Asia UOBKH 080707

Regional Morning Notes UOBKayHian Monday, July 07, 2008 TALKING POINT Hi-P International (S $ ) 1 .1 0 0 .9 0 0 .7 0 0 .5 0 0 .3 0 Jul 07 Sep 07 Nov 07 Jan 08 M ar 08 M ay 08 Jul 08 CHINA Update Page 2 China Merchants Bank (BUY/HK$22.85/Target: HK$33.20) Strong 2QFY08 earnings expected, reaffirming CMB’s growth story. Maintain BUY with a target price of HK$33.20. China Shenhua (BUY/HK$28.30/Target: HK$51.40) Page 4 Takeaway from three-day site visit. Much of policy risks in the price. Snippet Page 7 China Railway Group (BUY/HK$5.36/Target: HK$7.30) Adjustment in the shareholding structure of Societe par Actions a Responsabilitie. HONG KONG Sector Consumer Page 8 Direct flights from mainland China to Taiwan started last Friday. Taiwan’s new administration will push for more economic stimuli. Property Page 9 Pair trading idea – SELL Hang Lung Group and BUY 52%-held Hang Lung Properties. Snippet Shaw Brothers (HK) Ltd (NOT RATED/HK$23.00) Page 11 According to Sing Tao, Yeung Kwok Keung, chairman of Country Garden Holdings, will sign S&P agreement with Shaw Brothers within two weeks. MALAYSIA Economics External Trade Page 12 May 08: Another month of surprisingly strong export growth of 22%, boosted by stronger demand from China and EU. SINGAPORE Tehnical Singapore Bourse Upgrade near-term outlook to positive. Page 13 THAILAND Update Thai Vegetable Oil (NOT RATED/Bt26.75) Page 14 As the largest soybean processing company in Southeast Asia, TVO is a prime beneficiary of rising soybean price. Raised guidance; FY08 a record year? Hi-P has raised its guidance for 2QFY08 recently, thanks to the robust performance of its top customer Research in Motion (RIM) and reduced foreign exchange losses. In addition, its Polish operations have recovered. The Polish plant that has Braun as a client switched to a consignment model in 2QFY08. This will help Hi-P relieve the pricing pressure from suppliers and focus on improving capacity utilisation and production yield. Losses have been reduced, and the breakeven point is expected to be achieved by endFY08. Following Mr Mahoney’s resignation in Apr 08, Chairman Mr Yao Hsiao Tung has taken on greater responsibilities within the Group. Currently, Mr Gary Ho and his team are in charge of the Polish plant under the consumer electronic segment. Mr Ho is Managing Director for corporate business development. Mr Zhou Wei Dong is Managing Director for the wireless segment and is responsible for product definition, design and manufacturing. Mr Lim Kay Leong is Managing Director for computing and consumer electronics. Maintain BUY. We believe Hi-P will report a record performance this year due to its successful alliance with smart phone giant RIM. Margin improvement is driven by an increase in orders for high-end pipelines and greater insourcing. We raise our FY08 full-year earnings forecast by 23% to S$94.6m. Our target price has been increased to S$0.83 based on 7x FY09 PE. Page 1 of 16 Please see important notice on last page Regional Morning Notes Monday, July 07, 2008 China Merchants Bank Strong expected 2QFY08 earnings reaffirms CMB’s growth story CMB expects strong 1HFY08 earnings. CMB issued an announcement estimating 1H08 earnings would have increased over 100% yoy. The strong earnings growth was attributed to strong growth in loans and interest spread, as well as growth in interest and non-interest income. 1HFY07 net profit was Rmb6,120m. We raise our FY08 and FY09 net profit forecasts by 8% and 7% to Rmb22,912m and Rmb27,619m respectively. Earnings to be boosted by resilient loan growth and strong fee income. We maintain our 16% loan-growth assumption for CMB for FY08, but expect the continued repricing of loans to support CMB’s high non-interest margin (NIM), which will in turn allow CMB to generate strong net interest income (NII) for the year. CMB’s ability to target higher-yielding loans due to its high loanloss provisioning is another factor that could help offset the expected increase in funding costs as deposits continue to grow at a faster pace than loans, and as the deposit base continues to experience a shift from demand deposits to time deposits. We estimate NIM at a conservative 3.37% for the year. We expect fee income to remain strong this year, driven primarily by bancassurance, bank cards, and structured wealth management products. Bancassurance will be a major force in driving fee income as insurance policies have been a favourite alternative to equity-related investments. NPL formation remains key risk, but not as worrisome as market believes. The market has been concerned over CMB’s exposure to real estate developers and residential mortgages in southern China, particularly Shenzhen. While we concur that property developers and homeowners are some of the most hard hit by the People’s Bank of China’s tightening policies, particularly in and around Shenzhen, CMB has stated that it has little exposure to developers in that region. In fact, CMB’s mortgage exposure to those regions only amount to about 5% of its total mortgage