SGX IPO Writeups

Oriental Century

2006-05-27T01:32:00.000-07:00

Description
Provider of education management services to educational institutions in the PRC. Oriental Century manages Oriental Pearl College (does not own it), invested in and manages Nanchang No.3-Oriental Pearl High School (own school) and is in the process of establishing Humen Oriental Pearl Kindergarten (own school).

Offer
33.28m new shares at 35 cents each. 1.28m public offer shares and 32m placement shares. Enlarged share capital is 166.177m shares.

Financials
see table below

Risks
1. Cooperative agreement with government operated high schools may be terminated in event of breach or may not be renewed on favourable terms due to intense competition.

2. A bigger risk is that its proposed kindergarten in Humen may have to be relocated which would be a blow to the Group since the location of the kindergarten is very important (close proximity to affluent families).

Comments
STAG (personal opinion only).

Oriental Century has effectively only 2 schools and is aiming to expand via establishing co-branded senior high schools (similar to its Nanchang High School) and setting up a network of kindergartens in afluent regions. Pre-IPO investors were vested at 17.63 cents.

Oriental Century earns management and school fees. Management fees - fixed/variable component are collected in arrears on a monthly basis whereas management fees - retainer are collected annually. We recognise revenue from management fees progressively over the duration of the study period or semester. Retainer fees are relatively insignificant while management fees collected in arrears are subjected to credit risk. For school fees, they school fees are collected upfront before each academic semester and are recognised as revenue progressively over the duration of the academic semester so no credit risk here.

Currently, the Group has not increased the school fees at Nanchang High School since inception, with the increasing intake at these schools, costs will rise and this would affect gross margins. The school fees charged are under review currently. Overall, expect overall margins to continue declining as the Other Education segment, which has lower profit margins, contributes increasingly to revenues.

Fair value is pegged at 11x forward 2006 P/E (pegged at historical 2004 P/E) or $0.54. Education industry has high P/Es (historical industry average according to Reuters is 25x) but that largely applies for large capitalised education stocks, for Oriental Century, it is a rather small player and should be pegged at a significant discount.

Hengxin Technology

2006-05-07T06:54:00.000-07:00

Description
Research, design, development, manufacture and sale of communications and technological products, comprising RF coaxial cable series for mobile communications and other telecommunications equipment.

Offer
84m new shares at 25 cents each. 5m public offer shares and 79m placement shares. Enlarged share capital is 336m shares.

Financials
See above table

Risks
Rising raw materials costs (in particular copper) will erode margins, copper forms 63.8% of cost of sales in FY04 and 53.8% in 1H FY05. Copper has risen about 14% in 4Q 05 and has risen a further 65% for YTD 2006 from Dec 05. However, management has clarified that they do not expect this to have a signficant impact on their financial performance as they are able to pass on price increases to customers and able to lock-in some of its purchase prices of copper with the suppliers based on product prices quoted to the customers.

Comments
STAG (personal opinion only).

The uncertainty over the impact of copper prices on its gross profit margin is a concern. The big jump in copper prices was only seen in 2006. Improving capacity utilisation resulting in greater economies of scale will help to improve gross profit margins and negate some of the impact of the rise in copper prices. Net margins were higher than in FY04 due to tax exemption for FY05 and FY06.

Production capacity for RF coaxial cables will be increased by 20% in 1H FY06. Manaagement is confident about its prospects especially with telecommunications operators needing to invest heavily for 3G network. Management also aims to provide customers with “one-stop value-added manufacturing services” through the expansion of product range to include accessories such as connectors and antennas.

Fair value is pegged at 8x forward 2006 P/E or $0.35, representing a 38% upside from IPO price.

Jiutian Chemical

2006-04-30T19:01:00.000-07:00

Description
Has 3 main business divisions:
a) Methanol division (manufacture of pesticides, insecticides, medicine and other pharmaceutical products, and other chemicals)

b) DIMETHYLFORMAMIDE (DMF) division (DMF for specialist applications within the pharmaceutical and electronics industries and byproduct Methylamine for agricultural chemicals; medicine and fuel)

c) Gas division (produces consumable carbon dioxide and oxygen for fire extinguishers; metal welding and cutting etc)

Offer
54.938m new shares and 39.991 vendor shares at 29 cents each. 3m public offer shares and 91.929m placement shares. Enlarged share capital is 229.9288m shares.

Financials
See table below

Risks
1. Reliance on Anhua for supply of raw materials (will face escalating costs if Anhua fails to deliver on its supply agreement).

