Tuesday, September 17, 2013

Sin Heng : Poised for success when no one was looking (Phillip)

Sin Heng Heavy Machinery - SHHM
Target Price (SGD) 0.27
- Previous Target Price (SGD) -
Closing Price (SGD) 0.22
Poised for success when no one was looking

Company Overview
SHHM, with more than 40 years experience, is an efficiently run provider of cranes, aerial lifts and other heavy lifting equipment. They have projects in infrastructure and construction, offshore and marine as well as oil and gas. Their rental operations are mainly in Singapore, Malaysia, Vietnam and now newly in opportunistic Myanmar.
Their trading network are active and spans various countries in SEA. They are one of the largest world buyers and dealers of Kobelco cranes (ranked 13th of top 50 global construction equipment manufacturers by revenue), and the authorized distributor of hydraulic crane manufacturer, Kato (ranked 36th of top 50, and improving in sales yoy), in its markets, namely Brunei, Indonesia and Malaysia. While relatively under the radar, they have been successfully implementing their synergistic rental and trading business model in the region, and are now extending their footprint in Myanmar. Their closely compared publically listed competitors include Tat Hong Holdings Ltd, Tiong Woon Corp Holdings Ltd and Hiap Tong Corp Ltd.

What’s in the news?
• SHHM reported on 28 Aug 2013 that revenue up 44.3% to $186.5 million on broad-based improvement across geographical markets and business segments.
• FY2013 net profit up 45.1% yoy to $13.7 million on Group’s expanded fleet size and higher trading sales.
• Complementary rental and trading business model proven successful, Group to continue expansion plan in new and existing markets.

Investment Merits
• Factor and efficiency driven development. They have executed well in a viable business model and have positioned themselves in growth regions.
• Synergistic Trading and Rental business model. This allows greater flexibility in capital/fleet management and optimization of future profit. This is also a significant reason why they can efficiently maintain a young crane fleet.
• Strong execution. Not only has SH have a relatively better net earnings growth vs peers (SH +45.1% yoy vs Tat Hong -52% yoy. Tiong Woon from negative to positive, Hiap Tong +70%) for the last 12 months. They did it with significantly less leverage. (Sin Heng has net debt ex cash per equity ratio of 3% vs an
average of about 50% for the rest).
• One of the largest market player in crane trading in Asia
• Business alliance with Toyota Tsucho Corporation (TTC).

Able to leverage on their networks and resources.
• Close working relationships with global Japanese leading brands Kobelco (rank 13th of top 50) and Kato (36th)
• Regional Growth Prospects: Footholds in Malaysia, Vietnam and Myanmar. Malaysia increased sales of 22.0M from 6.2M in FT2011. Newly incorporated subsidiary in Myanmar earned $1.3M in less than 6 months.

These growth rates are projected to continue.
• First movers into growth arena in Myanmar vs their peers, reflecting on their initiative and competence in execution.
• Healthy balance sheet and well positioned for a CAPEX expansion cycle in weak yen and softening regional economy environment. They are presently almost in net cash including rights issue proceeds and have been willing to leverage up ~50% net gearing historically for fleet expansion. Note that SSHM’s peers are operating with 30-60% net debt to equity.
• Greater flexibility on their trading margins and further capital gains due to dealing primarily in Japanese Cranes in a weak yen environment.
• Cranes are movable and monetizable assets.
• Their recent 17.9M capitalization through rights issue in Jun-July puts them in prime position for fleet and business expansion.

Investment Action:
Fundamentals
Sin Heng is at better relative valuations compared to peers, but yet have had better capital management, better execution and is positioned for growth. It’s undiluted T12M PE of 7.2x is under the peers average of 9.8x while having considerably less leverage (have bullets to expand). It’s EV/EBIT (T12M) shows even better performance at 6.3 vs peer average of 9.9.

Taking the most conservative of methods written in the report - Undiluted T12M PE vs second best peer of 9.1x implies a target price of 0.27 SGD, which is justified because of their outperformance and competitive business model.

Technical price action suggests a 2 month consolidation between 20 and 22 cents. A breakout from 22 cents implies further upside. Any sort or normalization to historical EV or PE values is justifiable for it’s better relative valuation than its peers and implies at least a 20% gain to 26 cents which could trigger the breakout.