portfolio. CMB’s coverage ratio of 189% for 1QFY08 will also help absorb any moderate increases in non-performing loan (NPL) formation. Strong earnings expected to further underscore CMB’s growth story. Like the stronger-than-expected earnings reported in 1QFY08, 2QFY08 results are likely to surprise on the upside. The current share price weakness presents an attractive entry point for investors to take advantage of strongerthan-expected earnings. We revise our FY08 and FY09 earnings, reflecting higher NII due to strong loan pricing and strong fee income. We also raise our 12-month target price by 4% to HK$33.20, reflecting 4.1x FY09 P/B. CHINA China CIIH (966.HK) Merchants (3968.HK) BUY Current Price: HK$21.00 BUY Fair Price: HK$31.44 Current Price: HK$22.85 Target Price: HK$33.20 (Previous: HK$31.90) Nan Sheng (8621) 5404 Nan Sheng 7225 x809 Bank nan.sheng@uobkayhian.com (8621) 5404 7225 x809 nan.sheng@uobkayhian.com Sector Bloomberg Sector Reuters Bloomberg Website Reuters Insurance 966 HK Banking 966.HK 3968 HK www. ciih.com.hk 3968.HK Website www. cmbchina.com 52-Wk Avg Daily Vol. (m) 4.6 Market Avg Daily Vol. (m) 29,720.7 52-Wk Cap (HK$M) 34.7 3,810.3 Market Cap (US$M) (HK$M) 352,438.9 (US$M) Book NTA per Share (Rmb) ROE (%) per Share (Rmb) Book NTA ROE (%) Results Due Interim Due Results Final Interim Final 45,184.5 4.0 15.3 4.62 24.8 August April August April 12-Month House Call Tracking Date Rec Fair Price 12-Month House Call Tracking (HK$) 31/08/07 BUY 23.50 Date Rec Fair Price (HK$) 13/07/07 BUY 18.00 07/07/08 BUY 33.20 27/03/07 BUY 13.80 02/02/07 BUY 12.60 Price Chart HK$ Price Chart 45 40 30 35 30 25 25 20 20 15 10 10 5 0 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Year to 31 Dec Operating Income (Rmbm) 2006 2007 2008F 2009F 2010F 24,866 41,048 56,357 67,755 81,928 PreProvision Operating Profit (Rmbm) 13,775 24,310 33,881 40,610 49,430 Net Profit (Rmbm) EPS (Rmb) EPS Growth (%) PE (x) P/B (x) DPS (Rmb) 6,794 15,243 22,912 27,619 33,600 0.54 1.04 1.56 1.88 2.28 61.37 91.32 50.31 20.54 21.65 42.2 22.0 14.7 12.2 10.0 6.1 4.9 3.9 3.1 2.5 0.12 0.28 0.47 0.56 0.69 Please see important notice on last page Page 2 of 16 Regional Morning Notes Monday, July 07, 2008 Profit & Loss Year to 31 Dec (Rmbm) Net interest income Operating expenses Pre-provision profit Net profit 2006 21,509 (11,091 ) 13,775 6,794 2007 33,902 (16,738 ) 24,310 15,243 2008F 47,310 (22,477) 33,881 22,912 2009F 55,851 (27,145) 40,610 27,619 2010F 66,422 (32,498) 49,430 33,600 Balance Sheet Year to 31 Dec (Rmbm) Cash and Balance with Central Banks Due from other banks & fin institutions Total Gross Loans Gross loans & advances Total Assets Due to other banks & financial institutions Total Liabilities Total Shareholder's Equity 2006 2007 2008F 2009F 2010F 103,233 166,542 219,607 259,715 307,603 88,171 461,866 565,702 934,102 225,669 620,891 673,167 1,310,552 282,086 727,772 766,979 1,587,014 338,504 859,643 891,009 1,886,478 389,279 1,000,630 1,031,996 2,223,076 63,047 878,942 32,996 1,242,568 43,247 1,500,236 76,603 1,778,953 265,123 2,090,237 55,160 67,984 86,779 107,525 132,839 Please see important notice on last page Page 3 of 16 Regional Morning Notes Monday, July 07, 2008 China Shenhua Takeaway from site visit; Much of policy risks in the price. Summary. On a three-day site visit for analysts, management failed to address investors’ concerns on China’s coal policy risks – temporary coal price control, a proposed new resource tax system and rumoured cut in the export quota. While China Shenhua’s (Shenhua) 2008 earnings risks are limited, its 2009 earnings outlook hinges on 2009 contract price, which will gain visibility as CPI eases in 2H08. Expect further power tariff hikes and the proposed new resource tax system later in the year will provide a favourable backdrop for coal miners to raise contract price while the cost pressure of power sector eases. We cut our sum-of-the-parts based target price by 9% from HK$56.60 to HK$51.40, reflecting higher risk profile and slower progress of asset injections. Maintain BUY. A possible price hikes for 2009 contract? Investors are now predominantly focused on China’s coal policy measures as Shenhua’s 2009 earnings outlook hinges on contract price hikes, which we will gain visibility as CPI eases in 2H08. Although management declined to forecast exact price hikes, they appeared confident of higher 2009 contract prices, considering the big price discount of 40-50% to spot prices and high price cap. Should the spot price control lasts longer than expected, we believe Shenhua should be able to raise its contract price by 10-15% (vs our assumption of 10% to Rmb390/tonne, a 40% discount to QHD spot price at Rmb950-980/tonne on 30 June 2008). Also, we view further possible power tariff hikes and the introduction of new resource tax system later in the year as favourable backdrop to raise coal miners’ bargaining power to pass on the incremental costs while the cost pressure of power sector eases somewhat. 