DS has successfully transformed itself from a local furniture manufacturer to a global product specialist with in-house brands. It is poised for a quantum leap given the strong demand for hotel fit-outs, growing overseas traction and potential mega contract wins. Despite its robust growth momentum, valuation is a steal, at just 3.9x (ex-cash) FY10 PER, a sharp discount to its peers!

DS outshines its peers with the successful creation of in-house products and exclusive distributorship of renowned international brands. Besides achieving better margins, its in-house brands offer customisation and competitive pricing that are well sought after globally. With leading developers such as City Dev and SC Global as repeat customers, DS is poised to benefit from the recent pick up in private residential launches.

To prepare for the debut of the IRs, many existing hotels are rushing to refurbish their rooms to capture rising demand and premium room rates. With a decade of experience in fitting out hotel rooms, DS will be a prime beneficiary of this immediate demand surge. Earnings from hotel fit-outs, which have yet to be factored into our forecast, could potentially double DS’s earnings over the next 12 months.

The recent 45:55 joint-venture (DDS) with Depa from the Middle east will accelerate DS’s global expansion. By combining the group’s expertise in Asia with the strong financial and manpower resources of Depa, the JV has garnered big orders worth $137m within a year. This JV offers tremendous earnings upside, as it acts as a springboard for the group to clinch mega projects potentially worth many times of its market capitalisation.

While valuation is a steal, the stock offers good exposure to the IRs, buoyant residential property sales and fast-growing overseas markets like the Middle East. Moreover, attractive dividend yield of above 5% adds to its appeal. With a 59% price upside potential to our target price of 78 cents, we are initiating coverage on Design Studio with a BUY.

Leading economic indicators. Global economic data have been pointing to concrete evidence of an economic recovery with PMIs rebounding, unemployment generally easing and consumer confidence recovering from their lows. Increased confidence of an economic recovery has enhanced investors' preference for cyclical stocks such as commodities. Indeed, increased economic activity and flow-through effects of pump-priming initiatives will strengthen demand for commodities. The impact is likely to be more pronounced on economically-sensitive commodities such as metals and energy, and less significant for agriculture. We expect companies with exposure to hard commodities or with extensive downstream operations to be the main beneficiaries of the economic recovery.

Multiple growth drivers. China's insatiable appetite for commodities, fuelled by its massive infrastructure-related fiscal package and reconstruction following the Sichuan earthquake, has supported organic growth over the last few quarters. Going forward, besides enjoying a more conducive environment for organic growth, the emergence of distressed assets may provide opportunities for inorganic growth. For instance, Olam Int'l (Olam) and Noble Group Ltd (Noble) recently purchased distressed assets as part of their expansion strategies, while Wilmar Int'l (Wilmar) has proposed to list its China unit as part of its long-term growth plans. We favour companies that are well capitalized with healthy balance sheets and strong cash positions necessary for the execution of inorganic growth plans.

Preferred picks: Noble and Wilmar. Commodities-related stocks have outperformed the STI by 56% on average YTD. Further upside potential exists for stocks that are trading below their peers' valuations while offering sustained growth prospects. We highlight Noble [BUY, fair value S$2.50] as our top pick because (i) it is best positioned to ride the economic recovery given its diverse product portfolio, (ii) valuations are undemanding at 13.6x PER vs. its closet peer Olam's 22.7x PER, and (iii) balance sheet offers superior flexibility. We also like Wilmar [BUY, fair value S$7.28] due to (i) the potential listing of its China unit, (ii) its strong balance sheet and (iii) the geographical diversity of its businesses. We upgrade the commodities sector to OVERWEIGHT from NEUTRAL on improving outlook. Key risks include the de-stocking of inventory build-up and a slower than expected economic recovery.

We still like the sector because of its resilient earnings ? we see the potential of earnings disappointment for the market as a whole if the expected V-shaped recovery does not materialize.

With the market looking slightly toppish around 2600-2700, the risk of suffering a sharp pullback is less for the telcos given that they have generally lagged the market in terms of YTD gains.

Another talking point is the BPL broadcast rights for 2010-2012 ? we think that StarHub is still in the pole position to win it. We don't think SingTel would want to win it now (especially at a high price) given its limited distribution capability.

Things are likely to change when the NBN comes fully on-stream by 2012.

Not only for SingTel but potentially be good for M1 ? they will be able to offer a more integrated package and also branch into the more lucrative corporate broadband space.

M1 has highlighted its intention with the recent acquisition of Qala.

Again, we think that defensive stocks like the telcos remain relevant in today's context and their almost certain dividend payouts are attractive. In the longer term, the NBN could also bring new growth opportunities for the sector. Maintain OVERWEIGHT.

China’s passenger car sales in Aug ’09 surged 90.18% yoy and 3.1% qoq to 858,300, underpinned by the government’s stimulus measures such as aggressive cuts in sales tax and rebates for buyers in rural areas.

Overall vehicle sales also surged 81.7% yoy to 1.14mln units, much faster than July ’09’s 63.6% growth rate.

What is more significant is that even demand for larger vehicles which do not benefit from government stimulus measures has recovered, signalling real demand returning.

GM’s Aug ’09 sales surged a better than expected 113% yoy resulting in the President and MD for its China operations to raise his previous forecast made in July ’09 from 20% growth in 2009 to 40% currently.

GM is a major customer of Armstrong in China and the above positive news will continue to underpin Armstrong’s automotive business in China. This suggests upside surprises for Armstrong’s automotive business in 3Q ‘09. We maintain BUY on Armstrong.

Petrobras likely to kick start the first phase of rig tendering later this month: Petrobras directors have approved on Friday the first phase of Brazilian rig building program calling for a total of 28 deepwater rigs to be built in Brazil for exploring and developing the pre-salt reserves with delivery scheduled over period of 2013 to 2017.

First round of tendering drill-ship biased; but scale, “made in Brazil" requirement should put Singaporean and Korean rig builders on equal footing: While some quarters may view the drill-ship bias as negative for Singaporean rig builders given that (a) Both SMM and KEP have highlighted their interest and willingness to undertake drill-ship projects in Brazil, (b) Tender of nine rigs should provide necessary scale to own and expand shipyard in Brazil and (c) Made in Brazil requirement does neutralize the Korean competitive edge (to some extent) in drill-ships in our view.

Potential doubling of existing order book for KEP / SMM; rig building likely to be concentrated to 3-5 shipyards: Given the rig tender structure, this will likely result in better than expected rig new order impact of 7 rigs for Singaporeans (4 for Keppel and 3 for SMM in our estimates) currently implied in our estimates. We believe PBR is likely to keep the rig building process to handful of 3-5 yards with 6-9 rigs per shipyard. Moreover this contract could potentially double the existing order books of Singapore rig builders with US$4.5-5.4 billion worth of orders up for grabs in first phase. We retain OW on KEP and SMM with a slight bias in favor of Keppel in near term given (a) potential new orders in pipeline namely P-61, Chevron TLP and semisub from PV drilling, (b) existing yard presence in Brazil.

O&M sector remains underweight — We recently met with investors in Europe and sense clients are much more cautious on the sector as compared to Asian based investors. Most remain underweight on the sector. The concerns are the duration of the current rig building downturn, and whether orderbook wins can resume. Investors opined the sector will de-rate further and want to see evidence of orderbook returning first to the sector before considering the investment merits.

Our key arguments — i) contrary to investors' perception, the rig supply response during recent cycle is far more muted than thought ii) orderbook will be a lagging indicator during a recovery phase, iii) do not ignore strength of the FPSO market rebounding in 2010 onwards iv) unless Petrobras is willing to compromise on its E&P ambitions, KEP/SMM appear best positioned to capitalise.

Margin direction — Questions were also raised as to whether recent O&M margin strength could be repeated in 2010 given further productivity gains and repeated deliveries. We believe this is possible since other cost items like raw materials are already locked in. However, deliveries from 2012 onwards (via new orderbook) should see margin diluting back to 2006-07 levels given the competitive landscape, but not a sharp margin collapse as some may fear.

Financing, not rig supply is a bigger threat — Our earlier concerns on funding risks have now turned consensus. We reiterate the credit crunch, not rig supply remains a bigger threat to rig building orderbook since funding source for both ship and rig building emerge from similar group of European banks. Although credit spreads have narrowed, counter party risks have yet to abate and (eg. collapse in ships collateral values) have negative implications for rig financing.

Valuation — Investors were surprised the sector is not trading above its historical average mean after sharp YTD rally. Although both KEP/SMM has outperformed STI, both stocks, particularly Keppel O&M is trading below the recent cycle P/B average. We highlight potential upside surprise to our EPS forecasts on further margin accretion, and orderbook returning could be re-rating catalysts.

Other stocks in focus; ST Eng — Investors are divided on ST Eng. Some opined 2010 consensus forecast remains conservative considering the strength of the recent margin recovery for the MRO business, continued strength in Electronics and M&A catalysts. However, others are concerned on prospects of orderbook wins and believe a DPS cut is highly likely.

Saizen REIT was listed in November 2007 and it invests in residential properties across 13 regional cities in Japan. The properties are leased out typically to the working singles and small families. Demand for rental housing is strong in Japan as home ownership is relatively low at 60% compared to about 91% in Singapore and 76% in Hong Kong and 69% in the United States.

Saizen REIT’s income stream is steady and reliable as its portfolio is well-diversified with 6000 apartment units. Residential rent in Japan has been stable over the last 20 years, growing at an average of 1% p.a. The rental rates of Saizen REIT’s properties have been consistent at around S$2 psf/mth and occupancy rates maintained at about 90%. Yet the property values appear distressed (few real estate transactions due to lack of financing and sellers are in distressed state). With refinancing issues pending to be resolved, the stock is trading at even more distressed level of 0.4x P/NAV.

However, with proceeds from the rights issue, cash-on-hand, operating cash flow conserved and short-term bridging facilities, Saizen REIT expects to repay five out of six CMBS loans maturing in end 2009 and early 2010. The management is likely to default on the YK Shintoku CMBS loan (S$121m loan on assets ring-fenced of $375.5m) due in Nov 2009. This is the best option as Saizen REIT will still be able to operate as a going-concern and the reduction in Group NAV is only 10% or S$37.6m. Repayment of these CMBS would remove the encumbrance for half of its property portfolio (S$340m).

The manager has targeted to resume distribution by the middle of 2010 and this should encourage the exercise of warrants. The 3-year warrants came free (exercise price of 9 cts) with every right subscribed for. Proceeds from the warrants (S$41.1m in the event all the warrants are exercised) could be used for debt repayment. Assuming constant asset values, Group gearing could decline to 33% by 2012.

