Wednesday, August 22, 2007
Results Brief
(in no particular order)
OOIL (316)
There's little surprise, or one can say OOIL management is as reliable as ever. Latest interim results were more or less flat when compared to the 2nd half of 2006, although I'm sure it's still the best among its HK listed peers. Increasing fuel price and 3rd party logistics costs (port and ground transportation) are the culprit and may restrict further profit growth, but I have confidence that over the medium term these can be dealt with effectively. Shipping profit of HK$3b a year should be attainable. I'm however disappointed at the lack of news about new projects, or even an glimpse of where the management may consider spending its massive sales proceeds from the American ports (HK$10b after interim special dividend of HK$4b), despite having appointed UBS as the adviser for some time. Equally there's almost no progress made on the property side of which value is almost unchanged at about HK$10b, which may be excused by the lackluster Shanghai market.
The current price is about fair or slightly below value if benchmarked against its peers. Probably the lack of direction has stalled the share price movement somewhat. On more generous multiples or under better market sentiment a price of $85-95 can be justified. Any M&A opportunity is a bonus.
RIMH (1997)
This is a Taiwan company specialized in offering surface-mount technology (SMT) solutions to LCD makers, meaning soldering all electronic components onto PCBs. This is done automatically by machineries as PCBs have shrunk in size and gone multi-layer, so components used are now too small to be handled manually. RIMH is also responsible for the design, procurement and the logistics. Because SMT is such an integral part of the LCD production process RIMH has all its plants next to its customers'. And in many cases RIMH co-planned its expansion program including plant setup with its customers. I don't really understand why LCD makers can't handle SMT in-house and how SMT has come to become an independent business, but it appears the current mode is mutually beneficial and I'm too much of an outsider to question. But I'm quite certain that as more and more LCDs, LCDTVs, notebook computers, mobile phones are made in China, as opposed to Taiwan, Korea, and Japan, demand for SMT will grow naturally. So far RIMH is mainly serving fellow Taiwanese but over time I hope to see a more diversified clientele.
2006 profit was about HK$185m on HK$2.1b of turnover. 2007 interim saw turnover increased by more than 50% to HK$1.4b and net profit doubled to HK$137m. So we may be looking at an annualized profit growth of 50% to HK$270m. If this can be achieved, then the current capitalization of HK$2.1b definitely errs to the low side. RIMH has also planned for sizable capital expansion with its HK$400m IPO proceeds (NAV was HK$760m before IPO) and that's another indication of increased orders ahead, as RIMH has to expand with its customers together.
LCD market is known for high competition and low margin. RIMH although only a supplier is subject to similar pressure as its customers. But I hope RIMH's 'higher technology content' can help maintain its margin and competitiveness.
Meadville (3313)
Really impressive results! Profit was HK$300m last year and for 1st half this year profit already soared to HK$250m, on the back of a 42% increase in turnover to HK$2b. Management reported full utilization throughout (except for the Chinese new year holiday) and had to speed up the expansion plan to cope with all the demand. On the 3G front it's the biggest PCB supplier to both ZTE and Huawei and with extensive 3G testing underway in China orders are already flying. Consumer electronics side also performed satisfactorily as outsourcing of advanced electronics manufacturing continued. Laminate venture with Hitachi appears going well and that should cement Meadville's high end status in the industry. Some may be concerned about the share award charges, which will continue to drag down bottom line until 2011, but I can assure it has no effect on both equity and dilution, and can be safely ignored. (If you don't know what it's about, you can skip it altogether) Current capitalization of HK$3.6b is definitely too low, for an annualized profit of HK$500m can't be overlooked by the market for too long. Just think of why ZTE can have over 40x p/e while its biggest supplier can only demand 7x, this is too big a gap which will be narrowed.
Chalco (2600)
Definitely positive surprise as 2007 1st half profit was only marginally down 5% from that of 2006, when 2006 was an excellent year when alumina was at all time high. Downstream aluminum side now contributes about equally to the bottom line (vs 15% same period last year), making Chalco more resilient to market changes and an tremendous edge over competitors in both fields, on top of its huge size advantage already (50% and 23% of national output of alumina and aluminum). Alumina selling price was down but that's expected and the earnings gap has been filled up nicely by the downstream operation.
Proforma earnings was even higher at HK$7.2b and continual expansions could easily propel full year earnings to over HK$15b, against capitalization of about HK$200b (including shares for taking over Baotau Aluminum). Financial position is as strong as ever after A-share listing. Net gearing was only 11% and management should seriously consider offering fewer shares and more cash for future acquisitions, even though offering A-shares for exchange is still vastly beneficial to H-share holders.
Going forward Chalco will continue to benefit from the infrastructure and housing boom, and manufacturing to a lesser extent. And it's becoming more dominant in its field by each day. I wouldn't be surprised if Chalco can be traded at 20x p/e. Sifu Tony pointed out today rightfully that even Alcan of Canada was offered HK$250b by Alcoa of US. Comparatively speaking there should be plenty of upside for Chalco.
Note: Readers who wish to know more about the companies (except RIMH) can go to past posts for details.
DISCLOSURE: I hold 316, 1997, 3313, & 2600 at time of writing.
