aggressively in a slower/smaller consumer electronics market. For its smaller customers, credit worthiness has also been a burden, as Valuetronics now has to screen new opportunities more carefully to determine their risk-return benefits. Despite this, we are keeping our BUY and S$0.17 fair value, as we believe VHL's proactive management and emphasis on design and development with customers will put the company in good stead to tide through the financial crisis.

Miyoshi Precision Limited: Hold (OCBC Research, 11 Dec)
In its latest results, Miyoshi Precision had already shown signs of weakness within its core business segments. Looking ahead, we believe that the financial crisis and weak global economic environment are likely to affect to its businesses unfavourably. With economies dipping into recession, industry watcher TrendFocus has projected consumer confidence and overall spending in 2009 are likely to be lower, thereby impacting PC and HDD sales. To mitigate these negative effects, Miyoshi Precision will continue to explore ways to strengthen its margins and diversify into new business opportunities/customer base through synergistic acquisitions and alliances. While we continue to view it positively, especially with its healthy operating cash flows, net cash position of S$17.8m and strong management, we are again easing our FY09-10 forecasts slightly by 3.4-4.9% to reflect a worsening market outlook and an impending IT slowdown. Despite our fair value remaining unchanged at S$0.08, our new valuation criteria has now called for a more stringent rating process. As such, we downgrade Miyoshi Precision to a Hold.

Z-OBEE Holdings: Hold (OCBC Research, 11 Dec)
Z-OBEE Holdings had recently delivered a set of disappointing 2Q09 results amid sluggish demand in PRC's mobile consumer market. Going into 2009, we believe that the market would continue to be weak and that a major recovery is unlikely. With the sub-prime issues and global financial crisis, mobile subscribers are expected to extend the life cycle of their existing mobile handsets and spend less on mobile products. In view of the deteriorating outlook, we have pared our FY09-10 estimates by 3.7% to 8.2% and lower our fair value to S$0.03. However, on a brighter note, China is still expected to expand its subscriber base at a rate of 7 million new subscribers annually, with the majority coming from the rural areas. This should sustain demand for lower-tier handsets, and in turn demand for Z-OBEE's products and services.

Food Empire Holdings: Buy (OCBC Research, 11 Dec)
Food Empire Holdings Ltd (FEH) was among the few companies that turned in better-than-expected results in 3Q08. Earnings grew by a steady 17.0% YoY to US$6.3m on the back of a 41.4% improvement in revenue to US$61.6m. Despite wild swings in commodity prices in 2008, it has been holding its fort well with gross profit margin hovering within the 46%-50% range (vs. 46%-47% in 2007). We attribute FEH's consistent performance to (i) its dominant market share in key markets Russia, Ukraine and Kazakhstan, (ii) successful branding which strengthens its pricing power, and (iii) its position as an affordable and convenient brand for the masses. While a global recession will inevitably weigh on consumer spending, we believe that the impact on FEH should be somewhat mitigated given the relatively recession-proof nature of its products (3-in-1 coffee, instant beverages, convenience food) Rather, its key challenge lies in forex volatility. The Russian Ruble and Ukrainian Hryvnia, both of which are not hedgeable, have depreciated sharply against the USD. This has effectively elevated the cost of its products, which has led its distributors to downsize their orders as a result. Moving into 2009, the continued strengthening of the USD could dampen the group's sales performance. FEH's balance sheet looks reasonably healthy with a modest net gearing of 8.1%. Two thirds of its debt, or US$12m, is short term in nature, but this is partially backed by its cash holding of US$8.1m. Management aims to reduce its inventory in 4Q08, and this could shore up its cash holdings. As such, refinancing risk is not a cause for concern in our view. FEH's receivable days rose in 3Q08, suggesting that the credit crunch could have weighed on its distributors' liquidity. While the company has not seen significant defaults so far, a prolonged credit drought could put its receivables at risk. FEH's 9M08 earnings have met 78% of our full year forecast, giving it a good headstart to its seasonally strong 4Q. Nevertheless, we are projecting a slight contraction in FY09 earnings in light of the macroeconomic uncertainty. Rolling over our valuation to FY09 and keeping our valuation parameter unchanged at 8x, our fair value estimate eases slightly to S$0.46 (previously S$0.48).