As operations are expected to be stable, we estimate post-rights DPU to be in the range of 2.0-2.5 cts (yield 12.5-15.6% yield), based on a payout ratio of 90%. Assuming all warrants are exercised, the stock still yields 8% (est. fully diluted DPU 1.3 cts). With this, we also believe that the market is pricing in the possibility of the REIT having difficulty in securing loans on favourable terms in future due to their history of default.

Some positive surprises from 2Q CY09 results. Not withstanding one-off fair value losses, three of the property developers under our coverage - CapitaLand, Keppel Land and UOL Group, reported 2Q CY09 results that were within our expectations while two, City Developments and Soilbuild Group, came in above our expectations. Key sources of the upside surprise came from the revenue from new projects launched in 1H09 and fasterthan- expected construction schedule of existing projects. Developers share the consensus view that the worst is over for the Singapore property market.

Strong recovery in the residential property sector had even caught some of the developers by surprise but most of them had been well-prepared in their planning of new project launches to capture the upturn. Office market, which had the worst outlook among the different property sectors, had also seen a slower rate of decline in rents in 2Q09.

What can we expect in 2H09? Based on the latest URA data, developers sold a record 2,649 non-landed property units in July. In particular, sales in the Outside Central Region, which had seen four consecutive months of decline since February, jumped sharply by 70.7% MoM to 2,750 units, surpassing that achieved in February. This strong demand for mass market properties had exceeded our expectations and is likely to continue for the rest of the year, as we see the recent increase in cash-over-valuation in the HDB resale market as a catalyst for HDB home owners to upgrade to private properties. We now see prices of mass market properties stabilizing at S$700psf-S$800psf, which appears to be the comfortable price that HDB upgraders are willing to pay in recent mass market launches and this is above the S$600psf-S$650psf range seen earlier this year. Further upside will depend on any recovery in the economy that leads to increase in wages.

Advocating a cautious strategy for developers. Despite the recovery in the property market, we prefer to stick to a more cautious strategy when selecting our top picks for property developers. We prefer developers thathad already locked in profits for their land during recent upturn in the property market, which can provide earnings visibility for the next 2-3 years. We also favor developers that are trading at relatively larger discounts to their NAV/RNAV as this can protect against further downside from revaluation losses of investment properties going forward. Our preferred pick among the large-cap developers is UOL Group (BUY, FV: S$4.07). We also have a BUY rating on Soilbuild Group (FV: S$1.36).

Final dividend was reduced from 2 cents last year to 1.5 cents this year, below our expectations by 0.5 cents, due to 4Q ended June ’09 bottom-line coming in marginally below our expectations ($2.677mln versus $3.4mln a year ago and $3.3mln a quarter ago) reflecting higher than expected raw material costs, lower forex gain, partially offset by tax writeback. Despite this, the final div of 1.5 cents plus the interim div of 1 cent is still higher than last year’s 2 cents a share, which provides a yield of 10% at its current share price.

Payout ratio is 96.8% against last year’s 89%, but historically, the company has been able to payout almost all or even more of its earnings, reflecting little need to reinvest in capex, strong and consistent operating cash flows as well as huge cash reserves.

Financial position as usual remains robust with cash of $48.54mln against debts of only $1.245mln, giving a net cash position of $47.295mln. However, with the 32% rise in share price since our upgrade to BUY on 22 July ’09, net cash now represents 32% of market cap, down from 40% then.

We understand from management that 4Q ended June ’09 raw materials as a % of sales rose to close to 37%, up from their usual 30-32% due to one time expensing of raw materials purchased in preparation for the year-end seasonal ramp and should normalize back to the usual 30-32% range going forward.

Depreciation charge in 4Q also rose to $2.1mln, above their usual $1.6mln quarterly run-rate due to one-time write-down of their Taiwan machineries and should revert back of the usual $1.6mln going forward.

Looking ahead, as usual, management maintains a cautiously optimistic stance, warning about the uncertain business outlook due to the lingering effects of the global economic downturn and rising raw material costs.

However they admit for the first time that business activities are stabilizing, which we believe reflects the upcoming launch of the new Microsoft Windows 7 in Oct ’09 as well as a new Microsoft Office in early 2010, which coincides with the much anticipated PC upgrade cycle.

Being a key partner of Microsoft, the company has historically benefitted from all previous new software launches hence we expect this time to be no different.

Providing a yield of 10% while we await for earnings to kick in from Microsoft’s new software launches, the stock remains attractive. And this year being their 30th anniversary, hopefully there will be some goodies installed for shareholders as well. Maintain BUY.

An established property developer in Chongqing. We recently paid a visit to Ying Li International Real Estate in Chongqing, PRC and visited several of its investment properties and ongoing development projects. Ying Li is a Chongqing-based property developer that primary engages in commercial property development. The company is also one of the major landlords in the Jiefangbei area (prime CBD of Chongqing), holding ~30% of the commercial space in the area.

Potential catalysts from IFC and San Ya Wan projects. Construction work for the International Financial Centre (IFC) is progressing well. The retail portion of IFC is expected to be completed in 2H10 and the office tower will be completed in 2011. Upon completion, this project will have 108,388 sqm of office space and 36,920 sqm of retail space. Given the shortage of Grade A office space in Chongqing, we expect strong demand for the office space in IFC and Ying Li plans to retain the office portion of this development for investment purposes. For the San Ya Wan project, it is strategically located within the special economic zone and the development plan for the remaining land of this site (GFA of ~129,116 sqm) could be enhanced when the government releases the development plan for the area near the end of the year.

Opportunities for new projects. The Jiefangbei area is going through an urban renewal process and we understand that there are at least 7 sites in the Jiefangbei area that have been planned for commercial redevelopment. With Ying Li's good track record in urban renewal and strong working relationship with the Chongqing government, we believe that Ying Li could be one of the key players in this urban renewal process.

More funds may be needed. Ying Li has strengthened its capital base through a private placement of 107.1m shares at S$0.28, raising gross proceeds of S$30m. Proceeds will be used for the development of IFC, repayment of loans and working capital. With 4 projects already in the pipeline, we think that more fund raising exercises may be required for Ying Li to take on new projects.

Better outlook for FY10. Financial performance is likely to remain weak in FY09 but we expect Ying Li to turn in better results in FY10 and FY11, upon the completion of the retail and office portions of the IFC respectively. Ying Li's NAV is also expected to be boosted upon the revaluation of IFC when completed. This project is currently valued at RMB 6,290 psm. In comparison, the completed office space at New York New York is currently valued at RMB 12,892 psm. We do not have a rating on Ying Li.

Industry data indicates that day-rates and utilization rates for rigs have been declining. Besides dampening demand, this also raises the risk of more customers defaulting on their rig orders. SMM has already faced two defaults, but will likely avoid a loss by selling the rigs in the open market. However, if rig prices soften in tandem with day-rates, this may no longer be sufficient in order to protect itself fully against default risk.

Recent developments at Petrobras may cause further delays in its awarding of tenders. Brazilian President Lula de Silva has proposed new oil regulations to grant the government greater control over new deep water fields, and that oil revenues have to be spent on domestic social programs. These proposals are likely to be a political hot-button topic ahead of elections in October 2010. Petrobras is also planning to an estimated at US$25-50bn, in support of its US$175bn investment plans.

These two developments are likely to strengthen Petrobras’ position in the long term; however, the uncertainty generated in the near term may delay the awarding of tenders for equipment. Petrobras has a planned equipment capex budget of US$30bn, making them the single largest potential customer in the current soft offshore market. This position of strength and a more competitive environment also gives Petrobras more leverage in negotiating down prices, to the detriment of shipyard margins.


Both Keppel Corp’s Offshore & Marine and Sembcorp Marine have done well from the offshore up-cycle in the last 3 years. However, they are currently running down its current orderbook, and we expect earnings to decline from 2011 onwards, barring renewed order flow. We prefer Keppel Corp over SMM due to its more diversified earnings base, but maintain both stocks at Hold.

We had previously included Cosco as a potential offshore play, due to its low cost base, strong ambitions and growing technical expertise in the area. However, we believe that Cosco has missed the offshore cycle completely. We retain our Sell recommendation to target of S$0.81, due to shipbuilding execution issues, and a soft bulk carrier rates impacting both demand for newbuilds and charter rates for its fleet of 12 bulkers.


We recently initiated coverage of Ezion. We like the fact that Ezion identifies and capitalises on niche opportunities in the offshore space, and its projected 3-yr earnings CAGR of 109% pa is testament of this. We maintain our Buy recommendation to a target price of S$0.99.

Fuelled by globalisation. Growth of the shipping industry has been fuelled by globalisation and international trade. The global trade boom over the past 15 years has led to a 55.6% growth in wet cargo throughput, and a 105.2% surge in dry cargo volumes. Shipping has been, and still is, one of the most cost efficient modes of long haul transport. Demand for shippingrelated services is strongly correlated to global trade and outsourcing. Earnings of operators are therefore exposed to volatility arising from economic cycles.

The China force. China's industrialisation played an important role in the international trade boom. The widespread popularity of low-cost Chinese exports led to strong demand for container trade, while the country's heavy imports of industrial raw materials helped to support demand for bulk shipping. China's active role in international trade elevated demand for the Trans-pacific trade route, which at over 17% of total volume, forms the world's largest container trade.

Trapped with low freight rates and volumes. While thriving economic growth over the past decade fuelled the shipping industry's growth, the recent global economic downturn has conversely brought about a swift and sharp turn in fortunes. Weak consumer demand, slowing manufacturing activities and tight credit markets have crimped demand for shipping-related services. The industry now faces excess capacity, and in the absence of end demand, this has driven freight rates down to precariously low levels. Coupled with the slide in volumes, the shipping industry today is struggling with many even facing losses.

Outlook hinges on economic recovery. The shipping industry needs to see a sustained recovery in real demand before it can stage a resurgence. Freight rates need to be restored to profitable levels, and for this to happen, the problem of overcapacity must be resolved. We are seeing increasing signs of delays in deliveries of new builds and scrapping of old vessels. These may mitigate the anticipated overhang from new capacity coming onboard. However, weak near-term demand signals the likelihood of a prolonged and arduous recovery process for the shipping industry. Among the locally-listed shipping stocks, we have a HOLD rating on NOL (fair value estimate S$1.68).