Business Overview
History
SHHM has accumulated more than 40 years of experience and expertise in providing comprehensive heavy lifting solutions in infrastructure and geotechnic, construction, offshore and marine as well as oil and gas industries. Many landmark infrastructure and construction projects in Singapore that they were involved in include Newton Circle Flyover, Benjamin Sheares Bridge, Pan- Island Expression and more recently, the Singapore Flyer, Resorts World at Sentosa, Marina Bay Sands Integrated Resort, and Nation University of Singapore Flyover to name a few. Turning public in 2010, Table 1 shows the steady increase of their heavy lifting fleet. Note that FY2013 number of cranes is estimated to be 150, but with greater aggregate crane lifting capacity of 16,300 due to shifting towards bigger cranes.

Their core business activities are the rental and trading of cranes, aerial lifts and other heavy lifting equipment as well as the distribution of related spare parts.

They have actively been seeking new geographic regions to expand our business reach and network. Since 2009, they have established footholds in Malaysia, Vietnam and more recently, Myanmar, through the setting up of subsidiaries and joint ventures.

Their active trading networks span various countries of SEA. They are one of the largest world buyers and dealers of Kobelco (ranked 13th of top 50 global construction equipment manufacturers by revenue) cranes, and the authorized distributor of hydraulic crane manufacturer, Kato (ranked 36th of 50, and improving in sales), in its markets, namely Brunei, Indonesia and Malaysia. They have been successfully implementing their synergistic rental and trading business model in the region, and are now extending their footprint in Myanmar. Their closely compared competitors include Tat Hong Holdings Ltd, Tiong Woon Corp Holdings Ltd and Hiap Tong Corp Ltd.

Rental Business
SHHM’s customers deploy cranes for various industries including Intrastructure and geotechnic (heavy precast columns, slabs and beams), construction (buildings and upgrading works), offshore and marine (fabrication of oil rigs and deep sea-going vessels) and oil and gas (petrochemical plants and refineries).

The rental contracts are of varied durations from daily to monthly leases or such other periods as required by our customers.

SHHM also provide turnkey project engineering services to complement their provision of crane rental services. These services include advising our customers on the planning and the execution and where the crane is transported and installed at the job site. Often, SHHM’s aerial lifts are offered together as a package to customers who require both lifting equipment as part of their project needs.

Trading Business
SHHM is a reputable distributor of new and use cranes. With a wide trading customer base comprising more than 100 customers and spanning USA, Europe, the Middle East, Asia, Australia and Africa.

They have an established record of providing used cranes in good working condition after refurbishment.

Authorized Distributorships
For the distribution of new cranes, they have been awarded the dealership rights for the sale and distribution of all existing and new models of cranes and spare parts for Kobelco, one of the world’s top crane manufacturers. SHHM is also one of the world’s biggest customers of Kobelco cranes.

SHHM is also the authorized distributor for Kato, one of the world’s leading hydraulic crane manufacturers, to deal in new cranes and spare parts in Brunei and Malaysia. Below is a Kato SL 300R 30 tonne and Kobelco CKS800 80 tonne crane .

Revenue Drivers
Rental
As of June 2012, SHHM has a fleet of 159 cranes and 198 aerial lifts. Though rental only accounts for 29% of revenue, it accounts for 63% of gross profit due to higher margins. Since they IPOed in 2010 and was awarded Kobelco and Kato distributionship, revenues have increased by 20% in FY12 and 33.3% in FY13. The $53.5
million increase in FT13 was due to to the increase in revenue from expanded fleet size. Gross margins have been increased from 29.4% in FY10 (after industry margin adjustment due to completion of IR) to 35.7% in FY13.

Cost Structure
Labor costs, especially crane operators, account for about 30% of operating expenses for cranes. Depreciation accounts for about 40% while maintenance and overheads are around 30% of total costs.

Trading
Trading takes up 71% of revenue but only 37% of gross profit due to lower margins which have been roughly stable from FY11 to FY13 from 8.1% - 8.4%. Trading has surged, up 29% in FY12 and 49% in FY13. Though margins are smaller and the business is considered more erratic, there are advantages not immediately noticeable to the investor.

1) Trading is not capex intensive like renting.

2) The trading business is diversified in terms of geographical regions

3) Synergy with renting: This is a major plus point with Sin Heng that differentiates them from their peers. Their detailed business model will be covered in SWOT analysis. SHHM is much more evolved and specialized in their trading segment by far than any of their peers. Their trading networks combined with a ready rental fleet optimize opportunities for heavy lifting in any particular region. If SHHM has jobs, they do not have to sell, but rent. Vis-à-vis, they can assess jobs unavailable to them by selling cranes to other crane rental providers in the region.

4) Another synergistic benefit is the ability to navigate with flexibility through capex cycles. When cranes are cheap, they can buy more and put them to work through rental while waiting for a more opportune time to sell them.