CapitaMall Trust: Buy (OCBC Research, 5 Dec)
Recent spate of downgrading of S-REITs' credit ratings reflects the cautious stance that rating agencies had taken on S-REITs and has also raised further concerns on their credit health. In May, rating agency Moody's confirmed CMT's A2 rating but revised its outlook to negative due to its weakened financial profile following the acquisition of Atrium@Orchard. We believe that the risk of credit rating downgrade is higher now given the current tight credit market and slowing retail rental rates. A downgrade could potentially raise CMT's cost of refinancing and affect its future distributions. In light of the worsening economic and job outlook, consumer spending could continue to slow down in 2009. As such, we are now taking a more conservative stance in our retail rental rate expectations and adjust our rental forecast from 0% to -5% per annum for FY09 and FY10. We remain optimistic that CMT should be able to refinance its near term borrowings, given its portfolio of quality assets, track record of good access to the debt market and backing of a strong sponsor, CapitaLand. However, to reflect the tight credit market conditions, we are now factoring a higher increase in borrowing costs for FY09, from our previous forecast of +60bp to +100bp now. Also factoring in our new retail rental rate expectations, our FY09 DPU forecast has been cut by 6.8%, from 16.2 S-cents to 15.1 S-cents. We are also ascribing a 15% discount (no discount ascribed previously) to our RNAV forecast in light of the challenging condition in the retail market. As such, our fair value of CMT has now been lowered from S$2.57 to S$1.94. As upside to share price is still 35.7%, we maintain our Buy rating on CMT.

CitySpring Infrastructure Trust: Hold (OCBC Research, 5 Dec)
CitySpring's assets are fairly defensive, enjoying either a monopolistic market position or strategic consideration. City Gas earns regulated tariffs and benefits from fairly inelastic demand. Basslink and SingSpring earn availability-based revenues. Infrastructure entities typically enjoy stable, predictable and non-cyclical cash flows. However, the sector has suffered a major crisis of confidence, largely because of the aggressive use of leverage. For instance, two Singapore-listed infrastructure entities, Babcock & Brown Global Investments and the Macquarie International Infrastructure Fund have announced recently that they are temporarily suspending or reducing distributions and will divert cash income to pay down debt instead. CitySpring has no near-term refinancing risks and Temasek Holdings is a strong sponsor. Nevertheless, we remain concerned about the level of debt on CitySpring's books. Basslink, CitySpring's S$1.5b acquisition, is currently 100% debt financed. We feel this is not a long-term solution, and an equity injection is inevitable at some point. We expect negative sentiment to continue to cast a pall over the infrastructure sector in 2009 as funds de-leverage their balance sheets in line with the global credit cycle. Maintain HOLD with S$0.57 fair value.

AusGroup Ltd: Hold (OCBC Research, 5 Dec)
AusGroup has announced that a client had suspended a A$21m contract in the mineral resources sector. It has already completed 42% of this particular contract to date, and the company's management has said that AusGroup will be able to recover all costs incurred so far. The company also said the suspension will impact its 3Q and 4Q results as the contract was expected to be completed in the current financial year. The project suspension is, in our view, symptomatic of a larger problem that we have highlighted in recent reports. The energy and mineral resources sectors have been hit by global economic woes, difficult credit conditions, and price collapses. Consequently, we suspect that capital expenditure in these industries may not materialize according to plan. Major AusGroup customers including Rio Tinto and Alcoa have already announced that they are either reviewing or delaying investment plans. Across the board, we expect the focus to be on cash preservation at the expense of capital expenditure. This has already impacted AusGroup's current order book, and more worryingly, casts a pall on the company's future earnings. With limited visibility, we have decided to err on the side of caution. We are now assuming a 20% cancellation in secured orders. Our FY09F revenue estimate falls to A$358m, or a 5.5% decline. Additionally, we had previously estimated flat growth in FY10 but now estimate a 15% contraction in revenue to A$304m. We are lowering our valuation parameter to 5x FY09F earnings from 6x previously. Our fair value estimate drops from S$0.24 to S$0.17 (15% downside). Maintain HOLD.

Neptune Orient Lines: Sell (Phillip Securities, 5 Dec )
We are anticipating NOL to continue to face difficulties in 2009 after it mentions that it expects an operating loss for 4Q 2008. The global economy is facing financial problems and the slowdown in global trade will affect the businesses of NOL. This will affect the shipping volumes and the rates that NOL can bill its customers. Given the uncertainties, we expect a small profit of US$2m for NOL in 2009. Nevertheless, we expect the global economy to pick up in 2010 and NOL is likely to be a beneficiary of the increase in global imports and exports. We expect shipping volumes to increase, and rates to stabilise and improve from 2010 onwards. As a result, we expect the profits of NOL to increase beginning from 2010.
We believe that NOL is faced with the slowdown in the global economy. It has responded to the current crisis by reducing capacity on some of its routes from October to reduce operating costs. Moreover, it is cutting its workforce by 1,000 positions. At the same time, it is expecting an operating loss in 4Q 2008. As a result, we have a sell rating on the stock and we are valuing it at 0.35 time book value. This gives us a fair value of S$0.96.