Sees a slower 2H09. This is because RIM’s existing programmes are winding down faster than new models can ramp up in Q3. Prices and margins of matured products are also diminishing towards end of the products’ life cycles. Despite the slight pick up in Sep for new smartphones and shipments to new customers Dell, Microsoft and HTC, volumes are still low and consumer electronics recovery remains very slow. We also expect residual asset impairment charges on top of start up losses(c. S$1-2m) for the flexible printed circuit operation commencing in Q4.

More meaningful recovery only in FY10. This would be driven by full ramp up of new products/ customers and the resulting operating leverage. Hi-P is deepening relationships with existing blue chip clientele, particularly in the smartphone area, where Hi-P has an early mover advantage with RIM and Palm. Hi-P is also involved with Motorola’s latest suite of smartphones, which if successful would give Hi-P a further boost.

Sees 5-10% cut in consensus estimates. Hi-P has guided for 3Q to decline y-o-y and q-o-q. This forecast is intact from our recent corporate update. On the contrary, we see room for consensus downgrade on net profit forecast of S$80m for FY09. If Q3 is down q-o-q, it is challenging for Hi-P to clock S$20m each for 3Q/4Q. We expect earnings to be S$15m (-6% q-o-q) and S$20m (+38% q-o-q) for 3Q & 4Q respectively.

Downgrade to Hold with unchanged TP of S$0.76. Hi-P has more than doubled YTD compared to STI’s 50% rise. More importantly, we expect weak results to cap share price performance near term. Downgrade to HOLD.

Much has been discussed about abalone farming since our initiation report on Oceanus whereas restaurant and food processing segments were just briefly mentioned as both were still in the very early development stage. About one year since the RTO, Oceanus has made enormous progress and many changes have taken place. We have witnessed impressive achievements made by the management team. Some among them are strategic partnership with Ah Yat, restaurants in Shanghai taking off very well, accomplishment in canning processing techniques and so on.

The processing plant will be officially commenced in October this year and the segment's sales contribution is insignificant as of now. On the other hand, restaurant business has taken off successfully in Shanghai and more outlet openings are in the pipeline. Therefore, our focus in this report will be on restaurant business, and its prospect, financial forecast and relevant matters will be discussed in detail.

Reminiscent of Ajisen China: We believe Oceanus has an appealing story. Its aggressive network expansion plans for its "Ah Yat Tian Xia" abalone chain restaurant is reminiscent of the renowned Ajisen (China) Holdings Ltd, which was listed in 30 March 2007 in the Hong Kong Exchange. Similar success could be seen for Oceanus, but at a much shorter timeframe compared to its peer.

A distinctive advantage over peers: What makes Oceanus outstanding among its peers in the F&B sector lies in its complete presence along the value chain. From abalone farming, processing, to food chain operator, Oceanus basically has full control over its supply and demand for its abalone, which is one of the key raw materials of its restaurants. As the world largest land-based abalone farmer, Oceanus's interest in ensuring sufficient supply of abalone for its restaurant business is well safeguarded. Such a unique positioning in F&B industry has not only created a synergy in the company, but also strengthened its competitiveness in the industry.

Maintain BUY; Raise target price to S$0.53: In view of greater contribution from restaurant business in coming years, we prefer Sum of The Parts (SOTP) valuation methodology which allows us to evaluate each division of the company separately. Farming and food restaurant divisions are valued at 6x and 10x FY10 EV/EBITDA respectively. Net debt is then netted off to derive a target price of S$0.53 (previous S$0.44). We believe there is potentially significant upside for our target price, if the restaurant business could achieve better turnover and operating efficiency.

Ezra and ASL as favourites. Ezra Holdings (Ezra) and ASL Marine Holdings (ASL) remain as our favourites for the sector. Ezra has relatively defensive earnings, and coupled with the low base earnings accretion effect from its fledgling Subsea business, valuations will inevitably be driven upwards if executed well. Its fleet management business will lower reliance on spot charters and possibly boost earnings. ASL Marine's diversified business model (shipbuilding, repair and chartering) is expected to provide earnings support and its Batam yard expansion should translate to higher earnings with more repair work required from an enlarged global fleet. We maintain our BUY rating for Ezra [Fair value: S$2.00], and BUY rating for ASL Marine [Fair Value: S$1.18].

Swiber - lower debt, now waiting for contract wins. Swiber has a declining order book with recent contract wins comprising mainly of smaller ones compared to its previous major contracts, partly illustrating the slow down in the momentum of awarding projects by oil companies. However there seems to be increased hopes of bigger contract wins towards the end 09, though we would prefer to see this buzz translated to concrete wins. The group's debt level has also historically been relatively high, but net gearing is likely to improve further with proceeds from the sale and leaseback of vessels. Swiber's recent capital raising activities (incl. placement exercise) are important since it has two MTNs maturing in Aug 2010 and another two in Mar 2011 with quantum of US$71.2m and US$72m respectively. Swiber recently proposed a convertible bond issue to raise up to US$100m and the additional cash flow should ease its balance sheet. We maintain our HOLD rating for Swiber [Fair Value: S$0.94].

Wins small contract. SIA Engineering Company (SIAEC) has won a 10- year Maintenance Service Agreement with Panasonic Avionics Corporation, a leading supplier of aircraft in-flight entertainment (IFE) systems. SIAEC will maintain the eX2 IFE system which is installed on SIA's latest fleet of aircraft. The contract covers mainly line maintenance work on the eX2 IFE, including trouble-shooting, rectification and functionality checks to ensure a high level of operational reliability. We believe the earnings impact is negligible in view of the long attribution time frame and low revenue intensity as compared to its key airframe maintenance business.

SIA still critical to SIAEC's future. Although SIAEC's parent company has displayed improving operational performance in the latest month, this might be due to the summer travel spike. We believe that reinstatement of grounded aircraft might only occur in 2010 as SIA fights to contain rising fuel costs. Moreover, SIA has also rescheduled its delivery of eight A380s by 6-12 months, postponing maintenance work for SIAEC. With SIA's fleet size in status quo, we think SIAEC's airframe business activity will still be crimped. In the previous quarter, management presented a dim picture of business outlook "until there is sustained recovery of demand". We are iterating that recovery to previous year's record performance could occur only in 2012 or 2011 if demand experiences a V-shaped recovery.

Silver lining: Cost cutting. SIAEC has reached agreement with its three unions- this for staff to take half or 2 days no-pay leave in each month from July 09. To further manage the surplus personnel capacity, staff will be sent for training under government subsidised initiatives. The total savings from the no-pay leave, wage reduction and government subsidised training is expected to amount to about S$1m/month from July 09. Last quarter showed some cost management in its staff costs but we are hoping that more will be evident as it flows through past Jul 09.

Lowering fair value, Maintain HOLD. We have retained our estimates. Despite the recent run up in equities, MRO industry valuations have trended lower, signalling ill confidence in the aerospace industry. Consequently, we have lowered our PER peg to 12x (prev. 14x) and our SOTP valuation drops to S$2.76 (prev. S$2.95). We view the recent sustained price downtrend coupled with poor liquidity may stall any significant price ascension. Maintain HOLD. The current price yields about 5.6% for FY10F dividends.

Improving industry prospects. Our scan of the Drug Eluting Stent (DES) industry has yielded encouraging results. DES usage has risen to the mid-70% range (vs ~65% year ago). While there are still proponents and opponents to DES usage, rising clinical usage indicate that practitioners are more comfortable with the significant research put in for the last three years. Even less sanguine opponents of DES usage like Dr Edoardo Camenzind* said to "resist short-term (marketing) distractions and stick with (products with good) medical evidence". Biosensors possesses positive "medical evidence" and we expect its next update in end Sep 09 at a clinical conference to be encouraging.

Peer group scan. Abbott's Xience V DES is now the key product that has been gaining market share. Along with Boston Scientifics' Promus DES (sub-licensed Abbott DES platform), market watchers estimate that the Xience V platform has >50% market share in the US. JnJ continues to lose market share with its older Cypher DES but is hoping to roar back with its Nevo DES (but likely only in 2010). Medtronic's Endeavour DES platform is estimated to command market share in the mid-teens. The battle continues to be intense but the trend for technological superiority is sustained. We believe that the current iteration for clinicians to stick to products with strong clinical data will bode well for Biosensors' BioMatrix DES which is authenticated by strong clinical data.

Pricing pressure not for premium products. Abbott's and JnJ's 2Q webcasts indicate that ASP pricing pressures for DES have come more from hospitals vs. peers engaging in a price undercutting war. Abbott's management indicated that its newer generation Xience V DES have been sustaining ASPs. Our previous checks with Biosensors indicate that ASPs have been holding up in the EU markets.

M&A exit. We still believe a key exit for long-term investors will be an M&A situation. Adequate intellectual property protection, superior technology and a well-executed product launch has catapulted Biosensors onto the radar screens of the big boys. However, we think the company may need significantly more cash and people bandwidth to sustain its growth trajectory past FY11F. Our bets for future acquirers are Medtronic (lagging technology pipeline) and Terumo (Asian based powerhouse and current Biosensors' licensee). Maintain BUY at S$0.74 fair value.

Plant expansion and commencement of the new plant face further delays. Given weak demand, Synear continues to defer its expansion plans and suspend construction of new plants and cold warehouses. Synear has delayed the construction of its new Zhengzhou plant by another two years and now plans to complete it by 2012. Synear has also deferred the commencement of its new plant in Guangzhou. At the margin, sales trend(julaug) has been stable yoy on a relatively low seasonal quarter but costs could be on the upside.

The utilization rate remains low. Utilization at the Zhengzhou plant dropped to about 50% in 1H09 (vs 80% in 1H08) while utilization rates at the two plants in Chengdu and Huzhou remained at less than 20% in 1H09. We remain concerned about the intense competition in the sector and management's lack of strategy to tackle rising competition.

Margin pressures persist. Synear could continue to see margin pressure on the back of management's initiative to broaden the range of mass market products and increase commercial sales in 2H09. Synear has launched 20-30 new products to focus on the mass market and plans to increase commercial sales to 7% in FY09E from 5% in FY08.

Inflationary pressures have resulted in short-term headwinds; Sell. Our China Economist, Jun Ma, believes that inflation (CPI of 4% yoy) in China could rise faster in 2010, and this could compress margins for F&B companies.

We believe that the impact of El Niño could continue to push up agricultural prices (pork has increased by +20% on higher animal feed prices over the past two months) in 2H09. This could be partially offset by the 5% discount to spot prices that Synear has secured for its key raw materials (~80% of COGS).