5) Lastly and most important, their active trading networks coupled with their distributorships of new reliable Japanese cranes allow Sin Heng to efficiently renew the age of their rental cranes by selling off older cranes to other regions. This could very well be where SHHM hangs their hat the most. SHHM has one of the youngest fleets in the region with an average crane age of < 5 years. Developed countries usually have higher standards for cranes because they have safety and downtime standards as compared to developing regions. Hence, SHHM can position themselves more effectively to get a piece of both markets. Proof? SHHM has a higher than average utilization rate of 85%-90% versus their peers (75%), and their inventory turnover is only 27 days whilst have such a high volume of sales.

Growth Drivers
1. Strengthening its presence in Asia. SHHM has established its presence in Malaysia, Vietnam and Indonesia. Not only has the Kato distribution agreement for Indonesia (July 2012) had strengthened it’s product portfolio and position to tap on developments there. The first fruits of their implementing this business model in Malaysia and Myanmar are showing. Myanmar managed to have 100% utilization for 5 cranes in ½ a year ($1.312M). Malaysia revenue has grown by 22.1M from 6.2M at end FY2011.

Growth in Malaysia and Myanmar is expected. Malaysia due to government commitment of RM160B for infrastructure spending till 2020 and Myanmar is due to positive economic reforms and a strengthening Japan/Myanmar relationship.

2. Healthy Demand in Singapore, with good regional prospects (see Regional Analysis later).
Crane demand is will have a firm footing supported by a moderate pipeline of construction and infrastructure projects.

3. All growth drivers are further corroborated that they have raised 17.9M to take advantage of all of these opportunities. This capital raising action by SHHM is significant because SHHM has always been efficient with their crane utilization rates, and have shown that they only expand their fleet if they are confident in demand.

4. Continued beneficial partnership with Toyota Tsucho Corportation (TTC), a member of the Toyota Motor Group, acquired a 27% stake in SHHM in May 2012.
This allows leveraging on TTC’s resources, and marketing networks.

Regional Analysis
Singapore
Main rental opportunities in Singapore, Malaysia, and Indonesia are sustained with on-going intrastructure and new projects going forward.

Singapore has a steady pipeline of existing infrastructure and construction projects to bid for. The BCA expects construction demand between S$26B to $32B this year, spurred by large public sector projects such as public housing and infrastructure works like the Thompson MRT line.

A sample of on-going projects include:
The Singapore Transport Authority’s The 30km Thomson line (SGD18bn) started in 2012 and is to be fully completed by 2021. In September 2012, SP Power initiated it’s SGD 2bn Transmission Cable Tunnel Project, to be completed by 2018.

In October 2012, PSA Singapore Terminals to invest SGD3.5bn for the development of phases 3 and 4 of its Pasir Panjang Terminal. The phases involve the construction of several new terminals and will
complete over the decade.

New Projects include, in Apr 2013, Changi Airport Group’s initiation of their SGD 600mn Terminal 4 project at Changi Airport. Construction work to start in Q413 and to be completed in 2017.

Business Monitor International, in their report, Singapore Infrastructure Report Q4 2013, estimates growth in Singapore’s construction sector to reach 6.2% in 2013 and 3.7% per annum from 2014 to 2020.

We forecast flat to negative growth in revenue this year due to some project delays (Thomson line) and a normalization of the Q4 FY2013 revenue spike, which will
pick up by Q4 FY2014, followed by moderate growth in FY2015.

Malaysia
Although there may be symptoms that the infrastructure cycle may be turning, the Malaysian government announced an additional RM160bil to be spent on railrelated projects until 2020. Construction players have described it as a boost of confidence for the continuation of the workflow in the sector.

We forecast SHHM to have continued revenue growth this year and next.

Indonesia
The economic slow down and currency devaluation may seem to put a damper on crane trading due to the weaker IDR. A weak IDR seem to have 2 potential effects. A weak IDR may cause a drop in demand due to inflation and rising prices. Furthermore, if the government tries to control inflation by raising interest rates, then business cannot borrow as cheaply and this will slow down growth.

However, on closer inspection, the fallout to Sin Heng is not as severe as one might think.
1. In term of economic slowdown, management is of the opinion that most infrastructure projects they are involved in are still on-going. There are about 19B USD worth of infrastructure projects currently underway, including: Trans-Java toll road (5.5 B), Kalibaru port (4.0B) and Central Java coal power (4.0B). In addition, there is an additional $73B USD worth of proposed infrastructure going forward. These include the Trans-Sumatra toll road (36.1B), and Sunda Strait Bridge (15-20B). Hence, current projects are still online.