OOIL (316)
There's little surprise, or one can say OOIL management is as reliable as ever. Latest interim results were more or less flat when compared to the 2nd half of 2006, although I'm sure it's still the best among its HK listed peers. Increasing fuel price and 3rd party logistics costs (port and ground transportation) are the culprit and may restrict further profit growth, but I have confidence that over the medium term these can be dealt with effectively. Shipping profit of HK$3b a year should be attainable. I'm however disappointed at the lack of news about new projects, or even an glimpse of where the management may consider spending its massive sales proceeds from the American ports (HK$10b after interim special dividend of HK$4b), despite having appointed UBS as the adviser for some time. Equally there's almost no progress made on the property side of which value is almost unchanged at about HK$10b, which may be excused by the lackluster Shanghai market.
The current price is about fair or slightly below value if benchmarked against its peers. Probably the lack of direction has stalled the share price movement somewhat. On more generous multiples or under better market sentiment a price of $85-95 can be justified. Any M&A opportunity is a bonus.
RIMH (1997)
This is a Taiwan company specialized in offering surface-mount technology (SMT) solutions to LCD makers, meaning soldering all electronic components onto PCBs. This is done automatically by machineries as PCBs have shrunk in size and gone multi-layer, so components used are now too small to be handled manually. RIMH is also responsible for the design, procurement and the logistics. Because SMT is such an integral part of the LCD production process RIMH has all its plants next to its customers'. And in many cases RIMH co-planned its expansion program including plant setup with its customers. I don't really understand why LCD makers can't handle SMT in-house and how SMT has come to become an independent business, but it appears the current mode is mutually beneficial and I'm too much of an outsider to question. But I'm quite certain that as more and more LCDs, LCDTVs, notebook computers, mobile phones are made in China, as opposed to Taiwan, Korea, and Japan, demand for SMT will grow naturally. So far RIMH is mainly serving fellow Taiwanese but over time I hope to see a more diversified clientele.
2006 profit was about HK$185m on HK$2.1b of turnover. 2007 interim saw turnover increased by more than 50% to HK$1.4b and net profit doubled to HK$137m. So we may be looking at an annualized profit growth of 50% to HK$270m. If this can be achieved, then the current capitalization of HK$2.1b definitely errs to the low side. RIMH has also planned for sizable capital expansion with its HK$400m IPO proceeds (NAV was HK$760m before IPO) and that's another indication of increased orders ahead, as RIMH has to expand with its customers together.
LCD market is known for high competition and low margin. RIMH although only a supplier is subject to similar pressure as its customers. But I hope RIMH's 'higher technology content' can help maintain its margin and competitiveness.
Meadville (3313)
Really impressive results! Profit was HK$300m last year and for 1st half this year profit already soared to HK$250m, on the back of a 42% increase in turnover to HK$2b. Management reported full utilization throughout (except for the Chinese new year holiday) and had to speed up the expansion plan to cope with all the demand. On the 3G front it's the biggest PCB supplier to both ZTE and Huawei and with extensive 3G testing underway in China orders are already flying. Consumer electronics side also performed satisfactorily as outsourcing of advanced electronics manufacturing continued. Laminate venture with Hitachi appears going well and that should cement Meadville's high end status in the industry. Some may be concerned about the share award charges, which will continue to drag down bottom line until 2011, but I can assure it has no effect on both equity and dilution, and can be safely ignored. (If you don't know what it's about, you can skip it altogether) Current capitalization of HK$3.6b is definitely too low, for an annualized profit of HK$500m can't be overlooked by the market for too long. Just think of why ZTE can have over 40x p/e while its biggest supplier can only demand 7x, this is too big a gap which will be narrowed.
Chalco (2600)
Definitely positive surprise as 2007 1st half profit was only marginally down 5% from that of 2006, when 2006 was an excellent year when alumina was at all time high. Downstream aluminum side now contributes about equally to the bottom line (vs 15% same period last year), making Chalco more resilient to market changes and an tremendous edge over competitors in both fields, on top of its huge size advantage already (50% and 23% of national output of alumina and aluminum). Alumina selling price was down but that's expected and the earnings gap has been filled up nicely by the downstream operation.
Proforma earnings was even higher at HK$7.2b and continual expansions could easily propel full year earnings to over HK$15b, against capitalization of about HK$200b (including shares for taking over Baotau Aluminum). Financial position is as strong as ever after A-share listing. Net gearing was only 11% and management should seriously consider offering fewer shares and more cash for future acquisitions, even though offering A-shares for exchange is still vastly beneficial to H-share holders.
Going forward Chalco will continue to benefit from the infrastructure and housing boom, and manufacturing to a lesser extent. And it's becoming more dominant in its field by each day. I wouldn't be surprised if Chalco can be traded at 20x p/e. Sifu Tony pointed out today rightfully that even Alcan of Canada was offered HK$250b by Alcoa of US. Comparatively speaking there should be plenty of upside for Chalco.
Note: Readers who wish to know more about the companies (except RIMH) can go to past posts for details.
DISCLOSURE: I hold 316, 1997, 3313, & 2600 at time of writing.
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