Significant non-cash financial gain on mark-to-market on cross currency swap of Rp132b in 2Q09 vs a loss of Rp25b in 1Q09 due to appreciation of Rupiah vs. US Dollars. Higher CPO sales volume (+19% qoq) and higher CPO ASP (+11% qoq) Revenue increased by 31% qoq

Gross margin improvement in 2Q09 due to strong CPO prices. 1H09 net profit, however, declined by 28% yoy. 1H09 net profit represented 59% of our forecast.

The company is expected new planting of 8,000 ? 12,000ha in 2009, with majority of new planting will be on West Kalimantan province. As of 1H09, the company managed to increase new planting by 5,059ha.

On the back of seasonality patterns, the company is expected higher 2H09 CPO production compared to 1H09. We expect margin to sustain as the company is expecting cash cost of production for nucleus CPO of about US$200/tonnes in 2009. Maintain HOLD on First Resources and reviewing our target price.

The Group's 1Q10 revenue declined 38.2% to $8.8 million, mainly due to the lower engineering income for the current period. However, the recurring treatment revenue increased 20% to $3.0 million in 1Q10.

Material purchased, consumables used and subcontractors' fees decreased 52.7% to $5.4 million, in line with the 50.6% decline in revenue from engineering segment.

The decrease in other operating expenses of 32.1% as compared to the last corresponding period was attributable to lower engineering related expenses.

We raised FY11 sales estimate for treatment business by 10% while cut FY10-11 raw material cost estimate by 6-7%.

The sluggish performance by engineering segment was largely within our expectation. As a matter of fact, the contribution of this segment is gradually sidelined by the water treatment segment which has shown improving operating results over the past few quarters. The revenue for treatment was lifted by increasing minimum off-take volume and more treatment plants acquired.

Given that the industry outlook remains bright and the concession for treatment plant is not easy to come by these days, we believe United Envirotech is well poised to reap the benefits. On top of that, the management commentary in its recent results announcement turned more bullish. They are expecting better operating environment in the next two quarters. On the back of favorable backdrop, we increase valuation multiple to 1.25x FY10 NTA per share from 0.7x FY10 NTA, deriving a target price of S$0.28, representing 55% upside potential. Maintain BUY.

2Q09 revenue of S$38m and net earnings of S$9.4m (+10% yoy and 11% qoq) were in line with our expectations, as well as consensus. Profit growth was driven mainly by the aluminium alloy extrusion business, and despite lower contribution of only S$213k from associate Nanjing Puzhen (NPRT) in this quarter vs. S$953k a year ago.

At half time, earnings are up by 11% yoy to S$18m, on track to meet our full year forecast. So far, a strong performance from the alumunium alloy extrusion business is helping to offset a weak contribution from NPRT. However, we are expecting a much better showing from NPRT in 2H09 as they are expected to deliver over 200 carriages during this period.

Prospects for Midas are bright given its strong order book of RMB1.5bn for its core business and >RMB4bn for its associate NPRT. Meanwhile, both Midas and NPRT are expanding quickly to meet an anticipated demand for its products as China continues to rapidly develop both its high-speed railways and metro networks.

Maintain BUY, TP S$1.10 based on 20x FY10 earnings. Re-rating catalysts include further contract wins for both Midas and NPRT.

CDL sold 1031 homes in H109, higher than UBS est of 1000 for FY09 Based on sales thus far and management’s plans, we increase CDL’s 2009 home sales to 2100 units from 1000 units. We expect sales momentum to continue at current levels for H209 as mortgage and deposit rates stay low, and pent up demand works it way through. For 2009, we expect total Singapore primary sales of 11,000-13,000 units, higher than the 11,147 in 2006. Resale prices in the prime and mass districts have recovered 25% and 8% YTD respectively, and we expect resale volumes to continue to gradually trend up.

Q209 profit of S$140m in line with our estimate of S$125m H209 EPS of 14.7c was 61% higher than 9.1c for Q109, primarily because of home sales at The Arte. CDL had commenced construction for The Arte in 2008 so units sold in Q209 were booked in the same quarter. Also, hotel operating profit improved by 54% QoQ as the group cut costs by GBP44.6m by reducing manpower costs, central costs and non-hotel expenses. H109 EPS of 23.8c was 43% of our FY09 forecast.

Hotel EBITDA lowered by 10%, higher home sales lift EPS in 2010-2012E We adjust our EPS estimates to account for lower consensus EBITDA estimates (- 10%) for the hotel segment and higher home sales in 09 (2100 units from 1000 units). EPS for 2009/10/11E are changed by -7%/2%/7%. City Developments remains our Key Call in the Singapore Property sector. Our price target of S$11/sh is based on 1.1x P/RNAV.

Upcycle P/B values imply 48% upside for ASEAN property sector. Property indices across the region have rebounded by 54% ytd with stocks under our coverage gaining 230% on average since Mar 09 lows. Despite the huge gains, analysis of the past three upcycle P/B multiples still suggests a 48% upside potential for the sector.

Top picks. Thai developers (Asian Property Development/Target: Bt7.40, LPN Development/Target: Bt8.36, Quality Houses/Target: Bt2.16) offer the maximum upside of 75%. Next in line, Singapore developers (Allgreen Properties/Target: S$1.75, City Developments/Target: S$12.70, Ho Bee Investment/Target S$1.65) offer a 57% upside potential. They are followed by Indonesian developers (Bakrieland Development/Target Rp440, Kawasan Industri Jababeka/Target Rp190) with 54% upside. Lastly, Malaysian developers (IGB Corporation/Target: RM2.28, KLCC Property/Target: RM4.00) offer the least upside potential of 9%.

Most upbeat on residential segment. Residential sales in the ASEAN region made a strong comeback in 2Q09 on expectations of an economic recovery, relative stability of the job market despite the steep fall in Gross Domestic Product growth rates, low mortgage rates and a lack of alternative high-yield investments. Price levels rebounded 5-10% qoq in 2Q09 after a 30-50% fall from end-07 peak levels. As the economic recovery gains ground in the coming quarters, we expect sales momentum to pick up and price levels to firm up further on the back of improving liquidity conditions and easy financing options.

Structural transformation lends high degree of sustainability to the current recovery. Across the region, interest rates are drastically low and currencies are fairly stable in comparison to that during the Asian financial crisis. Household affordability levels are relatively high this time round due to the higher income levels, record low mortgage rates and stronger net household wealth. Corporate balance sheets are also a lot stronger. Furthermore, favourable migratory patterns to Asia due to its attractive long-term growth potential help support a sustainable recovery.

Key property catalysts for the region. In Singapore, the two upcoming integrated resorts will boost the country's long-term fundamentals. They are expected to create 50,000 to 60,000 jobs and directly contribute S$5.4b to the Singapore economy, or 2.6% of GDP, by 2015. In Thailand, drawing from the positive impact of supportive government policies in the past, the government's current property incentives are likely to re-rate SETPROP from the current 1.1x P/B to 1.6x. In Indonesia, the disbursement of Rp2.5t housing subsidies allocated in the 2009 budget and the finalisation of the government's ruling on foreign ownership would boost overall demand for property. In Malaysia, recent policy liberalisation measures such as the removal of property gains tax and the relaxation of rules on property purchases by foreigners should have a positive effect on the property sector, like what happened in the past.

Given the fervour over Genting Singapore (GENS), we worked out a scenario analysis which pegs GENS’ target price to a wide theoretical range. Nevertheless, we caution that GENS still faces pragmatic challenges pertaining to the high roller market. GENS’ share price has surged more than 25%. Since we initiated coverage on the stock a few weeks ago, GENS’ share price has surged well above our S$0.93 (ex-rights) target price, to now value the company at S$11b. As Resorts World Sentosa (RWS) does not as yet have a proven track record, we ran a sensitivity analysis of GENS’ share price to different scenarios of daily win per table for the VIP and grind markets, and visitor arrivals at RWS.

A wide “fair value” range explored at this conceptual stage. For purely illustrative purposes, a theoretical scenario analysis shows that GENS’ target price could rise to as high as S$2.39/share (ex-rights), implying 2011 EV/EBITDA of 13.8x (refer to our sensitivity table overleaf). Expectations for this “blue sky” scenario are exceptionally demanding, and include an early (end-09) opening date, strong VIP of S$1.9b – which would mean capturing a 13% market share of Asia’s VIP gaming market, and attaining grind revenues of S$2.3b, or 37.5% of Singapore’s gaming market. In addition, RWS would need to operate 800 gaming tables and generate a daily win per table of S$26,000 and S$10,500 for the VIP and grind markets respectively. In comparison, Macau has an estimated daily win per table of S$29,360 (VIP) and S$8,470 (grind).

Maintain HOLD with ex-rights target price at S$0.93/share, or a 2011F EV/ EBITDA of 12.8x. In the short term (after the rights issue announcement), we foresee share price weakness for both GENS and Genting Bhd (GENT). (GENT’s share price has fallen 5-6% in the last two days). However, the downside should be limited by the excitement over Wynn’s and Las Vegas Sands' (LVS) planned listing of their Macau casinos, as well as by the potential early opening of RWS. While valuations could remain stretched for a while, we provide a sensitivity analysis of the target price to various earnings scenarios.

Yesterday, Mr Mah Bow Tan, the Minister for National Development, announced several measures that the government will be taking in an effort to cool the heated property sector. These measures include 1) reinstatement of the Confirmed List for the 1st Half 2010 Government Land Sales (GLS) Programme, 2) removal of the Interest Absorption Scheme (IAS) and Interest- Only Housing Loans (IOL), with effect from 14 Sep 2009 and 3) non-extension of the Jan 2009 Budget assistance measures for the property market when the measures expire.

Recent site sales had seen very strong interests from developers and the reinstatement of the confirmed list will ease the competition among developers to replenish their landbank. However, we think the impact of the removal of IAS on home buying is unlikely to be significant on buyers who are buying for own-stay purposes. Developers usually charge buyers 2%- 5% more on the purchase price if buyers take up the scheme. So effectively, it is just a deferment of the interest payment by the buyer. Over the recent months, there is also a trend where more buyers are opting for normal progressive payment instead of IAS to enjoy lower price. This implies that the influence of the IAS on the recent buying frenzy is not very significant. Nevertheless, we think these measures will still have a psychological impact on buyers who may be worried of more tightening measures that could be introduced in future. This will particularly affect property investors and speculators. We maintain our NEUTRAL rating on the sector.

FSLT has secured a two-year waiver for its LTV covenant and reaffirms quarterly payout of 1.5 US cents from 3Q09 onwards. Maintain HOLD with fair price of S$0.64 in view of its loans due for balloon payment in 2012 and 2014.