2. President Susilo Bambang Yudhoyono stated that the government will prioritize infrastructure construction next year, and will continue to build provincial roads that link the western with eastern tip of the country in Sumatra, Java, Bali, Kalimantan, Sulawesi West Nusatenggara and East Nusatenggara and Papua provinces.

Additionally the government also planned to undertake bridge conservation projects with a total length of 329.4 km across the country, build more irrigation systems and dams to secure the country’s food and clean water resilience.

3. Regarding the weak IDR, the likewise previously weakened Yen normalizes the trading relationship between IDR/Yen, hence, the effect on trading is not as severe as one might expect. In fact, despite the IDR’s plunging strength, the currency looks to stabilize with government interest rate intervention. As it is currently, the IDR/JPY is around 0.87, which is actually only slightly lower than it’s 5-year median price of 0.9 (5-year high: 1.06, 5-year low: 0.74).

4. Conservatively speaking, it is possible to estimate flat to slightly weaker growth for trading in Indonesia for this year, but a continuation of the long term revenue growth and margins in the next. The longer term future operating in this region is still promising.

5. For these reasons, we conservatively forecast revenues to be volatile for next 2 years, but net flat rate of growth.

Effects of Weaker Yen
The SGD vs JPY is close to its 5-yr high (79 vs 83 high and 59 low), the SGD vs MYR (30 vs 34 high and 24 low) is higher than 5-yr average and the IDR vs JPY is a only a little under its 5-yr average. Hence, the estimated cumulative effect of the weaker Yen in relationship to the other current trading currencies involved is favorable, and SHHM will be able to have more flexibility with margins in the short term to medium term. This bodes well for trading revenues and margins.

Recent growth regions show promise too:
Sin Heng is the first mover in Myanmar vs. their main competitors. Not only do growth opportunities abound in Myanmar, but the Japanese premier forgave 176.1 billion yen of debts and pledged an additional 51 billion yen in new loans which would cover a whole gamut of infrastructure development, including road, electricity and water supplies; power station maintenance; and development of the Thilawa special economic zone near Yangon.

At present, many infrastructure projects are at initiation and planning stage. This gives SHHM potential opportunities more next year than this year. Revenue and net income has high probability of continued growth in Malaysia and Myanmar, but margins for the next 2 years may be muted due to one-time set up costs.

Conclusion:
We estimate conservatively that SH will have a minimal net earnings growth yoy rate this year, but a growth rate of 20% next year due to project pickups in Singapore, as well as the continued development in Malaysia and Myanmar.

SWOT Analysis
Strengths:
Close working relationships with global leading brands that are also gaining in sales
They have close working relationships with their principal brands and project clients. They are one of the largest world buyers and dealers of Kobelco (ranked 13th of top 50 global construction equipment manufacturers by revenue) our cranes, and is also the authorized distributor of another global leading hydraulic crane manufacturer, Kato (ranked 36th of 50, and improving in sales), in its markets, namely Brunei, Indonesia and Malaysia. Sin Heng has also been granted the distributionship to deal in mini crawler cranes, known as Mighty Cranes, in countries such as Brunei, Indonesia, Malaysia, Myanmar and Singapore.

It should be noted that Kobelco, whose parent company is Kobe Steel, is actively trying to innovate and carry out a thorough pursuit of high-end “Only One” products as part of their Vision “G” initiative that would begin in 2013. Kobelco also anticipated that overseas demand would continue to be strong. The effects of this initiative cannot be quantified as yet, but the initiative to innovate grants future competitive possibilities. The success and branding of Kobelco is directly tied in to Sin Heng’s trading business.

Active trading networks and the ability to locate and position their cranes are the keys that differentiates crane companies in terms of economic profit. For example, even the biggest of the crane peers, Tat Hong, was not immune to the slowdown and capex cycle revision in Australia (leading to a >35% drop in market cap to 560M).

A testament to SHHM resourcefulness is that although they are not the biggest company, they were the first of the four to set up shop in Myanmar, with others like Tat Hong to follow suit after.

Cranes are movable assets, and in this regard, the smaller size of their fleet actually plays to their advantage as they can more optimally position their cranes in active regions. This advantage shows up in their higher than average utilization rates (>80% on average for past 3 years, and 100% in Myanmar presently) which is generally higher than the peer average.

At this time, SHHM has set up in regions that have foreseeable longer term infrastructure commitments. Synergistic Trading and Rental business model in regions of opportunity (see chart) The synergy basically exists between 4 key elements (rental fleet, trading networks, OEM distributionships and TTC partnership) which lead to opportunity and efficiency of earnings.