2. Volatile prices of its products may affect revenues and net profits, however, over the years, prices have been showing a gradual increasing trend.

Comments
SUBSCRIBE (personal opinion only).

Another IPO that is priced so cheaply, even cheaper than Bright World in my opinion considering its growth prospects.

Monopoly like status for its products: Being the only DMF producer in Henan province and to the best of our Directors’ knowledge and belief, we are the only significant DMF producer within 500km from our location (based on available road and railway networks), the Group commands market leadership in its main product, hence high margins are sustainable and costs can be passed on easily to consumers given its high bargaining power.

Unlike many manufacturers, Jiutian has entered into a 20-year supply agreement with Anhua, an established state-owned enterprise in the PRC for the supply of our essential raw materials and is thus assured with a stable supply of raw materials at competitive prices. Capped price mechanism for three years from 2006 to 2008 will ensure stable margins.

Successful completion of DMF expansion plans will triple current output, lifting our turnover and profits substantially from 2007. After expansion, Jiutian will have 90,000 tonnes of DMF per annum (“p.a”). and 90,000 tonnes of methylamine p.a. This is to be completed by the second quarter of 2007. In addition, Jiutian will also increase its capacity for consumable carbon dioxide by 10 times (from 3,000 tonnes p.a. to 30,000 tonnes) by the first half of 2006.

2H FY05 will be significantly better than 1H FY05 due to additional capacity of DMF in May 2005 (50% increase - 30,000 tonnes vs 20,000 tonnes). FY06 will see full impact of the increase in additional capacity of DMF (as mentioned above) as well as the impact of 10x increase in carbon dioxide production capacity (less than optimal utilisation rates have been factored into account for all increases in capacity).

FY07 and FY08 will be the years of growth where there will be a tripling of DMF capacity by end 1H FY06. Full impact of this additional capacity to be felt in FY08. Jiutian will see compound annual growth of 71% and 59% in revenues and net profits from FY06 to FY08 respectively.

Dividend policy is expected to be 20% of net profits, yielding a very decent 3.4% at IPO price for FY05. No tax for FY2005 and FY2006, 15% effective tax rate for FY2007 to FY2009 (reflected in above figures).

Fair values are as follows:
Immediate fair value of 90 cents (10x forward 2006 P/E), $1.08 (12 month target based on 9x forward 2007 P/E) and $1.58 (24 month target based on 8x forward 2008 P/E).

China Precision Technology

2006-04-30T05:32:00.000-07:00

Important Disclosure
Please note that I have vested interest in this IPO via placement tranche, hence if you feel that my views may not be objective, please do not read further.

Description
Integrated manufacturing services provider (precision engineering processes such as metal stamping, plastic injection moulding, die-casting and mould design and fabrication, as well as other value-added operations such as assembly and surface treatment, namely electroplating for metal and plastic parts).

Main business is manufacture and supply of Electronic Tuner Components (80.9% of sales in FP05 (YTD Sep 2005) for TV sets, set-top boxes, DVD players, PCs, satellite receiver systems and automobile audio systems. Remaining 19.1% of sales from the manufacture and supply precision metal parts and plastic components for the automotive, office automation equipment and telecommunication industries.

Offer
80m new shares at 30 cents each. 2m public offer shares and 78m placement shares. Enlarged share capital is 400m shares.

Financials
See table below

Risks
1. Raw materials costs to erode margins, in FP05 vs FP04, it was highlighted that gross profit fell due to high copper prices, with prices rising another 55% since beginning 2006 (similar to 52% increase for whole of 2005), expect margins to continue to face pressure (factored in 2006 forecasts).

2. Foreign exchange losses are expected to increase due to depreciating USD against the RMB and other regional currencies (higher % of sales denominated in USD vs % of cost of sales in USD).

Comments
SUBSCRIBE (personal opinion only).

One-stop manufacturing services provider differentiates it from other competitors which specialise in one area or another. China Precision Tech can offer all services bundled to the same customer which helps to build long-term working relationships with its customers and allows for cross-selling of new products.

Business strategy of diversifying out of Electronic Tuner Components (as seen from the declining % of sales for this segment of the business) into other industries such as Telecommunications and Automotives (which is growing very strongly at the moment) is good in the long term as it reduces the impact of cyclical downturns in electronics industry. Also margins will improve as other segments command higher margins than Electronic Tuner Components.