First Ship lease Trust (FSLT)’s lenders have given a two-year waiver on the trust’s loan-to-value (LTV) covenant by reducing the minimum coverage ratio from 145% to 100%. This waiver period will extend until end 2Q11. Over the two-year waiver period, FSLT will make quarterly repayments of US$8.0m.

We believe this is a positive development for FSLT as the waiver eliminates the risk of a breach of its LTV covenant given the fall in ship values.

Besides quarterly loan repayments, FSLT has also been making voluntary prepayment of US$4.0m and US$8.0m in 1Q09 and 2Q09 respectively using cash retained as a result of lower distributions (1Q09: 74%; 2Q09: 50%).

With the reduction in FSLT’s LTV covenant ratio and the amortisation of its loans, the shipping trust reaffirms quarterly DPU guidance of 1.5 US cents from 3Q09 onwards, which implies an annualised yield of 14%.

While FSLT has begun to repay part of its loans, it still has a total outstanding loan balance of about US$400m due for balloon payment in 2012 and 2014.

As part of the arrangement with its lenders, FLST has agreed to bear a higher interest margin of 1.7% over the three-month US dollar LIBOR on the outstanding loan of US$501m (previous margin was 1-1.2%). As such, there will an additional interest expense of US$0.7m per quarter during the waiver period. That said, this has no impact on FSLT’s DPU guidance of 1.5 US cents per quarter.

While FSLT’s lessees have been making lease rental payments promptly, we do not rule out the risk of default by its charterers.

Although FSLT did not apply the distribution reinvestment scheme (DRS) for 2Q09, the scheme has a dilutive effect on its DPU and yields. In view of an increase in the cost of borrowings arising from the higher interest margin, we lower our earnings forecasts by 3-18% for 2009-11. However, we maintain DPU forecasts of 7.9 US cents and 6.9 US cents for 2009 and 2010 respectively, based on a distribution payout ratio of 50%.

We reiterate our HOLD recommendation on FSLT and maintain our fair price of S$0.64 based on 0.8x 2010 P/B of the container shipping sector. We suggest an entry price of S$0.52.

Avi-Tech looks compelling from a numbers perspective. At a market cap of $72.5m, the stock trades at just 1.1x its book value of 18.7 cents a share, of which 13 cents alone is net cash. Further, if we strip out its cash, its PE falls to a more interesting 5-6x (versus 13.5x based on reported FY Jun 2009 earnings). Note that this is despite FY09 being a poor year with profit at just 35% of its FY07 peak).

In comparison, most of its peers have lost money, including another burn-in service provider Sunright. The only other profitable peer – Micro-Mechanics – trades at 21x current year earnings and 13x forward earnings compared to Avi, which trades at 12x and 10x respectively. Forecasts are from Bloomberg consensus.

Even in FY09, when revenue and profit plunged by 58% and 54% respectively, and burn-in capacity utilisation fell to just 20%, it was able to stay profitable and cashflow positive. In fact, it has so much cash now that it is able to repay its suppliers early in exchange for discounts. Its good cashflow has also allowed the company to pay generous dividends since it listed in 2007. There is no fixed dividend policy but in FY08, it paid 2.5 cents in ordinary dividends (72% payout) and 1 cent in FY09 (64% payout). Assuming a 1 cent dividend is sustainable, the stock yields 5% at the current level.
Besides a recovery in burn-in, Avi-Tech has an opportunity to grow its burn-in boards business. Burn-in boards are the trays used in the burn-in process and are a significant investment for its customers. Avi-Tech is already supplying high-power boards (capable of testing parts up to 200 watts compared to the normal 4-5 watts of ordinary boards) to customers in the US and has recently landed a new potentially major account. While this business was not profitable in the last two years (small losses), a turnaround with the help of the new accounts is possible.

In addition, Avi has also identified green products such as energy saving LED lights for its system integration division to manufacture and sell under its own brand, for which a US wholesale channel has been secured. According to the management, these relatively new business, which contributed $2m in sales in FY09 (<10%), could expand to several million dollars in FY10.

In addition, with its cash hoard, Avi is exploring several opportunities to acquire companies with synergistic businesses in the areas it is familiar with. None has been firmed up yet but management has been pursuing this avenue since last year. We understand that it is interested in at least a controlling stake and will not spend more than half of its cash.

We maintain our view that TPV is one of the proxies to the theme of export recovery and SOE restructuring. Maintain BUY with a new target price of HK$5.46.

Revenue contracted 32.3% yoy to US$1.7b in 2Q09, but rebounded 24.4% qoq. Net profit fell 22.6% yoy to US$39.8m in 2Q09. TPV has been generating a strong operating cash flow since 2H08. The Group was in a net cash position as at end of Jun 09 vs net gearing of 31% as at Dec 08. An interim dividend of 0.6 US cents has been declared.

Key part of TFT-LCD supply chain in China. Without the support of domestic panel makers, local TV manufacturers are highly reliant on supply from panel manufacturers in Korea and Taiwan. According to the local Chinese press, the Chinese government plans to build up its own TFT-LCD supply chain locally. TPV’s management believes that CEC’s entry into theTFT-LCD panel manufacturing business would be a positive move in the long term. CEC is likely to leverage TPV for the process of assembling LCD TV sets. We still believe that CEC is likely to increase its stake in TPV to over 51% to consolidate it as a subsidiary in order to build up its TFT-LCD supply chain in China.

LCD-TV outsourcing. Hon Hai Precision has agreed to buy 90% stake in most of Sony’s Mexican units which produce TFT-LCD TVs. Under the agreement, Hon Hai Precision will buy Sony’s Baja California and manufacturing assets related to the Mexican units’ Tijuana factory. Sony will retain the remaining 10% stake in the Mexican units, while the Mexican factory will continue to manufacture LCD TVs for Sony. TV makers are now looking to outsource manufacturing operations and are in search of cost reduction opportunities. According to iSuppli, LCD TV makers outsourced about 28.7% of TV production to contract manufacturers in 2008. More outsourcing by TV makers will create growth opportunities for OEM/ODM manufacturers, including TPV. According to the management, the Group can look forward to growth opportunities in 2010 as a result of the band of customers it has built up.

We maintain our view that TPV is one of the proxies to play the recovery theme and is a beneficiary of SOE restructuring. After the earnings revisions, our forecasts are still the highest among all houses. TPV is now trading at 0.8x P/BV and is one of the few leading exporters trading below book value. We believe more outsourcing by TV makers will create growth opportunities for OEM/ODM manufacturers, especially for TPV which is likely to be one of the key beneficiaries of this trend. Maintain BUY with a new target price of HK$5.46 based on 1x 2009 P/BV vs the previous target price of 1x 2008 P/BV.

Elec and Eltek’s (E&E) taiwanese listed competitor Tripod Tech said that its expects customers in the notebook, handset and optoelectronics business segments to drive 3Q ending Sept’09 sales up another 15% while gross margins will exceed 2Q09’s 20%, and management remains optimistic of prospects in 4Q09, underpinned by their robust orders from key customers.

Last Friday, E & E’s major customer Intel Corp also raised its 3Q ended Sept’09 sales forecast from at least US$8.1bln to at least US$8.8bln reflecting stronger than expected demand from the PC industry, likely in anticipation of the upgrade cycle as a result Microsoft’s new Windows 7 launch next month. (Intel’s gross profit margin has also been revised upwards to an average of 54% versus 53% previously).

And Dell and HP are expecting their corporate customers to upgrade their systems next year as most of their systems are very old now.

E & E is currently only trading at 7-8x PE, 0.7x price to book and 0.6x price to sales versus Tripod Tech’s 16-17x PE, 2.3x price to book and 5.5x price to sales.

LIttle wonder that its major shareholder Kingboard wanted to privatize the company at US$1.20 a share (this failed as its independent adviser deemed the offer price too low), which should provide downside support in the event of a widely anticipated market correction.

While we maintain our BUY recommendation on E & E, we note that it had omitted interim dividend when releasing results for H1’09 (on Aug 14), vs 10 US cents a year ago.

While this can always be “justified” by the 46% profit decline in H1’09, the company actually raised final dividend last year to 5 US cents from 4.5 cents, despite a sharp 62% drop in profit for Q4’08. E & E however cut special for 2008 to 5.5 US cents from 8 cents in 2007.

It seems quite clear the omission was intended to “punish” shareholders for rejecting the voluntary delisting offer, which had to be withdrawn on Aug 21st..

Lum Chang Holdings was founded in the 1940s by Mr Lum Chang, a pioneer in Singapore’s construction industry, and was listed on the Singapore Exchange in 1984. L.C Development, which was previously a listed subsidiary with interests in hotels and serviced residences globally, was demerged in October 2005. Today, Lum Chang Holdings’ main business is that of construction in Singapore (approximately 90% of profits), while it also has property development interests in Singapore and Malaysia.

With its experience, the Group is amongst a handful of local-owned firms with the capability to handle large-scale civil and infrastructure projects on its own. Such projects are typically more technically challenging than residential projects. As a testament to this, Lum Chang completed the $213m DTSS_Pumping Station project at the Changi Water Reclamation Plant, winning the BCA Construction Excellence Award in May 08. It was also recently awarded a six-year $452.4m contract from the LTA to build the new Downtown Line 2 MRT Station at Bukit Panjang.

We estimate Lum Chang to have a construction net orderbook of about $700m as at FY09 (June Yr End) of which $500m relates to MRT projects to be recognized over the next 5-6 years. While the remaining $200m work relating to commercial and residential projects will be recognized over the next 12 months, management is optimistic that they can easily renew this orderbook, given their track record.

While the Group will reap some profits from the sale of its remaining four units of Swettenham Luxury Bungalows, we expect Malaysia to provide the excitement going forward. The Group has teamed up with a strong JV partner to develop 3 residential projects in Kuala Lumpur. In various stages of construction and launches, current market prices mean these will start yielding profits going forward.

Even without taking into account the expected profitability over the next few years, the Group is currently only trading at 1X P/B. Under its assets, $20.6m is net cash, while another $39.5m is the cost value of the Swettenham Bungalows which is below market price at the moment. We also note that all its trade and receivables are from government bodies/ blue-chip clients where we do not foresee any collection issues. The Group has paid steady dividend of at least 1 cent net per share since 1997.

Despite the lower-than-expected results, Zaino is preparing for its next leg of growth, to be driven by its enhanced market leadership and healthy financials. Maintain BUY.