Young Rental Fleet: They efficiently renew the age of their rental crane fleet (average age < 5 years old) by selling older cranes them through their developed trading networks to other countries and buying new ones. This process is easier because of the major dealerships and distributionships with Kobelco, Kato and Mighty crane.

With a younger fleet of reliable and popular Japanese brands, coupled with their project advisory, it helps their appeal when dealing with good quality clients in developed countries like Singapore where the requirement for safety and downtime is higher. The older cranes can be sold or used at their other regional operations. This optimizes products available for the different client needs and standards.

Optimum participation in regions: Trading and renting gives participation options for SHHM in the region of choice. If SHHM is able to get rental jobs, they rent. If not, they can still sell cranes to those who have jobs. The OEM distributionships and trading networks allows SHHM to sell a variety of cranes from old to new, depending on client’s needs.

Major Endorsement by Toyota Tshusho Corporations … that has invested in a 27 percent stake in Sin Heng. This allows Sin Heng opportunities to leverage on Toyota Tshusho’s networks, contacts and intel otherwise unavailable to them.

Weaknesses:
In general, their business is capex intensive and usually capital has to be raised for expansion. Their business is affected by cyclicality in regional economic cycles. Their 2 segments are synergistic with each other, but do not give them ample diversification against the ebbs and flows of the business cycle.

Opportunities:
Regional Opportunities: Refer to regional analysis to see the supplies of infrastructure and civil engineering projects in various regions.

Cash on hand for growth: SHHM has recently successfully raised 17.9M SGD in rights issue, which they opportunistically can use to increase the size of their fleet or for acquisitions if the market grants them profitable opportunities. They are the most capitalized of their peers.

Threats:
Competitors may start to adopt the strategy of active trading with rental and invade their business space.

Competitors may develop footholds in Myanmar and Malaysia, where they are first movers compared their peers. This may slow earnings grow and lower margins. If China cranes improve their reliability and after sales support, they may take market share of Japanese cranes and force Sin Heng to adopt a new product mix or change their overall strategy.

Valuations
Although Tat Hong is bigger, I believe SH’s track record, healthy balance sheet, successful business model and growth prospects should deserve a PE valuation at least equal to Tat Hong. We should use undiluted PE because they only recently exercised the rights issue in July and this helps to give better comparisons with debt. Note that even before dilution, SH was still less geared than Tat Hong. SH is also in good position to put their cash to work – opportunities are there, esp in Malaysia, Myanmar and even Australia.

Undiluted T12M PE vs Tat’s Hong’s PE (T12M) of 9.1 = Target price of 0.27 SGD. (Method 1)

If we concede that SH’s model is arguably, at least, better than the average of peers:
Undiluted T12M PE vs average peers of 10.9x = Target price of 0.32 SGD (Method 2)

If one is confident that Sin Heng can unlock their extra capital into vehicles of future earnings, than we can use EV/EBIT (T12M) vs their peers.
EV(dlluted)/EBIT vs the 2nd best performer of 8.8x = Target price of 0.30 SGD (Method 3)

EV(diluted)/EBIT vs the peers average of 9.9x = Target price of 0.34 SGD (Method 4)

Note: I am using T12M earnings which is more conservative since recent quarter results (Q4) is vastly better with an annualized PE of 6.2x (undiluted)

Referring ChartXX, based on it’s own historical EV/EBIT(T12M) cycle, we see that we are at historical lows vs the average value of 9.0x, lower than 1SD away. Based on normalization of market expectation on SH’s EV/EBIT

Target price upon normalization to historical average EV/EBIT = 0.31 SGD (Method 5)

Taking the most conservative of all valuation methods implies a target price of 0.27 SGD (25% upside)

Risks:
Event specific risks: Main contractor bankruptcy.
In June 2013, construction works at three stations on the Downtown Line Stage 2 (DTL2) - namely King Albert Park, Sixth Avenue and Tan Kah Kee stations - were halted after their main contractor, Austria's Alpine Bau, filed for insolvency. Such an event would have a direct impact on revenues if SH were directly participating in the project, and indirectly due to the holding up of jobs available due to pipeline delays.

Company specific risks: A big portion of the success of its trading business is the competency of their trading networks and regional analysis that comes from good
leadership and strategic placement. There is no guarantee that they will execute as efficiently as previously if current leadership goes through change



Source/Extract/Excerpts/来源/转贴/摘录: Phillip-Research,
Publish date: 16/09/13

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