BT: Market ripe for bottom- fishing: Credit Suisse (31 Jul 2006)

Business Times - 31 Jul 2006

Market ripe for bottom- fishing: Credit Suisse

It picks Hong Leong Asia, MMI, China Sky, Tat Hong, Utac, Datacraft Asia

By MATTHEW PHAN

THE Singapore small-cap universe has underperformed the market by 6 per cent in the past two months, and with the sell-down some stocks are now offering compelling valuations, Credit Suisse said last week.

'As the market stabilises and sentiment improves, we believe this is a good time to go bottom-fishing', it says in a report.

The bank picked six stocks with growth potential: Hong Leong Asia, MMI Holdings, China Sky Chemical Fiber Co, Tat Hong Holdings, United Test and Assembly Center and Datacraft Asia.

Of the six, all but Datacraft are valued at single digit price-earnings, and in the case of MMI, Tat Hong and HLA, there is yield support of 4-5 per cent. Returns on invested capital are generally on an uptrend, and range from 20 to 30 per cent, the report says.

'Hong Leong Asia controls China's largest independent diesel engine manufacturer, China's second-largest refrigerator/freezer maker, and South-east Asia's largest hard rock quarry,' the report notes.

The diesel engine division will recover from a cyclical downturn and the building materials divisions is similarly 'bouncing very nicely from a multi-year trough', it says. As for the refrigerator business, HLA has increased its stake to 90 per cent and will also benefit from its organic growth.

Further, HLA's environmentally friendly pallet business GPac, started in 2005, has 'huge long-term potential' and could be a top contributor to earnings in three years, the report says. 'Traditional wooden pallets are now recognised as an environmental nightmare, with MNCs and governments increasingly demanding costly changes.'

Nylon yarn maker China Sky is expected to benefit from growth in Chinese demand, as well as textile trade agreements made in 2005 between China and its key export markets. These agreements will benefit high-end players in the supply chain, as the imposed quota on Chinese-made textiles was 'on quantity, and not the value of products', the report says.

China Sky has successfully differentiated its products from commodity nylon and enjoys a 30 per cent price margin, it says, though it expects earnings and margin dilution as the firm expands sales abroad.

MMI Holdings, which supplies hard disk drive (HDD) base plates and other equipment to downstream manufacturers like Seagate, will benefit from new demand from DVDs, MP3 players and game consoles, which will drive 15 per cent growth in the HDD market, the report says. Seagate's acquisition of Maxtor means it now controls 40 to 45 per cent of the market and should stabilise prices, it says.

Tat Hong Holdings operates the largest fleet of cranes in Asia and Australia, and 'with mega-projects in the oil & gas and infrastructure sectors on the rise', management's three-year earnings growth estimates of 25 per cent per year 'is likely if not conservative', says Credit Suisse.

Key customers are large international contractors willing to pay a premium for Tat Hong's track record, as the cost of crane failure is much greater than that of crane rental, it says.

Credit Suisse complimented Datacraft Asia for its strong management that has 'nursed the company back to profitability over the past three years', with earnings per share growing as high as 40 per cent each year. The company has increased margins by focusing on the service business and reduced taxes by pursuing it in lower-tax locations like India.

The report also expects a price recovery from Utac - though the company is facing seasonally weak PC demand, its share price had fallen to 1x book value, and the current risk-reward profile is favourable, it says.

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