Update from distributors: better sales since July. We called the respective distributors after China Zaino International’s (Zaino) 2Q09 results announcement to obtain an update on the recent sales performance. Some new findings are summarised in the table below. Generally, distributors are feeling more confident in sales in the coming months and they also commented that sales from July onwards are getting better. They have expressed concern about future sales as there is a change in consumers’ preference towards cheaper products, where competition is more intense in this segment.

Expansion of distribution network and renovation of existing POS. Zaino intends to expand its distribution network to over 4,000 point of sales (POS) by 2011 and renovate existing POS outlets to provide a larger shop area to increase product penetration. Currently, 1,000 shops have to be revamped from metal fit outs to new wood fit outs. We believe such strategy is likely to enhance the market leadership of Zaino. Its luggage segment will continue to ride on its vast distribution network with further volume growth expected.

M&A opportunities. Zaino’s management has reiterated that they are actively looking for merger and acquisition (M&A) opportunities to further expand the group’s business structure. Possible M&A targets include backpack and luggage manufacturers that have already established a brand and existing network, similar to the group’s current competitors but with a smaller business scale and good track record.
Restart TV advertisement from June to strengthen brand image. After seeing the positive feedback from the TV advertisement shown from Jul 08 to Jan 09, the group restarted TV advertisement from Jun 09, expecting to continue throughout the rest of the year. We believe such a move will help to strengthen Zaino’s Daipai brand further and pave the way for its long-term growth.

Dividend payout is a sure thing for 2009. Despite a possible drop in earnings this year, the management has promised to pay dividends for 2009. The payout ratio is at least 20%, same as 2008.

Healthy financial position. Amid improving fundamentals in the overall economic environment, the group has been keeping its financial position healthy, paving the way for growth. As at end-2Q09, it had net cash of Rmb854m, or S$0.19/share. Trade receivables continued to fall from Rmb318.6m at end-08 to Rmb237.9m at end-Jun 09, suggesting that the group is enhancing its credit control ability.

Zaino is trading at 2.7x 2009 PE, a 40% discount to its Singapore-listed peers’ average, not to mention the huge discount compared to Hong Konglisted sportswear retailers’ average of 14.8x. We value the stock at a 10% discount to S-shares’ average and arrived at our target price of S$0.35, implying 3.8x 2009 PE.

Hubris, then denial. Singapore-listed shipping trusts had the misfortune of entering the market at the peak of cycle - with the added hubris of aggressive leveraged growth until 2H 2008. This was compounded by a highly unsustainable model of excessive distribution payouts. In the meantime, the cycle turned against the trusts as industry fundamentals deteriorated and credit markets became inaccessible. The trusts have largely spent the past year mired in denial on matters including counterparty health or availability of financing.

Grasping for salvation. But the real consequences of the past 24 months could not be avoided forever. The best reflection of the dawning of reality is in the steady decline in distribution payouts over the past two quarters. Guidance for 3Q09, if given, is even lower. The sector has started using cash earnings to prepay debt or part-finance committed acquisitions. The distribution model of 100% or even 70% of cash earnings payout is clearly broken. Unfortunately, starting to retain cash today is not a panacea (in our opinion) for some of the challenges facing the sector: loan-to-value covenants, large committed order books, and counterparty risks.

Unwinding leveraged plays. We are more negative on the trusts than the shipping industry as a whole, as we believe these small, highly leveraged asset owners will be the worst-off during this down-cycle. Rickmers Maritime, the most at-risk trust, must address some key challenges in the next year. The market, in our view, is treating RMT as the canary in the coal mine - that is, what happens to RMT will drive what happens to the sector. As such, the next few months are likely to be a period of extreme, newsdriven volatility. A capsizing boat may submerge the entire sector. We downgrade the sector from NEUTRAL to UNDERWEIGHT.

Prefer FSLT. We prefer FSL Trust (BUY, FV: S$0.76) to Pacific Shipping Trust (HOLD, US$0.27) for its diversified portfolio vis-à-vis PST's 100% container focus. We expect FSLT to secure LTV covenant waivers (with conditions/pricing still uncertain). PST did everything right when it came to payout and gearing, but it is still hurting as it goes through rate renegotiations with charterer CSAV. In a separate report out today, we maintain our SELL rating on RMT but reduce our fair value estimate to S$0.16 from S$0.39 as we adjust our valuation approach to reflect the likelihood and consequences of distress. We believe RMT's unit-holders are caught in a game of "heads I lose, tails you win", whatever the final resolution.

Production and sale of yarn and fabric. China Gaoxian Fibre Fabric Holdings Ltd. (China Gaoxian) is principally engaged in the production and sale of premium differentiated fine polyester yarn and warp knit fabric. The group's products are sold under its HuaGang and DaHuaWei brand names, while production plants are in located in China's Zhejiang and Fujian province. With an IPO price of S$0.26, China Gaoxian will raise about S$78.2m in net proceeds, which will be used to (1) expand its downstream fabric manufacturing business (S$35m); (2) expand production capacity (S$33m); (3) strengthen brand recognition and expand sales network (S$3m); (4) increase product development capabilities (S$3m); and (5) for general working capital (S$4.2m).

Higher revenue and margins. China Gaoxian reported a 36.8% YoY rise in revenue to RMB1.8b and a 47.9% increase in net attributable profit to RMB390.4m in FY08. Revenue is primarily generated from the manufacture and sale of products, which can be broadly classified into five series. The group started branching out into new products in Jan 08, and the change in product mix has resulted in higher revenue. Gross profit margins have also trended higher in the past three years (28.9% in FY06, 29.5% in FY07 and 30.4% in FY08).

Certain inherent risks. The group is highly dependent on the PRC market as all its products are sold to textile and garment manufacturers in the PRC. Hence a decline in consumer demand of the group's customers' end products in China (e.g. garments, home furnishings) will affect the group's business. An important raw material in the group's production is PET chips, which is derived from crude oil. Fluctuations in oil price will therefore affect the group's cost of production.

Relatively optimistic. The group is relatively optimistic about the prospects of the domestic PRC market given its government's initiatives to stimulate domestic consumption, higher export rebates for the textile industry as well as initiatives to increase the income levels of the rural population. Management also expects gross profit margin to remain generally stable till the end of FY09, barring unforeseen circumstances. As at 31 Aug 09, the group has purchase orders on hand amounting to about RMB291m to be delivered over the next two months. We do not have a rating on China Gaoxian.

We maintain our BUY call on Armstrong following a visit to its booming automotive parts factory in Changchun. In the past year, Changchun has surpassed Wuxi, which makes electronics parts, as the top producing factory in the group. Armstrong’s automotive business in China was the only segment to post positive 20% YoY growth in 1H09. With June and July continuing to strengthen, that growth looks set to continue in 2H09.

Although 2009 automotive growth is driven mainly by government subsidies at the grassroot level to boost domestic demand for vehicles, Armstrong will have the benefit of a wider product line-up at higher selling prices (and margins) to drive growth in 2010. There is also the potential to expand its involvement with a greater number of models with customers such as Audi (currently supplying only one model out of five).

New products include an EPP rear seat gasket for VW with a significantly higher price than other parts to-date. EPP has great potential to expand further as China wants to raise the level of EPP parts in each vehicle to 6.8kg (only half now). EPP is lighter than steel hence more environmental. We also saw a relatively high price point product for Peugeot. There is talk DPCA will make the 407 in China in future.

Armstrong is also interested in expanding into India, which was the world’s nineth largest automotive market in 2008 (but Asia’s third largest) with an annual production of 2.3m units (vs 9.3m for China) and 15% CAGR forecasted by Booz & Co by 2013. Management has already identified a local partner that is currently supplying die-cut parts to VW, BMW and Tata Motors, among others. A JV structure is likely.

We have kept our forecasts intact. Our target price is $0.34, pegged at 12x FY10 forecast. The stock trades at only 8x FY10 PE despite good growth prospects from the trough of this year. Group-wide, Armstrong has capacity for $230m in revenue and $23m in net profit (assuming 10% net margin). Its peak year was 2007, when it recorded $183m in sales and $20m in net profit.

Creative’s US$1bln technology bet Zii could show up in TV set-top boxes, digital signage systems and mobile phones from other manufacturers next year. Zii is a low-powered & low-cost computing platform aimed at a broad range of manufacturers as building blocks for mobile phones and other electronic devices. It features ready made tech that can be put together like a Lego set, allowing manufacturers to get new products to the market as fast as possible.

Future Zii-powered devices could include those that run on internet search giant Google’s upcoming Chrome computer operating system which could bring Zii into the realm of netbooks.

A Zii set top box could cost about US$50, making it significantly cheaper than existing products in the marketplace today, which should appeal to producers of digital signage systems found in shopping mails which typically comprise big screen TVs displaying advertisements.

Creative launched a Zii mobile phone last month which runs on the Google mobile phone operating system Android.

With Zii, Creative is trying to emulate the business model of Intel Corp which not only produce chips but also designs chipsets as well as work with software vendors to ensure their applications run well on their hardware. Creative is going one step further in making near complete products which manufacturers can use to churn out their own finished products faster.

The time savings for companies who adopt the Zii platform is estimated to be as much as 1 year.

Management expects this new platform to be able to earn significant revenues in future but declined to provide forecasts.

Management targets China as the near term target market given the willingness of manufacturers there to try new technologies.

As noted in the Hock Lock Siew (HLS) column in Business Times today, Creative’s new tech idea Zii coincided with a revival in the company’s share price. Indeed, the huge addressable market, positive initial reviews from tech blogs as well as encouraging tieups with famous tech giants such as Google makes the new tech idea sound promising.

However, we agree with the HLS columnist that a promising start does not equate to top and bottomline success, as finally the key to success is getting the idea into mass adoption by end users. And in this regard, Creative again faces a very steep uphill tasks as it again faces very established and deeppocket giants such as Nokia, Apple, Sony just to name a few. We understand that even Google’s attempts to penetrate into the mobile phone area is facing huge resistance from end users who are used to existing platforms.

And it is again useful to be reminded of Creative’s numerous failed past ventures with their only known success to be the Sound Card business which is obsolete today. Last year’s promising inPerson video conferencing product which was supposed to takeoff has yet to show results.

Creative’s 4Q ended June ’09 sales fell 38% to US$86mln while bottom-line swung to a loss of US$14mln, dragging full year loss to US$139mln. Management warned in their outlook statement that the market for their core products remain difficult and unpredictable and expenses will rise as they market their new Zii platform. This suggests that they will continue to remain in the red in the near term.

Fortunately for them, financial position remains sound with net cash of US$250.55mln against zero debts while shareholders funds total US$322mln.