3-5% resource tax assumption is priced in. China coal stocks took a toll last Friday on the reports that China would soon introduce the new resource tax system – a change from volume-based to selling price-based. China’s coal miners currently pay Rmb3.2-3.9/tonne for thermal coal and Rmb8.0/tonne for coking coal, about 1% of average selling price (ASP). Should the new tax rate increases to 3-5%, we think much of the impact is in the price. Our sensitivity analysis indicates 1ppt increase would moderately lower Shenhua’s earnings by 1.3%, against 2.5% for ChinaCoal, 2.6% for Yanzhou Coal and 2.3% for Hidili), thanks to its lower ASP and diversification into power business, which accounts for 30% of its total turnover. Slower progress of asset injections. The long-awaited asset injections will likely delay until next year. Shenhua Group, the parent company, has 6.0b tonnes of coal reserves with 67m tonnes of production capacity and a coal-tooil project. Management stressed the injection of all these assets into listed company in next 1-2 years when these assets achieve a comparable profitability for the listed company. The positive news flow of the world’s first coal-to-oil (direct) project, which will commence trial project in Sep 08 would serve as catalysts. We believe the price for the asset injections would be 12x P/B, based on its track record. CHINA China Shenhua (1088.HK) BUY Current Price: HK$28.30 Target Price: HK$51.40 (Previous: HK$56.60) Karen Li (852) 2236 6749 karen.wy.li@uobkayhian.com.hk Foo Choy Peng (852) 2236 6798 choypeng.foo@uobkayhian.com.hk Sector Bloomberg Reuters Website Coal 1088 HK 1088.HK www. en.shenhuachina.com 34.1 695,468.0 89,162.6 7.0 15.9 6.1 52-Wk Avg Daily Vol. (m) H-shr Market Cap (HK$m) (US$m) Book NTA per Share (Rmb) ROE (%) Net Debt per Share (Rmb) Results Due Interim Final Aug Mar 12-month house call tracking Date 07/07/08 17/03/07 17/12/07 10/10/07 27/09/07 21/08/07 Rec Target/Fair Price (HK$) BUY 51.40 BUY 56.60 BUY 61.00 BUY 55.50 BUY 53.20 BUY 26.00 Price Chart HK$ 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 12/06 01/07 02/07 03/07 04/07 05/07 06/07 07/07 08/07 09/07 10/07 11/07 12/07 01/08 02/08 03/08 04/08 05/08 06/08 Year to 31 Dec 2006 2007 2008F 2009F 2010F Turnover (Rmbm) 65,186 82,107 107,796 135,862 151,728 EBITDA (Rmbm) 33,947 40,282 54,870 70,426 79,276 Net Profit (Rmbm) 17,644 20,581 30,352 37,786 42,449 EPS (Rmb) 0.98 1.11 1.53 1.90 2.13 EPS Growth (%) 4.1 13.8 37.5 24.5 12.3% PE (x) 25.5 22.4 16.3 13.1 11.6 EV/ EBITDA (x) 16.4 12.9 9.4 7.2 6.1 DPS (Rmb) 0.34 0.47 0.53 0.66 0.75 Please see important notice on last page Page 4 of 16 Regional Morning Notes Monday, July 07, 2008 Growth drivers. Apart from its promising acquisition growth story, Shenhua’s organic growth drivers in 2008-10 will come a) at least 15.0m addition in coal production each year; b) fast-growing power segment with installed capacity increasing from 18,910MW to 30,000MW and c) railway capacity expansion to 350mtpa. Specifically, Shenhua plans to expand the production capacity of Zhunge’er open-pit mines to 45-50mtpa from 20mtpa and is looking to acquire two neighbouring open-pit coal mines with 40m tpa output. Cut target price to HK$51.40. While the China’s coal policy measures would weigh on Shenhua’s stock performance, we believe much of the known risks are in the price. But we lower our sum-of-the-parts based target price by 9% to HK$51.40, reflecting a higher risk profile and slower progress of asset injections. Our target price is derived from HK$38.40 for the current business plus HK$13.00 for asset injections (HK$7.00 for coal assets and HK$6.00 for coal-to-oil project). Maintain BUY. Near-term catalysts will come from a) positive news flow of coal-to-oil project in Sep 08, b) power tariff hikes likely in 4Q08, and c) annual coal price negotiation meeting in Dec 08. Risks include unexpected economic downturn, prolonged coal price control, higher-than-expected production cost, and resource tax increases. Sum-of-the-parts Valuation Coal WACC Terminal growth rate Fair value (Rmbm) Power WACC Terminal growth Fair value (Rmbm) Coal reserves (at parentco) WACC Terminal growth rate Fair Value (Rmbm) Coal-to-oil project (at parentco) WACC Terminal growth Fair value (Rmbm) Adj. net cash/(debt) (Rmbm) Net equity value (Rmbm) No. of shares Target price (Rmb) Target price (HK$) Source: UOB Kay Hian 10.4% 3.0% 104,187 (8,836) 896,427 19,890 45.07 51.38 8.7% 0.0% 122,818 8.1% 3.0% 175,992 8.7% 0.0% 502,265 Please see important notice on last page Page 5 of 16 Regional Morning Notes Monday, July 07, 2008 Profit & Loss Year to 31 Dec (Rmbm) Turnover EBIT Pre-tax Profit Net Profit EPS (Rmb) 2006 65,186 27,491 25,917 17,644 0.98 2007 82,107 32,497 30,779 20,581 1.11 2008F 107,796 45,806 43,861 30,352 1.53 2009F 135,862 60,413 58,583 37,786 1.90 2010F 151,728 68,333 66,587 42,449 2.13 Balance Sheet Year to 31 Dec (Rmbm) Current Assets Total Assets Current Liabilities Long-Term Loans Shareholders' Funds Total Equity & Liabilities 2006 32,138 172,360 36,124 42,427 69,784 172,360 2007 72,127 239,038 33,371 49,718 129,788 239,038 2008F 96,819 285,091 46,846 59,662 149,517 285,091 2009F 128,005 337,095 58,654 71,594 174,078 337,095 2010F 169,259 388,881 64,067 85,913 201,670 388,881 Cash Flow Year to 31 Dec (Rmbm) Operating Investing Financing Net Cash Inflow/(Outflow) Begin Cash & Cash Equiv. End’g Cash & Cash Equiv. 