Digitalisation (analog to digital eg high definition TV using digital signals, digital radio) will continue to boost demand for Electronic Tuner Components. Expansion strategy (increasing production capacity) bodes well for the future (no impact expected in FY06).

Jurong Technologies has taken up a 20% stake in the company (post-IPO), Jurong Technologies' subsidiary Jurong Hi-Tech Industries and China Precision Tech will be preferred subcontractors for each other which will allow China Precision Tech to expand its telecommunications segment of its business given that Jurong Technologies main business is in wireless communications.

Dividend policy (expected) is that 20% of profits will be paid out as dividends.

Fair value is pegged at 10x forward 2006 P/E or $0.44, representing a 46% upside from IPO price. Assuming further 20% increase in EPS for 2007, longer term fair value is pegged at $0.53.

Bright World

2006-04-23T05:42:00.000-07:00

Description
Manufacture of 104 different models of stamping machines (AOTU Trademark and the World Trademark) and its related components (including machinery parts and accessories as well as resin-casted components).

Offer
100m new shares and 5m vendor shares at 36 cents each. 5m public offer shares and 100m placement shares. Enlarged share capital is 400m shares.

Financials
see table below

Comments
SUBSCRIBE (personal opinion only)

This IPO is priced really at a bargain especially considering that FY 2005 should show about 40% growth yet it is priced at only 9.7x FY 2004 P/E (post-IPO). Furthermore, valuations are now being done based on FY 2006 and even FY 2007 forecasted results. Based on my FY 2005 estimates, P/E will drop to only 6.7x.

Bright World intends to double their production capacity over the next 3 years, increasing capacity by about a third each year. Also production capabilities and marketing efforts will be beefed up so with current strong manufacturing outlook in the PRC, Bright World looks like having Bright Prospects indeed. Current order book stands at RMB 348.5m.

Forecast 2006 to show net growth of another 40% bringing forward 2006 P/E down to 4.8x. Forward 2007 P/E is estimated at 3.6x. Hence pegging fair value at 10x forward 2006 P/E yields 76 cents, this could potentially rise to $1.01 based on 10x forward 2007 P/E in 6 to 9 months if Bright World can deliver 40% growth in interim profits for FY 2006.

Company intends to pay out 30% of net profits as dividends, forecast yield for 2005 and 2006 at IPO price is 5% and 6.3% respectively.

Sino-Environmental

2006-04-22T05:38:00.000-07:00

My Master (click on the word to go to his site) has written a very detailed analysis of this IPO so I will not repeat whatever he has said. Please to his blog to read the details.

My 2 cents worth:

Comments
SUBSCRIBE (personal opinion only).

For me, Sino-Enviro has far superior margins compared to Asia Enviro and Bio-Treat (listed as its competitors in prospectus). I believe it might be due to their industrial wastegas business where there are fewer competitors compared to the typical municpal waste water treatment segment of its business. Revenues for Sino-Enviro are less than half that of Asia Enviro, yet net profits are higher! This is similar to comparing Star Pharm with other pharmaceutical stocks.

I would peg fair value for Sino-Enviro at 12x forward 2006 P/E or $0.56 (higher than Asia Env but lower than Bio-treat due to its much smaller size) given its superior margins.

Sing Holdings

2006-04-21T21:44:00.000-07:00

Description
Development and sale of residential, commercial and industrial properties and (b) investment in residential, commercial and industrial properties in Shanghai and Singapore.

Offer
4m new shares at 33 cents each. 2.2m public offer shares and 41.8m placement shares. Enlarged share capital is 227.330m shares.

Financials
Historical 2005 P/E (restated based on 227.330m shares) : 28.2x
Forecast 2006 P/E (based on 227.330m shares) : 25.7x

Forecast NTA (post IPO, based on 227.330m shares): 37.57 cents
Forecast RNAV: 39.76 cents
Price/RNAV (forecast): 0.8x

Comments
STAG (personal opinion only).

Another property development and investment company with revenues largely from Shanghai (some exposure to Singapore) compared to Henan for Sunshine. Focus on the middle to upper middle income segments of the residential market will benefit Sing Holdings, commercial property market in Shanghai also expected to continue doing well (rental yields trending upwards).

As Sunshine Holdings is trading at 0.9x Price/RNAV, Sing Holdings should trade at no less than this ratio. Pegging fair value at RNAV (given higher quality properties) yields fair value of 40 cents.

Welcome Note

2006-04-21T20:50:00.000-07:00

Welcome to SGX IPO writeups :)