With the price surge on the back of the excitement of the new tech platform, the stock is now trading at 1.1x price to book despite its continued loss making position and management’s warning of the downbeat near-term outlook. We maintain SELL.

News: Genting Singapore is undertaking a renounceable underwritten rights issue at issue price of S$0.80 for each rights share, on the basis of 1 rights share for every 5 existing ordinary shares. At the existing share base of the company, approximately 1.9b rights share is expected to be issued, translating to S$1.5B in expected funds raised. Genting Singapore intends to use approximately 60% of net proceeds raised from the rights issue for funding of future acquisitions and/or investments undertaken by the group. The remaining 40% will be used for working capital purposes and includes repayment of bank borrowings.

Impact on our net profit, EPS estimates: As a result of the interest savings, we are increasing our net profit forecast for FY10E, FY11E and FY12E by 44%, 10% and 4% respectively. EPS in FY11E and FY12E are reduced by 9% and 13% respectively, due to the enlarged share base. EPS in FY10E, however, is higher by 20% as the interest savings were significant as a proportion of the smaller operational income base (1st year of opening of its Singapore project).

Ex-rights June-2010 PT of S$1.15; in bullish case, stock could trade up to S$1.95. We adjust our PT downward from S$1.20 to S$1.15 to factor in the additional shares / capital raised from the rights. In our initiation report dated 11th August 2009, entitled 'Playing it forward', we highlight that the stock could trade up to S$2 if we were to adopt bullish case assumptions (see pg 14 of the initiation report). Ex-rights, we believe the bullish case fair value is closer to S$1.95.

Dismal 4Q09 results. Silverlake Axis Limited (SAL) reported an extremely disappointing set of 4Q09 results last Friday. Revenue fell 20.1% YoY to MYR11.2m, and it was also down 25.7% QoQ. And due to the lower revenue, SAL slipped into the red with a net loss of MYR0.6m, compared to a net profit of MYR9.7m in 4Q08 and MYR0.7m in 3Q09. For the full year, revenue fell 62.7% to MYR54.8m, or about 6.8% shy of our estimate, while net profit fell 82.5% to MYR19.1m, or 11.2% short of our forecast. SAL declared a final dividend of MYR0.007/share.

Only positive from Maintenance Business. On a segmental basis, its SIBS Licensing revenue fell 78.8% YoY to MYR1.6m, though it was an improvement over the previous quarter where it did not record any sale. Software & Hardware Products fell 53.8% YoY and 98.7% QoQ to just MYR0.1m, and while Customised Software Solutions grew 125.2% YoY and 51.9% QoQ to MYR2.7m, it was from a very low base. On a slightly more positive note, its Maintenance & Enhancement Services rose 28.3% YoY and 14.3% to MYR6.5m, making up 58.8% of the 4Q09 revenue.

Earlier, SAL said it intends to use the downturn to restructure its business model i.e. moving away from the inherently lumpy licensing-based sales strategy towards a more balanced model with recurring sales making up at least 50% of total revenue.

Cautiously optimistic about FY10. As forewarned by management, the operating environment has remained challenging - any contracts would only materialize in FY10 despite the nascent increase in RFPs (Request for Proposals). SAL believes that these contracts would come from customers who have delayed their project implementation in FY09. However, due to its poor execution and continued disappointment over the past few quarters, we are a little less sanguine.

Suspending coverage. Although we had downgraded our rating to SELL in our previous report, the stock price has continued to run ahead of its fundamentals; we do not foresee a strong recovery in revenue and earnings. No doubt that the global economic environment has improved and the financial crisis has blown over, but we believe that the addressable market for its core banking solutions has also matured - we are unlikely to see much possibilities for full SIBS implementations. As such, we are suspending coverage on the stock.

GENS announced a 1-for-5 rights issue at S$0.80 each (32.8% discount to last done price of S$1.19) to raise S$1.63b to reduce debts and facilitate business expansion. This is expected to dilute 2010-11 EPS by 21.1%.

GENS has proposed a 1-for-5 renounceable rights issue of up to 2,043.7m new shares at S$0.80/share, a 32.8% discount to its last done price of S$1.19. This is the third rights issue since its IPO in 2005.

Rationale of rights issue. The rights issue is expected to raise gross proceeds of up to S$1.63b to strengthen its balance sheet (40%) and facilitate future acquisitions and investments (60%). No further details are provided on future acquisitions although we reckon that Genting Bhd (GENT MK) or Genting Malaysia (GENM MK) will be a better vehicle for this purpose.

Impact from rights issue. GENS’ 2010 and 2011 EPS are expected to be diluted by 21.1% after the rights issue. We now project gross debt to reduce to S$4.6b (previously S$5.22b) by end-10 (net debt/equity ratio of 85%).

We estimate a potential interest cost savings of S$20-30m per year which would raise our net profit forecasts marginally.

We have revised down our FY10 net-profit forecast for SCI by 5.2%, following a downward adjustment to our assumption for the Utilities segment’s UK revenue and upward revisions to our revenue forecasts for key subsidiary, SembMarine.

While SCI is a conglomerate, we believe that the company’s fundamentals are driven primarily by its rig-building operations, by virtue of that segment being the largest contributor to net profit (64.8% of our FY09 net-profit forecast), and given that its more earnings are more volatile than those of the Utilities segment.

We maintain our 4 (Underperform) rating and SOTP-based sixmonth target-price of S$2.69. We believe that the company is vulnerable to disappointing the market with respect to its FY11 net profit. We see the key share-price catalysts as: 1) the Petrobras contract tender and award in respect of its next round of deep-water drilling rigs and offshore storage vessels, and 2) announcements (or lack thereof) of new rig-building contracts. We predict the market could be disappointed by the volume of new contracts SembMarine wins over the next six months, despite the price of crude oil more than doubling from its cyclical low of US$33/bbl.

Downward revision to our 2010 revenue forecast for the Utilities segment. We visited SCI on 31 August 2009. During this meeting, we got more details on the company’s UK utilities operations. At the company’s 2Q09 analyst briefing, the company disclosed that its UK utilities operations had lost three of their biggest customers. During our recent company visit, we heard that these three customers have yet to wind down their operations. As a result, we believe that the Utilities segment’s revenue will decline on a year-on-year basis in 2010.

Adjustments to timing of semi-submersible orders. We now assume that new rig orders in 2010 will not arrive all at the same time. The timing difference causes ‘gaps’ in our estimates for 2011 rig-building utilisation, which in turn would affect the timing of SembMarine’s 2011 revenue recognition, in our view.

More non-rig revenue. We have made some adjustments to our assumptions for SembMarine’s non-rig business. This business includes ship maintenance, repair, and overhaul services. These types of contracts are usually not announced publicly in press releases, but are part of SembMarine’s normal ‘base-line’ recurring revenue. We have assumed a fairly steady stream of business, albeit with slightly lower volume in 2011 compared with 2009, on the assumption that major overhaul projects in 2011 (eg, the five-year overhaul) are lower than 2009 levels to coincide with lower utilisation rates on dry-bulk and container ships in 2009, and the phasing out of single-hull oil tankers under International Maritime Organization regulations by the end of 2010.

Genting Singapore has announced a 1 for 5 rights issue at subscription price of S$0.80 which could raise gross proceeds of cS$1.5bn-1.6bn. The company intends to use c60% of proceeds for future acquisitions/investments in leisure & gaming related sectors, and c40% for working capital purposes.

RWS remains fully funded with an S$4bn credit facility together with the original S$2bn equity funding from the 2007 rights issue. As of end H109, only S$1.6bn of the S$4bn had been drawn down. We do not expect any downstreaming of new equity funding into RWS from Genting Singapore. Pro forma, net debt to EBITDA would decline from 5.3x to 3.1x in 2010e, and from 4x to 2.3x in 2011e.

We believe strategically Genting Singapore may seek acquisition or investment opportunities in casino-related sectors outside of Singapore. However, we consider further investment in UK and new investment in the US as risky. Entry into Macau would be positive, but structural and regulatory issues remain difficult to overcome.

Since the subscription price of S$0.80 is only marginally lower than our current price target of S$0.82 and the increase in the share capital is only c20%, there would effectively be no change to our price target based purely on the terms of the rights issue transaction. However future investments may alter our fair value.

Encouraging set of 4QFY09 results. Avi-Tech Electronics recently turned in a set of better-than-expected 4QFY09 results. Revenue fell 50.1% YoY (+22.5% QoQ) to S$6.6m amid the difficult business environment, but was still ahead of our expectation of S$5.7m. Similarly, while net profit declined 29.6% YoY (+100.7% QoQ) to S$1.1m, it exceeded our forecast of S$0.6m, due to a more favorable sales mix and stronger-than-expected operating income. As a result, FY09 revenue of S$31.3m (-57.8%) was 2.9% above our sales estimate of S$30.5m, while net profit of S$5.4m (-54.4%) was 10.5% higher than our earnings projection of S$4.9m. The group expectedly ended the fiscal year by declaring a final cash dividend of 0.5 S cent/share, hence bringing the total FY09 dividend to 1 S cent/share (or 5.0% yield). Confident of riding out current downturn. While there are tentative signs of improvement in business activity, management cautions that the global recovery is likely to be subdued, and that the current economic climate is expected to continue to pose challenges to the group in the near term.

However, the group also highlighted that it is confident of riding out the current economic downturn, given its healthy balance sheet and strong cash position (S$0.13 net cash/share). In addition, it noted that its strategies to grow its businesses within the medical and life sciences industries and to broaden its service offerings had begun to take-off, having fulfilled its first orders for the respective equipment. In order to further pursue these new business opportunities, Avi-Tech had also established a wholly-owned subsidiary in the US. On this front, we understand that the group had since received an increased number of orders for Burn-In boards in the region.

Maintain HOLD with S$0.19 fair value. We view this stronger-thanexpected performance positively as it suggests that the worst may probably be over, and that the company is currently on track for recovery. For FY10, we also expect its healthy margins to sustain amid stronger percentage contribution from its higher-value Burn-In board manufacturing and services segments. As the group progresses into the new fiscal year, we now introduce our FY11 forecasts. Applying a 1x FY10F NTA (0.65x FY10F NTA previously), our fair value is raised from S$0.11 to S$0.19. However, as the stock appears to be fairly priced at the current share price, we maintain our HOLD rating on Avi-Tech.

Although a merger between Global Foundries, a subsidiary of Advanced Technology Investment Company (ATIC), and Chartered Semiconductor (Chartered) would make strategic sense, we believe the offer price is low for minority shareholders and the timing is also unfavourable, given that Chartered should return to profit from 3Q09. We believe ATIC’s offer only takes into account the replacement value of Chartered, not the intangible value. Minority shareholders will have an opportunity to negotiate a better offer or reject the offer during the upcoming EGM.