Cosco Corporation: Sell (DMG, 4 Dec)
Cosco has announced that its 51% owned subsidiary, Cosco Shipyard, has entered into a variation agreement for five units of its 57,000 dwt bulk carrier newbuilds. These five vessels were previously contracted to build at US$39m each, with expected deliveries dates between May 2009 and March 2010. This variation agreement includes cancellation of two vessels and deliveries rescheduling of the three remaining bulk carriers. The cancellation would be conditional upon an advance payment of up to 80% of the total contract price (of the remaining three bulk carriers) received from the shipowner. We are keeping our forecasts intact as we have previously factored in 20% cancellation orders in our estimates. Our target price remains at S$0.68. We believe Cosco's share price would be negatively affected due to concerns over further possible cancellations in the near term.

Sinotel Technologies: Buy (DMG, 4 Dec)
Sinotel has secured eight new contracts to provide Wireless Network Optimization Solutions to the authorized vendor of China Mobile's Hebei branch, Hebei Tianyu. These eight new contracts are worth RMB40.5m. This brings its total order book to RMB338m as at November 2008. These new contracts are expected to be delivered in FY09, and would have a positive impact on Sinotel's performance in FY09. This is the second batch of contracts Sinotel has secured from Hebei Tianyu. In January 2008, Sinotel secured four contracts from Hebei Tianyu, worth RMB52.8m. With these new contracts, Sinotel would be able to penetrate further into Hebei and strengthen its presence there.This would place Sinotel in a good position, to secure future telecommunication projects in Hebei. With the new contract wins, we are raising our earnings estimate for FY09 by 9%. Our earnings estimate for FY09 is RMB133.4m (EPS: RMB 47.6 ¢), up from RMB122.4m previously. We are maintaining our FY08 earnings estimate of RMB109.4m (EPS: 39.1 ¢). At the current price of S$0.095, Sinotel is trading at 0.9x forward P/E or 0.2x P/B. Pegging to its peers, we maintain our target price of S$0.20 for Sinotel, based on 2.0x FY09 P/E.

Noble Group Ltd: Buy (OCBC Research, 3 Dec)
Noble has proven its ability to manoeuvre the rapidly changing operating environment. Earnings have been growing relentlessly regardless of booms and busts of the commodity cycle in 2008. Already on track for record earnings in FY08, the group's profit will get an additional boost from its disposal of Portman in 4Q08, which could bump up its FY08 earnings considerably by 11%. While Noble will not be spared from the deteriorating global macroeconomic outlook, we take comfort in the group's well-diversified business model, which we believe will help to mitigate its overall risk. We are rolling over our valuation to FY09 and trim our valuation parameter to 8x (from 10x), bringing our fair value estimate to S$1.83 (from S$2.33). Nevertheless, we believe that Noble will be able to ride out the ongoing uncertainty, and as such maintain our BUY rating on the stock.

Straits Asia Resources: Buy (OCBC Research, 3 Dec)
SAR delivered a strong 345% year-on-year (yoy) surge in its 9M08 earnings to US$84.8m thanks to rising coal prices and higher production volumes, and it is on track to bring in another year of record profits in FY09. Order book visibility stretches comfortably into 2009 with a 62% increase in average selling prices (ASP). Coupled with declining production cost, we project that FY09 earnings could surge 168% on higher margins. While the bulk of SAR's FY09 contracts have been committed, its residual FY09 contracts, as well as contracts in FY10 and beyond, remain exposed to volatile energy prices. In light of tumbling oil prices, the group's record high FY09 ASP is not likely to be sustainable. We have taken this into account and assumed a conservative US$63/ton ASP for 2010 and beyond. At 1.8x FY09 PER with an anticipated yield of 12.3%, valuations are compelling. As such, our BUY rating and S$1.35 fair value estimate remains intact.

Golden Agri: Buy (OCBC Research, 3 Dec)
Golden Agri-Resources should benefit from a more cautiously optimistic outlook for the sector in 2009. Crude plam oil (CPO) prices appeared to have hit a near-term bottom around US$400-450/ton, following measures announced by both the Indonesian and Malaysian governments to help the sector. Nevertheless, recognising that the whole economic situation is still very uncertain and fluid, management intends to keep to a more prudent stance – this includes moderating its 2009 planting program, focusing on cost efficiency programs, and taking a conservative capital management approach to preserve cash to support its operation. As we have already incorporated a bear case scenario in our previous earnings revision, we see no need to revisit our numbers at this moment. As such, our fair value estimate remains at S$0.30 (6x FY09F PER).