2006 22,069 (27,558) 41,953 (5,177) 20,935 15,758 2007 25,626 (29,933) (4,118) 37,646 15,758 53,404 2008F 53,650 (29,993) (2,939) 19,540 53,404 72,944 2009F 58,470 (30,152) (2,676) 25,378 72,944 98,322 2010F 61,284 (20,718) (20,903) 37,890 98,322 136,212 Please see important notice on last page Page 6 of 16 Regional Morning Notes Monday, July 07, 2008 Snippet – China Railway Group Adjustment in the shareholding structure of SAR. In April, China Railway Group (CRG) signed a JV agreement with Sinohydro Corporation, Congo Mining and an individual Congo investor, Gilbert Kalamba Banika, to establish a joint stock limited company Societe par Actions a Responsabilitie (SAR) to invest in copper and cobalt mines. CRG owns 43% of the JV, the largest stake. Congo Mining will transfer the relevant mining rights into the JV. CRG announced yesterday that the Group, Sinohydro Corporation, Congo Mining and China Metallurgical entered into supplemental co-operation agreement and that China Metallurgical will become the shareholder of SAR and CRG’s stake will be reduced from 43% to 28%. China Metallurgical will hold 20% of SAR. China Metallurgical was the fifth largest construction company in China in 2006, which has a broad range of expertise and extensive market experience in the resource development industry. We believe the introduction of China Metallurgical to SAR as a shareholder is mainly to address investors’ concerns on CRG’s expansion into the mining business. According to announcement, the partnership between China Metallurgical and CRG will largely facilitate the smooth progress of the transaction and conduct of business activities of SAR. We share the view that this move will reduce CRG’s risk profile in the mining business. However, it will also limit the upside potential of CRG from the mining business as the acquisition is low. After the adjustment in shareholding structure, the contribution from SAR will only be equity accounted. More information will be provided in our sector report. Regarding core businesses, CRG’s management mentioned that margin improvement is on track given better economies of scale and contribution from higher margin railway segment. CRG’s ongoing business restructuring will improve operational efficiency in the long term. With its vertically integrated business model in the railway construction market covering design, construction, and railway equipment manufacturing, we still believe the Group will maintain its leading position at least for the next few years. We also expect the Group to make further announcements regarding obtaining the contracts of several large-scale projects in the near future. Potential asset injections from the parent company is also long-term positive. Any improvement in market sentiment will trigger a share price rally. CHINA China Railway Group (0390 HK) BUY Current Price: HK$5.36 Target Price: HK$7.30 Mark Po, CFA (852) 2236 6794 mark.po@uobkayhian.com.hk Please see important notice on last page Page 7 of 16 Regional Morning Notes Monday, July 07, 2008 Consumer Direct flights from mainland China to Taiwan Direct flights began. Direct charter flights from mainland China to Taiwan started on 4 July. The new flights, which will take place from Friday to Monday only, will connect five major cities in mainland China (Beijing, Shanghai, Xiamen, Nanjing and Guangzhou) to six airports in Taiwan. This is the first time that "ordinary" mainland Chinese citizens will be allowed to visit Taiwan as tourists. Before that, only mainland Chinese citizens who are permanent residents of a foreign country, or those with special permission for business or cultural exchanges, could visit the island. At present, a maximum of 1,000 Chinese tourists are allowed to visit Taiwan each day. Direct visits by mainland Chinese tourists will begin on 18 July, increasing the quota up to 3,000 mainland visitors a day. Renminbi can be exchanged into New Taiwan Dollar. To further facilitate the travel of mainland visitors, the Taiwan government (under new administration – Ma Ying-jeou) has recently amended the law to allow the Renminbi to be exchanged into New Taiwan Dollar. In addition, the Taiwan government has expanded Taiwan-China travel by ferry via the offshore islands of Kinmen and Matsu to all Taiwanese citizens. Taiwan’s new administration pushing for direct cargo flights. Nonetheless, direct cargo flights are still being blocked by China’s central government. For the upcoming talks with Beijing, Taiwan officials will push for the inauguration of direct cargo flight service and straighten the flight routes to save time and fuel costs. Note that the new charter flights still take a circuitous route, through Hong Kong airspace, so that flying times are longer