In our view, the all-cash acquisition offer from ATIC would not have come as a surprise to the market, given the topic has been discussed widely since the end of 2008, and last week the share price was pushed up to near the offer price of S$2.68.

We have revised up our FY09 revenue forecast by 6% and revised down our net-loss forecast to US$127m from US$181m. We have also raised our six-month target price to S$2.65 from S$2.20. However, we believe a full takeover bid should command a more than 20% premium to Chartered’s fair value. We maintain our 3 (Hold) rating.

The near-term impact of the merger on the foundry industry would be limited in our view, but the merger could put pricing pressure on advanced 32/38nm process technology and dampen TSMC’s (2330 TT, NT$62.0, 2) profit margin in FY11.

We have downgraded our rating for Keppel Corp to 5 (Sell) from 4 (Underperform). The key reason for this is Keppel’s dearth of new contracts and recent share-price appreciation.

We have raised our SOTP-based six-month target price for Keppel Corp to S$6.12 from S$5.44, due primarily to a change to our assumption for the value of the rig-building business. The upward adjustment is a concession to the view that the market is willing to pay more for an energy-related stock since the previous time we valued Keppel Corp’s stock, but the downside potential from the current price to our new target price reflects our fundamental bearish view on the company.

Keppel Corp is an offshore/marine, property, and utility conglomerate. However, the company’s Offshore & Marine segment has generated 74.1% of the group’s consolidated revenue and 72.3% of its pre-tax profit over the past four quarters. In other words, rig-building is what matters for this company and we, therefore, focus on this segment’s prospects.

Keppel Corp’s share price is up by 88.7% since 9 March 2009, compared with a 78.3% rise in the FSSTI and a 44.6% increase in crude-oil prices over the same period. While economic and equity-market conditions have improved recently, we think that expectations in the market are too high for Keppel Corp’s earnings (even after the upward revisions to our FY10 and FY11 net-profit forecasts, they are still significantly lower than the respective Bloomberg-consensus forecasts). The keyreason for our earnings-forecast revisions is to reflect the adjustment to ourassumption for unannounced rig and ship-repair/maintenance contracts, which factor in the relatively steady revenue stream of this type of business.

Despite the upward revisions to our FY11 revenue and earnings forecasts, they remain among the lowest of all contributors to the Bloomberg consensus (12.0% and 23.0%, respectively, lower than the averages). Accordingly, we think there is potential for Keppel Corp’s earnings to disappoint.

We have raised our SOTP-based six-month target price for Keppel Corp to S$6.12 from S$5.44. The key change to our assumptions is the value we assign to the rigbuilding business, which we benchmark off our target price for SembMarine. We use a DCF to value SembMarine, including a WACC of 10.9% and a terminal growth rate of 1.2%.

Genting Singapore (GENS) has proposed a renounceable rights issue of up to 2,043,716,096 new ordinary shares at an issue price of S$0.80/share on the basis of one (1) rights share for every five (5) existing shares. The issue price is at a 32.8% discount to GENS' closing of S$1.19. The rights issue is expected to raise gross proceeds of S$1.63b, which will be used to strengthen its balance sheet and facilitate future business expansion.

Our preliminary ex-rights target price is S$0.80. We foresee a potential selldown on GENS once the shares resume trading, but expect it to recover in the run up to the opening of Resorts World@Sentosa at the end of Dec 09 or 1Q10.

We expect Genting Berhad (BUY/RM6.88/Target: RM7.60) to fully subscribe for its entitlement. Its full entitlement would cost GENT S$0.84b (RM2.06b). GENT's gross cash stood at RM2.45b as at 30 Jun 09.

Advanced Technology Investment Company LLC (ATIC) of Abu Dhabi and Chartered Semiconductor Manufacturing of Singapore (Chartered) has announced an agreement whereby ATIC would acquire Chartered

Under the terms of the agreement, ATIC will pay S$2.68 cash for each share of Chartered, representing S$2.5b for Charter's equity. Chartered share price closed at S$2.66 on Friday.

Temasek Holdings, which owns approximate 62% of Chartered's shares, of Chartered's shares, also fully supports the acquisition and has signed an irrevocable undertaking to vote in support of the transaction. The transaction will be finalized during 4Q 2009.

Once the acquisition is completed, ATIC will be the sole owner of Chartered. ATIC is the technology investment arm of the Abu Dhabi government.

Its latest bid for Chartered comes on the heels of its March 2009 creation of GLOBALFOUNDRIES a US-based semiconductor manufacturer.

ATIC plans to capitalize on the complementary strengths of Chartered's 8-inch and 12-inch fabrication expertise and GLOBALFOUNDRIES advanced technology expertise.

Separately, Chartered has also announced over improved guidance for its upcoming 3Q 2009 results compared to its earlier guidance in July 24, 2009.

Chartered attributed the upward revision in its guidance to business improvement in its mature technologies. Chartered now expects wafer shipments to increase some 24% compared to 2Q 2009. As a result, Chartered now expects 3Q 2009 net loss to be reduced by US$18m to a loss of US$4m compared to its previous guidance of a net loss of US$22m.

We understand that Australian casinos have raised their VIP commission rates by about 0.2ppt to about 1.4ppt. Keener regional competition could be slightly negative for GENS and GENM (GENM MK/RM2.89/BUY/Target Price: RM3.26). Although Australia hosts a relatively small market (US$500-600m), it is still a significant part of GENS' target market.

Maintain Hold. Despite the potential upside to RWS' earnings, we conservatively maintain our HOLD recommendation on GENS pending better visibility of RWS' operating performance. Momentum investors may want to grab this opportunity to take profit on GENS, amid the peakish market outlook and the stock's slightly stretched valuations. Our fair price of S$0.95 is based on DCF valuations (cost of equity of 9.2% and zero terminal growth after the concession period). We prefer GENS' parent Genting Berhad (GENT MK/RM7.28/Target Price: RM7.60) as a much cheaper exposure into RWS. Our sensitivity table suggests that GENT would be worth about RM8.24 should GENS' share price remain at present levels.

Singapore Airlines and Airbus have agreed on a revised delivery schedule for eight A380 aircraft on firm order, impacting SIA’s 12th to 19th A380s. Under the new schedule, deliveries will take place between six to 12 months later than originally planned. The 12th aircraft will now be delivered in October 2010 rather than April 2010, while the 19th aircraft will be delivered in January 2012 rather than January 2011.

At present, SIA has nine A380s in operation and will take delivery of two more in the current financial year. SIA has said that it is satisfied with the operational and commercial performance of its A380s, which have proved to be popular with customers.

The delivery deferment is in line with our capacity forecasts, where we are projecting a 14% reduction in capacity in the current financial year, followed by a further 5% contraction in FY11. Similarly, we expect passenger traffic to fall by 15% in FY10, and by 3% in FY11.

SIA’s capacity cuts instituted over the past six months have shown load factors flattening out in the mid-to-high 70s. The erosion in traffic has also stabilized, but remains soft. The key question therefore remains yields, which remains at risk, where SIA has been discounting fares and loads on its premium classes are still weak.

Currently, our passenger yield assumption stands at 11.2 cts per km, which implies a net profit of S$451m in FY10, and is subject to further revision if yields do not recover from 1Q10’s 10.2 cts. Breakeven yield stands at 10.4 cts, by our calculations. SIA’s management has been warning that continued adverse business conditions could potentially cause a full year loss. However, we reiterate that FY10’s weak earnings are already expected and priced in by the market. We maintain our BUY call with target of S$14.70 based on 1.2x PBR.

In a media and analysts’ briefing held on Sept 4, CapitaLand Ltd (CapLand) unveiled its design for a new 99-year residential development located on the former Gillman Heights Condominium site. This site is the last Housing and Urban Development Company (HUDC) site not within a Housing and Development Board (HDB) estate. HUDC essentially means privatised HDB flats.

To recap, CapLand had in May 2009 completed the purchase of Gillman Heights after more than a year of legal proceedings against a group of minority owners appealing against the en-bloc sale. En-bloc purchase was done through Ankerite Pte Ltd, a consortium comprising CapLand, HPL Orchard Place Pte Ltd and two private funds. CapLand has since increased its stake in the consortium from 50% to 60% - taking over 10% stakes owned by a private fund.

The new condominuim project is called The Interlace. It sits on a eight-hectare site, located at the junction of Alexandra Road and Depot Road, next to Ayer Rajah Expressway and also in close proximity to West Coast Highway. There will be a total of 1,040 units. Sizes range from 807 sq ft to 6,308 sq ft in the form of two-, three-, four-bedroom apartments, penthouses and duplex garden units. CapLand intends to launch The Interlace next month.

Renowned architect firm Office for Metropolitan Architecture (OMA) designed The Interlace. Thirtyone apartment blocks, each six stories tall, are stacked in a hexagonal arrangement to form eight large-scale open and permeable courtyards. The interlocking volumes form the topography of a “vertical village” with cascading sky gardens and private and public roof terraces vertically extending the landscape of the courtyards. Project is expected to be completed in 2014F.

CapLand has also secured S$660mil project financing for The Interlace with seven participating banks. The loan syndication was particularly well-received, attracting over S$1bil in funds. CapLand’s management has conveyed that an all-in interest margin of 3.48% would be payable, or 2.8% margin above the three-month Singapore Interbank Offer Rate.

CapLand’s management has also guided for land cost of S$363 psf per plot ratio (ppr) and construction cost in the region of S$250 - S$270 psf. Indicative construction cost is above our initial estimates of S$160 psf, probably due to the complex “‘stacked lego blocks” design. As such we have revised breakeven cost upwards to S$754 psf. Wo Hup Holdings Pte Ltd, one of the project consultants, is believed to be the contractor for the job.

Pricing will be “affordable” according to CapLand’s management. However, we do not think “affordable will equate “cheap”. Considering the design efforts and construction overlay, the project is likely to command an average selling price (ASP) of S$1,200 psf, in our opinion. We think the project will be well-received with no nearby comparable projects.

Using latest resale prices at One-North Residences and The Rochester (both apartment blocks but One-North has a “loft” living concept) as a guide, their ASP of S$1,074 psf and S$900 psf respectively are around 11% - 25% below our expected ASP for The Interlace. n We have an RNAV estimate of S$4.72/share. Adopting a 20% discount to our RNAV estimate, our fair value stands at S$3.78/share and we maintain our HOLD rating.