Anwell Technologies: Neutral (DMG, 3 Dec)
3Q08 revenue increased 20.7% to HK$234.1m mainly attributed to Anwell's newly acquired disc manufacturing business although the company sank into the red with a HK$10.3m loss as higher depreciation charges and interest expenses hit bottomline hard. Correspondingly, a HK$11.7m net loss was also seen in 9M08 due to the dismal 3Q08 numbers. A sizable HK$38.4m depreciation charge mainly attributed to the purchase of machinery and land for its solar business was one of the reasons why Anwell was in the red. Going forward, we do not expect such charges to ease significantly, given the company's bold expansion efforts into the solar front. Management revealed that its equipment business was in a loss-making position in 3Q08, and is further expecting a dismal outlook as it foresees that its customers would be less inclined to invest in capex given the credit crunch. Net gearing for 3Q08 stood at 27.9% while interest from borrowings at a hefty HK$7.6m took a heavy toll on the company's bottomline. Should Anwell fail to reduce its debt level, we believe that net earnings may continue to be affected going forward. Anwell currently trades at 0.14x FY08 P/B which is relatively cheaper than the average of its SGX-listed peers at 0.3x P/B. Nevertheless, we have chosen to be cautious and are applying a 50% discount to the industry average in light of the negative stock market conditions. With our target price of S$0.016 (from S$0.03 previously) pegged to 0.15x P/B, we therefore upgrade our recommendation to NEUTRAL.

Kian Ann Engineering: Sell (DMG, 2 Dec)
Kian Ann Engineering Ltd (KA) is an independent distributor of heavy machinery and diesel engine parts. Its products are used for excavators, bulldozers, trucks, trailers, power generation sets and marine engines. It carries more than 1.3m item lines from over 270 brands including product lines from Caterpillar, Komatsu, Kobelco, Sumitomo, Hyundai, Mercedes Benz and Volvo. The company's revenues are geographically diversified with clients from Singapore, Malaysia, Indonesia, Thailand, Laos, Myanmar, Japan, Korea, China, Europe, Africa, Russia and North America. In addition, Kian Ann caters to various industries such as mining, construction, forestry, infrastructure and marine. Such a diversified base enables the group to have a more stable performance at different points of the economic cycle. Kian Ann's net gearing remains a comfortable 16%. However, there's a possibility of gross profit margins coming under pressure as may negotiate for lower average selling prices (ASP) during recessionary times. We project revenue in FY09 to rise 5% to S$157.7m, while earnings to decline 24.1% to S$8.4m. Due to KA's relatively constant and stable dividend payouts, we are using the dividend discount model to value the company. We are assuming a long term, terminal growth rate of 4%, in line with Singapore's GDP growth under moderate conditions. We have arrived at a target price of S$0.13 for Kian Ann. In view of the impact of the recession on the industries that KA is servicing, we initiate coverage with a sell recommendation.

City Developments: Neutral (DMG, 1 Dec)
The KRW 468.6b sale of Millennium Seoul Hilton by City Developments (CDL) 53.5%-owned Millennium & Copthorne Hotels plc (M & C) to Kangho AMC Co. (Kangho) has been aborted, as Kangho was not able to finalise its financing arrangements. Although this means that M & C will not able to book in a pre-tax gain of £155.0m for its 4Q08 financials, it would be recognising an additional non-refundable deposit of KRW 1.0b paid at the end of Oct 08, in addition to keeping KRW 58b worth of forfeited nonrefundable deposits paid by Kangho on 24 Jun 08. Just last week, we witnessed the collapse of CapitaLand's sale of its 30% stake in Menara Citibank. This aborted sale bears further testament to the continued credit squeeze. For companies with unimpressive balance sheets and operating performance (Kangho sat on a debt of 241b won and generated a net loss of 15.4b won in 2007), the difficulty to obtain finance is even higher. Looking forward, it is unsurprising to find continued strains within the asset monetisation environment, from our view.
Our latest end-FY09 RNAV has assumed the completion of this transaction, which would see CDL recognising its 53.5% share of the pre-tax gain. In light of the sale's abortion, we have now removed this gain, as well as accounting for the additional non-refundable deposit. Our base case end-FY09 RNAV now falls to S$10.97 (previously S$11.05). Sticking to our previously assumed 50% discount, our RNAV-pegged fair value for CDL inches lower to S$5.49 (previously S$5.53).