than required. Taiwan-based airlines benefitting from direct flights and economic progress. Ma Ying-jeou had said he wants to make the flights daily and more direct, with a broader deal possible as soon as next year. Major beneficiaries are Taiwan-based airlines including China Airlines (2610.TT) and Eva Airways (2618.TT), which will benefit from stronger demand for Taiwan-China link as well as potential economic progress in Taiwan. Mainland-based airlines and Cathay Pacific. For mainland-based airlines, China Eastern (670.HK) will benefit the most as it is based in Shanghai, which is home to the largest population of Taiwanese living in mainland China. Hainan Airlines (600221.CH) and China Southern (1055.HK) will lure passengers away from Cathay Pacific (293.HK), which operates around 15 flights daily to Taiwan and is expected to suffer from the direct link. Air China (753.HK) will suffer because of its 17.5% stake in Cathay Pacific. Hong Kong-listed companies with substantial exposure in Taiwan. Changes have been rapid since Ma Ying-jeou took over the administration of Taiwan. We expect more positive moves to boost Taiwan’s economy. Companies with substantial exposure in Taiwan include Next Media (282.HK), Hang Ten (448.HK) and Natural Beauty (157.HK). Consumption loss attributed to en route flights. Hong Kong Tourism Board estimates that Hong Kong will probably lose about HK$192m a year when about 1.11m people travelling between the mainland and Taiwan bypass the city as a result of full direct cross-strait flights. Nonetheless, this amount is relatively small compared to the total inbound tourism expenditure (HK$140.5b in 2007). Trade loss attributed to direct link. Hong Kong Trade Development Council estimates that the direct flight will reduce the tourism trade in Hong Kong by HK$37.5b a year (representing 6.75% of the total trade in 2007). Please see important notice on last page Page 8 of 16 HONG KONG Consumer OVERWEIGHT Tommy Ho (852) 2236 6797 tommy.ho@uobkayhian.com.hk Regional Morning Notes Monday, July 07, 2008 Property Pair trade – Switch from Hang Lung Group into Hang Lung Properties HONG KONG Share price should move together. 90% of Hang Lung Group’s NAV of HK$42.45/share rests in its 51.86%-held Hang Lung Properties. Hence, its share price should track closely to that of its subsidiary. Property MARKET WEIGHT Sylvia Wong (852) 2236 6793 sylvia.wong@uobkayhian.com.hk Discount to NAV too narrow. At HK$32.70, Hang Lung Group is trading at a 23% discount to NAV, which is narrow for a holding company and is also at the high end of the historical discount range. The average discount to NAV since 2000 is a much deeper at 44%. Historical Discount to NAV (%) 0 (10) (20) (30) (40) (50) (60) (70) 00 01 02 03 04 05 06 07 08 Av g discount 44% 20.00 10.00 0.00 (HK$) 50.00 40.00 30.00 Discount to NAV Source: UOB Kay Hian Share Price (RHS) Relative share price movement. We can see from the chart on the right that, since Hong Kong’s residential market hit bottom in 2003, Hang Lung Properties has been underperforming its parent company. This can be explained by the market’s interest in Hang Lung Group as a proxy for Hang Lung Properties, which became expensive as share price rallied. Started at a much lower base (i.e. 65% discount to NAV compared to Hang Lung Properties’ 32%), Hang Lung Group naturally outran its subsidiary. Relative movement - Hang Lung Properties/Hang Lung Group 0.9 1.5 0.8 1 0.7 0.6 Jan-07 Jul-07 Jan-08 Jul-08 0.5 03 04 05 06 07 08 Source: UOB Kay Hian, Bloomberg Please see important notice on last page Page 9 of 16 Regional Morning Notes Monday, July 07, 2008 Hang Lung Group’s reaction is slower. Holding the Group’s major assets directly, Hang Lung Properties tend to react much faster to changes in property market conditions (both in Hong Kong and China). This is evident in its outperformance against parent in 2H07 and underperformance this year. As a proxy, Hang Lung Group’s share price reaction tends to be delayed. But we expect it will eventually catch up with the share price weakness of its subsidiary. Moreover, its holding company discount should widen as conditions in the Hong Kong residential market turn negative. Risk of this trade. Other than its stake in Hang Lung Properties, Hang Lung Group also holds a few small properties in Hong Kong as well as a 66% interest in Shanghai’s Grand Gateway offices and serviced apartments and a 10% in Plaza 66 retail mall and offices. These assets account for about 10% of Hang Lung Group’s NAV and of that, close to 70% are from the two Shanghai properties. If Hang Lung Group starts to sell down these assets, its discount to NAV will stay low, or could even narrow further. Hang Lung Group's NAV Based on Hang Lung Properties' mkt value NAV HK$m HK$m Investment properties Residential Industrial Commercial Hotel Hang Lung Properties Other assets Net debts Subsidiary debts Appraised net assets NAV per share Source: UOB Kay Hian 3,962 1,245 3,468 142 51,162 200 (2,527) (1,018) 56,635 42.45 3,962 1,245 3,468 142 53,913 200 (2,527) (1,018) 59,387 44.52 Please see important notice on last page Page 10 of 16 Regional Morning Notes Monday, July 07, 2008 Snippet – Shaw Brothers (HK) Ltd Market rumours regarding finalisation of takeover agreement According to local newspaper Sing Tao, the chairman of Country Garden Holdings (2007.HK), Yeung Kwok Keung, will sign an S&P agreement with Shaw Brothers in one to two weeks. Under the S&P agreement, Yeung will buy 26% stake in Shaw Brothers (HK) Ltd (Tic: 80.HK) followed by a general offer. As part of the S&P agreement, Yeung will buy the assets from Shaw family, including the remaining interests in Shaw Studios. The total consideration will amount to HK$12.5b-13b. Shaw Brothers (HK) Ltd also has a 35% stake in Shaw Studios. Located in Tseung Kwan O on a land site of 523,000sf, Shaw Studios (GFA of 1.1m sf) features one of the largest sound- and vibration-insulated sound stages in Asia, a full-service colour lab and a digital imaging facility with over 20 sound and editing suites, a 400-seat dubbing and screening theatre, executive and production office space, banqueting facilities, visual effects and animation capabilities. The budget for the entire project is reported to be US$180m. It remains to be seen whether the new buyer will consider converting Shaw Studios into a property development project. In addition, the process of land conversion and negotiation of land premium may take ages to complete. That said, the sizeable land site of 520,000sf may turn into a residential project of GFA 2.2m sf, which looks meaningful. Since there are many unknown factors, it is prudent to assume a GFA of 1.1m sf (the current GFA for the production studio complex). Assuming that the land is worth HK$1,000-2,000psf, we come up with a valuation of HK$1.1b-2.2b. At this stage, it is very difficult to estimate the potential price for Shaw Brothers (HK) Ltd as the news did not mention whether the total consideration of HK$12.5b-13b will include the cost of potential privatisation as a result of the general offer. In addition, the size of other assets (apart from Shaw Brothers (HK) Ltd and Shaw Studios) is still unknown. HONG KONG Shaw Brothers (80.HK) NOT RATED Current Price: HK$23.00 (HK) Ltd Tommy Ho (852) 2236 6797 tommy.ho@uobkayhian.com.hk Please see important notice on last page Page 11 of 16 Regional Morning Notes Monday, July 07, 2008 Economics May 08: Exports remain surprisingly strong Data Released (May 08) Data Released (Apr 08) : : Exports Imports Exports Imports + + + + 22.0% yoy 7.9% yoy 20.9% yoy 7.9% yoy + + + 8.6% mom 3.5% mom 8.0% mom 0.5% mom MALAYSIA Economics External Trade Malaysia Research Team (603) 2143 1180 Malaysia's exports increased at the fastest pace in May 08 as surging global prices lifted sales of palm oil and crude oil. Exports grew 22.0% yoy and 8.9% mom to RM60.6b, above market expectation of 13-14%. Key to this unexpected performance was stable E&E exports. Exports supported by commodities and E&E. Export growth in May 08 was mainly driven by high commodity prices and stable Electrical and Electronic (E&E) shipments. Shipments of palm oil, crude petroleum and liquefied natural gas (LNG) grew by strong double digit on the back of high prices. After a strong growth in the previous month, shipment of E&E products moderated but still at a robust 9.9% growth vs 12.8% in Apr 08. High commodity exports are expected to be sustained into 2H08 but shipment of E&E would be at a much slower pace. Higher import of intermediate goods. Total imports for May 08 grew 7.9% yoy to RM45.0b. The growth was mainly driven by stronger growth in the import of intermediate and consumer goods. However, the import of capital goods contracted in May 08 by 4.8% vs +10.8% in Apr 08. Surge in trade surplus. As a result of the significantly stronger export growth, trade surplus for May 08 jumped by RM3.3b mom to RM15.6b. This is the highest level since Dec 06. Ytd, trade surplus increased by RM6.2b on the back of strong contributions from commodities, i.e. palm oil, crude petroleum and LNG. Based on the forecast by UOB Economic-Treasury Research, Malaysia’s 2008 total exports is expected to grow at 6.2%. This indicates a substantial slowdown in 2H08, which could be due mainly to weaker E&E shipments. Import growth is expected to be 8.0%. External Trade Breakdown May 08 (RMb) 60.6 45.0 15.6 Mar 08 5.5 2.9 22.3 yoy % chg (%) Apr 08 May 08 20.9 22.0 7.9 7.9 110.0 95.7 Exports (RM m) Exports (% yoy 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 62,500 60,000 57,500 55,000 52,500 50,000 47,500 45,000 42,500 40,000 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Source: Department of Statistics Imports (RM m) Imports (% yoy) 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 47,500 45,000 42,500 40,000 37,500 35,000 32,500 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 into 2HSource: Department of Statistics Trade Surplus (RM m) Trade Surplus 17,000 15,500 14,000 12,500 11,000 9,500 8,000 Total Exports Total Imports Trade Surplus Exports E&E Palm Oil Crude Petroleum LNG Imports Intermediate Capital Consumer 6,500 5,000 24.5 4.6 4.4 2.8 (19.6) 107.1 57.4 33.8 12.8 71.4 53.1 26.4 9.9 66.5 67.2 20.4 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Source: Department of Statistics 32.2 5.6 2.7 2.2 17.4 (0.4) 12.1 10.8 3.3 7.7 (4.8) 12.7 Source: Department of Statistics Please see important notice on last page Page 12 of 16 Regional Morning Notes Monday, July 07, 2008 Technical Analysis Singapore bourse - upgrade near-term outlook to positive For the past two months, we had maintained a negative outlook on the Singapore bourse, stating repeatedly that the Straits Times Index (FSSTI) should decline to at least 2,940 and could retest prior lows. Even so, we did not expect the index to break the prior low. Last week, we suggested 2,880 as a likely target level, stating that banking stocks have further downside potential. The FSSTI had declined to a low of 2,864 last Thursday but closed at 2,880. We are no longer bearish on the near-term outlook and believe this is the best buying opportunity since Mar 08 for the following reasons: a) The underlying wave pattern shows a tapering pattern but allows the potential for just one more minor 30-40 point decline before a sustainable rebound ensues. The alternate count suggests that a low is in place at 2,864. b) Our market breadth indicator is at multi-month lows but has not formed a new low as compared with the index. That is a bullish indication. c) Our price differential model signals the sharpest risk aversion since 22 January. As such, we believe the risk/reward ratio favours taking positions on the long side. We favour banks; Singapore Exchange; Ascott Residence Trust; property stocks Wing Tai, Ho Bee and Keppel Land; Cosco; Beauty China; Synear Food; China Hongxing and plantation stocks Golden Agri and Wilmar. As for the Dow Jones Industrial Average (DJIA), we raise our downside target from 10,900-11,000 towards 11,100. Our analysis suggests a near-term upward bias towards 11,430 to be followed by a decline towards 11,100. Thereafter, we expect a more sustainable rebound towards the 12,000 level. SINGAPORE Technical Analysis K Ajith (65) 6419 5411 ajith@uobkayhian.com Singapore bourse - Market breadth at multi-year lows 600.0 500.0 400.0 300.0 200.0 100.0 11/9/2006 11/9/2007 1/9/2007 3/9/2007 5/9/2007 7/9/2007 9/9/2007 1/9/2008 3/9/2008 . M a rk e t b re a d t h a t m u lt i m o n t h lo w s . Source: UOB Kay Hian, Bloomberg Please see important notice on last page 5/9/2008 Page 13 of 16 Regional Morning Notes Monday, July 07, 2008 Thai Vegetable Oil Riding on soybean price uptrend Thai Vegetable Oil PCL (TVO) is the largest soybean processing company in Southeast Asia. With a daily capacity to process 4,000 tons of soybean, the company is Thailand’s largest producer of soybean oil (both crude and refined) and soybean meal (for animal feed), commanding 75% and 26% market share respectively. The company’s operating performance has improved substantially over the last two years on the back of significantly higher gross margin, induced by strong global demand for alternative fuel. Despite the strong 100% ytd surge in share price, the stock is trading at 8.4x FY08 PE, which is still compelling considering the strong growth prospects. With a 60-70% dividend payout policy, TVO also offers a strong dividend yield of over 8% in 2008. Rising demand for soybean oil. Soybean meal is the major source of revenue for TVO, contributing 62% of total revenue in 2007 while soybean oil sales accounted for 38%. Only 2% of the company’s products are exported. Up to 87% of total sales are priced according to the global prices of soybean meal and oil. The remaining 13% of revenue come from the sales of cooking vegetable oil under the A-Ngoon brand which retail prices are semi-controlled by the Commerce Ministry. Since 2007, prices of soybean and soybean oil have been rising due to the changes in the industry structure induced by strong demand from China and India, and increasing usage of soybean and soybean oil to produce bio-fuel. As petroleum prices are expected to continue to rise, demand for alternative energy will remain strong. This will help sustain the prices of soybean oil in the near future. Margins to remain buoyant. TVO’s gross margin stood at a record high of 17% in 1Q08. This is because as high as 87% of its revenue are directly linked to the global prices for soybean oil and soybean meal, which have risen strongly in line with petroleum prices. As there is no sign of petroleum prices easing over the next 12 months, the company expects its gross margin to stay robust at 15-17% in 2008. Other factors to support margins. The remaining 13% of its revenue come from domestic sales of cooking oil (the A-Ngoon brand of soybean oil) which retail prices are semi-controlled by the Commerce Ministry. To deal with rising raw material prices, local producers of cooking vegetable oil have asked for a retail price adjustment of Bt8.5 per bottle (+17%). If approved, this will further strengthen TVO’s margins in 2H08. Capacity expansion. To capture the stronger growth prospects of the industry, TVO is expanding its capacity by another 50% (2,000 tons/day) which would raise its processing capacity to 6,000 tons per day. Total investment is around Bt2b which will be financed by the proceeds from an upcoming public offer of 50m shares (price to be fixed over the next two months). The new capacity which will come onstream in 2H10 will enable the company to capture more demand for soybean oil for alternative energy purposes and to fulfil soybean meal import demand. Net Profit (Btm) 507 471 1,256 EPS Growth (%) 27.5% -8.0% 113.8% THAILAND Thai Vegetable Oil (TVO TB) NOT RATED Current Price: Bt26.75 Thailand Research Team (662) 6598303 Sector Bloomberg Website 52-Wk Avg Daily Vol. ('000) Market Cap (Btm) (US$m) Book NTA per Share (Bt) ROE (%) Net debt/share (Bt) Results Due Interim Final Agro & Food TVO TB www.tvothai.com 1,837.6 15,487.8 463.7 5.83 35% 0.71 August February Price Chart 30 25 20 15 10 5 0 Jul-07 N ov-07 M ar-08 Jul-08 Source: Bloomberg Year to 31 Dec 2005 2006 2007 Turnover (Btm) 14,430 15,346 18,456 EBITDA (Btm) 1,050 1,139 2,198 EPS (Bt) 1.0 0.9 2.0 PE (x) 10.9 10.7 10.5 EV/ EBITDA (x) 9.0 6.6 5.4 DPS (Bt) 0.7 0.7 1.4 Please see important notice on last page Page 14 of 16 Regional Morning Notes Monday, July 07, 2008 Strong earnings outlook. The company posted a strong 1Q08 net profit of Bt585m, +267% yoy and +7% qoq, on the back of sales growing 59%yoy and gross margin expanding to 16.9%. Management has guided for a strong 25-30% sales growth in 2008 with gross margin expected at 15-17%. Based on the solid 1Q08 results, market forecasts for TVO’s FY08 net profit range from Bt1.4b to Bt2.2b (mean consensus of Bt1.8b). Valuation. The company is trading at historical PE of 10.5x, relatively lower than the peers average of 11.74x. However in terms of profitability, TVO has out-performed the sector in ROE, ROA and margins. Revenue, Net Profit and Gross Margin 20,000.00 15,000.00 10,000.00 5,000.00 2003 2004 2005 2006 2007 14% 12% 10% 8% 6% 4% 2% 0% Peers Valuation Price @ 23 Jun 08 (Bt) 24.90 4.38 4.38 84.00 2007 Hist PE (x) 10.5 11.6 14.0 10.9 11.7 2007 Net Profit (Btm) 1,256 240 31 505 Revenue Net Profit Gross Margin (%) Source: Thai Vegetable Oil Company TVO LST CPI UVAN Average Mkt Cap (Btm) 15,500.3 3,591.6 1,227.7 7,896.0 ROE (%) 34.5 12.1 2.5 35.7 21.2 ROA (%) 16.9 5.5 1.2 32.0 13.9 Soybean, Soybean Oil And Soybean Meal Prices (US$/Ton) 1,800.00 1,600.00 1,400.00 1,200.00 1,000.00 800.00 600.00 400.00 200.00 Jan-07 Soybean Oil Soybean Soybean Meal Jul-07 Jan-08 Jul-08 Year to 31 Dec (Btm) Turnover EBIT Pre-tax Profit Net Profit EPS (Bt) 2003 12,674 995 934 642 1.2 2004 15,421 633 569 393 0.8 2005 14,430 831 733 507 1.0 2006 15,346 884 746 471 0.9 2007 18,456 1,956 1,836 1,256 2.0 Source: Bloomberg Source: Bloomberg Year to 31 Dec (Btm) Profit & Loss Current Assets Total Assets Current Liabilities Long-term Loans Shareholders' Funds Total Equity & Liabilities 2003 4,674 6,715 4,116 206 2,568 6,715 2004 3,515 5,592 3,185 55 2,570 5,592 2005 4,317 6,512 3,903 38 2,797 6,512 2006 4,801 6,823 4,016 16 3,013 6,823 2007 5,472 7,425 3,721 64 3,933 7,425 Year to Sheet Balance 31 Dec (Btm) Operating Investing Financing Net Cash Inflow/(Outflow) Begin Cash & Cash Equiv. End'g Cash & Cash Equiv. 2003 (547) (222) 796 (1) 77 76 2004 1,804 (235) (1,479) 81 76 157 2005 (31) (334) 274 (55) 157 102 2006 1,049 (93) (409) 537 102 637 2007 1,033 (153) (1,057) (193) 637 444 Cash Flow Please see important notice on last page Page 15 of 16 Regional Morning Notes Monday, July 07, 2008 We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. 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UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for only institutional clients, is an authorised person in the meaning of the Financial Services and Markets Act 2000 and is regulated by The Securities and Futures Authority. In the United States of America, this research report is being distributed by UOB Kay Hian (U.S.) Inc (“UOBKHUS”) which accepts responsibility for the contents. UOBKHUS is a broker-dealer registered with the U.S. Securities and Exchange Commission and is an affiliate company of UOBKH. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact UOBKHUS, not its affiliate. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates herein reflect our judgement on the date of this report and are subject to change without notice. This report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, the firm preparing this report or its affiliates or the principals or employees of such firm or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal In transactions in any of these securities. Any such non-U.S. persons may have purchased securities referred to herein for their own account in advance of release of this report. Further information on the securities referred to herein may be obtained from UOBKHUS upon request. http://research.uobkayhian.com MICA (P) 229/04/2008 RCB Regn. No. 198700235E Page 16 of 16